Article

Factual Summary: To facilitate purchase of machinery, bank issued a commercial LC via S.W.I.F.T. payable to beneficiary. The credit provided in field 47A that: "[e]ach drawing under this LC must be presented to Royal Bank of Canada Singapore branch, which holds special arrangements for negotiation, reimbursement and document forwarding".

The beneficiary, however, presented its documents to the Singapore branch of another bank [collecting bank], including a bill of exchange drawn on the issuer's Dalian branch by the beneficiary on the issuer. The place of expiry was Singapore. [Collecting bank] agreed to purchase the documents on the following terms:

(i) the appellant guaranteed that the bill of exchange and other documents would be promptly honoured on the maturity date, failing which it would make immediate payment to [bank] for the amount of the draft plus interest, charges and expenses incurred, and

(ii) [bank] would accept the documents 'subject to recourse' to the appellant.

The appellant also agreed to indemnify [bank] against any loss arising from discrepancies between these documents and the terms of the letter of credit.

The collecting bank forwarded the documents to the Dalian branch of the issuer and received a telex from that branch to the effect that the documents were accepted and that the proceeds would be remitted to the collecting bank on the maturity date. On receipt of this message, the collecting bank discounted the documents. Subsequently, the issuer informed the collecting bank that "owing to an action brought against the appellant in China by the Chinese buyer, the court there had ordered the respondent to stop payment under the letter of credit." When the issuer repeatedly refused to honor its acceptance, the collecting bank demanded and received repayment from the beneficiary. The beneficiary then sued the issuer in Singapore for the amount due on the LC.

Deciding that Chinese law governed the LC, the trial judge dismissed the action. On appeal, the Court of Appeals of Singapore affirmed the judgement of the trial court and dismissed the appeal.

Legal Analysis:

1. Choice of Law: In deciding that the credit was governed by the law of China, the trial judge stated that:

"the proper law of a letter of credit is 'the system of law at the place where the obligations of the bank(s) to the beneficiary arising under the credit have their closest and most real connection with'. On the facts of the case, he found that the place of presentation of the documents under the letter of credit was China, and that the obligation to make payment under the credit was likewise to be fulfilled in China."

On appeal, the beneficiary argued that "there was sufficient evidence to hold that the credit had the closest and most real connection with Singapore, such that it was governed by Singapore law." In determining the proper law to be applied, the appellate court noted the distinction between straight or negotiation credits and between confirmed or unconfirmed credits. Concluding that the credit was an confirmed straight credit, the appellate court stated that the common law test was:

"the proper law governing a transaction is the system of law with which the transaction has the closest and most real connection. ... Where the contract between the issuing bank and the beneficiary under an unconfirmed straight letter of credit is concerned, the transaction contemplated is payment by the issuing bank upon the presentation and acceptance of conforming documents. ... This transaction is most closely connected with the system of law at the place of payment against documents, and thus, that system of law governs the contract between the issuing bank and the beneficiary under an unconfirmed straight credit."

In conclusion, the appellate court ruled:

"as far as the contract between the issuing bank and the beneficiary under an unconfirmed straight letter of credit is concerned, the system of law at the place of payment against documents governs this contract, since the transaction contemplated by the contract has the closest and most real connection with that system of law."

2. Negotiation Credits: With respect to negotiation credits, the appellate court stated that:

"a bank (the negotiating bank) may negotiate (purchase from the beneficiary) the documents to be presented under the letter of credit. Should negotiation take place, the beneficiary would get his money from the negotiating bank immediately, with the negotiating bank in turn presenting the documents to the issuing or confirming bank and receiving payment in due course. In such a situation, the payment undertaking of the issuing bank and, if the credit is confirmed, that of the confirming bank, is directed to both the beneficiary and either any bank if the credit is freely negotiable, or any bank described or stipulated in the credit if negotiation is restricted to certain banks ...

