Article

Factual Summary:

To pay for rolled steel, a member of the buyer's trading group applied for issuance of an LC. It was issued by bank in favor of seller and required that shipment be effected no later than July 30. In addition, it provided that the beneficiary must provide the buyer with notices of readiness at which point the buyer was to nominate a vessel for carriage of the goods. In the event that the buyer failed to nominate a vessel, the credit provided:

Special Instructions:

(3) Should openers fail to nominate a suitable vessel within 21 days of the delivery of the full consignment to Klaipeda, beneficiary can substitute documentary requirement (2) (Bill of Lading) with an original forwarder's receipt issued by Karpis in Klaipeda, dated not earlier than 21 days after the date of the notice of readiness of the goods for shipment (copy of such notice to be attached), confirming that Karpis have taken control of the full quantity in good order and condition and the goods are at the irrevocable disposal of [buyer] and will be delivered FOB stowed ... on board the seagoing vessel nominated by the opener. A signed statement by the beneficiary to be included which certifies that the owner did not nominate a suitable vessel within the 21- day grace period as per contract ...

(3) Documents must be presented within 21 days after Bill of Lading date but within the validity of the credit ... This credit is subject to UCP ... .

The documents were presented to the advising bank and included a notice of readiness dated 29 July and a forwarder's receipt dated 19 August. The adviser purchased the documents and forwarded them to the issuer. Although the issuer purported to reject the documents, it cooperated with the applicant and buyer to use to documents to obtain and dispose of the steel at a discounted price. The adviser sued the issuer for wrongful dishonor and the issuer joined the buyer and applicant as third parties. At a prior hearing, Judge Rix had ruled that the issuer was:

indeed prevented from relying on the discrepancies. This was on a basis that, regardless of the merit of the alleged discrepancies, the [issuer and applicant] were not entitled to keep the documents whilst in the same breath claiming to reject them on the grounds of discrepancies. In the result, [the advising bank] obtained summary judgment against [the issuer].

The proceeding then continued with respect to the issuer's claim for reimbursement from the applicant and the buyer. The trial court ruled that the issuer was not entitled to reimbursement.

Legal Analysis:

1. Notice of Dishonor; Waiver: In the prior hearing, the court ruled that the issuer failed to comply with the requirement of UCP500 Article 14(d). It is unclear from the opinion whether the deficiency was in the text of the notice or in the conduct of the issuer alone in that it wrongfully exercised dominion over the goods contrary to the recital in the notice of dishonor.

2. Discrepancies; Dates for Shipment: The issuer argued that the alternative clause permitting substitution of a forwarder's certificate obviated the deadlines for shipment. While noting that the terms of the credit were "somewhat unusual" and that the proximity of the dates "should inevitably have raised concerns", the court ruled that the deadlines remained in place and the failure to observe them resulted in a discrepant presentation.

3. Reimbursement; UCP500 Article 18: The issuer argued that it was entitled to reimbursement even if the documents were discrepant. The LC Agreement provided in Clause 5:

Borrower further agrees that any action, inaction or omission by the Bank or any of the Bank's correspondence under or in connection with any credit or documents if done in good faith, shall be binding on borrower and shall not put Bank or Bank's correspondence under any liability to borrower.

The court noted that:

Leaving aside the fact that Seco were not parties to that agreement, the reliance placed on the apparent broad scope of this provision by [the issuer] wholly ignores its context in both the narrow and the broad sense. In the narrow sense, the overall thrust of Clause 5 was to excuse the bank from liability arising from the underlying transaction. By the same token the bank's activities qua bank are not to expose it to liability to the borrower. These provisions are not material on the face of it to the right of reimbursement or otherwise in the event of rejection of the documents by the bank.

The broader context was the express incorporation of UCP by virtue of Clause 12 of the agreement. The contract has to be construed, if possible, in a manner consistent with UCP and the banker's duty of strict compliance ... . To that end the provisions of Clause 5 are comfortably consistent to the construction urged by [the buyer/ applicant]. In the alternative, [the issuer] relied upon Article 18(a) of UCP:

"Banks utilising the services of another bank or other banks for the purpose of giving effect to the instructions of the applicant do so for the account and at the risk of such applicant."

It was [the issuer's] case that the effect of Article 18(a) was that, if the documents were discrepant, then [the advising bank's] acceptance of them was at the risk of [the buyer/applicant].

Construing UCP500 Article 18, the court concluded that:

The sole effect of Article 18 is to prevent an applicant holding an issuing bank liable for damage caused to the applicant by the action of the bank instructed by the issuing bank. Any other construction would, to put it at its lowest, be surprising in that it would be relieving the issuing bank of any need to determine compliance pursuant to Article 14 of the UCP.

Comment:

1. The terms of the credit are, to say the least, convoluted. They require that the notice of readiness be given 21 days before the time when the seller can arrange alternate shipping. This shipping, in turn, must be effected no later than 30 July. As a result, the notice of readiness cannot have been sent later than 9 July. Since the credit was issued on 27 May, this time table could be met but it was incumbent on the seller to recognize its time constraints up front and act promptly or seek an amendment.

2. As it turned out, the consequences of a failure to do so were imposed on the issuer. This result is almost impossible to conceive. Because of the opinion, it is not possible to determine whether the deficiency which led to preclusion was in the text of the notice or the conduct of the issuer. If it was in the text of the notice, that is both remarkable and the problem of the issuer. But since the court speaks of the sale of the goods in cooperation with the applicant and the buyer, it is more likely that the problem is in the exercise of dominion. That the issuer would consent to turn over the documents without obtaining an indemnity from the applicant and buyer protecting it is difficult to imagine. That the court would fail to find estoppel in such a situation is likewise difficult to imagine if this action was the only basis for preclusion.

At the very least, this case highlights the unfortunate tendency of banks to rely on forms and formulary terms in them that will not withstand judicial scrutiny. Often they do not cause problems in situations such as this one because the customer cannot afford to incur the wrath of the bank by challenging them. When tested, though, they often are found wanting. This situation should cause every LC manager to seek a review of the forms by competent counsel intimately familiar with LC practice and law if such a review has not occurred in the past five years. In this regard, the 1997 Annual Survey of Letter of Credit Law & Practice at 359 contains model forms prepared by James G. Barnes of Baker & McKenzie for reimbusrement.

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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.