Article

Factual Summary:

To finance the shipment of 6,000 metric tons of heavy melting steel scrap, the applicant obtained a letter of credit for US$ 750,000. The issuer advised the credit through a Belgian bank which was also nominated as a negotiating bank under the credit.

The negotiating bank, at the beneficiary's request, added its silent confirmation to the credit. Among other terms, the credit required the presentation of an "original insurance policy", a "Draft Survey Report", and a "Certificate of Quality", the latter two issued by "Griffith Inspectorate".

After presentation, the negotiating bank paid the assignee $811,000 pursuant to an assignment of proceeds and the balance to the beneficiary and forwarded the documents to the issuer. The issuer rejected the presentation, noting the following discrepancies: "Insurance policy not marked original" and "Draft Survey Report and Cert. of Quality not issued by Griffith Inspectorate." As a result, the negotiating bank sued the issuer for wrongful dishonor and the applicant brought suit to prevent payment.

Legal Analysis:

1. Strict Compliance: The court noted that UCP 500 Article 13 contained a new wording of the standard for the examination of documents, adding the phrase "international standard banking practice". The court also noted that banks had the duty to use reasonable care in the examination of documents. While noting that many courts had equated "international standard banking practice" with strict compliance, the court stated that "a bank has to be careful to steer between too literal or rigid an approval, on the one hand, and on the other, applying a version of reasonableness, equity, good faith and so on, which could only in the end lead to uncertainty." In determining how banks should "reasonably interpret" documents, the court stated that bankers are not "precluded from having regard to the commercial function of the document." Additionally, the court stated that ambiguities should be resolved in favor of "giving effect to the overall purpose of the transaction."

Having so laid out the standard for determining compliance, the court noted that it was easier to state, than to apply.

2. Original, UCP Article 20: The court detailed the appearance and the production technique of the insurance policy. In fact, two policies had been presented, the first produced by a word processor on high quality paper containing a water-mark and the blue logo of the insurance company, and the second a photocopy of the first on plain paper. Both were signed, and the latter was marked "duplicate". Both policies contained the following statement: "This policy is issued in original and duplicate, one of which to be accomplished, the other to stand void."

The issuer and the applicant argued that, pursuant to the UK decision in Glencore International AG v. Bank of China, [1996] 1 Lloyd's Rep. 135 (Com. Ct. CA), case and UCP Article 20, all "originals" had to be stamped "original" to comply. As neither document in this presentation was so marked, the issuer and applicant argued that the presentation did not meet the "original" requirement. The court first noted that the rationale behind Glencore and UCP 500 Article 20 was to "relieve issuing bankers of the need to make difficult and fallible judgements on the technical means by which documents were produced."

The negotiating bank argued that Article 20 had no application to obvious originals because, by its terms, it states that banks will "also accept as an original." Under the negotiating bank's reasoning, the inclusion of the term "also" indicated that Article 20 was not intended to cover all originals, and excluded obvious ones. The court rejected this argument by noting that it was bound to follow the Glencore decision which held that Article 20 applied if the policy was either produced, or appeared to be produced by a computerized system. While the negotiating bank argued that the word processor upon which the policy was produced was not a "computerized system", the court noted that it "could not escape from the conclusion that a document produced by a word processor is a document produced by a computerized system." The court stated that it doubted that the ICC Working Party intended such a result, but that this was the clear meaning of the words they chose.

Having concluded that the policy was produced by a computerized system, the court next turned to whether it satisfied the "marked as original" requirement of Article 20. The issuer and applicant argued that only a stamp or title of "original" could fulfill this requirement. The negotiating bank, however, argued that the obvious characteristics of being an original displayed by the policy were enough. The court held that the blue logo, the watermark, the clause which stated the policy was issued in one original and one duplicate, and the fact that the bank received two copies with one clearly marked "duplicate" all combined to meet the "marked as original" requirement of Article 20. The court noted that "it would be repugnant to the whole scheme for the tender of documents under a letter of credit, and for the examination of those documents by a bank, to construe Article 20(b) as requiring the word 'original' to be placed on a document in circumstances such as the present where the other markings on the document clearly indicate that it is an original ...." Accordingly, the court ruled that there was no discrepancy based on the "original" issue.

3. Compliance: Other Discrepancies; Compliance: Knowledge of Trade Usages: The issuer and applicant next contended that the presentation of reports on "Daniel C. Griffith (Holland) BV" paper with a logo stating "Inspectorate" and a blurb stating "Member of the Worldwide Inspectorate Group" did not comply with the requirement that the reports be issued by "Griffith Inspectorate" because nowhere in the reports was there a reference to "Griffith Inspectorate". The court noted that if the credit had only called for an "inspectorate" and a certificate issued by the Griffith company, then clearly the presented documents would comply. The negotiating bank argued that there was a clear mistake in the credit which could only be interpreted as having required a certificate by a Griffith Company as part of this inspectorate organization. The court accepted this argument by noting that these loose affiliations of inspectorates were "common knowledge to any banker" which could be used in determining compliance. Accordingly, as common knowledge, the court found that a banker would determine that there was an error in the credit and "on a reasonable examination would reach the conclusion that the letter of credit called for a document issued by the Griffith company, a member of the "Inspectorate organisation".

Finally, the applicant, but not the issuer, argued that the requirement of a "Draft Surveyor Report" must have referred to the "draft" of the vessel as it made no sense to submit a draft report. As the submitted report made no reference to the draft of the vessel, the applicant claimed that it was discrepant. The court rejected this argument by noting that draft surveys referring to drafts of vessels were only used in highly specialized situations and this was not one of them since, if it were, one would expect much more detail in the credit as to the report's contents. The court regretted that many commercial documents contain "otiose" and "nonsensical" language, but that did not require it to give the word "draft" a "forced and unnatural meaning".

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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.