"The test for determining the proper law of contracts under a letter of credit varies, depending on the nature of the letter of credit under consideration and on the particular contract under that letter of credit which is in issue."

Looking at the credit involved in the case, the appellate court characterized it as unconfirmed and straight. It noted that:

"[w]hether or not a letter of credit allows for negotiation is a matter of construing the credit. ... A typical example of the wording used in a negotiation credit would be as follows: We [the issuing bank] hereby engage with drawers and [sol] or bona fide holders that drafts drawn and negotiated in conformity with the terms of the credit will be honoured by us and that drafts accepted with[in] the terms of this credit will be duly honoured at maturity. ... If the words used in a letter of credit are unclear, the courts are generally reluctant to treat it as a negotiation credit."

Explaining this conclusion, the appellate court stated that:

"In the present case, although Condition 47A.5 as well as the evidence of the [issuer's] witnesses in their affidavits of evidence-in-chief suggested that the parties did intend negotiation to be available under the credit, albeit only with [the Royal Bank of Canada], we noted that the respondent's payment undertaking in Condition 78 (para 4, supra) did not expressly extend to bona fide holders of drafts drawn under the credit, contrary to the wording usually used in negotiation credits (supra). Furthermore, the application form for the letter of credit did not state that the credit was to be available by negotiation, even though this could easily have been done. Instead, the form simply provided that the credit was to be available by acceptance of drafts."

3. Place of Payment: The beneficiary argued that the trial judge erred in ruling that the place of presentation is China, noting the terms of the credit that called for presentation in Singapore and that the place of expiry was in Singapore. In the trial court opinion, the following statement appears:

Where it is a straight credit, there is only one undertaking which is that of the issuing bank. The sites of that issuing bank, where the documents have to be presented for payment, must determine the governing law for the credit. So if the issuing bank for the straight letter of credit is in Chile, then Chilean law governs that credit, unless the letter of credit expressly provides otherwise.

The appellate court focused on the place of payment. In determining the place of payment, the appellate court stated that:

This turned on the terms of the letter of credit at the time the transaction between the [beneficiary] and the [issuer] came into existence. In this context, the [beneficiary] contended that this transaction was concluded only on 17 January 1996 when the [issuer] notified [the collecting bank] by telex that it had accepted the documents tendered by the appellant (...). The contention was flawed. The issuing bank's undertaking to the beneficiary under a letter of credit becomes binding when it is communicated to the beneficiary with the contract between the parties coming into existence at that point in time.

Recognizing that the credit called for presentation of documents in Singapore, the appellate court stated that:

[C]ondition 47A.5 pointed to the presentation of documents in Singapore as being for one of three possible purposes, namely negotiation, reimbursement or forwarding to the respondent. We ruled out negotiation as we were of the view that the credit was a straight credit. We also did not regard the reference to [the nominated bank] having special arrangements for 'reimbursement' (para 4, supra) as an indication that the bank was authorised to accept documents presented to it in Singapore on the [issuer's] behalf. This was because [S.W.I.F.T. fields] 41D, 42A and 42C of the credit, which stipulated that the credit was to be available with the respondent's Dalian branch by acceptance of drafts at 180 days after sight, entailed that payment, in the sense of honouring drafts drawn under the credit, could only be made by the respondent in China. It would be anomalous if [the nominated bank] had no authority to pay ... the beneficiary of the credit, and yet could bind the [issuer] by its acceptance of documents in Singapore. We thus treated as otiose the reference to 'reimbursement' in Condition 47A.5. This meant that the presentation of documents in Singapore could effectively only be for the purpose of forwarding to the respondent, with the presentation for acceptance in China.

