Article

Factual Summary:

Applicant engaged in a joint venture to form the beneficiary construction company. Following a shareholder dispute, the court ordered that the beneficiary be liquidated, that the applicant pay Singapore $ 2,982,517.17 to the beneficiary, and purchase the beneficiary's stock in another company for the higher of either its cost or fair market value and that the applicant pay the beneficiary amounts of tender deposits which had been paid out of the beneficiary's funds.

The applicant appealed the court's decision and, pursuant to an agreement with the beneficiary's liquidator, posted a standby in the amount of $ 4,316,354.17 to cover the amounts the parties had agreed would be sufficient to pay what was owed under the original judgment while execution of that judgment was stayed.

The standby was subject to UCP 500 and contained the following relevant provisions:

This SBLC is issued in connection with an order of the High Court of the Republic of Singapore (the High Court) dated the 15 July 1994 ... and a consent order dated the 24 August 1994 granting a stay of execution of the High Court judgment upon the provision of a satisfactory standby letter of credit or guarantee. An appeal has been lodged by the judgment debtor in the Court of Appeal of the Republic of Singapore in Civil Appeal No 131 of 1994 (the appeal). An appeal against the High Court judgment has also been lodged by [the beneficiary] in Civil Appeal No 121 of 1994.

2 Subject to cll 3 and 4 below, we shall make payment to [the beneficiary] or their liquidators and to no other party under this SBLC of the sum or sums payable pursuant to or under the judgment debtor's obligations to [the beneficiary] pursuant to or under the High Court judgment as affirmed in whole or in part and [sol] or varied by the decision (as defined in cl 2.2 below) on your written demand or demands for payment when such demand or demands is [sol] are presented to us at [the address] accompanied by the following documents:

2.1 A legal sealed (LS) copy of the High Court judgment;

2.2 A legal sealed (LS) copy of the order of the Court of Appeal in which orders are made in respect of the appeal (the decision), whether or not any order or orders in respect of any other appeal or matters are included therein;

3 Our maximum aggregate liability under this SBLC in respect of any and all demands made hereunder shall not exceed the sum of Singapore dollars four million three hundred and sixteen thousand three hundred and fifty four and cents seventeen only (S$ 4,316,354.17).

[Other clauses involved expiration, etc.]

On the appeal of the judgment for which the standby was issued, the court reversed the ruling so that the applicant was no longer required to pay the $ 2,982,517.17. Thus, as stated in the appellate opinion, the only remaining obligation of the applicant was to purchase the stock from the beneficiary for the higher of its cost or its fair market value. After this appellate judgment was rendered, the beneficiary made a demand under the standby for $ 3,793,000.00. The presentation contained the required court judgments, but the demand did not contain any calculations or representations as to how the beneficiary arrived at the amount demanded.

The issuer informed the applicant of the presentation, and the applicant told the issuer that it would dispute any payment and instructed the issuer not to pay. The issuer dishonored on the ground that the sum demanded "does not appear to be the sum or sums payable pursuant to or under the judgment debtor's obligations to [the beneficiary] pursuant to or under the High Court's judgment as affirmed in whole or part and or varied by the order of the Court of Appeal. ..." The beneficiary again demanded payment and the issuer dishonored by noting that the demand made no reference to any obligation of the applicant for the demanded amount.

The beneficiary filed suit against the issuer and the applicant successfully joined the action as a third party. The Singapore High Court dismissed. On appeal affirmed.

Legal Analysis:

1: Compliance: The court indicated that the determination of the LC's requirements turns upon its terms. The opinion quoted from the trial judge's opinion to the effect that:

the bank receiving the documents would, at the least, have had to check one document against the other to ascertain whether after the Court of Appeal decision [the applicant] was under any obligation at all to [the beneficiary]. The requirement that the judgments be tendered supported the inference that in this instance the duty of the bank was not simply to receive the documents and check to see whether they were the correct documents but also to look into the judgments before paying because it had to determine by reference to them what [the applicant] had been ordered to do in order to determine the payment which it had to make.

2. Standby LCs: Noting that the LC was "highly unusual" in that it was not a commercial LC, the court ruled that these terms, and this context, required the bank not only to merely determine that the terms "were quite clear, and there was no ambiguity."

