Gutteridge and Megrah's Law of Bankers' Commercial Credits

GUTTERIDGE & MEGRAH’S LAW OF BANKERS’ COMMERCIAL CREDITS GUTTERIDGE & MEGRAH’S LAW OF BANKERS’ COMMERCIAL CREDITS Eig...

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GUTTERIDGE & MEGRAH’S LAW OF BANKERS’ COMMERCIAL CREDITS

GUTTERIDGE & MEGRAH’S LAW OF BANKERS’ COMMERCIAL CREDITS Eighth Edition

Richard King of Inner Temple, Barrister

London and New York

First edition published 1932 This edition published in the Taylor & Francis e-Library, 2004. Eighth edition published 2001 Europa Publications Limited 2001 11 New Fetter Lane, London EC4P 4EE, United Kingdom (A member of the Taylor & Francis Group) © Richard King 2001 All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. ISBN 0-203-40393-2 Master e-book ISBN

ISBN 0-203-41256-7 (OEB Format) ISBN 1-85743-112-X (Print Edition) First edition 1932 H.C.Gutteridge QC Second edition 1955 Maurice Megrah Third edition 1962 Maurice Megrah Fourth edition 1968 Maurice Megrah Fifth edition 1976 Maurice Megrah QC Sixth edition 1979 Maurice Megrah QC Seventh edition 1984 Maurice Megrah QC Eighth edition 2001 Richard King

PREFACE TO EIGHTH EDITION It is a privilege to be responsible for this new edition of The Law of Bankers’ Commercial Credits and to build on the work of such eminent banking lawyers as H.C.Gutteridge QC and Maurice Megrah QC. In the preface to the second edition, Maurice Megrah referred to H.C.Gutteridge’s “penetrating mind”. Maurice Megrah was himself highly respected for his expertise in relation to documentary letters of credit and, while I was not a member of Chambers during his tenure at 5 Paper Buildings, I know that he was held in great esteem here on his death in 1985. The last edition of the book was published shortly after the 1983 Revision of the UCP came into force and, while noting the changes brought about by that Revision, Maurice Megrah continued to base the book around the 1974 Revision, which was relevant to many issues arising in connection with documentary credits at that time. Since then, the 1993 Revision has come into force and the 1974 and 1983 Revisions are of historical interest only. I have therefore undertaken a thorough revision of the text so that it reflects current law and practice in relation to documentary letters of credit. I have also incorporated reference to and commentary on the Uniform Rules relating to Bank-toBank Reimbursements, which came into force on 1 July 1996. Moreover, although this is a book principally concerned with commercial credits, attention has been drawn to the impact on the practice in relation to standby credits of International Standby Practices (ISP98), which came into force on 1 January 1999. Since 1984 there have also been many English cases concerning the law and practice in relation to documentary letters of credit. Such cases have dealt with, among other things, the obligations of the buyer in relation to the establishment of the credit under the contract of sale; the consequences of the seller’s failure to present documents under the credit; the circumstances in which a bank can refuse to honour a credit on the ground of fraud following the express recognition of the fraud exception by the House of Lords in United City Merchants v Royal Bank of Canada; the rights of an intermediary bank which discounts a deferred payment undertaking before the due date for payment; the rights and duties of banks upon transfer of the credit and assignment of proceeds; the duties of banks when rejecting documents; various aspects of documentary compliance (including the question as to what constitutes an original document); and the bank’s security rights as pledgee of the documents. I have also included analysis of the impact on jurisdictional issues of the Brussels and Lugano Conventions and the impact on the law governing credits of the Rome Convention. These changes have meant that the text has undergone very substantial rewriting. However, the fundamental principles relating to documentary letters of credit have not changed and the structure of the book has consequently remained as in previous editions. Following H.C.Gutteridge’s original structure, I have, however, restored the analysis of irrevocable and revocable credits to the chapter on the contractual relationships arising under a credit. Moreover, the chapter on documentary compliance had become so long that I have split it into two: the first of the two chapters now deals with the duties arising

on presentation of documents (including in the event of fraud) and the second deals with what constitutes documentary compliance. In preparing this edition I have been assisted by Stephen Lear, who kindly agreed to read through the text and made helpful suggestions for its improvement; by Graham Christiansen, of HSBC, who gave me invaluable insights into current practice and, in particular, into the growing trend towards the use of electronic documents; and by Jeremy Cooke QC, who provided me with detailed comments on the section of chapter 7 on insurance documents. Of course, responsibility for the final text rests with me, but I am nonetheless grateful for the assistance that I have received. I am grateful too for the assistance of Angela Hall, who has helped prepare the Table of Cases and Yvonne Dixon, who has prepared the Index and Table of Statutes. I also acknowledge the kindness of HSBC Bank Plc in permitting the reproduction of its form of application for the issue of an irrevocable documentary credit. Finally, I must express my appreciation for the assistance provided by Cathy Hartley and Tara Boland-Crewe of Europa Publications Ltd throughout the publication process. Richard King 5 Paper Buildings Temple London EC4Y 7HB 31 July 2001

PREFACE TO FIRST EDITION The financing of the exportation and importation of goods by means of bankers’ commercial credits is a device which, in its modern form, is the creation of the mercantile genius of the British people. It is somewhat surprising, therefore, that amongst all the wealth of English legal literature there should be no treatise dealing with these credits from a legal standpoint. It is for this reason that I have attempted to bring together in systematic form the material relating to these credits which is to be found scattered throughout the various series of English law reports. The exploration of a little-known field of law is always a hazardous enterprise, and it is hoped that the intricacy of the task will be regarded as some excuse for any imperfections and shortcomings of which I may have been guilty. The difficulty which arises in dealing with this subject is one which is also encountered in other departments of the law of banking, namely, the problem of defining the limits within which it is to be discussed. From one angle of view the law relating to these credits is closely connected with the law of negotiable instruments, whilst in many other respects it is also interwoven with the law of c.i.f. and f.o.b. contracts of sale. It has, consequently, proved to be impossible to discuss each and every problem in all its bearings without unreasonable deviation from the plan of a work which is intended to be a concise statement of those rules of law which are peculiar to this form of mercantile contract. It is hoped that this work may relieve the practitioner of a certain amount of the labour involved in the search for authorities, and that it may also be of some slight value to bankers and economists. The academic lawyer may perhaps find it of interest as furnishing an illustration of the process by which the Common Law of England is constantly being expanded to meet the demands of commerce. In particular the problem created in this instance by the rigidity of the rules relating to consideration is such as to merit attention from those who believe that there is scope for some modification of the law in its present form. Reference has been made to American cases where it was thought that they were directly in point, and in this connection I must acknowledge my indebtedness to the valuable help which I have received from my friend Mr Lucius Crane. I am deeply grateful to my friends Professor Gregory of the London School of Economics and Mr Maurice Megrah for the unfailing kindness which they have shown when endeavouring to guide my faltering footsteps over the ground of banking practice. I desire also to express my gratitude to Mr Charles Lidbury, Chief General Manager of the Westminster Bank, for permitting me to utilize certain materials on which the Forms in the Appendix have been based. My thanks are due to my daughter for the compilation of the Table of Cases and Index and for other help in connection with my task. H.C.Gutteridge Trinity Hall, Cambridge November, 1932

PREFACE TO SECOND EDITION The second edition of this book was to have been the combined work of the learned Author and myself, but to the deep regret of everyone who knew him and to my irreparable loss, Harold Cooke Gutteridge died in December 1953. He more than once expressed pleasure that the work was being undertaken and that he was happy with his collaborator, and if he had been able to carry the task to its end the result would have been invaluable. But, although a good deal of the new material which this edition contains had been submitted to him, illness prevented his saying what he thought of it and thus it must stand by itself, without the leavening of his penetrating mind. There has been little new interpretation of the law of this subject in the past twentythree years, but the practice relating to documentary credits has changed, or, perhaps, it would be better to say, has developed, so much in that time that the work that has had to be done to this book has almost changed it beyond recognition. Such matters as recourse, transfer, indemnities, and the Uniform Customs and Practice for Commercial Documentary Credits are dealt with for the first time. Nevertheless, while the responsibility for the new material can in no way be placed with the Author, any merit that it may have is due entirely to his teaching, philosophy and outlook. This work could not have been undertaken without the help and goodwill of many banking friends, in this country and abroad, who have advised me as to practice, answered my questions and furnished me with forms and examples. They are too many for me to mention individually, but they will recognise the part they have played and I thank them deeply for their collaboration. Maurice Megrah 5 Paper Buildings Temple London EC4 1955

PREFACE TO SEVENTH EDITION It is five years since the last edition of Gutteridge was published. The subject of documentary credits does not stand still and many are the decisions of the courts. A new edition has provided the opportunity to deal with two major decisions of the English Courts and to introduce the 1983 Revision of the Uniform Customs and Practice for Documentary Credits which will come into force shortly, in October 1984. The two cases are United City Merchants (Investments) Ltd and Glass Fibres and Equipment Ltd v Royal Bank of Canada, Vitrorefuerzos and S.A. and Banco Continental S.A. the House of Lords’ decision in which is reported in [1982] 2 Lloyd’s Rep 476; and Banque de l’lndochine et de Suez S.A. v J.H.Rayner (Mincing Lane) Ltd reported at first instance in [1983] Lloyd’s Rep and in the Court of Appeals in [1983] 1 Lloyd’s Rep. 228. The former is remarkable for laying down the very limited circumstances in which an issuing bank can properly refuse to pay, assuming that the terms and conditions of the credit have been complied with; and the latter settled the meaning of payment under reserve and added to what was already known of compliance of documents. Not much can yet be said of the 1983 Revision of the Uniform Customs and the new Rules will not be tested before October of this year at the earliest. It may be wise to indicate that the foreign decisions to which reference is made are for illustration only and do not necessarily represent the last word on the law in the foreign country. Thanks are again due to many who have positively or unwittingly contributed to my endeavours and I have to acknowledge the kindness of Midland Bank Ltd, Westpac Banking Corporation, Overseas Containers Ltd and FIATA for permission to reproduce some of the forms to illustrate the text. The fact that my name is still joined to that of Professor Gutteridge is due to his insistence at the time a second edition of his work was mooted. While he is in no way responsible for subsequent editions, I hope that the book still retains some of his design and thought which changes in the law and practice have not destroyed. Maurice Megrah 5 Paper Buildings Temple London EC4 October, 1984

CONTENTS

1 Commercial Credits—Mechanism and Operation

1

2 The Types of Credit

16

3 The Relationship Between Buyer and Seller

25

4 The Contractual Relationships Arising under a Credit

52

5 Transmission of the Benefit of a Credit

112

6 The Duty of the Parties upon Presentation of Documents under a Credit 7 Documentary Compliance

137

8 The Bank’s Security

242

9 Damages

262

10 Jurisdiction and Conflict of laws

174

278

Appendix Uniform Customs and Practice for Documentary Credits 1 (UCP500)

307

Appendix International Standby Practices (ISP98) 2

336

Appendix ICC Uniform Rules for Bank-to-Bank Reimbursements under 3 Documentary Credits (URR525)

377

Appendix Form of Application for Opening of a Letter of Credit Used by 4 HSBC Bank PLC

391

Appendix Extracts from the Eighth Edition on the Legal Aspects of the 5 Contracts Created by the Issue of a Credit

394

Index

403

Chapter 1 COMMERCIAL CREDITSMECHANISM AND OPERATION Introduction 1–01 The main object of a commercial credit (now more commonly referred to as a “documentary credit” or “letter of credit”)1 is to provide a means of payment for goods and services supplied by a seller to a buyer, usually to facilitate dealings between merchants in different countries, by ensuring payment to the seller for the contract goods or services on the one hand and their delivery to the buyer on the other. A trader requiring finance for such a transaction may ask his bank to issue a credit pursuant to which the bank agrees to pay the seller against the presentation of documents representing the goods. 1

The word “commercial” is now used to distinguish a credit issued for the purpose described in this paragraph from a “standby” credit, as to which see paragraph 2–15 below.

1–02 For domestic transactions in the United Kingdom a trader may obtain credit in the form of a loan or overdraft or on the discount of his trade bills of exchange. It is in overseas commerce that the commercial credit plays a leading part. When trader has confidence in trader, foreign trade tends to be financed more on the basis of the collection of a bill of exchange, which may be cheaper. Nowadays traders often prefer to rely on the credit of a bank and trade is then financed by irrevocable2 documentary credit. 1–03 A documentary credit transaction presupposes the case of a purchaser who is not sufficiently well known in markets other than his own to enable him to rely solely on his reputation for solvency and honest dealing. It may be essential that he should be able to purchase on credit, if he cannot afford to be deprived of the use of his capital during the period which must of necessity elapse between the shipment of the goods and their receipt and resale by him in the home market or elsewhere. Similarly, the exporter also may be in need of credit, for he may not be able to afford to lock up capital that is required in his own business pending the receipt of payment for his goods. Thus a mechanism is necessary which, on the one hand, enables the exporter to obtain prompt payment, while allowing the importer to postpone payment until such time as he has been able to market the imported goods. The mechanism that has developed to satisfy these requirements is the documentary credit. 1–04 Commerce has at times been carried on in new channels, and not always with persons of unblemished repute. Moreover, exporters of goods have suffered losses as a result of fluctuations in rates of exchange and devaluation of currencies. For these reasons there has been a marked disinclination for exporters to rely on the individual credit of buyers, and an increasing tendency for them to stipulate in contracts for the sale

Gutteridge & Megrah’s law of bankers’ commercial credits

2

of goods that a bank undertake responsibility for payment of the price.3 Even if importers and exporters are of good repute it may be preferable to finance a transaction by means of a documentary credit, for in times which are uncertain by reason of hostilities or the chance of hostilities, or, again, political interference, payment may be more easily forthcoming, as banks maintain accounts with each other which may not so readily be liable to foreign governmental control or interference. 1–05 Although the obligation of the bank issuing a documentary credit to pay under it has assumed different forms,4 it has historically been based on the bank’s promise to accept5 or honour bills of exchange if drawn on it or the bank’s 2

As its name suggests, an irrevocable credit is one that the issuing bank cannot revoke and thus gives assurance of payment. For the difference between revocable and irrevocable credits, see paragraphs 2–03 to 2–04 below; for detailed discussion of the obligations arising in respect of each, see paragraphs 4–39 to 4–63 below. 3 See the observations of Lord Sumner in The Kronprinsessan Margareta [1921] 1 AC 486 at 510. 4 See paragraphs 2–06 to 2–10 below. 5 The acceptance of a bill of exchange is the signification by the drawee of his assent to the order of the drawer—see section 17(1) of the Bills of Exchange Act 1882.

guarantee of payment if bills of exchange are drawn on the buyer,6 security for the payment, acceptance or guarantee residing—in part, at any rate—in the pledge of the documents of title to the goods exported and in the special property thus obtained. Now much of the finance of foreign trade by documentary credit entails payment on the security of the documents of title either against a demand or sight draft or merely against documents.7 The essentials of documentary credit transactions 1–06 A documentary credit is defined in the latest revision of the Uniform Customs and Practice for Documentary Credits formulated by the International Chamber of Commerce,8 to which most credits are made subject, as any arrangement, however named or described, whereby a bank (the “Issuing Bank”), acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf, (i) is to make a payment to or to the order of a third party (the “Beneficiary”), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or (ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or (iii) authorises another bank to negotiate, against stipulated documents(s), provided that the terms and conditions of the Credit are complied with.9

Commercial credits—mechanism and operation

3

It follows that documentary credit transactions involve at least three parties: the buyer (the applicant for the credit), the seller (the beneficiary under the credit) and the bank issuing the credit (the issuing bank). Usually there are four parties, with the introduction of a second (intermediary) bank.10 1–07 In Guaranty Trust Company of New York v Hannay,11 Scrutton LJ described the operation of a banker’s commercial credit in the following words: 6

Increasingly the practice is to provide for payment at sight or on deferred payment terms without the imposition of a bill of exchange. 7 See further at paragraphs 2–06 to 2–10 and 4–91 to 4–110. 8 The 1993 Revision (UCP 500). For the application of the Uniform Customs and Practice for Documentary Credits, commonly referred to as the “UCP”, see paragraph 1–12 to 1–13 below. 9 Article 2 of the UCP. 10 The terms “issuing” and “intermediary” are employed throughout to designate the banks that are the parties to the contracts embodied in a documentary credit, except where a more precise description is called for. An intermediary bank is often referred to as a “correspondent” bank. 11 [1918] 2 K.B. 623, 659–60, referred to in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 164–5. In Equitable Trust Co of New York v Dawson Partners Ltd (1926) 25 L1.L.R. 90 at 93 Scrutton LJ said: “I have stated my understanding of the system of

The enormous volume of sales of produce by a vendor in one country to a purchaser in another has led to the creation of an equally great financial system intervening between vendor and purchaser, and designed to enable commercial transactions to be carried out with the greatest convenience to both parties. The vendor, to help the finance of his business, desires to get his purchase price as soon as possible after he has despatched the goods to his purchaser; with this object he draws a bill of exchange for the price, attaches to the draft the documents of carriage and insurance of the goods sold and sometimes an invoice for the price, and discounts the bill—that is, sells the bill, with the documents attached, to an exchange house. The vendor thus gets his money before the purchaser would, in ordinary course, pay; the exchange house duly presents the bill for acceptance, and has, until the bill is accepted, the security of a pledge of the documents attached and the goods they represent. The buyer, on the other hand, may not desire to pay the price till he has resold the goods. If the draft is drawn on him, the vendor or exchange house may not wish to part with the documents of title till the acceptance given by the purchaser is met at maturity. But if the purchaser can arrange that a bank of high standing shall accept the draft, the exchange house may be willing to part with the documents on receiving the acceptance of the bank. The exchange house will then have the promise of the bank to pay, which, if in the form of a bill of exchange, is negotiable and can be discounted at once. The bank will have the documents of title as security for its liability on the acceptance, and the purchaser can make arrangements to sell and deliver the goods. Before acceptance the documents of title are the security, and an unaccepted bill without documents attached is not readily negotiable. After acceptance the credit of the bank is the security…


4

This was over eighty years ago, when documentary credits were less used than they are today; but the statement is basically still accurate—substituting “intermediary (or correspondent) bank” for “exchange house” and “issuing bank” for “bank” and subject to the fact that (as noted above) credits now commonly provide for sight or deferred payment12 without presentation of a bill of exchange. 1–08 When parties intend that payment will be made by documentary credit, the contract for the sale of the goods usually includes a provision that payment confirmed credit, which I believe to be accurate, in the case of Guaranty Trust v Hannay”. Cf Lord Cairns LC in Morgan v Larivière (1875) L.R. 7 H.L. 423 at 432–3. In Equitable Trust Co of New York v Dawson Partners Ltd Scrutton LJ was speaking of an irrevocable credit; the term “confirmed” has a special connotation—see paragraphs 2–05, 4–71 to 4–73 and 4–86 to 4–89 below. 12 Payment at sight is payment upon sight of the documents presented under the credit. Deferred payment is payment on a stipulated futured date or a date calculated by reference to a period after the happening of an event, typically presentation of documents or shipment. See paragraphs 2–07 and 2–08 below.

of the price is to be made by a bank pursuant to a documentary credit, preferably (from the seller’s point of view) a bank carrying on business in the country of export. Upon the credit being issued, the issuing bank, acting on behalf of the buyer and either directly with the beneficiary or through the intervention of a correspondent bank in the seller’s country, assumes liability for payment of the price, in consideration for a commission and the buyer’s promise of reimbursement. Between payment by the issuing bank and reimbursement by the buyer, the issuing bank usually has security afforded by the implied pledge of the documents of title presented in compliance with the terms of the credit and may take express security from the buyer. 1–09 The act by which the beneficiary of an irrevocable documentary credit becomes entitled to “payment”13 according to the promise embodied in the credit is the presentation by him within the validity period of the credit of documents complying in all respects with the terms and conditions of the credit. 1–10 The means by which payment may be made are stated in the UCP definition of a documentary credit set out above.14 The particular method of payment will be stipulated in the credit. Historically the normal,15 though by no means the exclusive, operation of a credit took the form of payment or negotiation (or possibly acceptance) of bills of exchange (drafts) by a correspondent bank in the country from which the goods emanated, acting on behalf of the bank issuing the credit or perhaps for itself. Alternatively, the credit would call for drafts on the issuing bank or on the buyer and be available for negotiation by either a specified, or any, bank. These methods of payment are still used, but sight or deferred payment terms are also common. Except where the same bank is operating in both the country of export and the importing country, almost invariably two banks are concerned in documentary credit transactions.16 The Uniform Customs and Practice for Documentary Credits


5

1–11 The conditions on which banks are prepared to issue and to act on documentary credits have been standardized. The Uniform Customs and Practice for Documentary Credits (the “UCP”) was first published in 1933 by the International Chamber of Commerce (the “ICC”)17 and there have since been 13

The term “payment” is used to cover the means by which the beneficiary obtains the funds to which the credit entitles him. 14 Paragraph 1–06. 15 Although not in Continental Europe or South America, where payment has usually been made on cash or deferred payment terms—see Ellinger, “The Uniform Customs and Practice for Documentary Credits—the 1993 Revision” [1994] LMCLQ 377 at 381, 386. 16 In the application of the UCP, branches of a bank in different countries are considered another bank—see article 2 of UCP 500. 17 For information concerning the ICC and the UCP, see the ICC web site at http://www.iccwbo.org/.

revisions in 1951, 1962, 1974, 1983 and 1993. The 1983 Revision, ICC Publication No 400, is commonly referred to as UCP 400. The 1993 Revision, ICC Publication No 500, is commonly referred to as UCP 500.18 The 1993 Revision is reproduced in appendix 1. 1–12 Article 1 of UCP 500 provides: The Uniform Customs and Practice for Documentary Credits, 1993 revision, ICC Publication No 500, shall apply to all Documentary Credits (including to the extent to which they may be applicable, Standby Letter(s) of Credit) where they are incorporated into the text of the Credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the Credit. It follows that the UCP is a body of rules binding on banks and applicants who have adopted them for particular transactions. It is not law,19 as has sometimes been suggested. The correct approach was set out by Mustill LJ in Royal Bank of Scotland Plc v Cassa di Risparmio dette Provincie Lombarde:20 Undeniably the Uniform Customs and Practice have an important role in the conduct of international trade. They expound technical terms; they promote consistency; and they enable the parties to express their intentions briefly, without the need to negotiate and set out all the terms of the relationship at length. Nevertheless, whilst not belittling the utility of the UCP, it must be recognized that their terms do not constitute a statutory code. As their title makes clear they contain a formulation of customs and practices, which the parties to a letter of credit transaction can incorporate into their contracts by reference. This being so, it seems to me that the obvious place to start, when searching for a contractual term material to a particular obligation, is the express agreement between the parties. If it is found that the parties have explicitly agreed such a term, then the search need go no further, since any contrary provision in UCP must yield to the parties’ expressed intention. If on the other hand the


6

agreement is silent in the material respect, then recourse must be had to UCP, and if a relevant term is found there, that term will govern the case. 1–13 UCP 500 is today embodied by express reference in virtually all applications for credits and in credits themselves.21 Assuming therefore that UCP 500 has been incorporated by express reference, the contractual relationships created by a documentary credit transaction22 are governed by the express terms agreed between the parties and the rules of UCP 500 except in so far as any rule is expressly excluded or is contradicted by specific terms of the credit. An example of the approach to be adopted is found in Forestal Mimosa Ltd v Oriental Credit Ltd.23 In that case, despite an express term of the credit that it was subject to the UCP “except so far as otherwise expressly stated”, it was argued that the UCP was not applicable because certain express provisions of the credit were inconsistent with the UCP. The Court of Appeal held that in the absence of an express exclusion of the whole or part of the UCP the proper approach is to read and construe the credit terms and the UCP together. There is no justification for reading into the contract an implied exclusion of all or part of the UCP. The Court then used the provisions of the UCP to explain and interpret the provisions of the credit. 1–14 It is not unusual for particular factual situations to throw up difficulties in the interpretation of the UCP.24 This is a problem for banks, which must decide in a short space of time whether they can pay against the documents presented, and for beneficiaries who believe that compliant documents have been presented, but may find them rejected. Shortly after the adoption of UCP 500 it was found that banks were misinterpreting certain provisions of the UCP, purporting to act on the basis of “international standard banking practice”.25 In order to correct such misinterpretations, the ICC Commission on Banking Technique and Practice issued “Position Papers”. Such Position Papers deal with the correct interpretation of article 9(d)(iii) (which deals with the amendment of credits),26 article 10(b)(ii) (which deals with the meaning of “negotiation”),27

18

For the background to UCP500 and a comparison between UCP 400 and UCP500, see Ellinger, “The Uniform Customs and practice for Documentary Credits—the 1993 Revision” [1994] LMCLQ 377. In January 2000 the ICC Banking Commission’s Technical Adviser, Gary Collyer, made it clear that there would be no revision of UCP 500 “for several years” (source www.iccwbo.org/home/news_archives/2000/no_ucp500_revisions_before_2003.asp), although an “e-supplement” is being produced (see paragraph 7–35 below). For use in relation to standby credits, the ICC has produced “International Standby Practices ISP98”, as to which, see paragraph 2–15 below. 19 Donaldson J in Golodetz 6- Co Inc v Czarnikow-Rionda Co Inc [1979] 2 Lloyd’s Rep 450 at 455 regarded it as axiomatic that the UCP rules do not have the force of law. 20 [1992] 1 Bank LR 251 at 255–6. Cf Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 (discussed in paragraph 1–13 below). 21

The SWIFT user handbook states that credits issued using SWIFT transmission are automatically subject to the UCP in operation at the date of issuance. Advising banks when notifying credits transmitted to them by SWIFT should nevertheless ensure that a clause incorporating the UCP is sent to the beneficiary—see Opinions of the ICC Banking Commission R305.