As for the place of payment against documents under the letter of credit, this would likewise be China since the documents were to be presented for acceptance in that country and since the wording of [S.W.I.F.T. fields] 41D, 42A and 42C indicated that payment under the letter of credit could only be made by the respondent from its branch in Dalian (para 26, supra). In this context, the [beneficiary's] contention that payment against documents was to be made in Singapore because negotiation was contemplated here and because the [issuer] knew it had to pay [the correspondent bank] here was flawed. As we indicated above (para 16-17, supra), the letter of credit did not in fact provide for negotiation in Singapore. Besides, the [issuer's] obligation to pay [the correspondent bank] stemmed from its status as the drawee of the bill of exchange which the latter had 'discounted', in the sense of purchasing the bill of exchange from the appellant after the respondent had accepted it. ... This obligation did not arise pursuant to the letter of credit, and thus, the place where it was to be discharged was immaterial to the place stipulated in the credit for payment against documents.

Consequently, since payment against documents was to be made in China on the facts of this appeal, the proper law of the contract between the appellant and the respondent under the letter of credit was Chinese law, as the system of law with which the transaction contemplated by this contract had the closest and most real connection.

4. Injunction: The trial court stated that:

"It was not clear what the basis of the stop payment order of the Chinese court was, whether it was based on fraud or some other ground. As stated earlier, it was not for this court to examine the basis of its decision or the correctness of its finding on Chinese law or on the facts according to that law, if the proper law governing the credit was Chinese law."

Nor is there any discussion of this issue in the appellate decision. Further, the trial court stated that:

I accepted the submission of counsel for the third party that the case before the court was not one concerning the principle of autonomy of letters of credit, ie the letter of credit is a separate transaction from the underlying contract and the court is not concerned with any dispute over the underlying contract, save if there is fraud.

The central issue was whether a foreign judgment should be given effect to and this turned solely on the issue of the proper law, which had to be determined from a proper application of the choice of law rules and nothing else. It would therefore be wrong to consider the policies associated with upholding the autonomy principle and the need for having smooth international trade financed by letters of credit without interference from injunctions, stop-payment court orders and so on, when deciding on the question of the proper law of a credit.

Should a decision be made that Singapore law was the governing law, then a consideration of the autonomy principle and other relevant policies might help to determine the enforceability of the credit obligations under the law of Singapore.

If foreign law applied, then the judgment of the foreign court, based on an application of its own rules and policies, which it was entitled to propound, should be given effect to. I agreed with the submission of the learned counsel for the third party that considering the policy behind autonomy of credits (an English/Singapore principle) before the selection of the proper law was to put the cart before the horse.

Comment:

1. This opinion demonstrates the value and necessity of adoption of the UN Convention on Independent Guarantees and Stand-by Letters of Credit. Ignoring the opinion of experts and the practice which this opinion represents, the court manages to muddle virtually every LC issue it takes up. Had it been provided the international structure of the UN Convention, its reasoning would have been guided into productive channels.

2. There is no doubt anywhere in the world (except, it would appear, in the mind of this court) as to what law governs the obligation of the issuer to the beneficiary. Unless the credit expressly provides otherwise, it is the law of the issuer at the place of issuance. The resort to nouveau conflicts analysis based on significant contacts is singularly unwelcome in LC law and practice. When raised at the UN Working Group, it was unanimously rejected as having no support whatsoever either in the literature or in practical considerations. It is, therefore, disappointing that this obviously learned court introduces such considerations to its analysis. Its conclusion, that the law of the place of payment governs, is simply wrong unless by the place of payment it means something different than that term means in LC law and practice.