3. Compliance: UCP 500 Article 13(a): It concluded that:

[c]learly, the bank's obligation was not merely to pay the amount demanded upon the presentation of the sealed copies of the two judgments respectively. The terms of cl 2 required more than that: it imposed on the bank a further duty to ascertain the amount payable by Low to KIP under the combined effect of the two judgments. The production of these documents was precisely for such purpose.

The court next turned to the issue of whether the presentation strictly complied with the terms of the credit. The bank argued that the maximum amount available would be the face amount less the $ 2.9 million payment overturned in the appellate decision. The applicant argued that, at the least, the beneficiary would have to specify how the figure demanded was reached. The beneficiary, on the other hand, argued that the only requirements to be met under the standby were the presentation of the sealed judgments and a demand. The trial court had rejected this contention.

In analyzing this issue, the appellate court turned to UCP 500 Article 13 and concluded that the bank had to 1) verify that the documents specified were tendered and 2) "to examine the contents of the two judgments and ascertain the extent of [the applicant's] payment obligation thereunder." It stated "the obligation of the bank was to pay what Low was obliged to pay under the combined effect of the two judgments. This can only be verified and determined by reference to the terms of the two judgments."

The court reviewed the amounts which the maximum amount represented, indicating that the amount of $ 1,333,837 was "the remaining of [the applicant's] obligations under the judgment" for the stock purchase, the $ 2.9 million obligation having been overturned by the appeal. It stated that:

The only payment obligation of Low under the High Court judgment was to purchase the shares of KIP n KZ Investments Pte Ltd at cost or at a fair price fixed by independent valuers, whichever was the higher. Conse-quently, when the appellants demanded payment of a sum of $ 3,793,000 simpliciter, the demand on the face of it appeared to be in excess of the amount originally contemplated. In our judgment, this apparent excess gave rise to a discrepancy which called for an inquiry or investigation or such as to invite litigation

4. Non-documentary Conditions: As to the argument that this requirement was non-documentary, the trial court stated:

All that could be gleaned from them [the judgments of the High Court and Court of Appeal] was that the only payment obligation of Low that remained intact was his obligation to pay the higher of the purchase price and the fair price of the relevant shares. No figure was assigned in the judgments to either of these prices. The liquidators did not furnish the bank with a copy of the valuation report (a document which was in fact contemplated by the High Court judgment) from which it could have determined that that figure represented the fair price of the shares.

5. Interpretation: The trial judge resolved the apparent dilemma by resort to rules of contract construction that "express terms were capable of overriding terms incorporated by reference, if the latter were inconsistent with the express terms,"concluding that the implied requirement to prove the assessment excluded the non-documentary condition rule and the rule that extraneous documents "will not be examined" of UCP 500 Article 13(a). The appellate court rejected the beneficiary's challenge on the basis of a 1986 English case, Forestal Mimosa Ltd v. Oriental Credit Ltd, 1 WLR 631 to the effect that "if it could be shown that there was some irreconcilable inconsistency between the Uniform Customs terms and the other terms of the document, the Uniform Customs terms would have to be ignored."

6. Extraneous Documents: UCP 500 Article 13(a): The appellate court concluded that:

The only way the bank could ascertain if the amount demanded represented Low's obligation under the judgment of the High Court was by reference to the valuation report. Having regard to the payment obligation of the bank as expressed in cl 2 of the letter of credit and para 6 of the High Court judgment, the operation of the credit gave rise to 'some irreconcilable inconsis-tency' between the express terms of cl 2 and the second para of art 13a. In our judgment, by reason of this inconsistency, the second para of art 13a (which directed the bank not to examine documents not stipulated in the credit), in so far as the valuation report is concerned, had to be ignored by the bank.

It follows, therefore, that the way out of the difficulty was for the liquidators to state in their demand that the sum of $ 3,793,000 as demanded represented (i) the fair price of the shares in KZ Investments Pte Ltd as fixed by independent valuers pursuant to para 6 of the High Court judgment, and (ii) Low's obligation under para 6 of the High Court judgment. In support of the demand, they should tender also a copy of the valuation report made by such independent valuers, a document contemplated in para 6 of the High Court judgment, fixing the fair price for the shares in KZ Investments Pte Ltd.

