Liablity of the issuing bank under the injunction situation

[PhanThanhNhan]

Pls give your comments and advice for the following case:
- The issuing bank A issued an L/C for USD80,000.00
- The Bank B of the beneficiary mailed the full set of documents to the issuing bank.
- After receiving these documents, the Issuing Bank did NOT make payment during the period stated in the L/C
- Upon receipt of the tracer from the Bank B, the Issuing Bank replied that it would NOT make payment due to an injunction.
- The beneficiary sued the Issuing bank for wrongful dishonor
.
Our questions in this case are:
1. Is the Issuing Bank needs to notify the Presenting bank within 05 days after receipt of documents upon receipt of the injunction?
2. Does the Issuing bank is liable for payment if they receipt the injunction?

[DanielD]

I do not know in other countries (but I presume it must be approximately the same), a bank is well advised to obey the national authorities such as a court.
Daniel

[JimBarnes]

The issuing bank's defense is based on court injunction, a kind of sovereign compulsion defense. This defense is not based on UCP and is, therefore, not necessarily affected by UCP notification and preclusion requirements.

Whether this is a good defense depends on what court decides the validity of the defense. This typically turns on whether the injunction appears to have been based on, and supported by a showing of, fraud rather than mere breach of the underlying contract.

Regards, Jim Barnes

[ThuHoangAnh_]

It’s true that the issuing bank can’t help acting in accordance with the court’s injunction, e.g., stop payment order.

(1) The five-day rule in UCP 600 has nothing to do with the court’s injunction, therefore, the issuing bank is not obligated to notify the beneficiary’s bank of the court’s injunction within such a period, but the sooner the better.

(2) It depends on the court’s injunction. For example, the court just orders the issuing bank to temporarily retain the payment until the dispute is settled. In this case, the bank’s liability for payment shall cease when the final award is given by the court.

Best regards, N.H. Duc

[asamaha]

I think banks do not accept to stop payment due to injuction unless the amount is paid by the applicant and blocked in their books until the final decision of the courts.
Antoine

[ThuHoangAnh_]

Dear Antoine,

The issuing bank’s liability for payment under LC is independent of the applicant’s liability under the contract for opening LC signed between the issuing bank and the applicant. Therefore, whether or not the applicant has fulfilled its obligation toward the issuing bank under the contract for opening LC, the issuing bank, subject to UCP, must honour if the documents presented are complying.

Yet, local law prevails over UCP. This is true in every part of the world. All entities are obligated to abide by the law of the country where they operate. And the issuing bank is not an exception. It can’t help stopping the payment if it has received such an order from the court of law.

Best regards,
N.H. Duc

[JimBarnes]

An issuing bank should follow UCP600 re timely notification of apparent discrepancies, unless the court enjoins giving of notice (which is rarely requested or ordered). Otherwise, the issuing bank will be precluded from raising discrepancy defenses if the injunction is later dissolved or if some other court decides not to recognize the injunction.

Regards, Jim Barnes

[RobertoC]

WE KNOW THAT IN MANY COUNTRIES FAILUR TO OBBEY TO THE INJUCTION ISSUED BY A NATIONAL AUTHORITY, LIKE A JUDGE, LEADS TO CIVIL SANCTIONS FOR THE BANK AND EVEN PENAL SANCTIONS FOR THE PERSON WHO EFFECTED THE PAYMENT.
HOWEVER, IT IS ESSENTIAL TO SEPARATE BANK’S OBLIGATIONS ARISING FROM UCP FROM THE ONES ARISING FROM NATIONAL AUTHORITIES’ INJUNCTION.
REFERRING TO UCP OBLIGATIONS ART. 14 (B) UCP 600 PROVIDES THAT BANKS “SHALL HAVE A MAXIMUM OF FIVE BANKING DAYS FOLLOWING THE DAY OF PRESENTATION TO DETERMINE IF A PRESENTATION IS COMPLYING”.
THIS PERIOD IS NOT AFFECTED BY THE OCCURRENCE OF A INJUNCTION.
AFTER THAT PERIOD A CONFIRMING OR NOMINATED (WHICH ACCEPTED THE NOMINATION) BANK HAS REASON TO BELIEVE THAT IT WILL RECEIVE THE PAYMENT (IF PROVIDED FOR AT SIGHT).
THEREFORE AN ISSUING BANK WHICH RECEIVES AN INJUCTION, SHOULD IMMEDIATELY INFORM THE CONFIRMING/NOMINATED BANK IN ORDER TO AVOID THAT THE SAME SUFFERS ANY DAMAGE DUE TO A POSSIBLE FRAUD.
IN THE SAME WAY, IF THE INJUCTION HAS BEEN ISSUED FOLLOWING A BREACH OF THE UNDERLYING CONTRACT, LIKE IT SOMETIMES UNFORTUNATELY HAPPENS, A DELAYED PAYMENT COMBINED WITH LACK OF INFORMATION CAN LEAD TO A DISPUTE BETWEEN ISSUING BANK AND CONFIRMING/NOMINATED BANK FOR FAILURE TO COMPLY WITH L/C TERMS AND CONDITIONS AND ART. 14 (b) UCP 600 REV.2007; ALL THE MORE SO, IF IT EMERGES THAT THE INJUNCTION WAS RECEIVED BY THE ISSUING BANK AFTER THE LIMITS SET BY ABOVE MENTIONED ART. 14 (B) UCP 600.

Regards
Fiorentini

[edited 9/19/2008 9:41:31 AM]