3. By selecting "the place of payment" as the focus of its choice of law analysis in a straight credit, the court adds confusion to an already convoluted opinion. There is no doubt based on the terms of the credit as recited in the opinion that the place of presentation is Singapore. There is also no doubt that the nominated bank, Royal Bank of Canada, was, at the least, a nominated paying bank under the LC and that it could have properly paid under the terms of the credit once the draft was accepted.. The trial court reached a different conclusion. It stated that:

if compliant documents were presented to RBC, and RBC had negotiated the credit in the sense of having given true value or in other words, paid without recourse (see arts 9a and 9b of the UCP 500), RBC would not have the security of any undertaking from the issuing bank, the third party, to be reimbursed as it was not authorised to negotiate in the first place. It followed therefore that RBC's role under this particular LC was limited to that of a mere advising bank and a collecting bank for the defendants, although it might have standing facilities or special arrangements with the third party for negotiation, reimbursement and document forwarding. There was no explicit authorisation given to RBC under the credit to perform any negotiation (in the sense as used in the UCP 500) for this particular LC

Had it done so, would the governing law then be the location of the paying bank? What the trial and appellate courts appear to mean by the place of payment is the location of the issuer who ultimately pays. This notion is reinforced by the trial court's statement:

The examination of the documents for compliance was in China and confirmation of acceptance by the issuing bank was also in China. If any payment was to be made, it was to be made in China by the issuing bank. That debt therefore was situated in China, where it was payable against documents, albeit non-compliant, which had been accepted by the issuing bank. Hence, I was driven by the overwhelming evidence to find that the LC had the closest and most real connection with Chinese law in this case and not Singapore law.

The problem with use of the concept such as "place of payment", apart from its novelty and unfamiliarity, is that it is artificial and divorced from reality and practice where payment means payment without recourse to the beneficiary. Thus, in practice, this place can move even under a straight credit. Under no circumstances, however, does the law governing the obligation of the issuer to the beneficiary move.

4. The court's venture into whether the credit could be regarded as a negotiation credit is also troubling. Since there was no negotiation by the nominated negotiating bank, the question is moot and need not have been addressed. Nonetheless, the court notes that the formula used in S.W.I.F.T. field 78 did not contain a reference to bona fide holders. This omission is, however, only one factor. Its significance can only be measured and understood in the context of the S.W.I.F.T. protocols for the various fields for MT700. The question then comes down to where negotiation is properly referenced in a MT700 message, the significance of such a reference or its omission, and how the communication would have been understood under standard international banking practice. It is not clear that the court even appreciated these issues much less the answer to them.

5. Although it concluded that the credit was not a negotiation credit, the trial court speculated on the applicable law in such an event. It stated:

By stipulating which bank in which country is authorised to pay, accept or negotiate, the issuer of an unconfirmed credit also has full control over the governing law of the credit. Upon the nominated bank agreeing as authorised under the credit to pay, accept or negotiate as the case might be, then the lex situs of the nominated bank where the beneficiary presents documents for such payment, acceptance or negotiation, will govern the law of the credit. That would be the place where the main performance of the obligations to the beneficiary under the credit will have the closest and most real connection. It must be remembered that the credit is after all issued in favour of the beneficiary in the first place. ..

If the issuing bank decides to issue a freely negotiable credit or for that matter a credit which can be confirmed by any bank in any country (if there is such a thing), then it cannot complain of the problem of facing a whole variety of foreign laws depending on where the beneficiary wants to have the credit negotiated or confirmed.

Apart from being unnecessary, this discussion truncates the issues. It fails to distinguish between the law applicable to any obligation or undertaking between the beneficiary and the several parties. By nominating a bank to negotiate, the issuer does not thereby submit its obligation to the law of that place. The same result obtains with regard to nomination of a confirmer. The confirmer's obligation to the beneficiary is governed by the law of the place of confirmation, but not the issuer's. That remains the place of issuance. As between the issuer and the confirmer, a more difficult question arises. The problem is whether to focus on the undertaking, in which case the place of issuance controls, or to focus on the correspondent relationship and the nature of the request being made, in which case the confirmer's law would control. The gratuitous discussion of this issue which has yet to be addressed coherently in any considered context by any authoritative body and which has been deliberately avoided in the efforts of law reform of the last decade as being beyond the articulated expectations of the international operations community by the trial court is not particularly helpful without the benefit of a broader frame of reference than is demonstrated in the opinion.