22

7

The contractual relationships created by a documentary credit transaction are discussed in chapter

4. 23

[1986] 1 Lloyd’s Rep 329. The incorporation clause referred to “Uniform Customs and Practice for Documentary Credits ((1984) Revision)”. It was accepted that this incorporated the 1983 Revision (UCP 400). 24 The ICC offers a documentary credit dispute resolution service known as “Documentary Credit Dispute Expertise” (DOCDEX), which is available in connection with any dispute related to documentary credits incorporating the UCP and the application of the UCP and the Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (the “URR”). The DOCDEX Rules are published at www.iccwbo.org/home/banking/docdex_rules.asp. 25 Cf article 13(a) of the UCP. 26 Discussed in paragraph 4–50 below. 27 Discussed in paragraphs 2–10 and 4–100 below.

article 13(c) (which deals with non-documentary conditions)28 and related parts of articles 23 to 30 (which deal with transport documents).29 The position papers are not intended to amend the articles of the UCP concerned, but merely to indicate the correct interpretation of them. Technically, therefore, they are not binding on a court seeking to interpret the articles, but are a highly authoritative statement of the proper interpretation. To similar effect are “Policy Statements” adopted by the ICC Commission on Banking Technique and Practice on 6 April 1998 in relation to the impact of the Euro on monetary obligations under documentary credits30 and on 12 July 1999 in relation to the correct interpretation of article 20(b) of the UCP (which deals with documents to be accepted as originals).31 The Commission also gives opinions on the application of the UCP to specific factual situations raised by the parties to credits. Such opinions also have no binding force, although they give an indication of the correct approach. 1–15 The assertion in article 1 of UCP 500 that the rules are binding on all parties is sweeping, qualified though it is. As credits almost invariably state that they are subject to the UCP, the beneficiary must therefore either accept the credit as it stands or decline to accept it on the basis that it does not conform with the sales contract if by the sales contract he is entitled to do so. Moreover it may well be that, in view of the extent to which today the UCP is applied, the payment provision in a contract of sale may carry the implication that, unless the contrary is specifically stated, payment by documentary credit means payment by documentary credit subject to the then current edition of the UCP.32 Where a documentary credit subject to the UCP is stipulated, applicants for credits and beneficiaries must expressly contract out of particular provisions if there is anything in the UCP that is inappropriate to the contract of sale or unacceptable to them. The main features of commercial credits in practice 1–16 It would be out of place to deal in great detail with the practical technicalities of documentary credits, but the question of the nature and extent of the rights and liabilities of the parties in law cannot be understood without some knowledge of the procedure which is generally followed by banks when establishing and operating credits of this nature. It may be useful, therefore, to indicate the main features of the process of finance by means of such credits, as a background for subsequent discussion of the legal rights


8

and duties of the four parties usually concerned, namely, the beneficiary (usually the seller), the 28

Discussed in paragraphs 7–24 to 7–26 below. Discussed in paragraphs 7–84 and 7–86 below. 30 Discussed in paragraphs 4–112 to 4–113 below. 31 Discussed in paragraph 7–33 below. 32 See Goode, Commercial Law, 2nd ed, pp 984–5. See also Harlow & Jones Ltd v American Express Bank Ltd [1990] 2 Lloyd’s Rep 343, where Gatehouse J held that a bank was bound to comply with the Uniform Rules for Collections even though such Rules were not expressly incorporated into the collection instructions concerned. 29

applicant for the credit (usually the buyer), the issuing bank and the intermediary or correspondent (paying, negotiating, advising or confirming) bank. 1–17 As stated above, a banker’s documentary credit is usually based on an antecedent contract for the sale of goods in which it is agreed that payment of the price will be made by a bank. The duty of arranging for payment to be made in this way rests on the buyer.33 The seller will often stipulate that the credit to be issued by the bank be available through and/or confirmed34 by a particular bank, with which it has previously arranged facilities for negotiation of the credit or an advance of the price. If so, the buyer must ensure that the bank issuing the credit arranges for it to be confirmed by, or be available for negotiation through, the stipulated bank and in accordance with the agreement between the buyer and the seller. When the buyer and the seller have not agreed which bank will advise, pay or confirm the credit (as the case may be) the issuing bank may select one of its correspondents in the seller’s country. The practice in England has been for the buyer to fill up a printed form of application35 supplied by his bank, setting out in detail the terms and conditions on which the bank is to issued the credit.36 In the application form the buyer specifies, among other things, the documents against which payment is to be made by the bank37 and (expressly or by implication) it is provided that the documents are to be held by the bank as security for advances (payments), with the bank being given (expressly or by implication) a power of sale.38 The buyer agrees also to indemnify39 the bank in respect of such advances and of any claim arising from the issue of the credit. The application form constitutes a memorandum of the buyer’s instructions to the bank and the detail in which it is framed is intended to avoid misunderstanding. In most respects it is the controlling document in the contractual relationship between the buyer and the bank. When the bank acts upon the application, the contract between it and the applicant is complete. 1–18 The procedure described above still forms the basis upon which credits are issued by retail banks, but with the increase in electronic communication the process is now often automated with instructions being provided by the buyer to the issuing bank electronically according to a computer generated document in a standard format. The buyer completes the document and, if it has the facilities to do so, will send it electronically to the issuing bank. 33

As to which, see paragraphs 3–01 to 3–22 below. For confirmation of credits, see paragraph 2–05 below. 35 An example of the form currently in use by HSBC Bank plc is at appendix 4. 34


9

36

Such instructions must be complete and precise—see article 5(a) of the UCP (discussed in paragraphs 4–15 to 4–17 below). 37 The documents against which payment, acceptance or negotiation is to be made must be specified precisely—see article 5(b) of the UCP (discussed in paragraph 4–18 below). 38 As to the bank’s security arising from its possession of the documents representing the goods, see chapter 8 below. Before accepting an obligation to issue a credit the issuing bank will conduct a credit assessment and will, if it considers it necessary, take specific or general security from its customer. 39 See paragraphs 4–12 to 4–14 below.

1–19 The issuing bank’s instructions to the intermediary bank are usually sent by SWIFT40 or by telex. In each case the document is sent with authorisation codes.41 When instructions are received by the issuing bank electronically, the issuing bank can prepare and issue the credit electronically to the intermediary bank within as little as 30 minutes. In any event, where the instructions are clear, the credit can usually be issued on either the same banking day or early the next banking day. When the credit is issued by SWIFT, code numbers (or “tags”) are assigned to the various elements of the credit. This enables credits to be produced in a common form (numbered 700 for a trade finance transaction) and makes identification of amendments easier. Where a telex is used there is no common form and it is often difficult to identify correctly the terms or to read amendments. 1–20 The credit, in its simplest form, may be addressed to and sent to the beneficiary, but it usually takes the form of a request to an intermediary bank which is asked: (a) merely to advise the beneficiary;42 (b) to negotiate the beneficiary’s draft;43 or (c) to advise the credit and to add its confirmation, thus binding itself also to the beneficiary.44 The credit notifies the beneficiary that the issuing bank or its correspondent will pay, or accept or honour drafts drawn for, the price of the goods, when the documents specified in the credit are presented. The credit may, moreover, authorize the intermediary bank, or any bank, to negotiate the beneficiary’s drafts or to pay against (or negotiate) prescribed documents. Upon receiving the credit an intermediary bank will stamp it received and pass it in hard copy to the beneficiary, stating that it has added its confirmation if requested to do so by the issuing bank.45 1–21 On receipt of the credit the beneficiary insures and ships the goods, obtaining a transport document, such as a bill of lading46 made out to his order or to the order of the bank,47 a policy of insurance and commercial invoice. He then draws for the price of the goods and, with the stipulated documents (that is 40

For an explanation of the SWIFT system, see Law of Bank Payments, 2nd ed, Brindle & Cox (ed) at pp 92–97. 41 As to which, see paragraph 4–35 below. 42 Pursuant to Article 7 of UCP 500, an advising bank must check the authenticity of the credit and inform the issuing bank without delay if it elects not to advise the credit. These obligations are considered in paragraphs 4–69 below. 43 That is to say, by giving value for it—see article 10(b)(ii) of UCP 500 and paragraphs 2–10 and 4–100 below. 44 Article 9(b) of UCP 500. The position of the confirming bank is considered in paragraphs 4–71 to 4–73 and 4–86 to 4–90 below.


10

to say, the transport document,48 the policy of insurance, the invoice and other documents as specified in the credit), presents the documents for acceptance, payment or negotiation.49 Credits often stipulate that presentation take place “at the counters of a named bank. This reflects practice when documentary credits first developed, when the beneficiary would present the documents at the bank’s counter and the bank would then and there examine the documents presented and either pay or decline to pay. Now documents are sent by post, courier or messenger to the bank stipulated in the credit and documents are accepted or rejected after checking in the trade finance/letter of credit department.50 Documents are not invariably presented by the beneficiary named in the credit. Under a negotiation credit the beneficiary may, before presentation, sell the benefit of the credit (together with the documents) to a bank, his own perhaps, which will purchase the right to receive payment under the credit on the faith of the issuing bank’s undertaking given in the credit.51 When the issuing bank or the intermediary bank, as the case may be, has accepted or paid the draft and detached the shipping documents, it is in the position of a pledgee of the goods represented by the documents.52 1–22 The marketing of the goods is in the hands of the importer, and the position on arrival of the goods in the country of import varies. The goods may have been sold by the importer before arrival, so that delivery has to be made to a purchaser; in which case the bank may deliver the shipping documents to the ultimate buyer against payment of the price, though in practice, in the interests of the importer, delivery to a sub-purchaser should be made by him and not by the bank. In such a case the bank may allow the importer to take possession of 45

In the case of negotiation credits, the beneficiary may need to have the original credit in order to effect negotiation. 46 Where transport is by sea or inland waterway. Transport may also take place by air, road or rail in which case the transport document will be an air waybill or a road or rail consignment note (as the case may be). Courier and post receipts may also be specified for presentation as transport documents. 47 In some countries, exchange control regulations require bills of lading to be drawn to the order of the issuing bank, or to the order of the applicant for the credit or sometimes to a named forwarding agent on his behalf. 48

Commonly required documents are certificates of origin, certificates of quality and packing lists, but credits may call for a wide range of documents—see, for example, South African Reserve Bank v Samuel & Co Ltd (1931) 40 Ll.L.Rep. 291 (certificates for maize in Government elevators), Bank Melli Iran v Barclays Bank (Dominion, Colonial and Overseas) [1951] 2 Lloyd’s Rep 367 (an American government certificate that the goods shipped—army trucks, were new), Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [1998] 1 Lloyd’s Rep 684, affirmed [2000] 1 Lloyd’s Rep 218 and [2001] QB 167 (telex advising applicant and issuing bank of shipment, receipt of shipmaster and beneficiary’s certificate certifying documents had been sent to applicant within a stipulated time) and Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 (copy of declaration detailing all shipments/despatches sent by airmail/telex direct to the applicant, packaging list and beneficiary’s certificate that all the terms and conditions of the credit had been complied with in full). See further paragraphs 7–124 to 7–131 below. 49 A bank other than the issuing or confirming bank may be nominated under the terms of the credit for the purpose of examining the documents and paying the beneficiary or accepting or negotiating


11

the documents on his signing what is called a trust receipt or letter of trust, by which he undertakes to hold the goods or their proceeds on behalf of and in trust for the bank.53 This involves some risk to the bank because the protection afforded against a dishonest customer is slight, as a trust receipt or letter of trust does not prevent the passing of the title to a purchaser from the importer for value and without notice of the trust.54 1–23 The above sketch of the course of business in connection with commercial credits is not exhaustive. It merely outlines the procedure that would usually be followed, stripped as far as possible of the commercial technicalities involved. It should here be mentioned that the carriage of goods has in the past 30 years been revolutionized by the use of containers. This resulted in an increase in combined transport and raised problems in relation to documentary credits, which are now resolved by the UCP. A further revolution is currently taking place, however, in relation to the electronic production and communication of documents.55 It is now both possible and convenient to produce and transmit documents electronically without using hard copy. Although it is possible to produce a credit that expressly permits or requires this, the presentation of documents electronically cannot take place under the UCP unless certain of its provisions are supplemented by specific provision in the credit. The ICC is now producing an “esupplement” that can be incorporated by reference into the credit to deal with this and this is likely to be ready for application in 2002.56

The contractual relationships involved 1–24 In a typical transaction in which an irrevocable documentary credit is issued and confirmed five contractual relationships arise: (i) a contract of sale between the buyer (the applicant for the credit57) and the seller (the beneficiary), (ii) a contract between the buyer and the issuing bank containing the terms on which the letter of credit is opened, (iii) a contract between the issuing bank and the bank which has confirmed the credit (the confirming bank) constituting the confirming bank’s mandate as to advice and confirmation of the credit, collection of documents and payment or acceptance or negotiation, (iv) a contract between the issuing bank and the seller containing the issuing bank’s undertaking to the seller to pay him or accept or negotiate his draft(s) provided that the seller has presented the stipulated documents in accordance with the terms of the credit and (v) a contract

the beneficiary’s drafts—see article 10(b)(i) of UCP 500. A nominated bank that is not a confirming bank has no liability to make payment or accept or negotiate drafts, unless it expressly agrees to do so—see article 10(c) of UCP 500. 50 See Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 37. 51 As to negotiation credits and rights of the negotiating bank under them, see paragraphs 4–100 to 4–110 below. 52 See chapter 8.


12

between the confirming bank and the seller containing the confirming bank’s additional undertaking to the seller to pay him or accept or negotiate his draft(s) provided that the seller has presented the stipulated documents in accordance with the terms of the credit.58 If the credit is not confirmed, there will be 3 contracts—(i), (ii) and (iv) as set out above. The principle of “autonomy” 1–25 It is a fundamental feature of documentary credit transactions that the contracts relating to the documentary credit are autonomous and separate from the contract of sale. As Hirst J stated in Tukan Timber Ltd v Barclays Bank Plc.59 It is of course very clearly established by the authorities that a letter of credit is autonomous, that the bank is not concerned in any way with the merits or demerits of the underlying transaction, and only in the most extremely exceptional circumstances should the Court interfere with the paying bank honouring a letter of credit in accordance with its terms bearing in mind the importance of the free and unrestricted flow of normal commercial dealings. This autonomy is reflected in article 3(a) of the UCP, which provides that credits are separate transactions from the sales or other contracts on which they may be based and that banks are not concerned with or bound by such contracts.60 Consequently a bank’s undertaking in relation to payment is not subject to claims or defences by an applicant resulting from his relationship with the issuing bank or the beneficiary. Moreover the terms of one of the contracts cannot be read into another.61 In this respect, article 3(b) of the UCP provides that a beneficiary cannot avail himself of the contractual relationships between the banks or between the applicant and the issuing bank. Further, the bank’s conduct in relation to a past credit between the same parties cannot be relied upon as a representation as to how it will act in relation to a separate credit.62 53

Such documents were at one time attacked on the basis that they constituted unregistered bills of sale or an unregistered charge on book debts, but it is now clear that they are not vulnerable on either of these grounds, see paragraphs 8–25 to 8–30 below. 54 See Lloyds Bank Ltd v Bank of America Trust and Savings Association [1938] 2 KB 147. 55 Electronic production and communication of credits and the advice of them has taken place for many years and this is already provided for in the UCP—see article 11 (a). 56 These matters are discussed further in paragraph 7–35 below. 57 Sometimes referred to as the “opener of the credit”.


13

The principle that the parties to credits are concerned only with documents 1–26 In documentary credit transactions the parties are concerned only with documents. This principle was established in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd,63 where Rowlatt J ruled that the position of the bank under an irrevocable credit is in law the same as that of a person who has contracted to buy the shipping documents representing goods shipped, or to be shipped, under the contract between the beneficiary and the person at whose instance the credit has been issued. He held that in such a case the bank must accept and pay for the documents irrespective of any defence which there might be to the claim under the contract of sale, which defence is solely a matter between the buyer and the seller. The credit was opened in pursuance of a contract between Urquhart Lindsay & Co Ltd and the Benjamin Jute Mills, by which the former were to manufacture certain machinery and deliver it f.o.b. Glasgow for shipment to Calcutta; the credit said nothing about part shipments. The sales contract contained a clause by which the prices payable for the machinery were to be increased in the event of a rise in wages, cost of materials or transit rates, or in the event of any further reduction in working hours, though the credit contained no condition as to price. Two instalments of the machinery were manufactured and shipped and duly paid for by the bank. A third instalment was also manufactured and shipped, but the bank refused to take up the shipping documents and honour the draft, on the ground that items for extra cost of labour were included in the invoice price of the goods and that the bank had been instructed by the Benjamin Jute Mills to refuse payment in those circumstances. Rowlatt J said:64 …the defendants undertook to pay the amount of invoices for machinery without qualification, the basis of this form of banking facility being that the buyer is taken for the purpose of all questions between himself and his banker, or between his banker and the seller, to be content to accept the invoices of the seller as correct. It seems to me that, so far from the letter 58

See Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227 at 237 and Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [1998] 1 Lloyd’s 684 at 706, affirmed [2000] 1 Lloyd’s Rep 218 and [2001] 1QB 167. See also United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 183 and Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87. The contractual relationship between the buyer and the seller is discussed in chapter 3; the other contractual relationships are discussed in chapter 4. 59 [1987] 1 Lloyd’s Rep 171 at 174. See also United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 182–3. 60 The same principle applies in relation to standby credits issued subject to International Standby Practices ISP98—see rules 1.06 and 1.07 (as to standby credits and ISP98, see paragraph 2–15 below). For an interesting application of the principle in relation to a standby credit issued to satisfy a condition for setting aside a judgment, see McNeill Electronics Ltd v American Sensors Electronics Ltd (1998) 39 OR (3d) 32. 61 Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 at 456. 62 Rafsanjan Pistachio Producers Cooperative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513.


14

of credit being qualified by the contract of sale, the latter must accommodate itself to the letter of credit.65 1–27 This principle was referred to as “trite law” by Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada,66 where he said:67 The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with 63

[1922] 1 K.B. 318, followed by Greer J in Dexters Ltd v Schenkere & Co (1923) 14 Ll.L.R. 586. 64 [1922] 1 K.B. 318 at 323. 65 What Rowlatt J probably meant by the last part of this statement is that the credit must be treated as taking priority over any contradictory factor in the contract of sale. Cf paragraphs 3–04 to 3–13 below. 66 [1983] 1 AC 168. 67 [1983] 1 AC 168 at 183.

control of the goods that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment. The principle is stated in Article 4 of the UCP as follows: In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.

Chapter 2 THE TYPES OF CREDIT Introduction 2–01 The great majority of credits issued today in the furtherance of foreign trade have one thing in common. They carry the promise of the issuing bank to “pay”, using the term in the general not the technical sense, if the documents prescribed in the credit are presented to that bank within the period of time during which the credit is available and any other conditions contained in the credit as a pre-requisite are complied with. There are, however, a number of different types of credit. 2–02 The UCP and International Chamber of Commerce publications of standard documentary credit forms1 have contributed to common usage of language in letters of credit and common meanings for various terms, but terms are still not used uniformly and may not necessarily mean the same thing to all banks, even within the same country.2 It follows that, except for a few terms 1

The most recent being Standard Documentary Credit Forms for use with UCP 500, ICC Publication 516. 2 When this book first appeared the author wrote that “Owing to the absence of any standard form of bankers’ commercial credit it is necessary to attempt some kind of

which are universally applied in the same sense, no account should be taken of a particular label and the wording of any credit must be read as a whole to see what contract it embodies. Classification by reference to the obligations of the banks 2–03 The most important division in the classification of credits is the division into revocable and irrevocable credits. This is the only classification specifically recognized by the UCP, article 6(a) of which states that a credit “may be either (i) revocable, or (ii) irrevocable”. Article 6(b) provides that a credit should clearly indicate whether it is revocable or irrevocable and article 6(c) provides that in the absence of such indication a credit is deemed to be irrevocable. 2–04 Under an irrevocable credit the issuing bank gives a binding undertaking to the beneficiary that cannot be revoked once communicated. The credit “constitutes a definite undertaking”3 of the issuing bank to pay the credit according to its terms. A revocable credit, on the other hand, may be cancelled or modified without notice by the issuing bank, which is only responsible in respect of any action properly taken by the beneficiary and any intermediary bank in reliance on the credit before notice of the cancellation

The types of credit

17

reaches him or it.4 As a result revocable credits are rare and this book is largely concerned with irrevocable credits.5 2–05 Irrevocable credits may be either confirmed or unconfirmed. A confirmation of an irrevocable credit by another bank, known as the “confirming bank”, “constitutes a definite undertaking”6 of the confirming bank to pay the credit according to its terms in addition to the undertaking of the issuing bank.7 The effect of this is that the beneficiary has contractual rights against both the issuing bank and the confirming bank. Whether the credit is confirmed or unconfirmed will depend upon whether the issuing bank requests the intermediary bank to confirm the credit or to pass it on to the beneficiary without confirmation. In adding its confirmation the confirming bank acts on the instructions of the issuing bank. As with the beneficiary’s rights against the issuing bank, the rights inherent in the confirmation of the credit are irrevocable once communicated to the beneficiary. Classification by reference to the method of payment 2–06 Letters of credit may be payable by “sight” payment, by “deferred” payment, by “acceptance” or by “negotiation”. Article 10(a) of the UCP provides that all credits must clearly indicate whether they are available by sight payment, deferred payment, by acceptance or by negotiation. The reason for this is partly that the different types of credit involve, or may involve, different obligations as to time of payment and partly because, as is shown by article 9 of the UCP, different factors affect the obligations of the issuing or confirming bank under each type of credit.8 Where the credit does not so indicate the basis upon which the bank has undertaken to pay must be determined by construing the terms of the credit. 2–07 A “sight” credit is one in which an issuing bank authorises a seller of goods to present documents of title for payment, without a bill of exchange or with a bill of exchange drawn on it payable at sight, to the bank issuing the credit or its correspondent and undertakes to pay the seller, or reimburse its correspondent upon the correspondent paying the seller, against the documents presented. 2–08 A “deferred payment” credit follows the normal form as to payment against documents, except that the paying bank is not called upon to pay until some specified later date. The paying bank is, however, required to pass the documents to its principal and may find itself under promise to pay in the future, having lost the security of the documents.9 Moreover a confirming bank that makes payment to the beneficiary before the deferred payment date without obtaining the authority of the issuing bank does so at its peril. If, before the date for payment, it transpires that the documents have been classification of the different types of this instrument which are in use in the business world.” 3 See article 9(a) of the UCP. 4 See article 8 of the UCP. 5 The rights inherent in irrevocable and revocable credits are discussed in paragraphs 4–39 to 4–57 and 4–58 to 4–63 respectively. 6 See article 9(b) of the UCP. 7 The position of the confirming bank is discussed in paragraphs 4–71 to 4–73 and 4–86 to 4–90 below.


18

presented fraudulently the confirming bank cannot recover an indemnity from the issuing bank and must pursue a claim against the beneficiary or another fraudulent party.10 2–09 An “acceptance” credit is one in which a bank authorises a seller of goods to draw a bill of exchange on it or its correspondent in the country of the seller, and undertakes either to the seller or an intermediary bank to accept and pay at maturity a bill drawn on it or to pay a bill which has not been accepted by the bank on which it is drawn.11 It is possible to stipulate in a credit that the issuing bank will pay a bill of exchange drawn on the buyer in the event of non-acceptance by the buyer, but this is discouraged by the UCP, which states that a credit should not be issued available by bills of exchange drawn on the applicant (buyer).12 2–10 A “negotiation”13 credit is, strictly speaking, one that authorises the beneficiary to draw on the issuing bank (or sometimes on the buyer) and to negotiate the draft with the intermediary bank advising the credit or with his own or some other bank.14 Negotiation means the giving of value for bills of exchange and/or documents by the bank authorised to negotiate.15 Giving of value includes both making immediate payment and undertaking an obligation to make payment (other than giving a deferred payment undertaking or accepting a bill of exchange).16 The issuing bank’s obligation is to pay without recourse to the drawer and/or bona fide holder, bills of exchange drawn by the beneficiary.17 The benefit of a negotiation credit is that the seller can discount the bills prior to the date for 8

Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 332. See paragraphs 4–91 to 4–113 below for the obligations of the banks in respect of each type of credit. 9 This is a relative newcomer to the list of credits and seems to have been introduced from Japan. For examples of cases involving deferred payment credits, see Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 and Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165. 10 Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165 (discussed at paragraph 4–95 below). As a result confirming banks usually now seek specific authority from the issuing bank before making payment to the beneficiary under such a credit before the payment date. See also Proctor, “Confirmed Letters of Credit—A New Twist” [2000] JIBFL 109. 11 A buyer who has to meet his debt to his banker arising from the latter’s payment of the seller’s sight draft drawn pursuant to a documentary credit may re-finance by drawing a “time” bill on his bank. The credit under which the bill is drawn is called a “London acceptance” credit and is not a documentary credit, but often a sequel to it. 12 See article 9(a)(iv) of the UCP. Where a credit calls for bills of exchange drawn on the applicant, banks treat such bills as additional documents to be presented by the beneficiary. 13

The term “negotiation” is sometimes used for the process of presenting documents for payment under the credit. This usage is confusing and was described by Megaw LJ as “unfortunate” in Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 334. Article 10(b)(ii) of the UCP states that “mere examination of the documents without giving value does not constitute negotiation”. Thus, some credits issued from outside the United Kingdom are stated to be available “for the face amount of the draft” for negotiation by a United Kingdom bank; this is no true negotiation, the face value of the

The types of credit

19

draft being paid against the requisite documents by the “negotiating” United Kingdom bank, which immediately debits the account of the foreign issuing payment under the credit and the bank discounting the bills has the security of the issuing bank’s undertaking to pay the draft on maturity. Classification by reference to other specific features of the credit 2–11 A “transferable” credit18 is no different from any other except that the rights it embodies may be transferred to any other person nominated by the prime beneficiary. A “divisible” credit used to be one which allowed the splitting of the credit in favour of more than one beneficiary. Now the UCP provides19 that Fractions of a transferable credit…can be transferred separately… and the term “divisible” is no longer recognised as a label.20 Where the credit indicates that “part shipments” are allowed, it is sometimes styled a “part shipments” credit.21 2–12 A “revolving” credit (revocable or irrevocable) is either (a) a credit the amount of which remains constant for a given period, so that whenever during the period it is drawn upon it becomes automatically available again for the full amount either immediately or, perhaps, as soon as advice is received that earlier drafts have been paid, or (b) a credit available for a reducing sum within a given period but which becomes automatically available again for the original sum at the end of the period.22 2–13 A “back-to-back” credit23 is the term given to an ancillary credit, which arises where the beneficiary uses the credit granted to him by the issuing bank to support another (ancillary) credit granted by the beneficiary’s bank to his supplier. Such credits are not common or popular in the United Kingdom because of the difficulty in matching the two credits, as where, for instance, the beneficiary is buying f.o.b. and selling c.i.f. As the credits are intended to cover bank with that amount. Credits that are not “negotiation” credits are sometimes referred to as “straight” credits. 14 In International Banking Corporation v Barclays Bank Ltd (1925) 5 Legal Decisions Affecting Bankers 1, Sir Ernest Pollock MR put the position as follows: “No doubt… letters of credit containing a provision to accept bills create a contract between the giver of the letters and the person who advances money on the faith of them, only where such letters are intended to be shown to a third person for the sake of obtaining advances. But where that intention is found to exist there is an offer which can be accepted by those who take the appropriate steps for the purpose; the essence of the letter is “that the person taking bills on the faith of it is to have the absolute benefit of the understanding in the letter, and to have it in order to obtain the acceptance of bills: see per Cairns LJ in Re Agra & Masterman’s Bank ((1867) L.R. 2 Ch. App. 391, 397)”. For a case where negotiation was restricted to a single named bank, see European Asian Bank AG v Punjab and Sind Bank (No 2) [19831 1 Lloyd’s Rep 611. 15 Article 10(b)(ii) of the UCP. 16 See Position Paper No 2 “Negotiation” produced by the ICC Commission on Banking Technique and Practice. This Position Paper makes it dear that it is not necessary for the documents to be negotiated through the bank nominated for payment under the credit


20

the same goods, it is important that they should be in virtually identical terms, except for such variations in price, amount and time validity as are required to meet the slightly different circumstances of supplier and seller. It is obviously essential that the bank issuing the second credit must be in a position to comply with the terms of the first credit, or it may find itself in possession of documents of title to goods which have been rejected by the original buyer and to which it will have to resort if it cannot look with safety to its own customer. 2–14 A “red clause” or “anticipatory” credit, which appears to be confined mainly to the Australian, New Zealand and South African wool trades,24is one whose object is to assist the seller, who has to pay for the goods before shipping them, by means of an advance of the price. The credit in such cases contains a so-called “red clause” (because it is printed in red) which authorizes the intermediary bank to make advances to the seller before shipment and provides that the proceeds of any draft negotiated under the credit may be applied to the repayment of such advances.25 2–15 A “standby” credit is not principally a means of financing the sale and purchase of goods but of guaranteeing the obligations of a party under a contract.26 Standby letters of credit originated in the United States as a method of providing a guarantee for performance of obligations and are most widely used there, although they are now used increasingly throughout the world. Generally a bank that issues a standby letter of credit undertakes to pay against presentation of a specified document or documents, but such documents typically relate not to shipment of goods but to certification that a party to a contract has not performed an obligation. In this respect they operate in a similar manner to a performance bond or first demand guarantee that provides for an undertaking to pay upon demand 17

Article 9(a)(iv) of the UCP. Sometimes credits are styled “without recourse”, which is intended to mean without recourse to the drawer of bills under it (usually the beneficiary). The issue of “recourse” is discussed at paragraphs 4–109 to 4–110 below. 18

See paragraphs 5–02 to 5–20 below. Under the UCP, a credit can only be transferred if it is expressly designated as transferable by the issuing bank—see article 48(b). The credit in Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 was styled “confirmed, irrevocable, transferable and assignable.” 19 Article 48(g). 20 Article 48(b) provides that terms such as “divisible”, “fractionable”, “assignable” and “transmissible” do not render the credit transferable and that, if such terms are used, they should be disregarded. Cf European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 617. 21 Under the UCP, partial drawings and/or shipments are allowed unless the credit stipulates otherwise: article 40(a). 22 In Nordskog v National Bank (1922) 10 L1.L.R. 652, a joint general manager of Lloyds Bank was called as a witness and his explanation of a revolving credit is given at p 656 col 1. In Mitchell Ltd v Ivan Pederson (1929) 34 L1.L.R. 310, the dispute related to a revolving credit, but no attempt was made to define the term. The point is probably not important for the term is not a term of art and the contract embodied in the credit must depend on the language in which it is couched. 23 See paragraphs 5–21 to 5–24 below. 24

Its use is dying out, but for a recent case involving a “red clause”, see SWIL International Pte Ltd v Ladykirk Shipping Ltd (unreported—1997).