Regrettably, they did not provide such document. In the circumstances, for the reasons given, there was a discrepancy which entitled the bank to reject the documents tendered, which they did. Appeal dismissed.

Comment:

1. This opinion is a convincing argument for adoption of the International Standby Practices.

2. Rather than ignoring non-documentary conditions, as required by UCP 500 Article 13(a), to which the standby was subject, the court ignored the UCP rule itself as well as the rule providing that extraneous documents are not to be examined.

3. This opinion reveals that no principle or rule, however fundamental or well explained, is immune from being misapplied by some lawyer or judge (or banker, for that matter, as the bank urged the result).

4. Although the LC was a standby, it was not, as the court states, "highly unusual". While the court may not have seen such a standby before, the reality is that in volume of outstandings, standbys far exceed commercial credits and are the "norm". Classifying the undertaking as a standby, however, should have no bearing on the result because it is subject to the same principles as a commercial LC and subject to the UCP, as well.

5. The issues touch on principles here that are fundamental to the independence of the letter of credit. The LC is independent because the obligation inherent in it can be determined by examining the documents presented on their face without resort to other evidence. That is the difference between an LC and a suretyship or accessory undertaking.

6. It is this principle which informs UCP 500 Article 13(a). One of the possible courses of action considered in the drafting of that provision (and of similar provisions in the UN Convention and Revised UCC Article 5) was to handle the presence of non documentary conditions which were inserted into LCs by turning them into documentary conditions. This approach was rejected because it was not feasible for document examiners to determine what documents might be implied.

7. As the court indicated, it is possible to vary the provisions of the UCP by an express statement in an LC. This rule applies to the UCP 500 Article 13(a) provision on non documentary conditions, as well. Such an attempt at variance, however, could have two results: 1) It could make the undertaking an accessory undertaking or contract which was no longer independent or 2) it could change the operative rule by which non documentary conditions are ignored so that they would be implied. As to the former result, if the condition is so essential to the undertaking as to render it devoid of an essential purpose, one must conclude that no independent undertaking was intended. As to the latter, it is theoretically possible for the standby to recite expressly that any non documentary condition is to be translated into a documentary one but, in practice, it is difficult to understand why the issuer would not simply make any such condition documentary. It is also difficult to understand how a beneficiary could accept such a condition since it would make the undertaking subject to unpredictable interpretations.

8. For the court to have altered the UCP arrangement in this case, however, is shocking. There is no suggestion whatsoever in the standby that any such "implied documentary condition" was contemplated. Based on the information in the opinion, it is clear that the judgments did not fix a maximum amount due for the stock purchase. While one would assume that the amount drawn should be based on an evaluation, the issuer has no obligation or business inquiring about the evaluation. Had the parties desired such an evaluation report, they could have required it. The documents presented conformed on their face to the requirements of the standby. What the court has done, in effect, is to rewrite the terms of the standby. In retrospect, the court decided that the standby issued in connection with legal proceedings should have been more explicit regarding calculation of the stock evaluation.

9. The real issue in this case is not compliance but whether the beneficiary made an improper drawing in light of the underlying transaction. The real question, then, is whether the drawing was abusive or fraudulent. The answer to this question, it would seem, must also be in the negative. The terms of the standby and the judgements presented under it make it clear that there was no cap on the sum to be paid for the stock--only an estimate of its value. The price was to be determined based on the fair market value or the purchase price or the higher. There is, therefore, a colorable basis for a drawing in excess of the estimated amount. As a result, extraordinary relief is improper and the issues regarding the underlying transaction, if any, must be sorted out in regard to the underlying transaction and not with respect to the LC.

10. While not entirely clear from the opinion, it appears from its tone that the court's opinion was advisory and that it was informing the beneficiary how to make a conforming drawing. One may speculate that the LC had not expired. If so, the decision was not fatal for the beneficiary but, if it is taken serious, constitutes a serious blow to the carefully prescribed order of sound letter of credit law and trivializes one of its foundational principles.

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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.