I received the following question from a colleague in Pakistan. Would appreciate your views on same.
(paraphrased - it's a long one)
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Freely negotiable Letter of Credit
The "nominated bank" negotiated and dispatched the documents to the issuing bank.
The negotiating bank heard nothing from the issuing bank for over 3 weeks. On enquiring at that time, the issuing bank indicated that it was not taking up the documents because:
Quote
1. Goods were purportedly loaded onboard Eax Sanctity Voy 035 on 20.08.2003. This vessel was not in the vicinity of Karachi Port on or about 20.08.2003. This vessel does not sail to Australia. It flies its service between Karachi & Keelung Taiwan.
2. The container number quoted on the Bill of Lading does not appear to relate to this shipment. We are advised that this container was actually on route from Hamburg to Hong Kong at the time B/L was dated.
In view of the above we have today returned documents to you by DHL & have closed our files.
Unquote
Negotiating Bank replied that the alleged discrepancies are baseless & untenable in terms of UCP 500 (Articles 9aiv, 13b, 14d,e &15) and that the issuing bank was precluded from refusing to take up the documents because it had not issued a notice of refusal in accordance with the provisions of UCP.
The Issuing Bank again refused payment on account that fraud has been proven in this transaction & our local laws prohibit us from undertaking Fraudulent Transaction. The ICC states that local laws & customs override the provisions of UCP 500
However, the Issuing Bank did not give any indication of a court order restraining them from making payment to the negotiating bank.
So, is the Issuing Bank justified in refusing payment to the negotiating bank against compliant documents under these circumstances?
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notice of refusal/fraud
notice of refusal/fraud
Leo,
Personal views without liability / responsibility:
1. I assume the nominated bank really did negotiate, i.e. it either made immediate payment or undertook an obligation to make payment (Position Paper 2 refers). If it did not, this is a matter between the beneficiary and the issuing bank.
2. Assuming it did negotiate, then -per the UCP- the issuing bank is obliged to 'reimburse' the nominated bank, notwithstanding there being fraud in the underlying transaction. Articles 9a(iv), 10d, 13a, 14aii, 15 etc refer.
3. Even if the issuing bank was the subject of an injunction from a competent court, if the nominated bank had truly negotiated, I would expect:
A. The issuing bank to seek to have the injunction overturned.
B. The nominated bank to be able successfully to sue the issuing bank, in principle at least. In practice, the question of the applicable law, which courts have jurisdiction and the ability to enforce any judgement against the issuing bank will be of great importance.
4. I think it is important to distinguish between 'discrepancies', which are a question of lack of facial compliance, and fraud in the underlying transaction. Therefore, I would not see Article 14e as relevant unless the issuing bank also contended the documents were facially non-compliant.
Jeremy
[edited 12/2/2004 2:59:38 PM]
Personal views without liability / responsibility:
1. I assume the nominated bank really did negotiate, i.e. it either made immediate payment or undertook an obligation to make payment (Position Paper 2 refers). If it did not, this is a matter between the beneficiary and the issuing bank.
2. Assuming it did negotiate, then -per the UCP- the issuing bank is obliged to 'reimburse' the nominated bank, notwithstanding there being fraud in the underlying transaction. Articles 9a(iv), 10d, 13a, 14aii, 15 etc refer.
3. Even if the issuing bank was the subject of an injunction from a competent court, if the nominated bank had truly negotiated, I would expect:
A. The issuing bank to seek to have the injunction overturned.
B. The nominated bank to be able successfully to sue the issuing bank, in principle at least. In practice, the question of the applicable law, which courts have jurisdiction and the ability to enforce any judgement against the issuing bank will be of great importance.
4. I think it is important to distinguish between 'discrepancies', which are a question of lack of facial compliance, and fraud in the underlying transaction. Therefore, I would not see Article 14e as relevant unless the issuing bank also contended the documents were facially non-compliant.
Jeremy
[edited 12/2/2004 2:59:38 PM]
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BillSlowinski
- Posts: 13
- Joined: Fri Apr 05, 2019 5:13 pm
notice of refusal/fraud
Leo:
My personal opinion without liability- The issuing bank has stepped outside of the UCP in this case. We all agree the issuer should first have reviewed the documents and where discrepancies are found followed through with a refusal per UCP500 article 14. That they have failed to do so would preclude them from refusing payment under UCP. Why did they go outside of the documents and attempt to verify shipment? This is again outside of the UCP. But I have been told this is not unusual in certain countries. (But what are we as an industry doing to this product? This is a larger question for another discussion.) So from a UCP point of view, their actions are improper and are at risk to be held liable for payment.
But then there is local law. A bank must abide by law of their jurisdiction. The UCP is not law. It is international customs and practices. UCP 500 Article 4 states all parties deal in documents. Article 15 states that banks are not liable or responsible for the genuineness or falsification of any documents or good faith or acts or omissions of any party. In the United States we have law governing letters of credit and other independent undertakings. I do not know Pakistani law but will address this from what little experience I have with US law. Again, this is my personal opinion.