The types of credit

21

without conditions.27 UCP 500 expressly contemplates the application of its rules to standby letters of credit where such rules are expressly incorporated and to the extent that they may be applicable.28 Standby credits are therefore issued subject to the UCP, but the UCP is drafted for commercial credits and some of its provisions are not easily applicable to standby credits, the essence of which is to provide for payment by a bank upon the happening of an event or events other than the shipment of goods. The ICC has now published uniform rules in relation to standby letters of credit, known as “International Standby Practices ISP98”,29 which entered into force on 1 January 1999 and which apply to credits made subject to them by express reference.30 Unlike commercial credits, it is not uncommon for standby credits to be syndicated or for participations in them to be sold. ISP98 contemplates these thing happening.31 2–16 Credits are sometimes described as general (or open),32 or special, credits, the former embodying an offer to any bank that cares to accept it and the latter being addressed to a named beneficiary and perhaps restricted in its operation to a specific bank. There are also credits described as authorities to pay, accept or negotiate. These are revocable or irrevocable credits depending for their effect on the undertaking they embody. There is nothing significant in the labels. By their very nature they are mandates, either specific to a given bank or open, as when embodying a general invitation to pay or negotiate. It is sometimes said that such an authority places no obligation on either the issuing or the intermediary bank, but clearly the responsibilities of both depend upon the terms of the authority. Classification by reference to manner in which the credit is issued 2–17 A credit used to be called a “cable” credit where it was communicated by cable. Today, the method used is SWIFT or telex and credits so communicated 27

In the absence of express contractual provision, standby credits do not, however, give rise to a subsequent accounting within the principles laid down for performance guarantees in Cargill 25

See the form set out in the judgment of Greer LJ in South African Reserve Bank v Samuel & Co Ltd (1931) 40 Ll.L.R. 291 at 301, to the effect that the bank was authorized to allow anticipatory drawings, advances to be paid out of proceeds of documentary drafts when shipping documents available, the red clause drawings to be covered by security put up by drawer. The practice in connection with the “red clause” was detailed by Herries, “Overseas Commercial Credits”, Journal of the Institute of Bankers (1925) Vol XLVI p 79. The red clause may take various forms, but in substance they are much the same. Some credits merely state that “red clause advances are permissible”. A refinement of the red clause is the “green clause”, used mainly in Australasian wool credits, which not only permits pre-shipment advances but also covers storage in the name of the bank. 26 Examples of English cases involving credits of this type are Offshore International SA v Banco Central SA [1976] 2 Lloyd’s Rep 402, Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG [1989] 2 Lloyd’s Rep 332, Society of Lloyd’s v Canadian Imperial Bank of Commerce [1993] 2 Lloyd’s Rep 579, Kvaerner John Brown Ltd v Midland Bank Plc [1998] CLC 446, ENS Ltd v Derwent Cogeneration Ltd (unreported—9/10/98), Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 and Sepoong Engineering Construction Co Ltd v Formula One Management Ltd [2000] 1 Lloyd’s Rep 602.


22

are referred to as “teletransmitted” credits. Indeed, the principal means of issue of a credit by the issuing bank to the advising bank is by teletransmission and teletransmitted credits that are subject to the UCP should not be confirmed by mail, unless the teletransmission states that full details will follow. Article 11 (a) of the UCP provides: (i) When an Issuing Bank instructs an Advising Bank by an authenticated teletransmission to advise a Credit or an amendment to a Credit, the teletransmission will be deemed to be the operative Credit instrument or the operative amendment, and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent, it will have no effect and the Advising Bank will have no obligation to check such mail confirmation against the operative Credit instrument or the operative amendment received by teletransmission. (ii) If the teletransmission states “full details to follow” (or words to similar effect) or states that the mail confirmation is to be the operative Credit instrument or the operative amendment, then the teletransmission will not be deemed to be the operative Credit instrument or the operative amendment. The Issuing Bank must forward the operative Credit instrument or the operative amendment to such Advising Bank without delay. 2–18 Often an issuing bank will be requested to advise the beneficiary that it is going to issue a letter of credit before it has in fact been issued. This can lead to difficulties if the issuing bank subsequently decides not to issue the credit or to do so on terms materially different from those that it has advised. Accordingly article 11(c) of the UCP provides: A preliminary advice of the issuance or amendment of an irrevocable Credit (pre-advice), shall only be given by an Issuing Bank if such bank is prepared to issue the operative Credit instrument or the operative amendment thereto. Unless otherwise stated in such preliminary advice by the Issuing Bank, an Issuing Bank having given such pre-advice, shall be irrevocably committed to issue or amend the Credit, in terms not inconsistent with the pre-advice, without delay. International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461—see Sepoong Engineering Construction Co Ltd v Formula One Management Ltd [2000] 1 Lloyd’s Rep 602 at 604. See also Lac Du Bonnet v Lee River Estates Ltd [1999] 9 WWR 411. 28 Article 1. 29 ICC Publication 590. To a substantial extent ISP98 sets out principles recognised by the UCP. It is set out at appendix 2 and reference to it is made below. It is unclear how quickly banks will routinely issue standby credits subject to ISP98 or whether ISP98 will become accepted in the same way as has the UCP. 30 ISP98 Rule 1.01(b). ISP98 does not define a standby credit and may apply to a credit if expressly incorporated whatever label is given to the credit. Where ISP98 is incorporated, its rules supersede conflicting provisions in other rules of practice to which a standby credit is also made subject (for example, the UCP)—see rule 1.02(b). 31 See rule 10. 32 For a credit of this type, see Re Agra and Masterman’s Bank, ex parte Asiatic Banking Corporation (1867) L.R. 2 Ch. App. 391. Owing to changes in business practice the distinction between general and special credits is of little importance today.

The types of credit

23

This is a new provision introduced into the UCP in 1993, which refers to a credit of which such preliminary advice has been given as a “pre-advised” credit. It follows from the provision that once an issuing bank has pre-advised a credit it is committed to issuing it substantially in the terms advised. Other classifications 2–19 Credits may be classified as import, export or transit credits according as they are intended to finance imports into a country or exports from it, or the movement of goods between two countries other than the financing country. They may, again, be described as currency or sterling credits according as they provide for payment in currency or sterling. Except for the last, none of these descriptions is a term of art and for most practical purposes they may be ignored. Many descriptions today have no exactness of meaning. There is no point in giving labels to credits unless the labels are of universal application and are reasonably descriptive of the credit to which they are attached.

Chapter 3 THE RELATIONSHIP BETWEEN BUYER AND SELLER The buyer’s obligation to open a credit Introduction 3–01 The contract of sale between buyer and seller usually provides for the way in which payment is to be made by the former to the latter and the means commonly chosen is that of documentary credit.1 Where this is so the buyer is under a duty to the seller to ensure that within a proper or 1

Where the parties have not reached agreement as to the principal terms upon which the credit is to be issued, the Court may hold that there is no completed agreement—see, for instance, Schijveschuurder v Canon (Export) Ltd [1952] 2 Lloyd’s Rep 196, in which both claim and counterclaim failed, the parties not being ad idem as to the terms of the credit.

reasonable time a credit is issued which complies with the conditions laid down in the contract of sale. The seller can require nothing more unless he has stipulated for a credit issued by a particular, or a particular class of, bank, as to which he will probably have consulted his own bank in advance and in which case no difficulty will ordinarily arise. The resulting credit stands by itself, whether or not it is in accordance with the sale contract. If it is not, the seller may either accept it as it stands, repudiate it altogether or persuade the buyer to have it amended to bring it into line with the agreed terms of payment. While the bank issuing the credit is not concerned with the contract of sale, disputes have arisen as to the duty of the buyer in relation to the issue of a credit. Such disputes are, however, a matter between the buyer and the seller and nothing arises on them as between the seller and the issuing bank. The nature of the buyer’s obligation—condition precedent 3–02 The buyer’s obligation to provide a letter of credit is usually a condition precedent to the seller’s obligation to ship the goods the subject of the contract of sale. The buyer’s failure to fulfil that obligation entitles the seller to treat the contract as repudiated and to sue for damages.2 The nature of the buyer’s obligation was considered by Denning LJ in Trans Trust S.P.R.L. v Danubian Trading Co Ltd,3 in which he said:4 The ability of the seller to carry out the transaction is, therefore, dependent on the buyer providing the letter of credit: and for this reason the seller stipulates that the credit should be provided at a specified time,


26

well in advance of the time for delivery of the goods. What is the legal position of such a stipulation? Sometimes it is a condition precedent to the formation of a contract, that is, it is a condition which must be fulfilled before any contract is concluded at all. In those cases the stipulation “subject to the opening of a letter of credit” is rather like a stipulation “subject to contract”. If no credit is provided, there is no contract between the parties. In other cases a contract is concluded and the stipulation for a credit is a condition which is an essential term of the contract. In those cases the provision of the credit is a condition precedent, not to the formation of a contract, but to the obligation of the seller to deliver the goods. If the buyer fails to provide the credit, the seller can treat himself as discharged from any further performance of the contract and can sue the buyer for damages for not providing the credit. The question is, what was the nature of the stipulation in this case? When the buyers sent their order, they stated in writing…that “a credit will be opened forthwith”. It was suggested that the buyers were not making any firm promise on their own account, but were only passing on information which had been given to them by their American buyers. The Judge did not accept that suggestion and I agree with him. The statement was a firm promise by the buyers by which they gave their personal assurance that a credit would be opened forthwith….it is clear that the stipulation for a credit was not a condition precedent to the formation of any contract at all. It was a condition which was an essential term of a contract actually made. It is clear from this that the effect of the buyer’s failure to provide a credit depends on the terms agreed between the parties. It is, however, unusual for a contract to be made in terms that do not constitute a firm promise by the buyer to provide the credit and a contract that simply provides for payment by letter of credit will be treated as giving rise to such a promise.5 3–03 Sometimes contracts provide that the seller must perform some act, for example the provision of a guarantee, prior to the buyer opening the letter of credit. It is a matter of construction of the contract as to whether such act is a condition precedent to the buyer’s obligation to open the letter of credit. The terms of the contract will also dictate

2

The seller may waive the condition precedent and may not later rely on the buyer’s failure to comply unless he (the seller) has given reasonable notice that he again requires compliance—see Plasticmodá Sodetà per Azioni v Davidsons (Manchester) Ltd. [1952] 1 Lloyd’s Rep 527. See also paragraphs 3–08 to 3–13 below. For a case where it was claimed that the beneficiary had agreed to forego its rights under the terms of an agreement that a standby letter of credit would be issued—see Sepoong Engineering Construction Co Ltd v Formula One Management Ltd [2000] 1 Lloyd’s Rep 601. 3 [1952] 1 Lloyd’s Rep 348.

The relationship between buyer and seller

4

27

[1952] 1 Lloyd’s Rep 348 at 355–6.

the precise nature of the act that the seller has to perform. In Heisler v Anglo-Dal Ltd,6 the Court of Appeal upheld the decision of Devlin J to the effect that an f.o.b. contract providing for the giving of a guarantee that goods would be delivered in accordance with the contract prior to the opening of the letter of credit was satisfied by the personal guarantee of the seller, which was all that the contract required. The reason for this decision was that, although the guarantee of the seller obviously did nothing to ensure fulfilment of the contract which the seller was already contracted to perform, if a third party or bank guarantee had been intended, it would have been a simple matter to say so and the requirement would have been more onerous.

The terms on which the credit should be opened 3–04 The buyer must procure the issue of a letter of credit that conforms to the terms of the contract between himself and the seller.7 So, an unconfirmed letter of credit does not conform to the terms of a contract under which a confirmed credit is to be provided; 8a letter of credit issued in Geneva does not conform to a contractual requirement that it be issued in London;9 a letter of credit pursuant to which the issuing bank is under an obligation to pay in one currency does not conform to the terms of a contract under which the money of account is another currency;10 and a letter of credit that stipulates presentation of a “freight prepaid” bill of lading does not conform to a contract of sale on f.o.b. terms.11 3–05 Where, however, the buyer and the seller expressly agree the terms of the letter of credit, which is then issued, and those terms are inconsistent with the terms of the contract between them, the effect is to vary the terms of the underlying contract.12 So, where the parties originally agreed that certain certificates would be provided, but then agreed that different certificates were required to be presented under the letter of credit it was held that they had amended the original contract so as to provide for provision of the certificates stipulated in the letter of credit.13 5

For early cases to this effect, see Dix v Grainger (1922) 10 L1.L.R. 496 and Garcia v Page & Co Ltd (1936) 55 Ll.L.R 391. An argument that the buyer’s obligation is not absolute and is limited to taking reasonable steps to procure issue of the credit was rejected in A.E.Lindsay & Co Ltd v Cook [1953] 1 Lloyd’s Rep 328. In Toprak Mahsulleri Ofisi v Finagrain Compagnie Commerciale Agricole et Financière SA [1979] 2 Lloyd’s Rep 98, where an irrevocable divisible transferable credit was to be opened in the seller’s favour by a stated date with, and confirmed by, a first class United States or West European bank, the Court of Appeal held that it was no defence that the issue of a credit would have been illegal in Turkey, the buyer’s country. 6

[1954] 1 Lloyd’s Rep 212, affirmed [1954] 2 Lloyd’s Rep 5. See also paragraph 3– 22 below.7 De minimis variations or inaccuracies may not constitute a breach of contract—see Bunge Corporation v Vegetable Vitamin Foods (Private) Ltd [1985] 1 Lloyd’s Rep 613 at 616.

8

Panoutsos v Raymond Hadley Corporation [1917] 2 KB 473, Enrico Furst & Co v W.E. Fischer Ltd [1960] 2 Lloyd’s Rep 340, Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367, Wahbe Tamari & sons Ltd v “Colprogeca” [1969] 2 Lloyd’s Rep 18 and Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388. See also Giddens v


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3–06 A similar situation arises where the parties do not, in the contract of sale, define the terms of the proposed letter of credit. In Soproma SpA v Marine & Animal ByProducts Corporation,14 McNair J, disagreeing with a view expressed by the Board of Appeal of the London Cattle Food Trade Association that the letter of credit did not conform to the contract between buyer and seller because it called for documents in addition to those specified in the contract, said:15 It seems to be a necessary implication from the use of the words “payment against letters of credit” that the credit itself should set out in detail the specific conditions under which it can be operated including the period of its availability and that so long as these conditions are fair and reasonable and not inconsistent with the terms of the contract itself no objection can be taken to them by the sellers. A slightly different approach was taken by Robert Goff J in Ficom SA v Sociedad Cadex Limitada,16 who said:17 Where [the parties do not, in their sale contract, define the terms of the proposed letter of credit] the letter of credit, as subsequently agreed between the parties, may fill the contractual gap and so supplement the terms of the contract of sale. 3–07 The seller may be taken to have agreed to the terms of the letter of credit for this purpose where his conduct plainly shows that he has accepted the letter of credit as opened, for example, by rejecting an amendment to the letter of credit proposed by the buyer “because it was not agreed initially” and notwithstanding that the effect of the letter of credit was to entitle the buyer to reject the goods for a reason not contemplated in the contract of sale.18 3–08 Where the buyer cannot point to any conduct on the part of the seller that gives rise to a variation of the contract of sale, it may be possible for him to rely on conduct that amounts to waiver or estoppel. In Panoutsos v Raymond Hadley Corporation19 the seller made shipments and receive d payments under an unconfirmed letter of credit, but subsequently without previously giving notice, refused to make further shipments on the ground that the credit did not conform to the contract because it was not confirmed. The Court of Appeal held that by waiving for a time the breach of contract as to a confirmed credit, the Anglo-African Produce Co Ltd (1923) 14 Ll.L.R. 230, where the contract of sale stipulated that a credit should be “established”. The credit which was issued contained the following clause: “Negotiations of drafts under these credits are subject to the bank’s convenience. All drafts hereunder are negotiated with recourse against yourselves.” It was held that this was not an “established” credit. However, “established” is not a description of a type of credit and the term is not today in use; it was merely an alternative expression to “issued” or “opened”. 9 Enrico Furst & Co v W.E.Fischer Ltd [1960] 2 Lloyd’s Rep 340 (discussed in paragraph 3–09 below). 10 Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313. 11 Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 2 Lloyd’s Rep 386 (discussed in paragraph 3–13 below). Under an f.o.b. contract it is the buyer’s


29

responsibility to provide a ship and pay freight As Evans LJ said (at 394): “It is abundantly clear, in my judgment, that the buyers’ own assurance cannot be enough to serve as a guarantee to the sellers that “freight pre-paid” bills of lading will be issued when shipment is complete. That would mean…that the security of a bank guarantee for the payment of the price, which is what the letter of credit mechanism provides, would be destroyed. I therefore agree with the Judge’s observations that the buyers’ contention, that the letter of credit terms were in conformity with the contract, is contrary both to the underlying concept of the f.o.b. contract (subject always to what special terms may be agreed in a particular case) and to the essential commercial purpose of the letter of credit machinery.” 12 Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 327 and 329. 13

Ets Soules & de v International Trade Development Co Ltd [1980] 1 Lloyd’s Rep 129 at 136–7, in which the Court of Appeal differed from Robert Goff J at first instance ([1979] 2 Lloyd’s Rep 122) as to the extent of the variation. 14

[1966] 1 Lloyd’s Rep 367. [1966] 1 Lloyd’s Rep 367 at 386. 16 [1980] 2 Lloyd’s Rep 118. Robert Goff J’s approach was followed by Bingham J in Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388. See also Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 at 323 and Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 2 Lloyd’s Rep 386 at 394. 17 [1980] 2 Lloyd’s Rep 118 at 131. 18 Ficom SA v Sociedad Cadex Limitada [1980] 2 Lloyd’s Rep 118 at 132. Consideration for the agreement is provided by the parties defining and accepting terms for their mutual benefit. 19 [1917] 2 KB 473 15


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seller was not bound to act on that credit up to the end of the contract, but was not entitled to cancel the contract without giving the buyer reasonable notice of his intention to do so, so as to give the buyer a reasonable opportunity to comply with the contract term. 3–09 In Enrico Furst Co v W.E.Fischer Ltd,20 the contract of sale called for an irrevocable credit opened in London for 70% of the contract price, the balance to be paid “within 30 days from date of shipment after verification”. The irrevocable credit actually issued was that of Swiss-Israel Trade Bank Ltd, Geneva, and was merely advised by the Westminster Bank, not confirmed. This was not disputed by the defendants. Diplock J, although holding that this was not an irrevocable credit opened in London, described the case as a classic case of waiver, saying:21 Where a buyer undertakes to open a credit of a particular kind by a specified time, as in this case, the undertaking involves two separable parts: first, that he will open the credit of the particular kind, and, secondly, that he will do so by the specified time. If by his conduct the seller leads the buyer to suppose, and to act upon the supposition, that he, the seller, will not insist upon the opening of the credit within the specified time, he waives his right to treat the failure to open the credit within the specified time as a breach of condition entitling him to repudiate the contract, but he does not thereby waive his right to have the credit of the particular kind opened within a reasonable time, and to treat failure to open it as a breach of condition if it is not opened in a reasonable time. What is a reasonable time, however, depends upon all the circumstances, including the conduct of the seller, and, if his conduct is such as to induce the buyer to suppose and to act on the supposition that there is no urgency about performance of the obligation, then a reasonable time does not expire until the seller has given to the buyer reasonable notice of his intention to insist upon the performance of this part of his undertaking. 3–10 On the other hand in Nichimen Corporation v Gatoil Overseas Inc,22 the seller extended the buyer’s time for opening the letter of credit to a fixed date. The Court of Appeal held that this did not waive the seller’s right to treat the time for opening the letter of credit as of the essence and to treat the contract as repudiated if the buyer failed to open the credit by the extended date. 3–11 The seller’s conduct may be such that he can no longer insist on a conforming letter of credit even by giving reasonable notice. In Soproma SpA v Marine & Animal ByProducts Corporation23 the credit was not issued in time to 20

[1960] 2 Lloyd’s Rep 340. [1960] 2 Lloyd’s Rep 340 at 350. 22 [1987] 2 Lloyd’s Rep 46. 23 [1966] 1 Lloyd’s Rep. 367; see also State Trading Corporation of India v Compagnie Française d’Importation et de Distribution [1983] 2 Lloyd’s Rep 679 and Bunge Corporation v Vegetable Vitamin Foods (Private) Ltd [1985] 1 Lloyd’s Rep 613. 21


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cover the whole shipment period and was also defective in that it was not a confirmed credit as required by the contract of sale. McNair J said: …the sellers could, I think, plainly have treated the buyer’s failure to open proper letters of credit as a breach of condition entitling them to rescind and claim damages. In fact (i) the sellers applied for the two letters of credit to be varied by the authorization of the tender of one consolidated set of documents under the two letters of credit and (ii) in fact after this authorization had been given they operated the letters of credit by the tender of a consolidated set of documents. In my judgment, by so acting the sellers must be taken to have accepted the position that their letters of credit were in order and, not having at any time given notice to the buyers that they required letters of credit in strict conformity with the contracts, they are precluded (whether the matter is put as waiver, variation or estoppel) from now saying that the letters of credit were not in order and did not accurately define the contractual mode of obtaining payment including the period of availability. See Panoutsos v Raymond Hadley Corporation and Enrico Furst & Co v W.E.Fischer Ltd. 3–12 In Alan & Co Ltd v El Nasr Export and Import Co,24 Lord Denning MR also stated that there are cases where withdrawal from a previously indicated position is not possible—either because it is too late or it cannot be done without injustice to the other party. In such event the seller is bound by his waiver and cannot revert to his strict rights.25 3–13 In order to establish estoppel or waiver it is necessary to show that there has been an unequivocal representation by one party that he will not insist on his strict rights. In Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce26buyers procured the issue of a letter of credit requiring presentation of “freight pre-paid” bills of lading. The sellers objected to the letter of credit and submitted a draft of the terms of the letter of credit to the buyers. The buyer proposed amendments, but the sellers did not reply before the agreed date for arrival of the vessel at the port of loading. The sellers then sought to impose a price increase if the vessel arrived after a certain day. The buyers said that there was no entitlement to do this under the contract and that the sellers would be in breach if loading was not commenced. The sellers then demanded prepayment of the price. The Court of Appeal held that a letter of credit 24

[1972] 1 Lloyd’s Rep 313. The facts were that the buyer opened a non-conforming credit in sterling rather than in Kenyan shillings. The seller did not protest, shipped the goods and received payment under the letter of credit in sterling. In the meantime sterling was devalued and the seller subsequently claimed an additional sum to bring the amount paid up to that which it would have been in Kenyan shillings. Lord Denning held that the sellers by their conduct waived the right to have payment by means of a letter of credit in Kenyan shillings. Megaw and Stephenson LJJ held mat on the facts the parties agreed to a variation of the currency of account in the contract of sale. Megaw LJ also held that the buyers were also entitled to succeed on the ground of waiver. 25 [1972] 1 Lloyd’s Rep 313 at 323–4. 26 [1997] 2 Lloyd’s Rep 386.


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stipulating that “freight pre-paid” bills of lading be presented did not conform to a contract of sale made on f.o.b. terms. It being common ground that the sellers were not entitled to demand a price increase or pre-payment prior to loading, the question then arose as to whether the sellers could justify their refusal to load on the ground that a conforming letter of credit had not been issued. The Court of Appeal held that (i) the seller’s failure to refer to the buyer’s breach in not issuing a conforming letter of credit when it sought an increase in the price of the goods did not prevent the sellers from subsequently relying on it to justify their refusal to load,27 and (ii) in the absence of a finding that the seller had made an unequivocal representation that it relinquished or would relinquish its rights arising out the buyer’s failure to open a letter of credit in the form required by the sale contract, there could be no waiver. Evans LJ said:28 Like all other forms of estoppel or waiver, the facts must justify a finding that there was an unequivocal representation by one party, by conduct or otherwise, which was acted upon by the other… When the facts do justify that finding, it is likely to be regarded as “unfair and unjust” for the party which made the representation to a contrary effect, to rely upon its contractual rights… Without such a representation, no estoppel or waiver can arise, and there is no general rule that what the Court…may perceive as “unfairness or injustice” has the same effect. The time within which the credit should be opened29 3–14 Disputes have arisen as to the duty of the buyer in regard to the time by which the credit should be opened. There are two classes of case—those where the contract stipulates the date by which the credit should be opened and those where it does not. 3–15 Where the contract specifies the date by which the credit should be opened, in the absence of agreement or circumstances showing the contrary, that is a condition of the contract and the seller is entitled to treat the contract as repudiated if the buyer does not procure the issue of the credit on or before that date.30 On particular facts, however, time may not be of the essence of the buyer’s 27

This was in accordance with the established principle that “a contracting party, who after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not…”: Taylor v Oakes, Roncoroni & Co (1922) 127 LT 267 at 269 per Greer J. This principle does not apply if the point not taken is one which if taken could have been put right—see Heisler v Anglo-Dal Ltd [1954] 2 Lloyd’s Rep 5 at 11. 28 [1997] 2 Lloyd’s Rep 386 at 397–8. 29 The time when the credit is opened is considered in paragraphs 4–47 to 4–48 above. 30 See, for example, Wahbe Tamari & Sons Ltd v “Colprogeca” [1969] 2 Lloyd’s Rep 18, Transpetrol Ltd v Transol Olieprodukten Nederland BV [1989] 1 Lloyd’s Rep 309 and Nichimen Corporation v Gatoil Overseas Inc [1987] 2 Lloyd’s Rep 46. Sometimes a period expressed in days before the loading period is stipulated in the contract—see Nichimen Corporation v Gatoil Overseas Inc [1987] 2 Lloyd’s Rep 46 and Sohio Supply Co v Gatoil


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obligation to provide the credit. In “Baltimex” Baltic Import and Export Company Ltd v Metallo Chemical Refining Company Ltd31a credit was, to the knowledge of all parties, to be opened by Russian sub-buyers from English buyers of lead on terms in which no time for payment was stipulated. The possibility of delay being known to the parties, it was held that the defendants could not complain of the delay that ensued.32 3–16 Cases have arisen where the contract has provided that the credit be opened “immediately” or “forthwith”.In Garcia v Page & Co Ltd,33 he contract called for payment by confirmed credit to be opened “immediately”. Porter J held that the issue of the credit was a condition precedent, and said:34 …and it had to be opened immediately. That means that the buyer must have such time as is needed by a person of reasonable diligence to get that credit established. 3–17 In Etablissements Chainbaux SARL v Harbormaster Ltd35 the credit was to be opened “within a few weeks”. In relation to this, Devlin J said:36 “A few weeks” is, of course, in itself too vague a term to be treated as an express provision as to time. What it amounts to normally is that a reasonable time from the making of the contract is to be afforded to the buyers for the purpose of obtaining a letter of credit. Everyone knows that it is a matter of machinery, that it has to be done through a bank and takes a little time, and in estimating what a reasonable time is one has the parties’ own estimate of “a few weeks” and it is in the light of that that finally the reasonable time should have to be settled. (USA) Inc [1989] 1 Lloyd’s Rep 588. As the latter case shows, care must be taken in drafting such provisions. 31 [1955] 2 Lloyd’s Rep 438. 32 See also the discussion on variation, waiver and estoppel at paras 3–08 to 3–13 above. 33 (1936) 55 Ll.LR. 391. In A.E.Lindsay & Co Ltd v Cook [1953] 1 Lloyd’s Rep 328 the contract also provided for a letter of credit to be opened “immediately”. Pilcher J, although referring to Garcia v Page & Co Ltd, appeared to be of the view that this provision was no different from the case where no express stipulation had been made and that consequently the credit must be made available to the seller at the beginning of the shipment period (see paragraphs 3–18 to 3–19 below). That was, however, a case where no credit had been opened and consequently it was unnecessary for the Judge to consider the precise effect of the word “immediately”. In State Trading Corporation of India v Compagnie Française d’Importation et de Distribution [1983] 2 Lloyd’s Rep 679 the contract provided that the credit be opened “immediately” but in no case later than 15 January 1979. The contract was amended on 25 January 1979 without the credit having been issued. Lloyd J held that although it was impossible for the buyers to open the credit before 15 January 1979 there was no reason why they should not have performed immediately and accordingly they were under an obligation to open the letter of credit immediately even though 15 January 1979 had passed. See also Trans Trust S.P.R.L. v Danubian Trading Co Ltd [1952] 1 Lloyd’s Rep 348 at 351–2. 34 (1936) 55 Ll.L.Rep. 391 at 392. 35 [1955] 1 Lloyd’s Rep 303. 36 [1955] 1 Lloyd’s Rep 303 at 306.


