Article

Factual Summary:

At the request of the buyers, the issuer issued an LC with "copious typed additions ... that ... [was] not a well-drafted document ... ." The credit was described in the opinion as follows:

"On the front of the credit there is at one point the heading DOCUMENTS REQUIRED ARE MARKED (X) BELOW. There follows a series of six boxes, each with a printed description of documents which may be required. In the present case four were marked X, as follows:

'Beneficiary's manually signed drafts at [180 days from B/L]

Manually signed commercial invoices ... in octuplicate certifying merchandise to be of [Iran] origin ...

Full set of clean 'shipped on board' marine BILL(S) OF LADING ...

Copy of declaration detailing all shipments/ dispatches sent by airmail/telex direct to the applicant ...'

Next there is a section headed 'Other conditions'. That provides, among other things,

(a) Carrier/Carrier's Agent certificate is required that the carrying vessel is operating under flag other than Israeli, Taiwanese, Indian ...

Thus far there is no problem with the printed requirements. Then there is a typewritten section which fills more than half the letter of credit, under the printed heading 'Special Conditions'. It has to be set out in full in order to give the full flavour of document:

(1) Packing list in triplicate required. (2) A Bill of Exchange to be provided drawn on opener as an additional document as per UCP500 Article 9B(IV). (3) Quantity to be adjusted within L/c value. (4) Reimbursements under this credit are subject to Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits ICC Publication No. 525. (5) LC should be freely available for negotiation with any Bank in the Beneficiary's Country, preferable through Credit Agricole Indosuez, London. (6) Shipment by container vessels allowed only. (7) Shipment details should be faxed to the applicant within three days from the shipment date on their Fax No 92-42- 5834716 or on their Telex No 47499 ISLLH PK and a copy of either advice should accompany the original documents. (8) Non-negotiable documents along with photo copies of original B/L should be sent to the applicant of LC by Courier service on their address FB/5, 3rd Floor, Awami Complex, Usman Block, New Garden Town Lahore- Pakistan. (9) Original documents alongwith eight copies each of invoice, packing list, weight and measurement list, Bill of Lading and certificate of origin should be sent to us by Courier at the cost of beneficiary. (10) The beneficiary should furnish a certificate that all the terms and conditions of LC have been complied with in full. (11) Cotton should be completely ginned (Certificate to this effect is required). (12) Phytosanitary certificate must be issued by the competent authority in the country of origin/shipment should cover that the consignment of raw cotton is free from all pests and diseases particulary anthonomus grandis. (13) The consignment must be fumigated for 48 Hours with 3-4 Lbs of methyl Bromide per 1000 Cu Ft before loading which must be reflected in the phytosanitary certificate. (14) Part shipment of less than IX 40 Ft FCL is not allowed. (15) Terminal handling charges at Karachi Seaport are for beneficiary's account and B/L must show the evidence as 'THE PREPAID'. (16) Containers should be allowed 20 days free of rent at destination by the shipping line from the date of arrival of the vessel and a certificate from the shipping line is required to this effect. (17) In the event of documents being presented to us which do not confirm the terms of the credit, we shall levy a charge, for account of the Beneficiary, which consist of a discrepancy fee of USD 50.00 together with any Telex fee that may occur. (18) All shipping documents to show goods imported under manufacturing bond licence No 45/LHR/95."

The seller/beneficiary presented to the confirmer a bill of exchange for $262,869.39 with accompanying documents. The confirmer accepted the bill of exchange, discounted it, and forwarded the documents to the issuer. The issuer dishonored, alleging that the documents were missing a weight certificate and measurement list. The confirmer was unable to obtain the alleged missing documents from the seller. The issuer then returned the documents to the confirmer. The confirmer sought reimbursement for the $262,869.39 it had paid from the issuer and damages since, as holder of the documents, it was charged for storing and disposing of the cotton by the port authorities. The trial court gave summary judgment for damages to the confirmer and the issuer appealed. On appeal, affirmed.

Legal Analysis:

1. Interpretation of LC: Whether Certain Documents are Required: The judge stated that the question was whether the missing documents are "[s]tipulated documents, against which payment or negotiation was to be made. In other words, were they a condition of the operation of the credit, or not?" Noting that the credit did not expressly stipulate that the documents be presented, the judge considered the credit as a whole.