6. The most troubling aspect of this decision is the assumption that a Singapore court is obligated to give effect to the order of another court enjoining payment on a LC even where the ground for that decision has nothing to do with fraud. Here, again, the need for the UN Convention is obvious. The court skirts this issue by agreeing with counsel for he bank that the case raises no issue regarding the independent nature of the LC. Nothing could be farther from the truth. If an entity is subject to the jurisdiction of the Singapore courts, it is subject to the law and public policy of Singapore. Admittedly, the Singapore court could not give question a finding of egregious letter of credit fraud or illegality. But it could refuse to permit an issuer from defending itself from its obligation under a letter of credit based on any other reason. To fail to do so is to undermine the meaning of an independent promise and of the reliability of the Singapore courts to enforce their integrity. In addition, it must be recognized that the undertaking involved is not only the LC but also an acceptance whose independent also merits protection by the courts. Ultimately, this decision and the conduct which gave rise to it can only undermine the willingness of the world community to accept letters of credit issued by Chinese banks.

7. The trial court undertakes an interesting discussion of discounting. It states:

Another related question is whether the plaintiffs here merely discounted the bill drawn by the defendants or had they negotiated the LC. As I understand it, 'discounting' means the discounting bank advancing or lending money after the bill has been accepted, which becomes the security for the advancement or loan, and upon failure of that security, there is recourse to the borrower for reimbursement of the moneys advanced or lent. A discounting transaction is in fact a separate 'side' transaction outside the credit to which the issuing bank is not privy to.

Whereas 'negotiation' under a credit in its technical and legal sense, within the meaning of the UCP 500, generally means giving value to or purchasing the bill usually prior to acceptance and making payment to the beneficiary without recourse, after the negotiating bank is satisfied that the documents tendered for negotiation are in compliance with the credit. Here, the negotiating bank relies purely on the creditworthiness of the issuing bank, and the negotiating bank can no longer look towards the seller of the bill for reimbursement, should the issuing bank fail to pay under the credit. A negotiation is a transaction under the credit, to which the issuing bank is privy to, because the negotiation by that bank will have to be first authorised or allowed under the credit.

* * *

Plainly then, it was a discounting arrangement where the plaintiffs required, more precisely an advancement of money, based on the security of an accepted bill from the third party. The plaintiffs' credit advice (see DBD33) of payment of S$ 680,236.85 (ie equivalent of US$ 500,000 less commission and other charges) to the defendants clearly stated that the plaintiffs had discounted the defendants' bill drawn against the third party, which credit advice was given only after the third party had advised the plaintiffs of their acceptance.

* * *

That discounting was without doubt an arrangement falling outside the LC and was a separate and distinct contractual agreement between the plaintiffs and the defendants. Thus, the accepted LC was a form of security given to the plaintiffs under the discounting arrangement. The plaintiffs took the risk of that security. The plaintiffs made payment under the discounting arrangement on the basis that (a) the security was good after having obtained confirmation of acceptance from the issuing bank; and (b) that the defendants were also creditworthy as the plaintiffs were relying additionally on their own right of recourse against the defendants. The presentation or tendering of documents by the defendants to the plaintiffs was not for the purpose of negotiation or acceptance by the plaintiffs but (a) for forwarding to the third party for their acceptance; and (b) for discounting subsequently should the documents be accepted.

Under the circumstances, when the plaintiffs forwarded the documents to the issuing bank, they were in fact presenting those documents to the issuing bank in China on behalf of the defendants, who were their customer and also the beneficiaries of the LC. The plaintiffs were thus the agent of the defendants in doing so and were acting as the collecting bank for the defendants, ie to present documents and to receive payment later from the issuing bank on the beneficiary's behalf. On the facts, the place of presentation to the issuing bank of the documents under the LC for acceptance was therefore in China and not in Singapore. This was an important factor for consideration in determining what the proper law of the LC might be.

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