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After considering the surrounding circumstances Devlin J concluded that the parties contemplated 3 or 4 weeks and that it was fair therefore “to take one month as being the period the parties themselves would have said was the time of the contract”.37 3–18 Where the contract does not specify the date by which the credit should be opened, it is clear that where a shipment period is specified the buyer’s obligation is to procure the issue of the credit so that it is available to the seller throughout the whole of the period of shipment specified. This was first established in Pavia & Co SpA v Thurmann-Nielsen.38 The facts were that Brazilian sellers contracted to sell to Italian buyers on c.&f. terms 3,000 tons of shelled Brazilian groundnuts, shipment as to one half in February, March and April 1949, and as to the second half in March, April and May of that year, at the sellers’ option. The sellers guaranteed the export licence and the buyers the import licence. Payment was to be by “confirmed” credit. The export licence was obtained on 9 February 1949 and the buyers were advised at once and asked to open the credit. The import licence was obtained on 4 March, but the credit was not opened until 22 April 1949. The sellers shipped a small consignment but no more. McNair J held that the buyers were in breach by not establishing the letter of credit in time. He said:39 …it seems to me that, unless the sellers are to be deprived of their right of shipment at any time during the contact period, it necessarily follows that the credit must both be opened and confirmed, if reasonably practicable, within such time as will enable the sellers to ship at any moment of their permissible period. The Court of Appeal held that the buyer was under an obligation to have the letter of credit open and available from the first day of the shipment period. Denning LJ said:40 In a contract which provides for payment by confirmed credit, when must the buyer open the credit? In the absence of express stipulation, I think the credit must be made available to the seller at the beginning of the shipment period. The reason is because the seller is entitled, before he ships the goods, to be assured that, on shipment, he will get paid. The seller is not bound to tell the buyer the precise date when he is going to ship; and whenever he does ship the goods, he must be able to draw on the credit. He may ship on the very first day of the shipment period. If the buyer is to fulfil his obligations, he must, therefore, make the credit available to the seller at the very first date when the goods may be lawfully shipped in compliance with the contract. 37

[1955] 1 Lloyd’s Rep 303 at 311. [1951] 2 Lloyd’s Rep 328; [1952] 1 Lloyd’s Rep 153 (CA). See also Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367. 39 [1951] 2 Lloyd’s Rep 328 at 331. 40 [1952] 1 Lloyd’s Rep 153 at 157. 38


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3–19 In Sinason-Teicher Inter-American Grain Corporation v Oilcakes and Oilseeds Trading Co Ltd,41 Devlin J and Denning LJ expressed the view (obiter) that the buyer cannot delay in providing the letter of credit until the last day before the shipment period commences. The relevant facts were that the plaintiffs agreed to sell to the defendants a quantity of Canadian feed barley on c.i.f terms for shipment in October/November 1952, it being one of the terms that the buyers were to issue a guarantee in favour of the sellers through their London bank that the documents would be taken up on first presentation. At the beginning of September 1952 the sellers called for the guarantee and, it not being forthcoming by September 10, they purported to cancel the contract. The buyers contended that the date for provision of the guarantee had not expired either because such guarantee did not have to be provided until the first date for shipment or alternatively until a date a reasonable time before the first date for shipment. Devlin J supported the contention that a reasonable time before the first date for shipment had not by then elapsed and rejected the contention of the sellers that the reasonable time for the provision of the guarantee had to be calculated from the date of the contract. In the course of his judgment, he said:42 I do not think the Pavia case really deals with the question of whether the first date of the shipment period is the last date by which the credit has to be opened. It may very well be argued, for example, that if the first available date for shipment is Oct. 1, then the sellers are entitled to tender any bill of lading which bears the date of Oct. 1. That means that it may well be actually loaded on the ship before Oct. 1. It means certainly that it will have to be brought down to the docks before Oct. 1, and it might be said that a seller was entitled to know before he embarked upon those operations which led directly to the performance of his obligations under the contract that his payment is secured by the credit for which he stipulated. I do not think the Pavia case decides that point one way or the other. In the Court of Appeal, Denning LJ said:43 We were referred to Pavia & Co SpA v Thurmann-Nielsen. I agree with what Mr Justice Devlin said about that case. It does not decide that the buyer can delay right up to the first date for shipment. It only decides that he must provide the letter of credit at latest by that date. The correct view 41

[1954] 1 Lloyd’s Rep 376; [1954] 2 Lloyd’s Rep 327 (CA). See also Ruchi International Ltd v Agri Marketing Co SARL (unreported—13/1/00), where Longmore J accepted that in relation to a letter of credit the law has crystallised the concept of “a reasonable time” into a reasonable time before shipment, but held that, in relation to the provision of a performance guarantee against the buyer’s obligation to make due payment, it was open to arbitrators to find that the guarantee did not have to be provided until loading was complete. 42 [1954] 1 Lloyd’s Rep 376 at 380. 43 [1954] 2 Lloyd’s Rep 327 at 331.


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is that, if nothing is said about time in the contract, the buyer must provide the letter of credit within a reasonable time before the first date for shipment. The same applies to a bank guarantee: for it stands on a similar footing. 3–20 The position in relation to a “classic”44 f.o.b. contract was considered in Ian Stach Ltd v Baker Bosly Ltd.45 Diplock J held that the latest date for opening the credit is the earliest shipping date. He said: It seems to me, in a case of this kind and in the case of an ordinary f.o.b. contract financed by a confirmed banker’s credit, the prima facie rule is that the credit must be opened at latest (and that is as far as I need go for the purpose of this case) by the earliest shipping date. In that way, one gets certainty into what is a very common commercial contract… 3–21 Where the contract does not specify the date by which the credit should be opened and no period for shipment is agreed, the buyer’s obligation to provide the credit must be fulfilled within a reasonable time having regard to all the circumstances of the case.46 In Etablissements Chainbaux SARL v Harbormaster Ltd 47 Devlin, J. said: …it is plain that if parties put in a term of this sort as to reasonable time it is not a term which has to be assessed in the abstract as at the date of the contract; it has to be considered in the light of the circumstances which prevailed after the contract. I will take the well-known passage from Lord Watson’s speech in Hick v Raymond & Reid [1893] AC 22…Lord Watson said, at p 32, that where the law implies that a contract should be performed within a reasonable time, it “has invariably been held to mean that the party upon whom it is incumbent duly fulfils his obligations, notwithstanding protracted delay, so long as such delay is attributable to causes beyond his control, and he has neither acted negligently nor unreasonably.” But in applying that principle, in my judgment, one has to consider what is the reasonable time provided for. 44

Cf NV Handel My J Smits Import-Export v English Exporters (London) Ltd [1957] 1 Lloyd’s Rep 517, where the contract provided that the seller had the duty and responsibility of fixing the shipping. 45 [1958] 1 Lloyd’s Rep 127. 46 For the general principle, see Chitty on Contracts, 28th ed, para 22–020. Previous editions of this work summarised the position in relation to the buyer’s obligation to provide the credit in the following statement: “It is thus an implied condition in all contracts calling for the issue of a credit that it be issued within a reasonable time; if this is not done the credit is clearly defective.” While, in relation to contracts which do not expressly provide for the time by which the credit is to be


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issued, it may be possible to justify this generalisation, it seems to the present editor that it does not adequately take account of cases where the contract provides for a shipping period discussed in paragraphs 3–18 to 3–20 above. 47 [1955] 1 Lloyd’s Rep 303.

This principle also applies after the time fixed for performance by the buyer has passed, either because an event which has to occur prior to the provision of the credit does not occur before the time when the credit should be provided,48 or because the seller has acquiesced in delay by the buyer and wishes again to make time of the essence of the buyer’s performance.49 3–22 The buyer’s obligation to provide the credit may not arise until after the seller has performed some act. In Knotz v Fairclough, Dodd & Jones Ltd, 50 a contract of sale provided for payment by letter of credit for 97% of the seller’s provisional invoice. Sellers J held that that provision of the provisional invoice was a condition precedent of the obligation that lay on the buyer to put up the credit. He said:51 I think, in the arrangement between these parties, it was necessary for the seller to give proper notice, either by provisional invoice or in some other way, and to request from the buyers the form of credit which he required. If the contract does contain a provision to this effect, it is therefore essential that the seller perform his obligations under the contract, otherwise the buyer will be able to treat the contract as repudiated and claim damages. 48

For example in Pavia & Co SpA v Thurmann-Nielsen [1951] 2 Lloyd’s Rep 328, affirmed [1952] 1 Lloyd’s Rep 153, where the necessary export licence had not been provided by the first date for shipment. McNair J held that the buyers were under an obligation to take reasonable steps to provide the credit from the date when the export licence was obtained. See also Knotz v Fairclough, Dodd & Jones Ltd [1952] 1 Lloyd’s Rep 226 at 231, where the event was an act that had to be performed by the seller, and Transpetrol Ltd v Transol Olieprodukten Nederland BV [1989] 1 Lloyd’s Rep 309, where the contract provided for the buyer to open the letter of credit within 1 working day from the date of nomination of a vessel by the seller, and in which Phillips J held that the seller’s nomination was valid and the buyer in breach of contract for failing to open the credit. 49 See Etablissements Chainbaux SARL v Harbormaster Ltd [1955] 1 Lloyd’s Rep 303 at 312, where Devlin J said: “Now, the position of a party who has started out with a contract where time is of the essence and has allowed the time to go by is, I think, quite clearly laid down by the authorities. He has got to make time of the essence of the contract again in the normal case, and that means that he has to give a notice giving the other side what is a reasonable time in all the circumstances to comply with their obligations, and it is only after they fail to do that that he is entitled to cancel the contract.” See also Enrico Furst & Co v W.E.Fischer Ltd [1960] 2 Lloyd’s Rep 340 at 350 and Toprak Mahsulleri Ofisi v Finagrain Compagnie Commerciale Agricole et Financiere SA [1979] 2 Lloyd’s Rep 98. Cf Nichimen Corporation v Gatoil Overseas Ltd [1987] 2 Lloyd’s Rep 46. As to the position when time is not of the essence of the contract, see Behzadi v Shaftesbury Hotels Ltd [1992] Ch 1 at 12 and 24. 50 [1952] 1 Lloyd’s Rep 226. See also paragraph 3–03 above. 51 [1952] 1 Lloyd’s Rep 226 at 231. The crucial words here are “in the arrangement between these parties”. There is usually no obligation on the seller to submit a form of credit to the buyer.


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The credit as payment—absolute or conditional Introduction 3–23 The effect of a commercial credit in constituting payment pursuant to and sufficient to discharge the payment provision of a contract for the purchase and sale of goods must depend upon the facts of the particular case. The contract of sale may, unusually, make the credit absolute payment. Acceptance by the seller of a commercial credit constituting absolute payment would debar him from his ordinary right to pursue the buyer if he (the seller) did not receive payment under the credit. 3–24 If the issuing bank refuses without just cause to pay under the credit, it can be sued for breach of the credit contract, which imposes on the seller the sole necessity of presenting the proper documents within the time laid down. Providing that the seller fulfils his part of the credit contract, only the issuing or confirming bank’s failure (insolvency, bankruptcy or liquidation) can prevent the seller’s receiving payment from that source.52 If the credit provides for payment in cash against documents, either the seller is paid or he does not relinquish the documents. If the bank wrongly refuses to pay, it is in breach, as is the buyer unless the sales contract provides that the mere issue of the credit is absolute and final payment, which provision would have to be in terms which made clear beyond doubt what the parties intended. This could not normally be in the contemplation of the parties and, unless it is expressly and clearly stated, the seller’s rights against the buyer are not exhausted by the issue of the credit and he may sue the buyer for the price in the event of the issuing or confirming bank failing to pay.53 Absolute/conditional payment 3–25 The distinction between absolute and conditional payment was discussed by Lord Denning MR in Alan & Co Ltd v El Nasr Export and Import Co.54 He said:55 If the letter of credit is absolute payment of the price, the consequences are these: The seller can only look to the banker for payment. He can in no 52

But see in this connection, Saffron v Société Minière Cafrika (1958) 10 CLR 231 and Sale Continuation Ltd v Austin Taylor & Co Ltd [1968] 2 QB 849. 53 See Newman Industries Ltd v Indo-British Industries Ltd [1956] 2 Lloyd’s Rep 219 (reversed on a different point [1957] 1 Lloyd’s Rep 211), Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313, E.D.&F. Man Ltd v Nigerian Sweets & Confectionery Co Ltd [1977] 2 Lloyd’s Rep 50 and Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388 at 392. See also North Western Shipping & Towage Co Pty Ltd v Commonwealth Bank of Australia (1993) 118 ALR 453, where it was held that the opening of a letter of credit did not constitute “payment” for the purpose of a retention of title clause in the contract of sale and accordingly property in the goods the subject of the credit did not pass to the buyer when the credit was issued. 54 [1972] 1 Lloyd’s Rep 313. See also Greenough v Munroe 53 F. 2d. 363 (1931) at 365. 55 [1972] 1 Lloyd’s Rep 313 at 321–2.


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circumstances look to the buyer. The seller must present the documents to the banker and get payment from him in cash or get him to accept sight or time drafts. If the banker does not take up the documents, the seller will retain them, resell and sue the banker for damages. If the banker takes up the documents in exchange for time drafts, and the banker afterwards becomes insolvent, the seller must prove in the liquidation. He cannot sue the buyer… In my opinion a letter of credit is not to be regarded as absolute payment, unless the seller stipulates, expressly or impliedly, that it should be so. He may do it impliedly if he stipulates for the credit to be issued by a particular banker in such circumstances that it is to be inferred that the seller looks to that particular banker to the exclusion of the buyer. …If the letter of credit is conditional payment of the price, the consequences are these: The seller looks in the first instance to the banker for payment: but, if the banker does not meet his obligations when the time comes for him to do so, the seller can have recourse to the buyer. In conclusion, he said:56 …I am of the opinion that in the ordinary way, when the contract of sale stipulates for payment to be made by confirmed irrevocable letter of credit, then, when the letter of credit is issued and accepted by the seller, it operates as conditional payment of the price. It does not operate as absolute payment. It is analogous to the case where under a contract of sale, the buyer gives a bill of exchange or a cheque for the price. It is presumed to be given, not as absolute payment, nor as collateral security, but as conditional payment. If the letter of credit is honoured by the bank when the documents are presented to it, the debt is discharged. If it is not honoured, the debt is not discharged: and the seller has a remedy in damages against both banker and buyer. 3–26 Circumstances may show that the parties intended the letter of credit to be taken as absolute payment, but it is submitted that insistence by the seller upon a credit confirmed by a bank in his own country is not enough, by itself, to justify the conclusion that the credit constituted absolute payment. The reason for the seller’s requiring confirmation is to avoid possible trouble, by having a reliable payer in his own country, not to forego the normal rights of a seller against his buyer.57 56

[1972] 1 Lloyd’s Rep 313 at 323. The opinion was obiter (although concurred in by Stephenson LJ at 329). Megaw LJ (at 327–8) expressly refused to formulate a general principle on this subject on the basis that each case will turn on its own facts. That Lord Denning correctly set out the general principle in relation to letters of credit was accepted by Ackner J in Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156 at 159 and the Court of Appeal in Re Charge Card Services Ltd [1989] Ch 497 at 511–2. 57 Cf Saffron v Société Minière Cafrika (1958) 100 CLR 231 at 243–4, where the High Court of Australia stated: “A provision for payment by revocable letter of credit could hardly be regarded in any circumstances as negativing payment in the event of revocation. At the other end of the scale a provision for payment by irrevocable and confirmed letter of


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Claims by seller against buyer—bank not insolvent 3–27 A seller who has contracted for payment by irrevocable credit must endeavour to obtain payment from the issuing or confirming bank and only if he fails to receive payment from that source for a reason other than that he does not and cannot present the documents required by the terms of the credit is he justified in applying direct to the buyer at whose request the credit was issued.58 3–28 In Soproma SpA v Marine & Animal By-Products Corporation,59 McNair J said:60 Under this form of contract, payment by letter of credit, as it seems to me, the buyer performs his obligations as to payment if he provides for the seller a reliable and solvent paymaster from whom he can obtain payment—if necessary by suit—although it may well be that if the banker fails to pay by reason of his insolvency the buyer would be liable, but in such a case, as at present advised, I think that the basis of the liability must in principle be his failure to provide a proper letter of credit which involves (inter alia) that the [obligor]61 under the letter of credit is financially solvent (this point as to the buyers’ liability for the insolvency of the bank was not fully argued before me and I prefer to express no concluded opinion upon it as I understand that it may arise for decision in other cases pending in this Court). credit which in words taken from The Law of Bankers’ Commercial Credits, Gutteridge & Megrah, p. 13, is “an absolute undertaking by the banker to honour all drafts complying with the terms of the instrument creating the credit, subject only to limitations as to amount and the period of time for which it is to be available”, might perhaps not unreasonably be regarded as a stipulation for the liability of the confirming bank in place of that of the buyer. Where the stipulation is for an irrevocable but not confirmed credit there would be less reason for regarding the provision of the credit as being all that is required by the buyer in any circumstances.” See also Vivacqua Irmaos v Hickerson 190 So. 657 (1939) and Ornstein v Hickerson 40 F. Supp. 305 (1941) (explained by Lord Denning in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 321– 2 on the basis that the seller had stipulated for “the credit to be issued by a particular banker in circumstances where it is to be inferred that the seller looks to that particular banker to the exclusion of the buyer.” 58 Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367 at 385–6, Ficom SA v Sociedad Cadex Limitada [1980] 2 Lloyd’s Rep 118 at 133 and Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388 at 392. Cf North Western Shipping & Towage Co Pty Ltd v Commonwealth Bank of Australia (1993) 118 ALR 453. 59 [1966] 1 Lloyd’s Rep 367. 60 [1966] 1 Lloyd’s Rep 367 at 385–6. See, however, the comment of Lord Denning on the first sentence of this passage in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 321. 61 The Judge said “obligee”, but must have meant “obligor”.


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It seems to be quite inconsistent with the express terms of a contract such as this to hold that the sellers have an alternative right to payment from the buyers by presenting the documents direct to the buyers. Assuming that a letter of credit has been opened by the buyer for the opening of which the buyer would normally be required to provide the bank either with cash or some form of authority, could the seller at his option disregard the contractual letter of credit and present the documents direct to the buyer? As it seems to me, the answer must plainly be in the negative. McNair J referred to the credit provision as an express term of the contract, the contract of sale, presumably. It must be right that the seller has not the option of tendering direct to the buyer, ignoring the credit altogether (which would usually not be a sensible line to take). 3–29 In Ficom SA v Sociedad Cadex Limitada62 and Shamsher Jute Mills Ltd v Sethia (London) Ltd63 non-conforming documents were presented under the credit. In the former case the sellers then disposed of the goods for their own account and in the latter the goods appear to have been sold in satisfaction of freight or warehouse costs with neither seller nor buyer deriving any benefit. In both cases it was held that the seller could only obtain the price through the letter of credit.64 In Shamsher Jute, Bingham J said:65 62

[1980] 2 Lloyd’s Rep 118. [1987] 1 Lloyd’s Rep 388. 64 Previous editions have included the following: “This raises the point whether, in the event of the seller’s being responsible for failing to receive payment under the credit, by reason that his documents are not in order, he thereby loses aU right to be paid the price. It is submitted that this cannot be so, that if he cannot rectify his irregular tender before the expiration of the credit, the security of which he has lost, he may tender to the buyer with an indemnity to cover the buyer’s loss of interest on any moneys he had placed with the issuing bank and necessary expenses. If the credit is only conditional payment it should not matter for what reason the issuing bank does not pay.” In the light of Ficom and Shamsher Jute Mills it now seems clear that the courts will not be receptive to this submission. 65 [1987] 1 Lloyd’s Rep 388 at 392. 66 In Moralice (London) Ltd v E.D. & F.Man [1954] 2 Lloyd’s Rep 526 at 533, McNair J said: “I think it is probably true to say that when a c.i.f. contract provides that payment shall be by means of presentation of documents against an irrevocable credit, that necessarily involves, not only in the contract between the confirming bank and the seller, 63


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If the seller fails to obtain payment because he does not and cannot present the documents which the terms of the credit, supplementing the terms of the contract, require, the buyer is discharged: that was the Ficom case. In the ordinary case, therefore, of which the present is an example, the due establishment of the letter of credit fulfils the buyer’s payment obligation unless the bank which opens the credit fails for any reason to make payment in accordance with the credit terms against documents duly presented. I know of no case where a seller who has failed to obtain payment under a credit because of failure on his part to comply with its terms has succeeded in recovering against a buyer personally. 3–30 In the Shamsher Jute, Bingham J was dealing with a case where the failure to present documents required by the terms of the credit is the fault of the seller.66 In Saffron v Société Minière Cafrika67 the seller shipped goods under an f.o.b. contract in circumstances which enabled the buyer to obtain control of the goods upon shipment prior to issue of the bill of lading. The buyer then obtained a bill of lading made out in terms that prevented the seller from complying with the terms of the credit and as a result the seller could not obtain payment from the bank. The seller sued for the price. The High Court of Australia upheld the claim, saying:68 The question could only arise in special circumstances, e.g., if the bank responsible for the credit were to become insolvent, or as here, where notwithstanding that the documents tendered were not in conformity with the letter of credit, the seller had lost control of the goods to the buyer. The Court held that property in the goods had passed to the buyer and, the buyer not having restored dominion over the goods to the seller, the seller was able to maintain an action for the price. The seller had sold and delivered the goods to the buyer and was entitled to payment unless there was a term in the contract excusing payment. It held that on the facts there was no such term since the letter of credit was not confirmed and provided for part payment only of the price. The Court then considered what the position would have been if the letter of credit had been intended as the “primary source of payment” and said:69 Had the issue been whether the letter of credit was intended as the primary source of payment, the answer would have been that it was. In that event, the further question would have arisen whether the circumstances in which that primary source failed excused the defendant from payment altogether. It would seem that the only possible ground upon which the seller could have been defeated in his claim for the price would have been that the seller was solely responsible for the failure of the primary source of payment.


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3–31 The approach of the High Court of Australia in Saffron v Société Minière Cafrika 70 is consistent with Ficom SA v Sociedad Cadex Limitada 71 and Shamsher Jute Mills Ltd v Sethia (London) Ltd.72 The decision of Sellers J in Newman Industries Ltd v Indo-British Industries Ltd73 is more difficult, however. In that case the plaintiff sold a secondhand generator to the defendant f.o.b. British port, but in the contract between the buyer and the seller, that the documents must be such as will strictly comply with the terms of the letter of credit.”

payment to be made under a letter of credit on presentation of shipping documents to the defendant’s bank in London. The plaintiff presented the documents, but as a result of a dispute about the terms of a guarantee of satisfactory performance, the bank refused to pay. The plaintiff sued the defendants, not the bank, the buyer having neither paid for the goods nor taken delivery of them at the port of destination. Having held that property in the generator passed to the defendant on shipment, Sellers J considered whether the plaintiff was entitled to claim directly against the defendant rather than the bank. He said: The action is against the buyer, not against the bank, and the question of importance is whether the seller must look only to the bank who issued the letter of credit; that is, whether the method of payment agreed releases the buyer from direct liability for payment under the contract of sale. There does not seem to be any definite authority on the matter. Where it has been agreed that payment is to be by a bill of exchange, the payment would normally be a conditional payment and it would require very clear terms to make it an absolute payment. Here, payment was to be by a draft drawn on the bank issuing the credit and it was, therefore, to be made by a negotiable instrument. Originally the payment of the price was to be guaranteed by a bank and the letter of credit was only taken subsequently in substitution at the request of the defendants and with the agreement of the plaintiffs. I do not think there is any evidence to establish, or any inference to be drawn, that the draft under the letter of credit was to be taken in absolute payment. I see no reason why the plaintiffs, in the circumstances which have so unfortunately and unnecessarily arisen, should not look to the defendants, as buyers, for payment. 67

(1958) 10 C.L.R. 231. See also Samsung America Inc v Yugoslav-Korean Consulting & Trading Co Ltd 670 N.Y.S. 2d 466. 68 (1958) 10 C.L.R. 231 at 243. 69 (1958) 10 C.L.R. 231 at 244–5.. 70 (1958) 10 C.L.R. 231. 71 [1980] 2 Lloyd’s Rep 118. 72 [1987] 1 Lloyd’s Rep 388. 73 [1956] 2 Lloyd’s Rep 219; reversed on a different point [1957] 1 Lloyd’s Rep 211. The ground on which the decision was reversed calls into question the views expressed by Sellers J. As was pointed out by Lord Denning in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 322, the case concerned a time draft and is not therefore direct authority for the position in relation to sight letters of credit.