He noted that:

"[o]ne can see at a glance that the letter of credit is a hotchpotch or amalgam of terms that require documents to be provided, terms as to what documents should contain, terms as to performance of the sale contract, terms as to performance of the letter of credit contract and terms which may or may not be one of those things. For example term (1) appears to be a requirement for a stipulated document; [Counsel for the confirming bank] accepts that it is. Term (2) is unclear, as art 9(b)(iv) does not in terms state what is the function of an 'additional document'. Term (3) is also unclear. Does it or does it not regulate the content of some of the stipulated documents? Term (4) is nothing to do with documents, and is for present purposes part of the contract between the confirming bank and the issuing bank. Term (5) appears to be part of the contract between the buyers and the [issuer], which has been carried over into the letter of credit. Term (8), which deals with non-negotiable documents and photocopies, is manifestly not providing for stipulated documents. And so on. Apart from the problem of understanding these provisions, there is a degree of repetition and inconsistency. A printed instruction, marked in typescript with a cross, reads: 'Please send original and duplicate sets of documents to us by successive Registered Courier.'

By contrast, [Clause] 9 would require that some but not other stipulated documents (if that is what it were referring to) should be sent to [the issuer] by courier at the cost of the beneficiary. The printed form requires invoices in octuplicate; [Clause] 9 refers to an original and eight copies. A certificate stating the origin of the goods is required both in the printed form when it deals with invoices, and on the Issuing Bank's argument in [Clause] 9. [Counsel for the confirming bank] points out that mandatory language is used in these 18 clauses when on his submission it is desired to provide for a stipulated document. Thus [Clauses] 1 and 11 refer to a document being 'required', [Clause] 15 states what the bill of landing 'must show' and such like."

The judge concluded that:

"It seems to me that the letter of credit leaves one in genuine doubt as to whether [Clause] 9 is stating that the documents which it refers to are stipulated documents, essential to the operation of the credit. It certainly does not, as required by art 5(b), state precisely that a weight and measurement list, and a certificate of origin, are documents against which payment or negotiation is to be made. I would therefore hold, in agreement with the [trial] Judge, on the construction of the letter of credit that [the confirmer was] entitled to payment."

2. UCP500 Article 5: The judge noted that UCP500 Article 5 was relevant.

"In part that article is hope, aspiration, advice. But the requirement that a letter of credit must state precisely what documents are required for payment, acceptance or negotiation seems to me to be part of the terms of the contract. And by that I mean terms of (i) the contract between the buyers and the issuing bank, (ii) the contract between the issuing bank and the confirming bank, and (iii) the contract between the confirming bank and whoever should present documents for negotiation - in this case the sellers."

3. Extraneous Documents: In construing the LC, the judge distinguished between "stipulated documents" on the one hand and others, not mentioned in the credit, which are provided by the sellers on negotiation. Said the judge of the latter: "Those the banks need not examine. And there must be a third class, including non-negotiable documents (whatever that may mean) and copies, mentioned in the credit but not stipulated documents."

4. Request for Clarification: Alternatively, the issuer argued that the confirmer should have asked for clarification of the terms of the LC. The court rejected this argument stating that it was impracticable for the confirmer to request clarification because there were only five days between issuance of the LC and the latest shipment date, and the court said "I do not see that they were obliged to give up the chance of participating in business which is presumably profitable to some extent ... because the ... language of the other party might ... lead to a dispute."

5. Clarification: The issuer also argued that the confirmer could have asked for clarification when the documents were first presented. The court said that this was also impracticable. The court relied on the confirmer's argument that clarification at presentation of the documents would not have done the confirmer any good because "[t]hey had bound themselves to the sellers in the terms of the letter of credit."

6. Construction of LC: The confirmer's counsel argued that where there is ambiguity in the LC, it should be construed against the issuing bank. The court agreed and said, " ... the confirming bank is the correspondent of the issuing bank, and acts for the issuing bank in order to do what the issuing bank is not present to do for itself. That is ... sufficient to attract the rule that an agent is to be excused for acting on a reasonable ... interpretation of his principal instructions."

Comments

It goes without saying that the credit, as issued, is not well drafted. The question remains whether the issuer or confirmer should bear the consequences of the poor draftsmanship. It cannot be enough to say that the confirmer (or the beneficiary) should bear the consequences of the issuer's unprofessional draftsmanship merely because it did not seek clarification. In such a situation, the court quite properly gives weight to a reasonable interpretation adopted by the confirmer.

© 2000 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.