In the US, the standard for proving fraud is very high. Is it material fraud or something else (less)? U.S. State law covering a defense of fraud under a letter of credit transaction is found in Revised UCC Article 5 section 5-109 Fraud and Forgery. This section set a high burden for proof to enjoin payment under a letter of credit. The law understands the necessity of maintaining the independence principle of the letter of credit in order for letters of credit to remain a viable payment mechanism. Among the issues covered by this section, payment may be enjoined if a court finds forgery or material fraud committed by the beneficiary where (a) relief is not prohibited by law for an accepted draft or deferred obligation incurred by the issuer; (b) the beneficiary who will be adversely effected by the enjoining of payment, is adequately protected against loss it may suffer by the enjoinment; and (c) the applicant has submitted information to the court that they are likely to succeed with their claim of forgery or material fraud. US law states the issuer shall honor the presentation, if honor is demanded by a nominated person who has given value in good faith and without notice of forgery or material fraud. But also where the law speaks to non-payment, it also speaks to information submitted to the court. So from my reading, a court order is necessary for non-payment. Again, this is all US law not Pakistani law, and I am not a lawyer.
My personal opinion without liability- The issuing bank has stepped outside of the UCP in this case. We all agree the issuer should first have reviewed the documents and where discrepancies are found followed through with a refusal per UCP500 article 14. That they have failed to do so would preclude them from refusing payment under UCP. Why did they go outside of the documents and attempt to verify shipment? This is again outside of the UCP. But I have been told this is not unusual in certain countries. (But what are we as an industry doing to this product? This is a larger question for another discussion.) So from a UCP point of view, their actions are improper and are at risk to be held liable for payment.
But then there is local law. A bank must abide by law of their jurisdiction. The UCP is not law. It is international customs and practices. UCP 500 Article 4 states all parties deal in documents. Article 15 states that banks are not liable or responsible for the genuineness or falsification of any documents or good faith or acts or omissions of any party. In the United States we have law governing letters of credit and other independent undertakings. I do not know Pakistani law but will address this from what little experience I have with US law. Again, this is my personal opinion.
In the US, the standard for proving fraud is very high. Is it material fraud or something else (less)? U.S. State law covering a defense of fraud under a letter of credit transaction is found in Revised UCC Article 5 section 5-109 Fraud and Forgery. This section set a high burden for proof to enjoin payment under a letter of credit. The law understands the necessity of maintaining the independence principle of the letter of credit in order for letters of credit to remain a viable payment mechanism. Among the issues covered by this section, payment may be enjoined if a court finds forgery or material fraud committed by the beneficiary where (a) relief is not prohibited by law for an accepted draft or deferred obligation incurred by the issuer; (b) the beneficiary who will be adversely effected by the enjoining of payment, is adequately protected against loss it may suffer by the enjoinment; and (c) the applicant has submitted information to the court that they are likely to succeed with their claim of forgery or material fraud. US law states the issuer shall honor the presentation, if honor is demanded by a nominated person who has given value in good faith and without notice of forgery or material fraud. But also where the law speaks to non-payment, it also speaks to information submitted to the court. So from my reading, a court order is necessary for non-payment. Again, this is all US law not Pakistani law, and I am not a lawyer.
notice of refusal/fraud
Bill,
Nice to have your views. My impression is that U.S. courts, at least those that understand credits and the UCC provisions that apply to them, will not 'enjoin' (I think that's the U.S. term) the issuing bank from making payment where it can be shown -to the court- that a nominated bank has carried out its nominated bank role in accordance with the UCP. No doubt you'll correct me if my impression is wrong.
Also, for your info, in England I believe a court injunction is not necessary to prevent payment, where fraud is alleged, and -furthermore- a court that understands credits will not usually grant one on 'balance of convenience' grounds. My understanding is that the onus is on the relevant bank to decide, in the light of the information regarding fraud presented, if it has an obligation to make payment or not. In Leo's example, if the issuing bank were English and the nominated bank had negotiated, the issuing bank would be obliged, under English law, to reimburse the nominated bank however strong the evidence of fraud was (unless, of course, there was strong evidence the nominated bank itself was involved in the fraud). Not that I am suggesting English law would necessarily apply to the English issuing bank's obligations to the nominated bank.
Jeremy
Nice to have your views. My impression is that U.S. courts, at least those that understand credits and the UCC provisions that apply to them, will not 'enjoin' (I think that's the U.S. term) the issuing bank from making payment where it can be shown -to the court- that a nominated bank has carried out its nominated bank role in accordance with the UCP. No doubt you'll correct me if my impression is wrong.
Also, for your info, in England I believe a court injunction is not necessary to prevent payment, where fraud is alleged, and -furthermore- a court that understands credits will not usually grant one on 'balance of convenience' grounds. My understanding is that the onus is on the relevant bank to decide, in the light of the information regarding fraud presented, if it has an obligation to make payment or not. In Leo's example, if the issuing bank were English and the nominated bank had negotiated, the issuing bank would be obliged, under English law, to reimburse the nominated bank however strong the evidence of fraud was (unless, of course, there was strong evidence the nominated bank itself was involved in the fraud). Not that I am suggesting English law would necessarily apply to the English issuing bank's obligations to the nominated bank.
Jeremy
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
notice of refusal/fraud
Are any of the lessons of Banco Santander or IBK v BNP Paribas applicable here ?
In other words is this an acceptance or deferred payment credit in which the fraud was discovered after documents found (initially) in order ?
Laurence
In other words is this an acceptance or deferred payment credit in which the fraud was discovered after documents found (initially) in order ?
Laurence
notice of refusal/fraud
If the credit is available by negotiation there should not be. I believe the judgment was essentially a result of the UCP not covering discounting of deferred payment obligations and there not being any English statue law on the subject (unlike, with respect to statute law, bills of exchange). Had the credit, in this court case, been available by negotiation I have no doubt the judgment would have been in the nominated bank's favour, except possibly if it could have been shown the nominated bank had been negligent etc.