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The Judge held that the bank was “probably not” justified in paying on the documents presented, although he was of the view that the terms of the letter of credit mistakenly did not properly accord with the contract of sale. However, his decision as to what the buyer and seller had agreed was reversed by the Court of Appeal,74 which did not then need to deal with the question whether the seller could claim directly against the buyer having presented non-conforming documents to the bank. The decision of the Court of Appeal calls into question Sellers J’s approach on this point, however, which is inconsistent with the statement of Bingham J set out in paragraph 3–29 above. Sellers J’s statement might be justifiable on the basis that, as in Saffron v Société Minière Cafrika.75 the buyer obtained property in the goods, which Sellers J held expressly had passed to the buyer on shipment because bills of lading had been taken in the name of the buyer.76 However, in the light of Soproma SpA v Marine & Animal ByClaims by seller against buyer—bank insolvent 3–32 Unless the circumstances show that the letter of credit was taken as absolute payment, the seller can obtain payment direct from the buyer where the bank becomes insolvent. Where the issuing or confirming bank fails and the credit has provided for the documents of title to be surrendered against acceptance of the seller’s time draft on the bank, the rights of the seller are limited to proving in the bank’s liquidation and to proceeding against the buyer on the sales contract. Where the draft is drawn on the buyer, the seller has a right of action against the buyer on his acceptance. 3–33 The issue appears first to have been considered in the New Zealand Court of Appeal in Hindley v Tothill, Watson & Co.81 The report is not particularly satisfactory in illustrating the point under discussion, but the Court of Appeal rejected the argument, that the credit constituted absolute payment, saying82 that the seller had the liability of: the bank in the first instance and, on the bank’s default, that of the [buyer]. …We do not accede to the contention that the acceptance of the bills by the Bank of New Zealand for the defendants’ half of the sacks was equivalent to payment and that the defendants would not have been liable for the price if the bank had not met the bills. 3–34 In Alan & Co Ltd v El Nasr Export and Import Co83 Lord Denning MR said:84 74

[1957] 1 Lloyd’s Rep 211. (1958) 10 C.L.R. 231. 76 Although it does not appear to have been argued that the rejection of the documents gave rise to a re-vesting of the property in the seller. Cf Ficom SA v Sociedad Cadex Limitada [1980] 2 Lloyd’s Rep 118 at 133, where Robert Goff J said: “Had the goods not Products Corporation,77 Ficom SA v Sociedad Cadex Limitada78 and Shamsher Jute Mills Ltd v Sethia (London) Ltd,79 it must be treated with considerable caution.80 already been rejected they would, on rejection of the documents presented for payment under the letter of credit, have re-vested in the seller.” 77 [1966] 1 Lloyd’s Rep 367. 78 [1980] 2 Lloyd’s Rep 118. 75


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The bank may accept time drafts in exchange for the documents, but may fail to honour the drafts when the time comes. In that case the banker will have the documents and will usually have passed them on to the buyer, who will have paid the bank for them. The seller can then sue the banker on the drafts: or if the banker fails or is insolvent, the seller can sue the buyer. The banker’s drafts are like any ordinary payment for goods by a bill of exchange. They are conditional payment, but not absolute payments. It may mean that the buyer (if he has already paid the bank) will have to pay twice over. So be it. He ought to have made sure that he employed a “reliable and solvent paymaster”. Stephenson LJ gave the reason for this:85 …the buyers promised to pay by letter of credit, not to provide by a letter of credit a source of payment which did not pay. 3–35 These principles were applied in E.D.&F. Man Ltd v Nigerian Sweets & Confectionery Co Ltd86 where the issuing bank failed without having paid the seller, but having received funds from the buyer. Ackner J said:87 It follows from the finding that the letters of credit were given only as conditional payment, that if they were not honoured, the [seller’s] debt has not been discharged. This is because the buyers promised to pay by letter of credit, not to provide by a letter of credit the source of payment which did not pay…the sellers’ remedy in such circumstances is to claim from the buyers either the price agreed in the contract of sale or damages for breach of their contractual promise to pay by letter of credit. The choice of an intermediary bank is essentially a matter for the buyer and his bank and it is not unreasonable to expect them to accept responsibility if the paymaster fails. 3–36 It would seem that insolvency does not automatically end the contract between the parties, nor is it breached, and thus it follows that the seller is not relieved from fulfilling his part of the contract.88 However, dishonour of drafts by the issuing bank may constitute a repudiation of the issuing bank’s agreement to pay, thereby enabling the seller to sue the beneficiary or to recover documents deposited with the bank by way of pledge. In Sale Continuation Ltd v Austin Taylor & Co Ltd 89 the defendants were agents of Malaysian sellers in regard to a 79

[1987] 1 Lloyd’s Rep 388. It was, however, treated as persuasive authority by both Orr J and Lord Denning MR in Alan & Co Ltd v El Nasr Export and Import Co [1971] 1 Lloyd’s Rep 401 at 417–9, [1972] 1 Lloyd’s Rep 313 at 322. 81 (1894) 13 NZLR 13. 82 (1894) 13 NZLR 13 at 23. 83 [1972] 1 Lloyd’s Rep 313. See also Bank of the United States v Seltzer 233 App. Div. 225, 231 N.Y. Supp. 637 (1931) (referred to by Paull J in Sale Continuation Ltd v Austin Taylor & Co Ltd [1968] 2 QB 849 at 859), Greenough v Munroe 53 F. (2d) 362 (1931) at 365 (referred to by Lord Denning in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 322), sale 80


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of timber to Belgian buyers. Payment was to be by irrevocable credit opened by the defendants calling for drafts on the issuing bank. The defendants applied to Sale & Co, who issued their irrevocable credit in favour of the sellers, which was advised to the sellers through Eastern Bank Ltd, to whom Sale undertook:

Upon presentation of the documents to us…we confirm we shall place the value of such documents at your disposal 90 days after sight. The defendants’ application to Sale & Co contained the following: In consideration of your opening this credit, we engage to provide you with funds to meet disbursements thereunder as soon as you receive advice that payment has been made… The drafts are to be secured by the due endorsement and delivery as collateral security to the bank of the above mentioned documents… Drafts were in due course drawn by the seller on Sale & Co who accepted them against delivery of the documents of title. Sale & Co then released the documents to the defendants pursuant to an arrangement (a letter of trust) by which the defendants undertook to hold them, and the proceeds when received, in trust for the bank. In due course the documents were presented by the defendants to the Belgian buyers and, upon the failure of Sale & Co the purchase price was passed to the sellers. Sale & Co claimed the money, but Paull J held that they were not entitled to it; once Sale & Co’s draft was dishonoured (or notice of intention not to pay it was given) the sellers were entitled to cancel the contract of pledge by returning the draft for cancellation and claiming the purchase money from their agents, the defendants. 3–37 It is not easy to reconcile this decision with those in Re Agra Bank, ex parte Tondeur90 and Ex parte Agra Bank, Re Barber.91 In Re Agra Bank, ex parte Tondeur it was held that, to quote the headnote, “suspension of payment by the bank before there has been time for the letter of credit to be used is not a breach or repudiation of contract”, although Sir W.Page Wood V.C. said that: if a man by his own act renders it impossible for him to perform the contract or if he distinctly or decidedly repudiates and rejects the contract even though the time of its performance has not arrived and it may be said, as was said in the carrier’s case, that there is still time for repentance, then the contract is broken and a remedy may be had in damages Vivacqua Irmaos v Hickerson 190 So. 657 (1939) (referred to by Lord Denning in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 322) and Ornstein v Hickerson 40 F. Supp. 305 (1941) (referred to by Lord Denning in Alan & Co Ltd v El Nasr Export and Import Co [1972] 1 Lloyd’s Rep 313 at 322 and by Ackner J in E.D.&F. Man Ltd v Nigerian Sweets & Confectionery Co Ltd [1977] 2 Lloyd’s Rep 50 at 56). 84 [1972] 1 Lloyd’s Rep 313 at 322. 85 [1972] 1 Lloyd’s Rep 313 at 329. This formulation was said to “beg the question” by Millett J at first instance in Re Charge Card Services Ltd [1987] Ch 150 at 167. 86 [1977] 2 Lloyd’s 50. See also Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388 at 392.


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and the Vice-Chancellor suggested that it was open to the liquidator to pay the bills if it was in the interest of the bank that he should do so. In Ex parte Agra Bank, Re Barber, the failure of the bank was held to be no reason why the company-beneficiary of the credit “should not have performed its part of the contract”. In Sale Continuation Ltd v Austin Taylor & Co Ltd, the defendants could have paid the proceeds to the receiver on the understanding that they be appropriated to payment of the sellers’ bill when due. This would have been no breach. When the sellers in that case accepted the credit, they agreed that the documents of title should be delivered against Sale & Co’s acceptance and from which moment they would have lost their lien as unpaid vendors. The documents then became the property of Sale & Co to deal with as they pleased; they could have delivered them direct to the buyers and obtained payment,92 in which event neither the sellers nor the defendants would have had any claim to the proceeds. When, however, they handed the documents to the defendants in trust they made the defendants their (Sale & Co’s) trustees and agents and in that respect the defendants were not acting and could not act as the agents of the sellers. By dealing with the documents as they did and with the proceeds the defendants converted the documents by depriving Sale & Co of dominion over them. 3–38 On the question of the trust receipts, Paull J said:93 One starts by saying that the position here is not the usual position where the customer of the Bank is the buyer of the goods. In such a case the seller parts with his ownership in the documents as soon as he sends the documents to the Bank. His right is to be paid the draft. The ownership of the goods passes to the buyer but the Bank has the possessory title of a pledgee as against the buyer. He has that title until the buyer puts the Bank in funds in respect of the draft and discharges his liability for interest payable in respect of the draft. If the pledgor does not do so the Bank has the usual right of a pledgee to sell as if he were the owner. And again:94 Now the essence of a pledge is that it is security against either an immediate advance or against a present liability to make a future payment. The trust receipt contemplated that the defendants would part with the documents to the Belgian buyer and recover the purchase price. It was no 87

[1977] 2 Lloyd’s 50 at 56. In Maran Road Saw Mill v Austin Taylor & Co Ltd [1975] 1 Lloyd’s Rep 156, Ackner J held that the same principle applied to payments by principal to an agent. 88 Re Agra Bank, ex parte Tondeur (1867) LR 5 Eq 160 and Ex parte Agra Bank, Re Barber (1870) LR 9 Eq 725. 89

[1968] 2 QB 849.

90

(1867) LR 5 Eq 160. (1870) LR 9 Eq 725.

91


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breach of trust to do so. In my judgment the same principle applies to money as applies to the obligation to put the Plaintiffs in funds before the maturity of the draft. Once the draft is dishonoured (or notice of intention not to honour given) Nenasi [the seller] is entitled to cancel the contract of pledge by returning the draft for cancellation and claiming the purchase money from their agents the defendants. With respect, this would appear not to take due account of the fact that the defendants were, under the trust receipt, the agents of the plaintiffs not of the sellers.95 3–39 Maran Road Saw Mill v Austin Taylor & Co Ltd96 also related to a shipment of timber from Malaysia to a Continental buyer through the agency of the defendants, the failure of Sale Continuation Ltd rendering unenforceable its irrevocable credit opened at the instance of the defendants. The plaintiff sellers drew on Sale pursuant to the credit and delivered to Sale the documents of title against their acceptances. The defendants duly put the issuing bank in funds but in due course the bills were dishonoured and the negotiating bank in Malaysia had recourse to the plaintiff drawers, who, in turn, sued the defendants on the ground that they had breached their agency agreement. Ackner J held that the defendants had not discharged their contractual obligations, which required them to pay over and account for moneys due pursuant to the letters of credit. Payment had not been under the credit and thus the defendants were in breach. The buyer’s frustration of a credit 3–40 The contract between buyer and seller may call for presentation to the bank by the seller of a document issued by or countersigned by the buyer. The question arises as to what happens if the buyer refuses to issue or countersign the document with the effect that the seller cannot present the correct documents to the bank. In these circumstances, if the seller ships the goods and the buyer obtains property in them the buyer will be liable to the seller for the price.97 Moreover, the Court may be prepared to imply into the contract a term that the parties will co-operate to ensure the performance of their bargain.98 Failure by the buyer to issue or countersign the document (as the case may be) will be treated as a breach of this term for which the buyer will be liable to the seller in damages. 92

[1968] 2 QB 849 at 861, but quaere whether this would have infringed any agreement they had with the defendants to release the documents in trust. 93 [1968] 2 QB 849 at 861. 94 [1968] 2 QB 849 at 861–2. 95 For a criticism of this critique, see Benjamin’s Sale of Goods, 5th ed, paras 23–081 to 23–082.


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3–41 The seller’s interests may, however, be best served by claiming against the bank if it is possible to do so. In Astro Exito Navegacion SA v Southland Enterprise Co Ltd99 the buyer under a shipbuilding contract caused the bank to issue a letter of credit which required presentation of a notice of readiness that was accepted and signed by the buyer’s agents. The seller disputed the buyer’s right to have the credit issued with this requirement. Nevertheless, upon the buyer failing to accept the notice of readiness, the seller sought (by way of specific performance) an order that the buyer sign the notice of readiness. The proceedings were stayed pending arbitration but Parker J made an order by way of interim relief that the buyers, through their agents, sign the notice of readiness by a set date, failing which a master of the Supreme Court be appointed to sign it with the resulting document standing as a valid and duly executed document. The Judge ordered that money paid upon the ensuing presentation of the documents to the bank be paid into a joint account of solicitors pending further order. Following the intervention of the bank, the House of Lords held that the Judge had power under section 47 of the Supreme Court of Judicature (Consolidaton) Act 1925100 to make the order for signature of the notice of readiness so as to fulfil the requirements of a contract between parties one of whom was not before the Court. The bank is therefore under an obligation to treat a document signed by a master pursuant to an order made under this power as a conforming document. As a consequence the seller is able to obtain payment from the bank. The consequences of breach 3–42 Where the buyer fails to open a letter of credit in accordance with the contract of sale by the date required by the contract, this constitutes a repudiation of the contract and the seller is entitled to treat the contract as terminated and claim damages for nonacceptance of the goods.101 3–43 Where the seller fails to perform an obligation which is a condition precedent to the buyer’s obligation to open the credit or fails to present conforming documents to the bank within the time stipulated in the credit, this constitutes a repudiation of the contract of sale and the buyer is entitled to treat the contract as terminated and claim damages for non-delivery of the goods.102 96

[1975] 1 Lloyd’s Rep 156. Saffron v Société Minière Cafrika (1958) 100 CLR 231. 98 Mackay v Dick (1881) 6 App. Gas. 251 at 263. See also Chitty on Contracts, 28th ed, para 13– 011. 99 Reported as Astro Exito Navegacion SA v Chase Manhattan Bank NA [1983] 2 AC 787. 97


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3–44 If the seller presents conforming documents to the bank, this will discharge his obligations under the contract in relation to the documents and he will be able to recover the sum due under the letter of credit. This will usually be the whole contractual consideration, but it need not be. If it is not, the seller is entitled to recover such further consideration from the buyer as is payable under the contract of sale. If, when the goods are delivered, they do not conform to the contract quality, the buyer may claim damages for breach of warranty, or if the facts justify it may reject the goods and claim damages for non-delivery or return of the price as for a consideration that has wholly failed. 3–45 If it transpires that the documents tendered to the bank are fraudulent (by, for example, the bill of lading being ante-dated) and the bank pays the seller, the buyer may be able to recover damages from the seller for breach of contract103 or, if the facts justify it, in deceit. 100

Now section 39 of the Supreme Court Act 1981. The principles upon which damages are assessed are discussed at paragraphs 9–03 to 9–04 below. 102 See Bunge Corporation v Vegetable Vitamin Foods (Private) Ltd [1985] 1 Lloyd’s Rep 613, where it was argued that the buyer’s failure to open the credit in time prevented the buyer from recovering damages in respect of the seller’s prior unaccepted repudiation of the contract of sale. The argument was rejected. 103 See Kwei Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459. 101

Chapter 4 THE CONTRACTUAL RELATIONSHIPS ARISING UNDER A CREDIT Introduction 4–01 Normally four parties are concerned in an ordinary commercial credit transaction: (a) the buyer (applicant) who procures the issue of the credit, (b) the bank that issues the credit, (c) the correspondent bank which is the intermediary between the issuing bank and the seller (beneficiary) and which pays or negotiates documents or drafts tendered with documents or which merely advises the credit to the beneficiary, and (d) the seller (beneficiary) in whose favour the credit is normally issued. A credit is sometimes issued by the bank direct to the seller but generally the issuing bank advises the credit through its own branch or through an intermediary bank in the country of export. Where an irrevocable credit is confirmed by an intermediary bank, the latter assumes a direct liability to the seller and looks to the issuing bank for indemnity. Under a negotiation credit, the negotiating bank may be any bank (not necessarily the intermediary advising bank) to which the beneficiary takes his draft and documents for negotiation. 4–02 In a typical commercial credit transaction, therefore, in addition to the contract between buyer and seller, contracts arise between the buyer and the issuing bank, the issuing bank and the intermediary, the issuing bank and the seller and, if the credit has been confirmed, the intermediary bank and the seller.1 Each of these contracts will be discussed separately below, but some overlapping and repetition in the discussion of them is inevitable. It is, however, important to recognise that the UCP is nowadays incorporated into virtually all applications for credits and the credits themselves.2 It follows that the contractual obligations undertaken by the parties are often to be found set out in detail in the UCP and all analysis of the contractual relationships must be undertaken against that background. 4–03 A commercial credit is usually issued pursuant to a term of the sales contract,3 but this is not a matter with which the bank issuing the credit is concerned. If it were otherwise financing by letter of credit would be impossible. In law the credit contract stands by itself and is not to be interpreted to the point of amendment or augmentation by reference to the contract of sale.4 4–04 Moreover the parties to the various contracts arising once the credit is established deal in documents and are not concerned with the goods that such documents represent or any obligations in relation to them provided for in the contract of sale.5 4–05 The bank issues its credit in accordance with the instructions given by the buyer, as set out in the application, and has no other responsibility in this respect than to comply with them. Whether or not the credit is that for which the contract of sale calls, the issuing bank can be sued by the beneficiary only for breach of the undertakings embodied

The contractual relationships arising under a credit

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in the credit, expressed or implied.6 Vis-à-vis its own customer, the applicant for the credit, the issuing bank is an agent; vis-à-vis the beneficiary, it is a principal. The contract between the buyer (applicant) and the issuing bank Introduction 4–06 The process of establishing a letter of credit begins with the buyer requesting the bank to issue a letter of credit in favour of the seller.7 This will be done by the buyer completing an application form or conveying his instructions to the bank in some electronic form.8 The terms on which the bank undertakes to issue the credit are set out in full in this document. Forms of application follow much the same pattern, dictated mainly by experience. By way of example the standard form used by HSBC Bank plc is reproduced at appendix 4. While particular terms that forms of application contain have been judicially considered from time to time, there appears to have been only one case in the United Kingdom in the second half of the 20th century in which such a form has been the subject of dispute.9 Forms of application contain a request that a credit be issued in accordance with the instructions set out in the form. By completing the form the buyer indicates whether the credit should be transferable, the expiry date, the place of expiry and the amount of the credit, whether partial shipments and transhipment are allowed, the last date for shipment, the place of shipment and the place of destination, the method of payment,10 the bank through which the credit is to be advised and whether the credit is to be confirmed, the description of the goods and the trade term pursuant to which shipment is to take place, the documents against which payment is to be made and who is to be responsible for charges.11 Usually the form will contain a condition that the buyer reimburse and indemnify the bank and pledge the documents and the goods represented by the documents to the bank. The application form or other document of instruction is a contractual document and acceptance of the instructions by the bank gives rise to a contract between the buyer and the bank.

1

See paragraph 1–24 above; and United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 182–3, Bank ofBaroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 90, Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227 at 237 and Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [1998] 1 Lloyd’s Rep 684 at 706, affirmed [2000] 1 Lloyd’s Rep 218 and [2001] 1 QB 167. 2 Incorporation of the UCP is discussed in paragraphs 1–11 to 1–15 above. 3 Discussed in chapter 3 above. 4 This is often referred to as the principle of “autonomy”, which is discussed at paragraph 1–25 above. 5 This principle is discussed at paragraphs 1–26 to 1–27 above. 6 This is an aspect of the principle of autonomy discussed in paragraph 1–25 above. 7 The issue of the credit may be the subject of discussions between the buyer and the issuing bank, which give rise to representations made by the buyer to the bank. For an example of a


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The terms of the contract 4–07 Once the contract has been created, the bank, as agent for the buyer, is under an obligation to make payment to the seller in accordance with the terms and conditions agreed in the contract and to take reasonable care in carrying out its functions as agent.12 The UCP makes certain other provisions that apply to the contractual relationship. Thus the bank is specifically required to— Examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit.13 The bank must also examine the documents and determine whether they comply with the terms of the credit within a reasonable time and in any event within 7 banking days following the day of receipt of the documents.14 In performing its functions, however, the bank is entitled to disregard (i) documents that are not stipulated in the credit15 and (ii) non-documentary conditions.16 4–08 Article 18(c)(i) of the UCP provides that the buyer, having instructed the bank, is liable for the bank’s charges, including commissions, fees, costs or expenses incurred in connection with its instructions. Usually payment of charges will be expressly agreed between the buyer and the bank in their contract and it will then not be necessary to resort to this article. The parties may, however, agree that the seller or some other party will be responsible for the bank’s charges. Article 18(c)(ii) of the UCP provides that if this is stipulated in the credit, the buyer, as instructing party, remains liable for payment of the charges if they cannot be collected. In each case it will be a matter of construction of the contract between the buyer and the bank whether such contract, by providing for payment by a third party, excludes the operation of article 18(c)(ii) because of inconsistency between the two provisions.17 4–09 A series of articles in the UCP relieve the bank from liability in relation to certain matters. These are as follows: case where statements made by the buyer constituted fraudulent misrepresentations, see Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513. See also Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600. 8 See paragraphs 1–17 to 1–18 above. 9 Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 150–1 (for a description of the form). 10 That is to say, by sight, by deferred payment, by acceptance or by negotiation—see paragraph s 2–06 to 2–10 above. 11 Non-documentary conditions should not be included—see article 13(c) of the UCP and paragraphs 7–24 to 7–26 below. 12 Thus, if the issuing bank on behalf of the buyer conducts enquiries in connection with the transaction financed by the letter of credit it must take reasonable care not to supply misleading information to the buyer. It is not, however, under an obligation to pursue the enquiries with due diligence although the fact that it has made wholly inadequate enquiries may render the information it supplies misleading—see Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 157–8.

Article 1518


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Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods or any other person whomsoever. Article 16 Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in the transmission of any telecommunication. Banks assume no liability or responsibility for errors in translation and/or interpretation of technical terms, and reserve the right to transmit Credit terms without translating them. Article 1719 Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control or by any strikes or lock-outs. Unless specifically authorised, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business. Article 18 13

Article 13(a) of the UCP (discussed at paragraphs 7–05 to 7–18 below). The precursor of this article in the 1962 revision of the UCP (in the same terms) was said by Lord Diplock in Gian Singh & Co Ltd v Banque de l’lndochine [1974] 2 Lloyd’s Rep 1 at 11 to do “no more than re-state the duty of the bank at common law”. The obligation is owed primarily to the buyer, but not to the beneficiary— Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 78 and Nasser v Florida Fleet Sales Inc 97 Civ. 9269 (DCC) (S.D.N.Y. 1999); cf Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 at 353. 14 Article 13(b) of the UCP (discussed at paragraphs 6–05 to 6–08 below). 15 Article 13(a) of the UCP (see paragraphs 7–19 to 7–21 below). The bank must either return such documents to the presenter or pass them on without responsibility. 16 Article 13(c) of the UCP (discussed at paragraphs 7–24 to 7–26 below). 17 As to the effect of inconsistency and the courts’ approach to reconciliation of contract terms and provisions of the UCP, see paragraphs 1–12 to 1–13. 18 Discussed at paragraph 4–21 to 4–22 below.


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(a) Banks utilising the services of another bank for the purpose of giving effect to the instructions of the Applicant do so for the account and at the risk of such Applicant.20 (b) Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). (d) The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages. Financing arrangements between the buyer and the issuing bank 4–10 Financing arrangements between the buyer and the issuing bank will take many different forms. If the buyer undertakes many documentary credit transactions through a bank he may be granted a credit limit (similar to a limit for advances). Alternatively, the buyer may in advance place the bank in funds for the purpose of meeting the payment to be made under a credit, in which case 19

This article appears to apply when it is unlawful to operate the credit because of sanctions. The effect of the article is that obligations do not survive once sanctions are lifted—see Opinions of the ICC Banking Commission R336 and R348. This may be unsatisfactory. The equivalent provision in ISP98 has been modified so as to permit the operation of the credit after the interruption to business is lifted or at a substitute place of presentation—see rule 3.14. 20 Discussed at paragraph 4–13 below.

the funds so deposited cannot be used by the bank for any other purpose.21 Where an intermediary bank is interposed between the issuing bank and the beneficiary and the funds are remitted to the intermediary bank, no action will lie against it by the buyer for a refund, as there is a want of privity, which will be fatal to the claim;22 but this would be unusual. If the bank becomes insolvent before the funds have been applied to the purposes of the credit, whether the buyer can claim that the funds are held on trust for him or whether he can rely only on his right of proof against the bank’s assets will depend on the terms on which the funds were paid to the bank.23 The bank’s security 4–11 As security for the advance which the issuing bank, in effect, makes to the buyer when paying against documents when it has not been put in funds by the buyer, the documents relating to the goods when delivered to the bank may be held until such time as the buyer’s liability has been discharged. The question of the bank’s rights in respect of its security is closely linked up with certain other aspects of the matter, for instance, the legal effect of a letter of trust, and therefore it is more convenient to deal with these separately as a whole.24 The issuing bank’s right to reimbursement or an indemnity from the buyer


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Introduction 4–12 The terms on which the bank is entitled to be reimbursed or indemnified in respect of payments made under the credit may be provided for in the contract between the buyer and the bank.25 In the absence of provision varying the position, if the bank carries out its instructions strictly in accordance with its mandate, it is entitled to indemnity by the applicant and to reimbursement if it pays.26 It is essential, however, that the bank shows that it has carried out, in all their strictness, the buyer’s instructions as specified in the contract between the buyer and the bank resulting in the issue of the credit. In Equitable Trust Co of New York v Dawson Partners Ltd27 the bank was instructed to accept a “certificate of quality issued by experts who are sworn brokers”. A certificate issued by a single expert was presented. Despite having the objection pointed out to it by the buyer, acting on advice the bank accepted and subsequently paid the seller’s draft and claimed reimbursement from the buyer. The House of Lords held that the bank was not entitled to reimbursement. Lord Sumner said:28 What the [bank] tendered, as one of the documents and as the only certificate of quality, was one issued by only one expert who was a sworn broker, and by nobody else. There is really no question here of waiver or of estoppel or of negligence or of breach of a contract of employment to use reasonable care and skill. The case rests entirely on performance of the conditions precedent to the right of indemnity, which is provided for in the letter of credit. It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well. 21

For example as a set off against other liabilities incurred by the buyer. See Farley v Turner (1857) 26 LJ Ch 710. 22 Johnson v Robarts (1875) LR 10 Ch. 505, Calico Printers’ Association v Barclays Bank Ltd (1931) 36 Com Cas 71, 197 and Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 L1.L.R. 49. See also Polymer Trading Sarl v Cic-Union Européenne et Cie 640 N.Y.S. 2d 32 (N.Y.App.Div. 1996). 23 Re Barned’s Banking Co, Massey’s Case (1870) 39 LJ Ch 635, contrasting Farley v Turner 29 LT Rep NS 23–7; and see Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567,Re Kayford Ltd (in liquidation) [1974] 1WLR 279, Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 and Hurst-Bannister v New Cap Reinsurance Corp Ltd (unreported: 10/12/99). 24 See chapter 8 below. 25 In relation to standby credits issued subject to ISP98, reimbursement and indemnity are expressly provided for in rule 8.01. 26 As to measure of damages for breach by the buyer of his agreement to indemnify the bank, see Re Ludwig Tillman (1918) 34 TLR 322, in which it was held that Tillman, who had been prevented by war from performing his undertaking to put a bank in funds to meet the bank’s acceptances on his behalf, was bound to indemnify the bank against what it had had to pay in borrowing from the Bank of England for the purpose of paying its acceptance.


