Factual Summary:

Bank issued an LC that authorized confirmation and provided that it was:

"[a]vailable against presentation of drafts at 180 days from the date of negotiation by deferred payment." It also stated that a required document was "[n]on legalized non certified Certificate of Origin issued by exporter acceptable for negotiation in which case Beneficiary's Certificate stating that the original legalized and certified Certificate of Origin will be sent directly to the Applicant must accompany the documents presented for negotiation."

On 26 March 1999, confirmer received documents and made payment to the beneficiary under issuer's LC, and forwarded to the issuer all the documents called for under the LC for reimbursement. In reference to payment schedule, confirmer stated "180 days fr Date of nego- due on 21 Sept 99". On 31 March 1999, the issuer telexed an agreement to "remit proceed as per [confirmer's] instructions", in effect agreeing to reimbursement.

On 25 May 1999, issuer sent confirmer a telex stating that "by reason of a serious fraud suspicion, [confirmer] would not be in a position to effect payment ... under the LC." Issuer further stated that "[the confirmer] should retain and refuse any payment to any beneficiary under the credit until further notice from the issuer and that any payment that had been effected by [the confirmer] would be deemed by the issuer to have been done by [the confirmer] 'under its own and exclusive responsibility only.'"

The confirmer responded by stating it had "confirmed and negotiated documents in strict compliance with the terms of the credit and that on the due date the [issuer] was to effect payment according to the [confirmer's] instructions as the [issuer] had itself confirmed by its tested telexes ... ." When the due date arrived the issuer refused payment, claiming "that there had been fraud by the beneficiary and as such fraud was discovered before the maturity date no payment was due." Confirmer brought action for reimbursement. On its motion, summary judgment was granted for confirmer.

Legal Analysis:

1. Deferred Payment Undertaking; Negotiable Credit: The court considered itself constrained by the decision in Banco Santander SA v. Bayfern Ltd, [1999] All ER (D) 586 (Queen's Bench Division, Commercial Court)[England] in the event that it concluded that the credit was a deferred payment undertaking. The thrust of that controversial decision was that a confirmer that discounts documents that comply on their face with the terms and conditions of the credit bears the risk that they will be found to be fraudulent prior to the maturity date.

On the other hand, the court noted that a negotiable letter of credit "entitles the negotiating bank to buy over or otherwise give value for the documents and drafts drawn by the beneficiary and present these under the credit in its own name to the issuing bank, for payment at maturity ... . Unlike in the situation of a deferred payment credit, a negotiating bank is permitted to make payment to the beneficiary without waiting for maturity of the credit. It buys over the documents on presentation and that is the essence of negotiation. Fraud on the beneficiary's part does not affect a negotiating bank unless the negotiating bank is itself a party to or has knowledge of the fraud."

Given these different outcomes, the court considered whether the credit in the case before it was a negotiation credit or a deferred payment undertaking.

It approached this task on the sound principle of construction that the only relevant terms were those of the credit and the correspondence between the banks. The court also noted that it should look at the document as a whole. Finally, the court indicated that it would not conclude that the credit was a negotiation credit if the terms of the credit were unclear with respect to negotiation.

In construing the credit, the court stated that "the most important sentence in the credit was the one near its beginning which stated 'Available against presentation of drafts at 180 days from the date of negotiation by deferred credit'. The fact that the words 'deferred credit' appeared in that sentence did not in my mind detract from the vital points that in order to obtain payment under the credit, drafts would have to be presented for payment to be made 180 days from the time those drafts had been negotiated. Drafts in themselves are negotiable instruments and the inference to be drawn from the use of the word 'drafts' instead of documents was reinforced by the use of the word 'negotiation' in the same sentence. It appeared to me that the words 'deferred payment' were a reflection of the fact that the drafts would not be payable at sight but only after 180 days. They were surplusage but could not detract from the main meaning of the sentence. This interpretation was supported by the further references to negotiation which appeared in special condition 4 and special condition 7. In the latter case, the confirming bank (ie the plaintiff) was expressly instructed that it was not to negotiate under reserve without prior reference to the consent of the issuing bank (ie the defendant). There would have been no need for this instruction had it not been anticipated that negotiation would take place." As a result, the court concluded that the credit was negotiable and not a deferred payment undertaking.

The court rejected the issuer's argument that the reference to "deferred payment" was ambiguous. "[T]he weight of the credit when construed as a whole showed it to be a negotiation credit. I was also not impressed with the argument that it could not be a negotiation credit because of the absence of the undertaking to engage with drawers that the drafts drawn and negotiated in conformity with the credit would be duly honoured at maturity."

It also rejected the issuer's argument that "the word 'negotiation' in the opening part of the letter of credit should be read as 'presentation'. [Its] only basis to support this argument was that as it was uncertain whether the letter of credit would be negotiated, the word 'negotiation' must mean 'presentation' otherwise the date of payment could not be determined. I considered this argument a nonstarter. Even where a letter of credit is admittedly negotiable and the maturity date is determined from the date of negotiation, such an uncertainty would be present, but such uncertainty could not and would not change the nature of the letter of credit. If the [issuer's] argument was correct, it would mean that all letters of credit must stipulate that the date of payment is to be calculated solely from the date of presentation of documents. This proposition is not supported by authority."

2. Dishonor: The issuer argued that there were questions of fact regarding whether the documents complied with the terms and conditions of the credit. The court rejected this argument, noting that the issuer did not raise any issue regarding discrepancies.


This case illustrates the pernicious effect of the Banco Santander decision. The result is intuitively anti-commercial as is apparent to anyone with a basic understanding of the role of LCs in trade finance. That prior English decisions had signaled that such an absurd decision would be forthcoming is hardly a defense for it (as is sometimes suggested).

As a result, we now have a sensible court faced with a compelling commercial situation and forced to warp standard practice to fit the contours of Banco Santander. Is the credit a negotiation credit? Hardly. Although it uses the term "negotiation", the credit provides for a deferred payment undertaking by a confirming bank. Although the confirmer could have been authorized to negotiate drafts drawn under the credit if they were drawn on it under UCP500 Article 9 (b) (iv), the court does not even mention the drawee of the draft nor distinguish negotiation on the part of the confirmer under UCP500 Article 9(b) from that on the part of a nominated negotiating bank under UCP500 Article 10.

Even if the draft had been drawn on the confirmer, it would have been a time draft and would not have justified a discount under the bizarre rule of Banco Santander.

Did it "negotiate" the draft? What the bank did in this case is not distinguishable from that of the confirmer in Banco Santander. The difference is that the court here had the sense to understand that the result was not sound and to erect a technical distinction which, although perhaps unsound, avoids an even more unsound result but at the cost of blurring the meaning of negotiation and deferred payment undertakings. Given this approach, it is no wonder that banks are frustrated with the law in general and lawyers in particular.



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.