Factual Summary: The beneficiary's bank presented documents to the issuer under an LC with a cover letter which indicated that they were discrepant and requested the issuer to honor despite these discrepancies or to hold the documents at the presenter's disposal. Subsequently, the issuer gave the beneficiary timely notice of dishonor, stating that it was holding the documents at the presenter's disposal. Following negotiations between the parties, the issuer sent a telex at the instruction of the applicant agreeing to pay 80% of the value of the credit in return for the release of the documents. This arrangement was agreed on with the additional understanding that the applicant would pay the balance "on collection basis upon receipt of [a] draft survey report". The applicant paid 80% of the price. When the report was duly submitted by the beneficiary, the applicant refused to authorize payment of the balance, claiming that the goods were of poor quality. The beneficiary then brought this action jointly against the issuer for wrongful dishonor of the letter of credit and the applicant for breach of agreement. After a trial, the court found for the issuer and against the applicant.

Legal Analysis:

1. "Collection Basis": Approval: The court decided that the obligation of the bank turned on the meaning to be given to the phrase "on a collection basis". The court concluded that the phrase is ambiguous so that its context must be taken into account in understanding it. According to the court, where discrepant documents are presented under the credit, there may exist an implied request to seek applicant waiver of the discrepancies or an extension of the date of expiry. If the issuer or confirmer accepts the documents "on a collection basis", it agrees to be bound by its obligations under UCP500 Article 9 despite the discrepant or expired nature of the presentation. Another alternative is that the documents are presented outside of the context of the LC transaction. In this situation, the bank acts merely as an agent of the party sending the documents, agreeing to "collect" on them if the buyer chooses to buy the discrepant documents.

The court ruled that the circumstances of the presentation in the instant case suggested that it took place outside the context of the LC. The absence of a deadline for presentation of the survey report, the "truncated" nature of the presentation, and the conditional nature of the issuer's payment obligation were all incongruous with a presentation under the terms of the credit.

The court indicated that the "distinguishing feature" of the case was that the issuer had given a notice of dishonor after receiving the presenter's submission. It concluded that if discrepant documents were presented to an issuer or confirmer and the bank subsequently issued a notice of dishonor (or "refusal" as the court terms it), the liability of the bank under the credit is terminated. It concluded: "After issuing this notice [the issuer] no longer had any obligation to pay under the letter of credit. The parties to the sale of goods might negotiate a solution, but as far as [the issuer] was concerned, there was nothing left for it to do under the letter of credit. The letter of credit was at an end."

2. "Collection Basis": Amendment: If the subsequent presentation was in fact under the letter of credit, it would have had to have been amended because the document at issue, the Report, was not a required document under the original LC. The court ruled that such an amendment would have involved making the survey report a required document under the credit. The absence of an expiry date for presentation of this document was inconsistent with such an amendment where it is sound banking practice to include an expiry date in the credit.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.