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Business could not proceed securely on any other lines. The bank’s branch abroad, which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else it is safe; if it departs from the conditions laid down, it acts at its own risk. The documents tendered were not exactly the documents which the defendants had promised to take up, and prima facie they were right in refusing to take them.29 The same rule applies to cases in which the payment is made by an intermediary bank which, at the instance of the issuing bank, has advised or confirmed the credit. The issuing bank must reimburse or indemnify the intermediary bank if the circumstances are such that the issuing bank would have been obliged to pay the seller.304–13 In Credit Agricole Indosuez v Generale Bank31 it was argued that, where the confirming bank made payment against discrepant documents, article 18(a) of the UCP32 nevertheless enabled the bank to obtain reimbursement from the buyer because the effect of article 18 (a) was to place the risk of acceptance of discrepant documents on the buyer. David Steel J unhesitatingly rejected this argument, saying:33 …article 18 does not require an applicant to accept and pay for documents which do not comply with his instructions. The sole effect of article 18 is to prevent an applicant holding an issuing bank liable for damage caused to the applicant by the action of the bank instructed by the issuing bank. Any other construction would, to put it at its lowest, be surprising in that it would be relieving the issuing bank of any need to determine compliance pursuant to article 14 of the UCP.

27

(1927) 27 L1.L.R. 49. See also South African Reserve Bank v Samuel & Co Ltd (1931) 40 L1.L.R. 291 and Davis O’Brien Lumber Co Ltd v Bank of Montreal [1951] 3 DLR 536 at 556. Documentary compliance is dealt with in detail in chapter 7. 28 (1927) 27 L1.L.R. 49 at 52. See also Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 151. 29 If the buyer nevertheless reimburses the bank he may recover the sums paid from the seller if the goods are not shipped and there is a total failure of consideration—see Emilio Clot v Compagnie Commerciale du Nord SA (1921) 8 L1.L.R. 380. If the buyer sells the goods for the account of the bank, he must account to the bank for the proceeds (subject possibly to an allowance for his labours), but he is not entitled to deduct from the proceeds a sum reflecting his loss of profit suffered as a result of the seller’s breach of the contract of sale—see 69971 Manitoba Ltd v National Bank of Canada (1995) 122 DLR (4th) 609. 30 Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 U.L.R. 49 at 52. Reimbursement of a nominated, negotiating or confirming bank by the issuing bank is provided for in article 14(a) of the UCP (discussed at paragraph 4–66 below).


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4–14 The Court may, however, construe the bank’s mandate broadly where the particular stipulation has no significance for the buyer. Thus in Midland Bank Ltd v Seymour34 the Midland Bank’s customer, Seymour, requested a credit in favour of Taiyo Trading Co “available in Hong Kong” by drafts at 90 days’ sight. Taiyo Trading Co shipped rubbish and Seymour sought to resist the Bank’s claim for reimbursement on several grounds. The sellers’ drafts were negotiated, unaccepted, in Hong Kong and were accepted by the bank in London after the credit had expired. It was contended that the bank was accordingly in breach. Devlin J held that the mandate to the bank did not make the place of availability expressly exclusive and accordingly that acceptance in London was within the terms of the mandate. Duty to make instructions complete and precise 4–15 It is hardly necessary to emphasize the importance of clarity and completeness in the instructions given in the application for the credit.35 Article 5 of the UCP provides: (a) Instructions for the issuance of a Credit, the Credit itself, instructions for an amendment thereto, and the amendment itself, must be complete and precise. In order to guard against confusion and misunderstanding, banks should discourage any attempt: (i) to include excessive detail in the Credit or in any amendment thereto; (ii) to give instructions to issue, advise or confirm a Credit by reference to a Credit previously issued (similar Credit) where such previous Credit has been subject to accepted amendment(s), and/or unaccepted amendments(s). (b) All instructions for the issuance of a Credit and the Credit itself and, where applicable, all instructions for an amendment thereto and the amendment itself, must state precisely the document(s) against which payment, acceptance or negotiation is to be made.

31

[2000] 1 Lloyd’s Rep 123. Set out at paragraph 4–09 above. 33 [2000] 1 Lloyd’s Rep 123 at 128. 34 [1955] 2 Lloyd’s Rep 147. 35 An illustration of the difficulty which may arise where not only the wording but even the placing of particular words in a credit may be ambiguous is a case decided by the Cour de Cassation in Beirut in May 1971, in Státni banka ceskoslovenská v Arab Bank Ltd—see Revue Judiciaire Libanaise (1972) Partie jurisprudence, pp 45 et seq. and Revue de la Banque, Brussels, 1972, no. 3, p 251. At the instance of Ets. G.Fakhoury, the Arab Bank issued its irrevocable credit through Státni banka ceskoslovenská in favour of Kospool Foreign Trade Corporation for £190,000. The credit set out in a box the documents against which the issuing bank would pay and was confirmed by the State Bank. Outside the box appeared the words: “N.B. Date of sailing and carrying steamer to be nominated by shippers telegraphically to openers”. It is said in the judgment of the Supreme Court that the required cable was duly sent, though whether to the Arab Bank or Fakhoury is not dear, but the issuing bank refused payment on the ground that the credit called for a document relating to the “N.B.” The Court of Appeal, in a judgment upheld by the Supreme Court, 32


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4–16 These provisions apply equally to instructions given by the applicant for the credit and to those given by the issuing bank to any intermediary bank. In Credit Agricole Indosuez v Muslim Commercial Bank Ltd,36 Sir Christopher Staughton said of Article 5(a):37 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 negotation seems to me to be part of the terms of the contract. And by that I mean the 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. It follows from this that if an issuing bank suffers loss as a result of the buyer’s failure to fulfil these requirements it can recover such loss as damages for breach of contract.38 Similarly where a buyer suffers loss as a result of the issuing bank’s failure to issue a credit that is clear and precise in accordance with the terms of the contract it can recover damages from the bank.39 4–17 Article 5 (a) of the UCP promotes simplicity by placing the responsibility on banks to discourage parties from making the credit excessively detailed. It also deals expressly with a situation where confusion is likely to be caused. That arises when it is agreed that a credit is to be in the same form as a previous credit. Such agreement is satisfactory if the previous credit has not been amended. Where, however, the previous credit has been amended or has been subject to a proposed amendment which is not accepted by the beneficiary, this can cause difficulty because it is unclear whether the credit should be issued in accordance with the amended or unamended previous credit or (as the case may be) with the previous credit with the unaccepted amendment.40 Where a credit has been the subject of amendment or of an unaccepted proposed amendment, the bank must clarify with the buyer the exact terms of the credit that it is instructed to issue and set out these terms in full in the credit. 4–18 Article 5(b) of the UCP places an obligation on the buyer to give precise instructions as to the documents that must be presented before payment can be made.41 held that the “N.B.” was mere information to be given to the confirming bank and not a condition to be fulfilled for the realization of the credit. 36 [2000] 1 Lloyd’s Rep 275. 37 [2000] 1 Lloyd’s Rep 275 at 277. 38 It is hard to envisage a situation where this would occur without the bank being held responsible for its own loss because if the bank gives a reasonable interpretation to the instructions it can obtain reimbursement (see paragraphs 4–19 to 4–20 below) and if the bank gives an unreasonable interpretation to the instructions it should be regarded as the author of its own loss. 39 Aside from any breach of these requirements of the UCP which are incorporated into the contract, the buyer will have claims against the bank for either failing to carry out its instructions or


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for failing to act with reasonable care. However, the buyer is unlikely to suffer a loss in such circumstances unless he is not given an opportunity to waive a failure

One area where confusion can arise is as to the credentials of the person who is to issue a particular document. Often the buyer seeks protection by references to phrases such as “first class”, “well known”, “qualified”, “independent”, “official”, “competent”, “local” or similar phrases. Such phrases lead to difficulty because it is not possible for the banks to assess whether the requirement has been fulfilled. Article 20(a) of the UCP provides that such phrases: shall not be used to describe the issuers of any document(s) to be presented under a Credit. If such terms are incorporated in the Credit, banks will accept the relative document(s) as presented, provided that it appears on its face to be in compliance with the other terms and conditions of the Credit and not to have been issued by the Beneficiary. Thus the bank is under no obligation to determine whether the qualifications or expertise of a person who issues a certificate complies with such a general description. The bank can effectively ignore such a requirement save that it must ensure that the document is consistent with others and is not issued by the beneficiary. It follows that the only real benefit to the buyer that is secured by the use of such terms is to make clear that the document cannot be issued by the beneficiary. If the buyer wishes a document to be issued by a person with a particular qualification or expertise, the qualification or expertise must be specified clearly. Ambiguity 4–19 Where the instructions received by the bank are capable of different meanings, the bank is entitled to act upon a meaning that the words are reasonably capable of bearing.42 In Midland Bank Ltd v Seymour,43 Devlin J said:44 …when an agent acts upon ambiguous instructions he is not in default if he can show that he adopted what was a reasonable meaning. In Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd,45 the Privy Council endorsed this principle. Lord Diplock said:46 It is a well-established principle in relation to commercial credits that if the instructions given by the customer to the issuing banker as to the documents to be tendered by the beneficiary are ambiguous or are capable by the seller to present documents in accordance with the terms of the credit, as to which, see paragraph 6–07 below. 40 As to amendment of credits, see paragraphs 4–47 to 4–50 below. 41 As to the effect of this clause on the construction of the credit as between issuing and confirming banks, see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 278 and 280.


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of covering more than one kind of document, the banker is not in default if he acts upon a reasonable meaning of the ambiguous expression or accepts any kind of document which fairly falls within the wide description used… 4–20 Midland Bank Ltd v Seymour and Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd concerned claims between the buyer and the issuing bank, but were strictly speaking obiter dicta because in each case the Court held that the documents presented complied with the terms of the letter of credit properly construed. These dicta were, however, applied in Credit Agricole Indosuez v Muslim Commercial Bank Ltd.47 The latter case involved a claim between issuing and confirming banks as to the proper construction to be put on the terms of a letter of credit. Sir Christopher Staughton was prepared, although believing that the letter of credit left a genuine doubt as to the precise documents stipulated for presentation under the credit, to agree with the judge at first instance that on the true construction of the credit the confirming bank was entitled to payment.48 However, he also held that the confirming bank succeeded on the basis of the principle stated by Devlin J in Midland Bank Ltd v Seymour and Lord Diplock in Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd.49 Peter Gibson LJ said, however, that he was left in “real uncertainty” as to whether conforming documents had been presented and decided the case on the basis that the confirming bank had acted on a reasonable construction of ambiguous terms.50 Sedley LJ agreed with both judgments.51 In the light of this decision it is now clear that, in an appropriate case, both issuing banks and confirming banks that are not negotiating banks52 are entitled to reimbursement from the buyer and the issuing bank respectively where they make payment on the basis of a reasonable construction of a genuinely ambiguous document.53 Fraudulent documents 4–21 The issuing bank is entitled to reimbursement or an indemnity from the buyer even where the documents have been fraudulently prepared and presented by the seller. In Gian Singh & Co Ltd v Banque de L’Indochine54 the issuing bank paid under a letter of credit which called for “a certificate signed by Balwant Singh, holder of Malaysian 42

As to the difference between English and New York law on the application of the principle, see Offshore International SA v Banco Central SA [1976] 2 Lloyd’s Rep 402 at 404–5. See also Ocean RiggASA v Safra National Bank 99 Civ 1434 (S.D.N.Y. 1999) for the principle in New York law that ambiguities will be construed against the issuer. 43 [1955] 2 Lloyd’s Rep 147. 44 [1955] 2 Lloyd’s Rep 147 at 153. The principle was first established in Ireland v Livingston (1872) LR 5HL 395. 45 [1973] AC 279. 46 [1973] AC 279 at 283. 47 [2000] 1 Lloyd’s Rep 275. 48 [2000] 1 Lloyd’s Rep 275 at 278, 49 [2000] 1 Lloyd’s Rep 275 at 279–80.


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passport E-13276, certifying that the vessel had been built according to specifications and is in fit and proper condition to sail”. The buyer sued the bank for wrongfully debiting its account, on the ground that the signature on the certificate against which the bank had paid was a forgery. The Privy Council held that the signature was a forgery but that the certificate was in conformity with the requirements of the credit and accordingly the buyer was bound to reimburse the bank. Lord Diplock said:55 In business transactions financed by documentary credits banks must be able to act promptly on presentation of the documents. In the ordinary case visual inspection of the actual documents presented is all that is called for. The bank is under no duty to take any further steps to investigate the genuineness of a signature which, on the face of it, purports to be the signature of the person named or described in the letter or credit. 4–22 The principle that the issuing bank is entitled to reimbursement from the buyer even where the documents have been fraudulently prepared and presented by the seller follows from article 15 of the UCP, which provides that banks assume no liability or responsibility for the “accuracy, genuineness, falsification or legal effect” of documents or for the “good faith or acts and/or omissions” of the consignees or forwarders.56 However, it is now established that the bank is under no obligation to pay the seller where the seller fraudulently presents documents that contain material misrepresentations of fact that to the seller’s knowledge are untrue.57 The corollary of this is that where the fraudulent conduct of the seller is obvious or clear to the bank, the bank is not entitled to reimbursement from the buyer if it pays.58 In this respect there is an implied limitation on the bank’s mandate to pay under the letter of credit and it has no discretion to pay where it knows of the fraud.59

50

[2000] 1 Lloyd’s Rep 275 at 281. [2000] 1 Lloyd’s Rep 275 at 280. 52 The position of negotiating banks may be different—see European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 617–8. 53 There is no requirement to make enquiry as to the true meaning of the buyer’s instructions after the credit has been issued, although if an issuing bank recognises that it has received ambiguous instructions it should clearly clarify them with the buyer and if a confirming bank recognises that the credit is ambiguous it can refuse to confirm it until the credit is clarified (but need not do so)— see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 278–9 and 281. 54 [1974] 2 Lloyd’s Rep 1. See also Is Bankasi AS v Bank of China [1996] 2 Lloyd’s Rep 611, affirmed [1998] 1 Lloyd’s Rep 251, which involved claims on counter guarantees by a bank which had paid under performance bonds. See further Ulster Bank v Synnott (1871) 5 Ir Rep Eq 595, Woods v Thiedemann (1862) 1 H & C 478 and Basse and Selve v Bank of Australasia (1904) 20 TLR 431. As to alterations of a document of a material character, see Re Salomon and Naudzus (1899) 81 LT 325 and paragraph 6–71 below. 55 [1974] 2 Lloyd’s Rep 1 at 11. 51


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Restraint of payment 4–23 It is now clearly established that where the issuing bank is aware that the seller is acting fraudulently in presenting documents under the credit it can and should refuse to pay.60 The question to be considered here is whether the buyer who believes that the seller is shipping goods which do not conform to the contract or is presenting documents fraudulently can obtain an order from the court either (a) restraining the seller from presenting documents to the bank to obtain payment or (b) restraining the bank from making payment against conforming documents.61 4–24 In Hamzeh Malas & Sons v British Imex Industries Ltd62 the buyers, believing that the sellers had shipped defective goods, applied for an injunction restraining the sellers from drawing under the credit established by the buyer’s bank. This was refused, Jenkins LJ stating:63 …the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. 56

Article 15 is set out in full in paragraph 4–09 above. This disclaimer would not cover an altered document if the alteration was apparent on the face of it if the effect of the alteration was that the document did not comply with the terms and conditions of the credit, as to which see paragraph 6– 71 below. 57 See paragraphs 6–57 to 6–60 below. 58 Turkiye Is Bankasi AS v Bank of China [1996] 1 Lloyd’s Rep 611 at 616–7, affirmed [1998] 1 Lloyd’s Rep 251 at 253 (applying, for the test to be used in determining whether the bank has sufficient knowledge of the fraud to justify refusing payment, Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 Lloyd’s Rep 166 and United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554, for which see paragraphs 4–27 to 4–30 below) and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 203. See also United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 184–5. 59 Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 203. See also Tukan Timber Ltd v Barclays Bank Plc [1987] 1 Lloyd’s Rep 171 at 177. It may be that the bank will nevertheless be able to recover an indemnity if the buyer has not rescinded the contract with the seller—see Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153 (affirmed sub nom Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345) at 163 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 201. 60 See paragraph 4–22 above and paragraphs 6–57 to 6–67 below. 61 The Courts apply the same principles in either case—see Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd’s Rep 256, Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251 at 256, Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345 at 361 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 190. Cf Themehelp Ltd v West [1996] QB 84. 62 [1957] 2 Lloyd’s Rep 549.


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The Court of Appeal thus held that it ought not to exercise its discretion and grant the injunction. Sellers LJ said, however, that there might be cases in which the courts would exercise jurisdiction, as “where there is a fraudulent transaction”.64 4–25 Hamzeh Malas & Sons v British Imex Industries Ltd65 was referred to by Lord Denning MR in Elian v Matsas,66 who said67 that a bank guarantee is very much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas v British Imex Industries Ltd. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. In the circumstances of that case, where there had been considerable delay in making a claim under the guarantee and there was a prima facie case that the terms of the guarantee did not justify payment in the circumstances under which the demand was made, the Court held an interim injunction warranted as preventing what might be irretrievable injustice. Elian v Matsas has, however, been described as a “very special case”68 and characterised as a case of “fraud”.69 4–26 In Discount Records Ltd v Barclays Bank Ltd70 the plaintiffs had ordered goods from a French company, which goods turned out to be rubbish, and they applied for an injunction restraining the defendant bank from paying the draft drawn in respect of the purchase or meeting its obligation under an irrevocable credit established for the purpose. The judge came to the conclusion that the plaintiffs had not established fraud and refused to interfere, saying:71 I would be slow to interfere with bankers’ irrevocable credits…unless a sufficiently grave cause is shown; for interventions by the Court that are too ready or too frequent might gravely impair the reliance which, quite properly, is placed on such credits. 4–27 In R.D.Harbottle (Mercantile) Ltd v National Westminster Bank Ltd,72 another case concerning a performance guarantee, Kerr J said:73 63

[1955] 2 Lloyd’s Rep 549 at 550. [1955] 2 Lloyd’s Rep 549 at 550. 65 [1957] 2 Lloyd’s Rep 549. 66 [1966] 2 Lloyd’s Rep 495. 67 [1966] 2 Lloyd’s Rep 495 at 497. 68 Howe Richardson Scale Co Ltd v Polimex-Cekop [1978] 1 Lloyd’s Rep 161 at 165 (Roskill LJ). But see Solo Industries (UK) Ltd v Canara Bank [2001] EWCA Civ 1041. 69 Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345 at 357 (Staughton LJ), but cf Themehelp Ltd v West [1996] QB 84 at 104. 70 [1975] 1 Lloyd’s Rep 444. 71 [1975] 1 Lloyd’s Rep 444 at 448. 64


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It is only in exceptional circumstances that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the bank have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged. In considering whether the case justified the grant of an injunction, Kerr J said:74 The plaintiffs…still face what seems to me to be an insuperable difficulty. They are seeking to prevent the bank from paying and debiting their account. It must then follow that if the bank pays and debits the plaintiffs’ account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank’s contract with the plaintiffs or a breach of it. If it is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract…then the plaintiffs would have good claims for damages against the bank. In that event the injunctions would be inappropriate, because they interfere with the bank’s obligations to the Egyptian banks, because they might cause greater damage to the bank than the plaintiffs could pay on their undertaking as to damages, and because the plaintiffs would then have an adequate remedy in damages. The balance of convenience would in that event be hopelessly weighted against the plaintiff. 4–28 Kerr J’s approach was approved in Edward Owen Engineering Ltd v Barclays Bank International Ltd75 where Lord Denning said:76 72

[1978] QB 146. [1978] QB 146 at 155–6. 74 [1978] QB 146 at 155. 75 [1978] 1 Lloyd’s Rep 166. See also Howe Richardson Scale Co Ltd v Polimex-Cekop [1978] 1 Lloyd’s Rep 161. Like R.D.Harbottle (Mercantile) Ltd v National Westminster Bank Ltd both these cases concerned performance guarantees. 73


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The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice. Geoffrey Lane LJ said:77 The only circumstances which would justify the bank in not complying with a demand made under that agreement would be those which would exonerate them under similar circumstances if they had entered into a letter of credit, and that is this, if it had been clear and obvious to the bank that the buyers had been guilty of fraud. 4–29 In Bolivinter Oil SA v Chase Manhattan Bank NA78 Sir John Donaldson said:79 We should like to add a word about the circumstances in which an ex parte injunction should be issued which prohibits a bank from paying under an irrevocable letter of credit or a performance bond or guarantee. The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that, whatever disputes may thereafter arise between him and the bank’s customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met. In requesting his bank to issue such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional cases, he is to be allowed to derogate from the bank’s personal and irrevocable undertaking, given be it again noted at his request, by obtaining an injunction restraining the bank from honouring that undertaking, he will undermine what is the bank’s greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, if this happens at all frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined. Judges who are asked, often at short notice and ex parte, to issue an injunction restraining payment by a bank under an irrevocable letter of credit or performance bond or guarantee should ask whether there is any challenge to the validity of the letter, bond or guarantee itself. If there is not or if the challenge is not substantial, prima facie no injunction should be granted and the bank should be left free to honour its contractual obligation, although restrictions may well be imposed on the freedom of the beneficiary to deal with the money after he has received it. The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which 76

[1978] 1 Lloyd’s Rep 166 at 172. [1978] 1 Lloyd’s Rep 166 at 172 at 174. 78 [1984] 1 Lloyd’s Rep 251. 79 [1984] 1 Lloyd’s Rep 251 at 257. 77


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may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged. 4–30 In United Trading Corporation SA v Allied Arab Bank Ltd,80 Ackner LJ said:81 The evidence of fraud must be clear, both as to the fact of fraud and as to the bank’s knowledge. The mere assertion or allegation of fraud would not be sufficient…. We would expect the Court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents… In general for the evidence to be clear, we would also expect the [party against whom fraud is alleged] to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. …the only realistic inference to draw [must be] that of fraud. Moreover the Court further endorsed the approach of Kerr J in R.D.Harbottle (Mercantile) Ltd v National Westminster Bank Ltd82 to the assessment of the balance of convenience in relation to the grant of an interim injunction.83 4–31 It is therefore clear that the courts will only grant an injunction where an established case of fraud to the knowledge of the bank has been made out and even then only in the most exceptional circumstances.84 Indeed in Czarnikow 80

[1985] 2 Lloyd’s Rep 554. [1985] 2 Lloyd’s Rep 554 at 561. 82 [1978] QB 146 at 155 (set out in paragraph 4–27 above). 83 [1985] 2 Lloyd’s Rep 554 at 565. 84 In addition to the cases discussed above, see Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd’s Rep 256, GKN Contractors Ltd v Lloyds Bank Ltd (1985) 30 BLR 48, Tukan Timber Ltd v Barclays Bank Ltd [1987] 1 Lloyd’s Rep 171, Korea Industry Co Ltd v Andoll Ltd [1990] 2 Lloyd’s Rep 183, Society of Lloyd’s v Canadian Imperial Bank of Commerce [1993] 2 Lloyd’s Rep 579, Dong jin Metal Co v Raymet Ltd (unreported: CA transcript 13 July 1993), Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187. See also Turkiye is Bankasi AS v Bank of China [1998] 1 Lloyd’s Rep 250. In Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153 at 162 Phillips J said that he knew of no reported case upholding the grant of such an injunction based on fraud in inter partes proceedings and in Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 189–90 it emerged that there were only two occasions on which such an injunction had been upheld on an inter partes basis and that there were difficulties with both. Those cases were Themehelp Ltd v West [1996] QB 84 (where there was a concession that there was a difference between the grant of an injunction against a bank and the grant of an injunction against a fraudulent beneficiary, as to which see 81


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footnote 61 above) and Kvaerner John Brown Ltd v Midland Bank Plc [1998] CLC 446 (where there was no consideration of the balance of

Rionda Sugar Trading Inc v Standard Bank London Ltd,85 where it was unsuccessfully argued that it was not necessary for there to be a cause of action against a bank in order to obtain an order restraining payment where fraud was sufficiently shown,86 Rix J said:87 I do not know that it can be affirmatively stated that a Court would never, as a matter of balance of convenience, injunct a bank from making payment under its letter of credit or performance guarantee obligations in circumstances where a good claim within the fraud exception was accepted by the Court at a pre-trial stage. I do not regard Mr Justice Kerr [in Harbottle] and the other Courts which approved or applied the logic of his “insuperable difficulty” as necessarily saying that it could never be done. It is perhaps wise to expect the unexpected, even the presently unforeseeable. All that can be said is that the circumstances in which it should be done have not so far presented themselves, and that it would of necessity take extraordinary facts to surmount this difficulty. 4–32 In the light of this, if the buyer has suspicions about the probity of the seller, he can try to achieve the same end by a clause in the credit making it impossible for the seller to comply with its terms.88 Moreover in many cases documents presented may be irregular in some slight technical matter89 and a convenience). A possible exceptional case might be if the validity of the letter of credit or performance guarantee was itself in question—see Elian v Matsas [1966] 2 Lloyd’s Rep 495 (see paragraph 4–25 above), Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251 at 257 (see paragraph 4–29 above) and Themehelp Ltd v West [1996] QB 84 at 104. See also Contronic Distributors Pty Ltd v Bank of New South Wales [1984] 3 NSWLR 110. Kvaerner John Brown Ltd v Midland Bank Plc [1998] CLC 446 concerned a standby credit, but there is no suggestion that different principles apply. For cases in the US concerning applications to restrain payment of standby credits, see Dynamics Corporation of America v Citizens and Southern National Bank 356 F. Supp. 991 (1973), Intraworld Industries Inc v Girard Trust Bank 336 A. 2d 316 (1975), Itek Corporation v First National Bank of Boston 730 F. 2d 19 (1984) and Brenntag International Chemicals v Bank of India 175 F/3d 245 (2nd Cir. 1999). For cases in Canada, see Henderson v Canadian Imperial Bank of Commerce (1982) 40 BCLR 318, Canadian Pioneer Petroleums Inc v Federal Deposit Insurance Corp [1984] 2 WWR 563 and Phoenix Conveyor & Belting Systems Inc v Speed King Manufacturing Co Inc (1985) 23 DLR (4th) 266. 85 [1999] 2 Lloyd’s Rep 187. 86 [1999] 2 Lloyd’s Rep 187 at 203. Cf Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153 at 162. 87 [1999] 2 Lloyd’s Rep 187 at 204. 88 But see Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329, where it was held in the light of the provisions of the UCP that the issuing bank’s engagement to honour “accepted drafts” did not mean that it did not have to pay in the event that the buyer refused to accept the drafts. 89 Paradoxically this might be less likely where the documents have been fabricated in order to comply with the credit, although for a case where such fabrication produced a host of irregularities (missed by the confirming bank), see Standard Chartered Bank v Pakistan National Shipping


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Corporation (No 2) [1998] 1 Lloyd’s Rep 684, affirmed [2000] 1 Lloyd’s Rep 218 and [2001] 1 QB 167.

buyer may even ask his bank to scrutinize documents with the object of finding fault. 4–33 It may also be possible for the buyer to protect his position by obtaining a freezing order in relation to the seller’s assets so as to prevent the seller from disposing of the proceeds of the credit once received.90 In a case of fraud such an order can be obtained on a worldwide basis91 and as ancillary to relief to litigation abroad.92 The contract between the issuing bank and the seller (beneficiary) Introduction 4–34 A contract arises between the issuing bank and the seller when the bank issues the credit and communicates it to the seller.93 The communication will usually take place by advice through an intermediary bank. The instructions to the advising bank will generally be provided by SWIFT94 or telex and such SWIFT or telex message will be copied by the advising bank to the beneficiary. Unless such teletransmission states that it is not the operative instrument (or that full details are to follow), an authenticated teletransmission to the advising bank is deemed to be the operative instrument and any subsequent mail confirmation must be disregarded.95 90

See Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd’s Rep 256, Themehelp Ltd v West [1996] QB 84 at 103, Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 203 and Britten Norman Ltd (in liquidation) v State Ownership Fund of Romania [2000] Lloyd’s Rep Bank 315 at 321. This remedy may not be satisfactory from the buyer’s point of view if he has immediately to reimburse the bank in relation to any payment or if there are competing creditors for the seller’s assets (of which the sums paid under the letter of credit will form part). See also Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153, (affirmed sub nom Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345) at 165–7, where the claim for an injunction (rejected on the facts by Phillips J) was put on the basis of preserving property the subject of a trust. 91 Rule 25.1(1)(f)(ii) of the Civil Procedure Rules, Republic ofHaiti v Duvalier [1990] 1 QB 202 and Derby & Co Ltd v Weldon [1990] Ch 48. An injunction extending beyond the jurisdiction will be necessary where the credit is payable abroad, see Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd’s Rep 256. 92 See section 25 of the Civil Jurisdiction and Judgments Act 1982 and the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997. See also Credit Suisse Fides Trust SA v Cuoghi [1998] QB 818 and Refco Inc v Eastern Trading Co [1999] 1 Lloyd’s Rep 159 and Bank of China vNBM (unreported: 4/7/01). 93 The precise time at which the contract comes into existence is discussed in paragraphs 4–47 to 4– 48 below. 94 Credits issued under the global electronic trading system, “Bolero.net” (see pragraph 7–35, footnote 91 below) are generated through the SWIFT system. The use of encrypted email is given support by section 7 of the Electronic Communications Act 2000. 95 Article 11 of the UCP. When the bank sends a covering document with the credit giving recommendations as to the preparation of documents, the terms of such a document do


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4–35 Authentication of telexes is effected by inserting codes or tests that are secret between the sender and the recipient and by which the recipient can recognise that the telex has been sent by and with the authority of the bank purporting to send it. The test key is in effect an electronic signature of the bank sending the message. The banking system relies with complete confidence on tested telexes and the system is meant to avoid arguments in relation to authority. A bank receiving a tested telex will treat it as a message that can be safely and securely acted upon by the recipient without question or any further investigation. 4–36 This banking practice was considered by Waller J in Standard Bank London Ltd v The Bank of Tokyo Ltd.96 In that case fraudsters managed either to send tested telex messages authenticating telexed letters of credit issued by the BOT to Standard as beneficiary or to trick employees of BOT into sending them. Waller J analysed the legal effect of the tested telex as follows:97 Standard rely first on a general representation by BOT that if a telex comes by “tested telex” that telex will be duly authorized by BOT (that representation on any view is authorized); second, they rely on the use of the “tested telex” mechanism itself as representing that the telex is authorised as the previous representation stated that it would be; and thirdly they rely on the statement in the telex as being the authorized statement of BOT. If the latter statement is not to be a statement from BOT on which Standard can rely, that can be for only one reason and that is because Standard is on notice that a fraudster has produced the “tested telex” and infiltrated the “tested telex” system. On the facts Waller J held that Standard did not have such notice. In doing so, he held that it was not right to attribute to Standard’s representatives constructive knowledge of facts which they would have found out if they had not acted negligently, although facts which they would have found out if they had not wilfully turned a blind eye to them could have been attributed to them.98 4–37 Where the telex advice stipulates that the mail confirmation of the telex is to be the operative instrument, the telex is deemed not to be the operative instrument and the mail confirmation must be sent by the issuing bank without delay.99 If such mail confirmation is issued in fraud of the bank, it will only bind not form part of the contract between the parties—see Banque de l’Indochine et de Suez SA v J.H.Rayner (Minting Lane) Ltd [1983] QB 711 at 717–8. 96 [1995] 2 Lloyd’s Rep 169. The practice as set out in the text is described by Waller J at 172–3. For a US case where the telex issued without authority constituted a promise to issue a credit, see Qatar National Navigation and Transport Co Ltd v Citibank NA 89 Civ. 363 (CHC) (S.D.N.Y. 1998). 97 [1995] 2 Lloyd’s Rep 169 at 175. 98 [1995] 2 Lloyd’s Rep 169 at 175. 99 Article 11(a)(ii) of the UCP.


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the bank if the fraudster is acting in the course of his employment with the bank. If he is not, the bank will not be vicariously liable for the acts of the employee.100 4–38 The effect of the contract between the issuing bank and the seller depends upon whether the credit is irrevocable or revocable. Article 6 of the UCP provides: (a) A Credit may be either (i) revocable, or (ii) irrevocable.101 (b) The credit, therefore, should clearly indicate whether it is revocable or irrevocable. (c) In the absence of such indication the credit shall be deemed to be irrevocable. It may be that any necessary indication that the credit is revocable can be gathered—apart from any label—from the terms and conditions of the credit, although the terms will have to be clear to produce this effect.102 Irrevocable credits The bank’s obligation 4–39 Under an irrevocable credit the issuing bank gives a binding undertaking to the beneficiary that it will pay against documents or that all bills drawn in compliance with the terms of the credit will be honoured.103 Although in the absence of clear indication to the contrary credits issued under the UCP are now deemed to be irrevocable, in practice irrevocable credits contain a clause to the following or some equivalent effect: We undertake to honour such drafts on presentation provided that they are drawn and presented in conformity with the terms of this credit. 100

See Credit Lyonnais Bank Nederland NV v Export Credit Guarantee Department [1999] 1 Lloyd’s Rep 563. 101 ISP 98 1.06(a) provides: “A standby is an irrevocable, independent, documentary and binding undertaking when issued and need not so state.” 102 In Panoutsos v Raymond Hadley Corporation 22 Com Cas 207, affirmed [1917] 2 KB 473 and 22 Com Cas 308, a contract was entered into in London for the sale of wheat for delivery in Greece, which provided that payment should be made by ‘confirmed bankers’ credit’. The credit which was actually issued (by an American bank) contained this clause: “In advising you that this credit has been opened, we are acting merely as agents for our foreign correspondents and cannot assume any responsibility for its continuance.” The sellers declined to deliver the goods on the ground that this was not a “confirmed bankers’ credit”. Arbitrators held that a credit in this form could be revoked and was, therefore, not an irrevocable credit and the contrary was not argued before Bailhache J and the Court of Appeal. 103 In M.A.Sassoon & Sons Ltd v International Banking Corporation [1927] AC 711 at 724 Lord Sumner said: “It is not easy to see in what respect [the word “irrevocable”] would carry the matter further than the word “contract”, used in its strict sense, would have done, for…the word “irrevocable” simply closes the door on any option or locus penitentiae, and makes the agreement


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definite and binding—in other words, creates a true contract, which will either be performed or be broken.”

Such a provision may be said not only to ensure payment of the price of the goods, but also to relieve the seller from the risk of dilatory and contumacious conduct on the part of the buyer. 4–40 The effect of an irrevocable credit is to substitute the issuing bank for the buyer as the person who undertakes to “buy” the shipping documents,104 and this is an undertaking which is absolute in the sense that so long as the documents of title to the goods which the seller presents to the bank are in order, in the sense of being those prescribed in the credit, the bank must accept them regardless of any controversy between the seller and the buyer as to whether the contract of sale has been performed.105 The bank’s responsibility is absolute, dependent only upon the presentation of the proper documents within the period of availability of the credit and upon compliance with any other condition precedent in the credit. As Rowlatt J said in Stein v Hambros Bank of Northern Commerce:106 The obligation of the bank is absolute, and is meant to be absolute, that when the documents are presented they have to accept the bill. That is the commercial meaning of it. 4–41 In United City Merchants (Investments) Ltd v Royal Bank of Canada,107 speaking of the contract between the confirming bank and the seller but in terms appropriate to the contract between the issuing bank and the seller, Lord Diplock said:108 If, on their face, the documents presented to the confirming bank by the seller conform with the requirements of the credit as notified to him by the confirming bank, that bank is under a contractual obligation to the seller to honour the credit, notwithstanding that the bank has knowledge that the seller at the time of presentation of the conforming documents is alleged by the buyer to have, and in fact has already, committed a breach of his contract with the buyer for the sale of the goods to which the documents appear on their face to relate, that would have entitled the buyer to treat the contract of sale as rescinded and to reject the goods and refuse to pay the seller the purchase price. In that case it was held that the fact that the documents contained an inaccurate material statement of fact was not a ground for rejecting them. It was further held that the fact that the person (not being the beneficiary) who prepared the inaccurate document knew of the inaccuracy did not alter the position. 104

See Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 at 323. See the observations of Bankes LJ in Belgian Grain and Produce Co Ltd v Cox & Co (France) Ltd (1919) 1 L1.L.R. 256 at 257. 106 (1921) 9 L1.L.R. 433 at 507. See also Scrutton LJ in Donald H.Scott & Co Ltd v Barclays Bank Ltd [1923] 2 K.B. 1 at 14. 107 [1983] 1 AC 168. 108 [1983] 1 AC 168 at 183. 105


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4–42 Under the UCP the liability of the issuing bank is provided for in article 9(a),109 which states: (a) An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment—to pay at sight; (ii) if the Credit provides for deferred payment—to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; (iii) if the Credit provides for acceptance: (a) by the Issuing Bank—to accept Drafts(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or (b) by another drawee bank—to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; (iv) if the Credit provides for negotiation—to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. Article 9(a) uses the phrase “definite undertaking” to describe the absolute obligation of the issuing bank discussed in paragraphs 4–39 to 4–41 above. It makes clear that the issuing bank’s obligation is subject to (a) presentation of the documents stipulated in the credit to the “nominated bank”110 or to the issuing bank itself and (b) compliance with the terms and conditions of the credit. Conceptual difficulties 4–43 The fact that the beneficiary obtains contractual rights against the issuing bank upon communication of the credit to him gives rise to conceptual difficulties under the common law.111 In principle, letters of credit are governed by the same legal principles as all contracts.112 The problem is (i) to define the nature of the contract created by the issue of the credit and (ii) to surmount the obstacle presented by an apparent lack of consideration for the bank’s promise to the beneficiary. So far as consideration is concerned, it is argued that either there is no consideration for the promise or, if there is, then it fails because it does not 109

For a statement of the liability of the issuer of a standby credit issued subject to ISP98, see ISP98 rule 2.01. 110 For the position of the nominated bank, see paragraph 4–70 below. 111 There may be a similar conceptual problem in relation to the contract between the confirming bank and the seller, but often the seller agrees to pay the confirming bank’s charges or pay a confirmation fee and thereby provides consideration for the confirmation. 112 Letters of credit are not negotiable instruments.


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move from the promisee (the beneficiary) but from a stranger (the customer of the issuing bank, usually the buyer).113 Conceptually this is correct. 114It is nevertheless clear that the beneficiary has contractual rights.115 4–44 The English courts have never resolved this difficulty in terms. The defence has either not been raised or, if raised, has not be pressed. It appears to have been assumed in all cases that there was good consideration for the bank’s promise. In Urquhart Lindsay & Co Ltd v Eastern Bank Ltd,116Rowlatt J had no doubt that upon the plaintiffs’ acting upon the undertaking contained in the letter of credit consideration moved from the seller. In Donald H.Scott & Co Ltd v Barclays Bank Ltd,117 Scrutton LJ appears to have taken it for granted that privity of contract had been established between the seller and the bank in that case. In neither of these cases was the point in issue. In Dexters Ltd v Schenker & Co,118 the defence of no consideration was raised, but withdrawn by counsel. Alluding to this defence, Greer J pointed out119 that until the seller of goods to be paid for by a commercial credit receives the credit, he is under no obligation to hand the documents to anyone, and he thought that the observations of Rowlatt J in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd 120applied. 4–45 This does not, however, explain why the bank’s obligation arises upon communication of the credit to the beneficiary, why such obligation is irrevocable and why the benefit of it may be transferred to a third party. Yet, it has been recognised as such for over 40 years. As Denning LJ said in 1952 in Trans Trust S.P.R.L. v Danubian Trading Co Ltd:121 113

As to the latter, see Dunlop v Selfridge & Co [1915] AC 847. A bank may obtain a fee from the beneficiary for adding its confirmation. Such fee would certainly constitute consideration moving from the promisee. 114 The undertaking by the seller to deliver the goods to the buyer cannot as a rule be relied on for this purpose because the contract of sale is almost invariably made before the bank issues the credit, and consideration would be past. In any event performance of what one is already bound to perform by a contract with A cannot be good consideration for a fresh promise by B, who is a stranger to the original contract. In other words, an undertaking by the seller to perform the contract of sale cannot be consideration for the bank’s promise to pay the price of the goods. 115 The various theories relating to how and why the promises of issuing and confirming banks are enforceable by the beneficiary were discussed in the previous edition of this book. Those theories and the discussion of them are set out in appendix 5 below. 116 [1922] 1 KB 318. See also Re Agra and Masterman’s Bank, ex parte Asiatic Banking Corporation LR 2 Ch 396, where Cairns LJ said that it was not disputed that the credit constituted a contract based upon a sufficient consideration moving from the beneficiaries to the bank. This was, however, a case in which the negotiation of drafts was contemplated by the credit. 117 [1923] 2 KB 1. The decision of the Court of Appeal in this case went on other grounds. The court was in fact very careful to indicate that it declined to adjudicate on a number of contentions raised in the course of the case and the defence of no consideration does not seem to have been pleaded or raised in argument. 118 (1923) 14 Ll.L.R. 586. 119 (1923) 14 Ll.L.R. 586 at 588. 120 [1922] 1KB 318. 121 [1952] 1 Lloyd’s Rep 348 at 356.


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[An irrevocable letter of credit] is an assurance that the seller will get paid. It is even more than that. It is a chose in action which is of immediate benefit to the seller. In 1957 Jenkins LJ said in Hamzeh Malas & Sons v British Imex Industries Ltd:122 …it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes on the banker an absolute obligation to pay… The question has therefore been academic for many years.123 4–46 Since 1999, however, the Contracts (Rights of Third Parties) Act 1999 may have provided a solution to the problem. Section 1 of that Act provides that a third party may, in his own right, enforce a term of a contract that purports to confer a benefit on him. In the case of letters of credit there is a contract between the buyer and the issuing bank under which the issuing bank is under an obligation to confer a benefit on the beneficiary by issuing the letter of credit and continuing to make available to the beneficiary the benefit of its undertaking to pay. Such promise could be enforced by the beneficiary under the Act, with the result that the beneficiary can force the issuing bank to issue and continue to make available the credit or claim damages for its failure to do so.124 Amendment and the time when the credit becomes binding 4–47 Article 9(d)(i) of the UCP provides that, subject to the provisions of article 48 (which deals with transfer of credits) an irrevocable letter of credit cannot be amended or cancelled without the agreement of the issuing bank, the beneficiary and, if the credit has been confirmed, the confirming bank.125 This is 122

[1957] 2 Lloyd’s Rep 549 at 550. See also R v Benstead (1982) 75 Cr.App.Rep. 276 and Jaks (UK) Ltd v Cera Investment Bank SA [1998] 2 Lloyd’s Rep 89. In the latter case Moore-Bick J, having stated that the relationship between the issuing bank and the beneficiary is governed by the ordinary principles of the law of contract held accordingly that any renunciation by the issuing bank of its obligations prior to the time for performance has to be clear and unequivocal and that where the bank has renounced its obligations the beneficiary has a choice whether to treat the contract as discharged immediately. 124 See section 1(5) of the Act. Having made the contract, the buyer and the issuing bank could not vary it without the consent of the beneficiary—see section 2 of the Act. In the case of a confirmation, upon the confirming bank acting upon the issuing bank’s instructions in consideration for the issuing bank’s implied promise to reimburse the confirming bank, there is a contract between the issuing bank and the confirming bank under which the confirming bank promises that it will make and continue to make available to the beneficiary the benefit of its undertaking to pay. This promise is enforceable by the issuing bank, thereby enabling the beneficiary to enforce it directly under the terms of the Act. 125 In the last edition of this book the editor stated: “Nor, it is submitted, can a bank which has issued its credit and communicated it to the beneficiary be required by the applicant to amend it, whether or not the beneficiary is agreeable. The bank is bound by the terms and undertaking of the credit and it could be deleterious to its interests if it could be compelled to alter the conditions on which its communicated promise to pay depends.” 123


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only consistent with the credit being binding on the bank before documents are presented by the seller.126 However, the UCP does not otherwise indicate when a credit becomes binding so that it cannot be amended except with consent. The possible times are (i) when the issuing bank despatches the credit to the advising bank (or the beneficiary if no advising bank is involved), thereby causing the credit to pass out of its own control, (ii) upon receipt of the credit by the advising bank and (iii) upon receipt by the beneficiary of the credit or advice of it.127 4–48 Of these, possibility (i) provides a definite point determinable by the issuing bank at which it knows that it cannot amend the credit without obtaining the consent of the beneficiary.128 It has, however, the disadvantage that the beneficiary may not know when the credit is despatched and thus until then cannot determine whether the credit complies with the terms of the contract with the buyer. Possibility (ii) puts the beneficiary in no better position in fact and, since the advising bank will be the agent of the issuing bank,129 in no better position in law. When looking at the matter in the context of claims between buyer and seller the courts have decided that communication to the beneficiary This submission is espoused in the UCP, which requires the agreement of the issuing bank and confirming bank, if any, to amendment or cancellation of the credit. For amendment of standby credits issued subject to ISP98, see rules 2.06 and 2.07. As to cancellation under ISP98, see rule 7.01, which states how the beneficiary’s consent may be evidenced. Under rule 7.02 the issuer may refuse to cancel at the request of the beneficiary until certain things have been done, so as to ensure that its liability is truly at an end. Under rule 9.01 credits must permit the issuer to terminate the credit on reasonable prior notice or payment, but such notice would have to expire after the conditions for payment had arisen. 126 That the contract between the issuing bank and the beneficiary is made before the credit is drawn upon or acted upon by the beneficiary is clear from Westpac Banking Corporation v Commonwealth Steel Co Ltd [1983] 1 NSWLR 735 at 740–1 (not following dicta of Devlin J in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 166 and Donaldson J in Elder Dempster Lines Ltd v Ionic Shipping Agency Inc [1968] 1 Lloyd’s Rep 529 at 535) and Bunge Corporation v Vegetable Vitamin Foods (Private) Ltd [1985] 1 Lloyd’s Rep 613 at 617. 127 The last edition of this book stated: “A credit once communicated to and acted upon by the beneficiary cannot be amended without the beneficiary’s consent.” The implicit suggestion that the credit might be amended prior to the beneficiary acting on it is inconsistent with the current revision of the UCP and the cases cited in the previous footnote. 128 It probably also most accords with current banking practice. Rule 1.06(a) of ISP98 provides that a standby credit is binding when issued and rule 2.03 states: “A standby is issued when it leaves an issuer’s control unless it clearly specifies that it is not then “issued” or “enforceable”. Statements that a standby is not “available”, “operative”, “effective”, or the like do not affect its irrevocable and binding nature at the time it leaves the issuer’s control”. Further, article 9(d)(ii) of the UCP provides that the issuing bank is bound by amendments from the time of issuance, although there is no compelling reason why the time when the credit becomes binding on first issue and the time when an amendment becomes binding on the bank should be the same. Cf Goode, Commercial Law, 2nd ed, p 986, note 64. 129 This follows from the language of article 7(a) of the UCP.


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is necessary and thus that possibility (iii) is correct.130 It may be that for the purpose of the UCP, the credit is issued when it leaves the issuing bank’s control,131 but that for the purpose of determining whether the buyer has complied with his obligations under the contract of sale, the credit is issued when it is communicated to the beneficiary.132 4–49 Instructions to issue an amendment should be complete and precise and banks should discourage attempts to include excessive detail.133 Instructions for an amendment and the amendment itself must state precisely the document(s) against which payment, acceptance or negotiation is to be made.134 If incomplete or unclear instructions are received to amend a credit, the bank requested to act may give preliminary notification to the beneficiary for information only and without responsibility.135 An advising bank so requested to act should inform the issuing bank of the action it has taken and request the issuing bank to provide necessary information. The issuing bank must provide such information without delay. The amendment will then be advised only when complete and clear instruction have been received and if the advising bank is then prepared to act on the instructions.136 4–50 Normally a proposed amendment to a credit will be discussed between the applicant and the beneficiary prior to it being issued by the issuing bank. Nevertheless, although the issuing bank is bound by the amendment “from the time of the issuance of such amendment”,137 the terms of the original credit (incorporating previously accepted amendments) remain in force for the beneficiary until the beneficiary communicates his acceptance of the amendment to the bank that advised that amendment.138 The beneficiary thus can accept or reject amendments and should give notice of acceptance or rejection. If the beneficiary does not give notice of acceptance or rejection the presentation of documents conforming to the credit and to not yet accepted amendments is deemed to be notification of acceptance by the beneficiary of such amendments and from that time the credit is amended.139 If the beneficiary does not accept the amendments, he may present documents in accordance with the original credit. It is not open to the issuing bank to stipulate that amendments are deemed accepted unless rejected within a given period.140 The beneficiary is not permitted to accept some 130

See, in particular, Bunge Corporation v Vegetable Vitamin Foods (Private) Ltd [1985] 1 Lloyd’s Rep 613 at 617 (applying dicta of Lords Wilberforce and Brandon in Brinkibon Ltd v Stahag Staul und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 at 42 and 47–8). 131 Cf Westpac Banking Corporation v Commonwealth Steel Co Ltd [1983] 1 NSWLR 735 at 740– 1, where Rodgers J held that for the purpose of determining where the contract was made under rules relating to jurisdiction the contract between the issuing bank and the beneficiary was made at the place where it was communicated to the beneficiary. 132 In each case, the question is one of construction of the contract concerned. 133 Article 5(a) of the UCP. For a case involving an ambiguous amendment, see Ocean Rigg ASA v Safra National Bank 99 Civ. 1434 (SAS) (S.D.N.Y. 1999). 134 Article 5(b) of the UCP. 135 Article 12 of the UCP. The preliminary notification should state clearly that the notification is provided for information only and without responsibility. 136 Article 12 of the UCP. 137 Article 9(d)(ii) of the UCP. 138 Article 9(d)(iii) of the UCP.


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amendments contained in an advice of amendment and reject others and any such partial acceptance has no effect.141 The issuing bank’s right to refuse payment 4–51 Although the issuing bank cannot, in the case of an irrevocable credit, rely on any defence that may be open to the buyer under the contract of sale, it may be entitled to refuse payment on other grounds, which may be summarized as follows: (a) non-compliance by the seller with such of the terms of the credit contract as are in the nature of conditions precedent to the liability of the bank; (b) fraud on the part of the seller; (c) unenforceability of the obligation to make payment under the credit or illegality affecting such obligation; (d) set off of a liability owed by the beneficiary to the bank; (e) mutual mistake on the part of the seller and the bank relating to the issue of the credit. 4–52 The first two grounds occur most frequently in connection with the documents to be presented to the bank when payment is demanded. The question of the conformity or otherwise of such documents to the terms of the credit has proved to be by far the most fertile source of litigation in connection with credit transactions. Questions relating to the documents also arise in connection with the bank’s duty to the buyer, since the bank will not as a rule be entitled to be indemnified unless it has paid against the documents which have been specified in the instructions given by the buyer. For these reasons questions arising in connection with the documents have been isolated and are dealt with separately.142 4–53 Unenforceability of the obligation to make payment under the credit was considered by the House of Lords in United City Merchants (Investments) Ltd v Royal Bank of Canada.143 The facts were that an English company sold manufacturing equipment to a Peruvian company and agreed to a scheme to double the price to enable the Peruvian company to exchange Peruvian currency for the excess amount in breach of Peruvian exchange control regulations. A letter of credit was issued in Peru and confirmed by the defendants. Shipment of the goods was made on 16 December 1976, a day later than the limit specified in the letter of credit, but loading brokers, not acting for the plaintiffs, fraudulently entered the earlier date as the date of shipment on a notation stamped on the bill of lading. The defendants rejected the documents and were sued under the letter of credit. Mocatta J held that, as the plaintiffs were innocent of the brokers’ fraud, the defendants were not entitled to reject the documents. But, by a second judgment in the action, given for the defendants, he held that the contract of sale and purchase was a disguise for exchanging 139

Article 9(d)(iii) of the UCP. See Position Paper No 1 produced by the ICC Commission on Banking Technique and Practice. 141 Article 9(d)(iv) of the UCP. 142 In chapters 6 and 7. 143 [1983] 1 AC 168. 140


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currencies and therefore that the contract and the letter of credit were unenforceable by reason of article VIII, section 2(b), of the Bretton Woods Agreements Order in Council 1946. The Court of Appeal dismissed the plaintiffs’ appeal on the ground that whilst it was possible to divide the contract into that part which was a disguised monetary transaction and that part which was not, the plaintiffs could not enforce the former since in the circumstances the defendants were entitled to rely on the broker’s fraud as a defence to the claim. The House of Lords held that the broker’s fraud did not provide a defence to the claim and the part of the transaction that was not a disguised monetary transaction could be enforced. Lord Diplock made it clear that the Bretton Woods Agreements Order in Council did not make the contract contained in the letter of credit illegal, but unenforceable to the extent that the transaction, viewed by reference to its substance, constituted a disguised monetary transaction. He then said:144 In the instant case there is no difficulty in identifying the monetary transaction that was sought to be concealed by the actual words used in the documentary credit and in the underlying contract of sale. It was to exchange Peruvian currency provided by the buyers in Peru for US$331,043 to be made available to them in Florida; and to do this was contrary to the exchange control regulations of Peru. Payment under the documentary credit by the confirming bank to the sellers of that half of the invoice price (viz $331,043) that the sellers would receive as trustees for the buyers on trust to remit it to the account of the buyer’s American company in Florida, was an essential part of that monetary transaction and therefore unenforceable; but payment of the other half of the invoice price and of the freight was not; the sellers would receive that part of the payment under the documentary credit on their own behalf and retain it as the genuine purchase price of goods sold by them to the buyers. I agree with the Court of Appeal that there is nothing in the Bretton Woods Agreements Order in Council 1946 that prevents the payment under the documentary credit being enforceable to this extent. 4–54 So far as illegality is concerned, if the contract between the issuing bank and the seller is itself directly affected by illegality, in accordance with general principles the seller will not be able to enforce payment. The question arises, however, whether that contract can be affected by illegality in the underlying transaction. As to this, different opinions have been expressed. In Group Josi Re v Walbrook Insurance Co Ltd145 it was contended that certain reinsurance contracts had been entered into illegally and that consequently letters of credit opened for the payment of loss reserves under which debit notes confirming liability for the amounts due under the contracts had to be presented could not be enforced. Clarke J held that the letters of credit were not directly affected or tainted by the alleged illegality of the reinsurance contracts and that the only basis upon which presentation of documents under the letter of credit could be restrained would be if the debit notes could not honestly be presented under the letter of credit, for example 144

[1983] 1 AC 168 at 190.


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because the beneficiary knew that it was not entitled to be paid the sums under the contracts.146 The Court of Appeal held that payment under the reinsurance contracts was not illegal. Accordingly it was not necessary to consider the point. However, Staughton LJ referred to United City Merchants (Investments) Ltd v Royal Bank of Canada147 and expressed the opinion that a letter of credit could be affected by the illegality of the underlying transaction if the letter of credit is being used to carry out an illegal transaction where the foundation for the claim under the credit is that illegal transaction or where it is necessary to plead the illegality in order to support the claim. He said that the illegality, like fraud, would have to be clearly established and known to the bank before it could operate as a defence, or a ground for restraining payment.148 4–55 Set off between the beneficiary and the issuing bank occurs rarely because there is not usually any antecedent banking connection between the issuing bank and the seller and usually the choice of the paying bank is, from the seller’s point of view, fortuitous. Moreover, if a beneficiary wishes to avoid the nomination of a particular bank as paying bank he is able to do so before completion of the underlying contract. However, where the issuing bank has a liquidated claim against the beneficiary that arises out of the same transaction as the credit, the issuing bank is entitled to set off its claim against the beneficiary’s claim under the credit.149 A claim by the bank for repayment of the sum that the bank is liable to pay under the credit on the ground that the beneficiary has acted fraudulently is also capable of giving rise to a set off if the evidence in support of the fraud is sufficiently powerful.150 4–56 The bank may also be able to resist payment and to claim rectification on the ground that the credit was issued by reason of a mistake common to both parties. Similarly, if the credit was issued by reason of the unilateral mistake of the bank and the seller is aware of the mistake so that he draws against the credit in bad faith, the law will not allow him to recover. These are matters governed by the general law of contract and not by conditions peculiar to the law of commercial credits. Payment 145

[1996] 1 Lloyd’s Rep 345. [1996] 1 Lloyd’s Rep 345 at 354 and 356. After Clarke J’s decision there was a hearing before Phillips J in order to determine whether the reinsurance contracts had been avoided for nondisclosure, which is reported as Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153. The decisions of both Clarke J and Phillips J were the subject of the hearing before the Court of Appeal. 147 [1983] 1 AC 168. 148 [1996] 1 Lloyd’s Rep 345 at 362–3. 149 Hong Kong and Shanghai Banking Corporation v Kloeckner & Co AG [1989] 2 Lloyd’s Rep 323. See also Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyd’s Rep 445 and Bamberger Polymers International Corporation v Citibank NA (New York District Court, 27/12/83). 150 Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600. See also Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] CLC 466 and Solo Industries (UK) Ltd v Canara Bank [2001] EWCA Civ 1041. 146


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4–57 Once documents are properly presented and all the terms and conditions of the credit are complied with, the manner in which the issuing bank must fulfil its obligation to make payment depends on whether the credit provides for sight payment, deferred payment, acceptance or negotiation. The obligation of the issuing bank in relation to each type of payment is dealt with in paragraphs 4–91 to 4–113 below. The beneficiary’s remedy if the bank does not fulfil its obligations is dealt with in chapter 9. Revocable credits 4–58 A credit is revocable when it clearly indicates that it is revocable.151 A revocable credit is so termed because it carries a notification to the beneficiary that the bank reserves the right of modification or cancellation.152 Article 8 of the UCP provides: A revocable Credit may be amended or cancelled by the Issuing Bank at any moment and without prior notice to the beneficiary. A person acting in reliance on a credit of this kind, whether he be the seller himself or the purchaser of a draft drawn under the credit, has notice that the credit may be withdrawn at any time. 4–59 The commercial value of a revocable credit was considerably impaired by the decision in Cape Asbestos Co v Lloyds Bank Ltd153 that where a credit takes this form the bank issuing it is at liberty to cancel it when it pleases and is under no legal duty to give notice either to the beneficiary or to anyone else, so that an exporter shipping goods on the faith of the credit may find himself in a dilemma owing to the fact that the credit has been revoked without his knowledge. In that case a credit was issued by Lloyds Bank on 14 June 1920 in favour of Cape Asbestos in the following terms: Gentlemen, we beg to inform you that we have received advice by telegraph from the Banque de l’Est, Warsaw, of the issue of a credit in 151

Article 6 of the UCP. See paragraph 4–38 above. Until the 1993 revision of the UCP a credit was deemed to be revocable unless there was a clear indication that it was irrevocable. Commenting on this position, it was stated in the last edition of this book that: “The provision…shows an excess of caution on the part of the issuing bank and the buyer-applicant for the credit. It might be thought that the rule should be subject to the giving of notice and that receipt of notice should be the point of time when the beneficiary could no longer avail himself of the credit. It may be that revocable credits are so rare that the point is not worth making, but the question is raised whether they should not be barred altogether.” In International Banking Corporation v Barclays Bank Ltd (1925) 5 Legal Decisions affecting Bankers 1 at 5 and 15, Atkin and Sargent LJJ stated that “cable” credits (now “teletransmitted” credits—see paragraph 2–17 above) were in the absence of indications to the contrary irrevocable. In practice even prior to 1993 all revocable credits stated positively that they could be cancelled without notice or were labelled “revocable” or “unconfirmed” or both. Some banks have used forms which leave the point open, so that the form could be adapted to either purpose. Revocable credits were traditionally used in the timber trade and abroad where governmental edict required 152 It is sometimes said that an authority to pay is like a revocable credit because it can be cancelled at any time; but whether this is so must depend on the terms of the credit.


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your favour for £1,620…on account of Stubicki and Felsze, Warsaw…to be availed of meanwhile by your draft on us at sight, accompanied by invoice. Bill of lading in complete set to order of Lloyds Bank Ltd, covering shipment of 30 tons asbestos sheets consigned to Stubicki and Felsze, Warsaw, per s/s -. This is merely an advice of the opening of the above-mentioned credit and not a confirmation of the same. During the currency of the credit, namely on 4 August 1920, Lloyds Bank received instructions by cable in effect cancelling the credit. Cape Asbestos was not informed of the cancellation and on 30 September 1920 a further consignment of asbestos was made and a sight draft together with the shipping documents presented to the bank. Payment was refused and Cape Asbestos sued Lloyds Bank, alleging that it was the duty of the bank in the circumstances to give reasonable notice of the cancellation of the credit. This contention was rejected by Bailhache J who held that the letter of 14 June 1920 “announced the opening of a revocable and not a confirmed credit” and that there was no legal obligation on the part of the bank to give notice to the beneficiary if the credit was cancelled. It was admitted that the practice was to give notice, but solely as a matter of grace, and Bailhache J, whilst commending the practice as reasonable and business-like, pointed out that it had no bearing on the question of the legal liability of the bank. The position of the beneficiary under this form of credit is therefore not strong. Because of this, revocable credits are rare. 4–60 The report of Cape Asbestos Co v Lloyds Bank Ltd gives no indication of the terms of the instruction given to Lloyds Bank by the Banque de l’Est, Warsaw, their principals. The beneficiary was authorized to draw on the bank at sight for the price, but it is submitted that the same principle would apply in a case where the credit authorized the negotiation of drafts; the person purchasing a bill drawn pursuant to a revocable credit is to be deemed to have notice of the terms of the letter of credit under which the bill was drawn.154 The credit, while not stating that it was liable to be revoked at any time, did state that the bank was merely advising. 4–61 It is the practice of banks to give notice of the intention to cancel the credit, but this is an act of courtesy and no liability is imposed on the bank where, by reason of some oversight155 or otherwise, the notice is omitted. Where notice of cancellation is given through an intermediary (paying or negotiating) bank, it does not affect any payment or negotiation made by it before receipt of the notice. This is reflected in article 8(b) of the UCP, which provides: …the Issuing Bank must: (i) reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation—for any 153

[1921] WN 274; see also Giddens v Anglo-African Produce Co Ltd (1923) 14 Ll.L.R. 230. International Banking Corporation v Barclays Bank Ltd (1925) 5 Legal Decisions affecting Bankers 1, in which it was stated that a revocable cable credit (now a teletransmitted credit—see paragraph 2–17 above) had to be “domiciled” with and available through the advising bank otherwise there would be no means by which the 154


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payment, acceptance or negotiation made by such bank—prior to receipt by it of notice of amendment or cancellation, against document which appear on their face to be in compliance with the terms and conditions of the Credit; (ii) reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in compliance with the terms and conditions of the Credit. 4–62 If the purchaser of a draft takes it with notice of the fact that the credit has been revoked it is clear that he acquires no rights against the bank. A negotiating bank (it is unlikely to be anyone else) may, however, have negotiated the draft prior to the revocation, or without notice of it. Article 8(b)(i) of the UCP deals with this situation. Where the credit provides for the drawing of a time draft which is accepted on presentation of documents, the right to revoke is gone. 4–63 There can be no confirmation of a revocable credit, though in theory an intermediary bank may bind itself even though its principal’s responsibility to it is not absolute.156 Confirmation would be a contradiction. The contract between the issuing bank and the intermediary bank Introduction 4–64 Where a credit is issued in respect of a foreign trade transaction, an intermediary bank in the seller’s country is usually introduced into the credit contract. This is because the seller usually does not want to rely on the credit of a bank in the country to which he is selling, preferring to have the promise of a bank in his own country. Accordingly the bank issuing the credit will then nominate another bank which it will ask to confirm the credit. 4–65 The intermediary bank acts on the instructions of the issuing bank, looking to the latter for indemnity in respect of its so acting.157 It may perform one or more of three functions: (a) to advise the credit to the beneficiary, in which capacity it is referred to in the UCP as the “advising bank”; (b) to pay, to incur a deferred payment undertaking, to accept drafts or to negotiate drafts on behalf of the issuing bank with or without obligation on its part, in which capacity it is referred to in the UCP as the “nominated credit could be effectively revoked by the issuing bank See also Chartered Bank of India, Australia and China v Macfadyen & Co (1895) 1 Com Cas 1. 155 As in Cape Asbestos Co v Lloyds Bank [1921] WN 274 (see paragraph 4–59 above). 156 Cf International Banking Corporation v Barclays Bank (1925) 5 Legal Decisions affecting Bankers 1, where it was held that an intermediary bank which advised that a credit was irrevocable when it was revocable was liable for breach of warranty of authority.


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bank”; and (c) to confirm the credit by adding its undertaking to that of the issuing bank, in which capacity it is referred to in the UCP as the “confirming bank”. Agency and reimbursement 4–66 The relationship between issuing and intermediary bank depends upon what the latter is called upon by the issuing bank to do. The rights and liabilities of intermediary banks, confirming or not, are governed by the terms of the instructions which they receive from the issuing bank on the one hand,158 and of their advice or notification to the seller in pursuance of such instructions on the other. As between the issuing bank and the intermediary bank the relationship is, unless otherwise agreed, that of principal and agent,159 so that, subject to any agreement to the contrary, when the intermediary bank has fully complied with its mandate it is entitled to reimbursement of any moneys it has properly paid.160 It is also entitled to be indemnified against any loss it may suffer by reason of its acting on the mandate. In so acting the intermediary bank has the benefit of the principle that it is not in default if it acts upon a reasonable meaning of an ambiguous expression.161 Moreover, even if the intermediary bank has no authority to negotiate, when it pays a sum to the beneficiary before the due date for payment it does not act in breach of its mandate and is entitled to reimbursement at the due date for payment. If the intermediary bank pays a discounted sum to the beneficiary, it is entitled to reimbursement of the full sum payable under the credit.162 Unless the credit gives authority to negotiate, however, if between the date when the intermediary bank pays and the due date for payment it becomes clear that the beneficiary is not entitled to payment, the intermediary bank is not entitled to an indemnity in respect of its payment because the early payment is not made with the authority of the issuing bank.163 4–67 When having accepted documents following presentation by the beneficiary an intermediary bank seeks reimbursement from the issuing bank, it makes an implied 157

Note that there is no privity of contract between the buyer and the intermediary bank—see paragraph 4–10 above. In Polymer Trading Sarl v Cic-Union Européenne et Cie 640 N.Y.S. 2d 32 (N.Y. App. Div. 1996), it was held that a confirming bank owes no duty of care to the applicant for the credit. 158 By way of illustration, see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275. 159 Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 90–1. But see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 280. As to the position of a negotiating bank, see European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 618. 160 Article 14(a)(i) of the UCP. As to the relationship between article 14(a)(i) and article 10(d), see Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Banking Rep 239 at 244–5, affirmed [2000] Lloyd’s Rep Bank 165 at 171–2. Sometimes the word “cover” is used in the letter of credit. That has no different meaning from reimbursement under the UCP—see Banco Santander SA v Bayfern [2000] Lloyd’s Banking Rep at 167. The undertaking is to reimburse a payment made under a deferred payment undertaking is to repay at maturity—see Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Banking Rep 239 at 244. See also Flagship Cruises Ltd v New England National Bank of Boston 569 F.2d 699 (1978) and Chinsim Trading (Pte) Ltd v Indian Bank [1993] 2 SLR 144. For standby credits issued subject to ISP98, see rule 8.01.


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representation that the presentation of the documents has been made prior to the date of expiry of the credit.164 Any reimbursement induced by such an implied representation is recoverable as a payment made under a mistake of fact.165 Liability for acts of the intermediary bank 4–68 The intermediary bank may be chosen, as between the buyer and the issuing bank, by the buyer (following agreement with the seller) or by the issuing bank. If the former, the buyer takes the risk of the intermediary bank failing to act in accordance with his requirements as laid down in the credit. In the latter case, the buyer normally relieves the issuing bank from responsibility. In this connection article 18 of the UCP provides: (a) Banks utilizing the services of another bank for the purpose of giving effect to the instructions of the Applicant for the credit do so for the account and at the risk of such Applicant. (b)Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). (d) The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages. Sub-articles (a) and (b) appear to make the buyer responsible for any mistake on the part of a bank instructed by the issuing bank, whatever may happen in respect of the credit transaction. Their effect is, however, limited to relieving the issuing bank of liability for damage caused to the buyer by the actions of the bank instructed by the issuing bank. It does not enable the issuing bank to claim reimbursement or an indemnity from the buyer where the buyer’s instructions have not been carried out.166 Intermediary bank instructed to advise 4–69 A bank which is instructed to advise, but not confirm, a credit may advise the credit to the beneficiary without adding its confirmation.167 Accordingly the beneficiary only has the undertaking of the issuing bank to pay the credit. Under article 7 of the UCP168 an advising bank has a limited liability to take reasonable care to check the apparent authenticity of the credit which it advises. If it elects not to advise the credit it must inform the issuing bank without delay. If it cannot establish the apparent authenticity of 161

Discussed in paragraph 4–19 to 4–20 above. Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Banking Rep 165 at 171. 163 Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Banking Rep 165 at 172. Contrast Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 205. See also Hamilton Bank NA v Kookmin Bank 98 Civ. 2162 (LAK) (S.D.N.Y. 1999). 164 Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 64. Sometimes the statement is made expressly and, if such a statement is made without belief in its truth it can give rise to a claim by the issuing bank and the buyer in deceit—see Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 Lloyd’s Rep 218. 162


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165

But see Bank Tejarat v Hong Kong and Shanghai Banking Corporation (CI) Ltd [1995] 1 Lloyd’s Rep 239 at 244–5.

the credit it must advise the bank from which the instructions appear to have come without delay. If it elects nevertheless to advise the credit it must advise the beneficiary that it has not been able to establish the authenticity of the credit. The advising bank, as agent for the issuing bank, probably also owes a duty of care to the issuing bank. However, a bank which is in the position of both advising bank and beneficiary under a credit does not owe a duty to the issuing bank to investigate the transaction for the issuing bank’s benefit or to warn the issuing bank of any facts it may have discovered in relation to fraud by the issuing bank’s agents or employees.169 Intermediary bank instructed to act as nominated bank 4–70 Article 10(b) of the UCP provides that unless the credit stipulates that it is only available170 with the issuing bank, it must nominate the bank which is 166

Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123 at 128. See paragraph 4–13 above. 167 Article 9(c)(ii) of the UCP. If the issuing bank uses the services of an advising bank to have the credit advised to the beneficiary, it must also use the services of the same bank for advising an amendment—article 11(b) of the UCP. 168 In relation to standby credits issued subject to ISP98, see rule 2.05. 169 Standard Bank London Ltd v The Bank of Tokyo Ltd [1995] 2 Lloyd’s Rep 169 at 176, applying Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 at 790–805 (affirmed [1991] 2 AC 249). 170 In Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 164, Devlin J said: “The term that is used is, “credit is to be available”.…It is not a very precise phrase, but it is one that is very commonly used in letters of this sort, and I think that “available” means that this credit can be drawn on in the manner prescribed. That is how it is made available, and the manner prescribed is by presenting the draft and documents to the bank or to the bank’s agent, that is, the draft that is to be accepted and the shipping documents that are there specified. That would appear to be the prima facie and simple meaning of the word “available”.” Devlin J rejected a submission that it meant “available for negotiation“, that is to say by negotiation of the unaccepted draft with the seller’s bank. It is therefore essential that a credit that is to be available by negotiation must be expressly so stated. See also

authorised to make payment under the credit. Unless the nominated bank has confirmed the credit171 or unless it has expressly agreed to pay, incur a deferred payment obligation, accept drafts or negotiate and such agreement has been communicated to the beneficiary, the nominated bank has no obligation to the beneficiary to make payment when it receives, examines or forwards documents.172 By nominating another bank, the issuing bank authorises such bank to make payment (using that term broadly) against documents which appear on their face to be in compliance with the terms and conditions of the credit and undertakes to reimburse such bank in accordance with the provisions of the UCP.173 It follows from this that the nominated bank is the agent of the issuing bank to receive, examine and forward the documents174 and to make payment in accordance with the issuing bank’s obligations, but unless it has confirmed the credit the nominated bank


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cannot be compelled by the beneficiary to make payment and the beneficiary’s claim is against the issuing bank. In a freely negotiable credit any bank is a nominated bank.175 Intermediary bank instructed to confirm 4–71 Where the issuing bank instructs the intermediary bank to confirm the credit and it does so, the beneficiary has, subject to any term of the credit to contrary effect, the contractual obligation of both the issuing and confirming banks to pay the credit.176 In confirming the credit the confirming bank acts upon the authorisation or request of the issuing bank. When the confirming bank makes payment, accepts drafts or negotiates drafts or documents, it does so pursuant to the mandate of the issuing bank provided that it does so against documents which appear on their face to be in compliance with the credit and the right to reimbursement from the issuing bank depends upon the confirming bank’s compliance with the terms of its mandate.177 Thus if a bank purports to confirm a credit at the request of the applicant or beneficiary without the authority of the issuing bank such bank will not be entitled to reimbursement from the issuing bank.178 Although the confirming bank will usually be nominated to pay or accept drafts or negotiate, another bank or banks may be nominated, albeit that such bank or banks other than the confirming bank will have no obligation to the beneficiary to do so.179 Where the confirming bank is not the nominated bank, both it and the issuing bank are bound to reimburse the nominated bank and take up the documents.180 4–72 If a bank is not prepared to confirm a credit when authorised or requested by the issuing bank, it should inform the issuing bank without delay.181 Such bank may, however, advise the credit to the beneficiary without adding its confirmation unless the issuing bank specifies otherwise in its authorisation or request to add confirmation.182 If incomplete or unclear instructions are received to confirm a credit, the bank requested to Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348, where the beneficiary was given the right to nominate the place where payment would take place. 171 See paragraphs 4–71 to 4–72 below. 172 Article 10(c) of the UCP. In relation to standby credits issued subject to ISP98, see rules 2.04 and 2.05. 173 Article 10(d) of the UCP. See also paragraph 4–66 and footnote 159 above. 174 No time is specified in the UCP within which the nominated bank should forward the documents to the issuing bank. In the light of this the courts will imply a duty to do this with reasonable despatch—see Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 66. 175 Article 10(b)(i) of the UCP. 176 The position of the confirming bank was stated by Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 183, set out in paragraph 4–41 above, and is provided for in article 9(b) of the UCP, set out at paragraph 4–86 below. In Bank ofBaroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87, Mance J held mat the performance which was characteristic of a contract between issuing and confirming banks was the confirming bank’s adding of its confirmation and its honouring of the obligations accepted in relation to the beneficiary. The liability of the issuing bank to reimburse or indemnify the confirming bank was secondary. 177 Article 10(d). See also paragraph 4–66 and footnote 159 above.


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act may give preliminary notification to the beneficiary for information only and without responsibility.183 An advising bank so requested to act should inform the issuing bank of the action it has taken and request the issuing bank to provide necessary information. The issuing bank must provide such information without delay. The confirmation will then be advised only when complete and clear instruction have been received and if the advising bank is then prepared to act on the instructions.184 An intermediary bank may extend its confirmation to an amendment and if it does so is irrevocably bound at the time of its advice of the amendment.185 The credit can only be amended with the confirming bank’s consent,186 however, and the confirming bank can choose to advise an amendment without extending its confirmation, although if it takes this course it must inform the issuing bank and the beneficiary without delay.187 4–73 The confirming bank may be asked (a) to pay against the credit; (b) to accept drafts drawn under it; (c) to negotiate drafts drawn either on the buyer or on the issuing bank; (d) in effect, where it negotiates, to buy or sell currency according as the credit is a sterling or a currency credit. Where the credit calls for a “time” draft drawn on the confirming bank and the confirming bank accepts the draft, the confirming bank is entitled to be reimbursed when it pays (and it cannot after acceptance decline to pay) whether or not there is any dispute between the buyer and the seller, providing that the documents presented to it against acceptance are in conformity with the conditions of the credit.188 In the case of a revocable credit this right seems to extend to all payments made by the intermediary bank before it receives notice of the modification or cancellation of the credit.189 The obligations of the banks when the intermediary bank is entitled to reimbursement from the issuing bank 4–74 As stated above, upon payment pursuant to the terms of the credit, a nominated bank is entitled to reimbursement by the issuing bank.190It is common for an intermediary 178

Confirmation should thus be given only at the request of the issuing bank. A beneficiary may ask for the confirmation of an unconfirmed credit, but to agree might deprive the intermediary bank of its normal right to recover from the issuing bank as having gone beyond its mandate. However the issuing bank’s obligation to the beneficiary would still be available to the beneficiary and by assignment to the bank. A revocable credit would never be confirmed—see paragraph 4–63 above. 179 Article 10(c). In a freely negotiable credit, any bank is a nominated bank: article 10(b)(i). 180 Article 14(a). 181 Article 9(c)(i). 182 Article 9(c)(ii). 183 Article 12. The preliminary notification should state clearly that the notification is provided for information only and without responsibility. 184 Article 12. 185 Article 9(d)(ii). 186 Article 9(d)(i). 187 Article 9(d)(ii).


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bank acting on instructions from the issuing bank to be advised to reimburse itself by reference to a third bank.191 This advice is normally contained in the text of the letter of credit issued by the issuing bank to the nominated bank. It forms part of the contractual agreement between the parties and the agreed way in which payment must be made.192 Article 19 of the UCP amplifies the obligations of the parties where such agreement is made and provides: (a) If an Issuing Bank intends that the reimbursement to which a paying, accepting or negotiating bank is entitled, shall be obtained by such bank (the “Claiming Bank”) claiming on another party (the “Reimbursing Bank”) it shall provide such Reimbursing Bank in good time with the proper instructions or authorization to honour such reimbursement claims. (b) Issuing Banks shall not require a Claiming Bank to supply a certificate of compliance with the terms and conditions of the credit to the Reimbursing Bank. (c) An Issuing Bank shall not be relieved from any of its obligations to provide reimbursement if and when reimbursement is not received by the Claiming Bank from the Reimbursing Bank. (d) The Issuing Bank will be responsible to the Claiming Bank for any loss of interest if reimbursement is not provided by the Reimbursing Bank on first demand, or as otherwise specified in the Credit, or mutually agreed, as the case may be. (e) The Reimbursing Bank’s charges should be for the account of the Issuing Bank. However, in cases where the charges are for the account of another party, it is the responsibility of the Issuing Bank to so indicate in the original Credit and in the reimbursement authorisation. In cases where the Reimbursing Bank’s charges are for the account of another party they shall be collected from the Claiming Bank when the Credit is drawn under. In cases where the Credit is not drawn under, the Reimbursing Bank’s charges remain the obligation of the Issuing Bank. 4–75 If the issuing bank instructs the reimbursing bank not to make payment to the claiming bank, the claiming bank’s claim is under the original obligation of the issuing bank to provide reimbursement through the reimbursing bank and article 19(c) does not have the effect of providing an alternative means through which the claiming bank can obtain payment direct from the issuing bank.193 Article 19(c) appears, however, to preserve the claiming bank’s claim against the issuing bank in the event that payment by the reimbursing bank is prevented by some supervening illegality. 4–76 International practice in relation to reimbursement has developed beyond what is set out in article 19 of the UCP. In 1993 the ICC Commission on Banking Technique and 188

See Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Banking Rep 239 at 246, affirmed [2000] Lloyd’s Banking Rep 165. 189 Article 8(b) of the UCP. See also Bank Melli Iran v Barclays Bank (Dominion, Colonial and Overseas) [1951] 2 TLR 1057 at 1063. 190 Paragraph 4–66 above. 191 This method of reimbursement makes it difficult for the issuing bank to recover money paid under a mistake of fact as money had and received by the intermediary bank—see Bank Tejarat v Hong Kong and Shanghai Banking Corporation (CI) Ltd [1995] 1 Lloyd’s Rep 239 at 244–5. 192 Royal Bank of Scotland Plc v Cassa di Resparmio delle Provincie Lombarde [1992] 1 Bank LR 251.


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Practice authorised a working party to develop rules specific to the process of bank-tobank reimbursement. This resulted in the publication by the ICC of Uniform Rules for Bank-to-Bank Reimbursements (known as “URR”),194 which took effect from 1 July 1996. The URR provide for the rights of the parties upon the issuing bank authorising a third bank (the reimbursing bank) to reimburse an intermediary bank. That is done by a reimbursement authorisation. The URR apply if such reimbursement authorisation incorporates the URR.195 If the credit specifies that the URR will apply to reimbursement, there is a binding agreement between the issuing bank and the intermediary bank that the issuing bank will issue a reimbursement authorisation to the bank and incorporate the URR into it. The reimbursement authorisation is, however, separate from the credit to which it refers and the reimbursing bank is not concerned with or bound by the terms and conditions of the credit.196 The effect of this is that the reimbursing bank is under no obligation to ensure that the intermediary bank is entitled to reimbursement under the credit and is thus not concerned with whether the documents presented under the credit are compliant. 4–77 A reimbursement authorisation authorises the reimbursing bank to make payment to the intermediary bank (referred to in the URR as the “claiming bank”) upon a claim for reimbursement being made.197 The reimbursement authorisation and any amendment of it must be sent by authenticated teletransmission or signed letter.198 The reimbursement authorisation must contain specific information concerning the credit.199 Unless the issuing bank has requested the reimbursing bank to issue a reimbursement undertaking and such undertaking has been issued, a reimbursement authorisation can be amended or cancelled by the issuing bank by sending notice to that effect at any time prior to the reimbursing bank honouring claims under it.200 A reimbursement undertaking is an irrevocable undertaking by the reimbursing bank issued to the claiming bank at the request of the issuing bank pursuant to which the reimbursing bank undertakes to meet the claiming bank’s claims made in accordance with the provisions of the URR.201 Once a reimbursement undertaking has been issued it cannot be amended or cancelled without the consent of the claiming bank 202 and the reimbursement authorisation on which it is based cannot be amended or cancelled without the consent of the reimbursing bank.203 A reimbursement undertaking must indicate the terms and conditions of the undertaking, including latest date for presentation of a claim.204 193

Royal Bank of Scotland Plc v Cassa di Resparmio delle Provincie Lombarde [1992] 1 Bank LR 251. 194 ICC Publication 525. The URR are set out at appendix 3. For a detailed description of their operation, see “Bank-to-bank reimbursements under documentary credits: the Uniform Rules”, H.N.Bennett [1998] LMCLQ 114. For a letter of credit that provided for reimbursement under the URR, see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 277–8. 195 Article 1 of the URR. Rule 8.04 of ISP98 provides that the URR applies to reimbursement instructions in standby credits issued subject to ISP98.


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4–78 Claims for reimbursement must be made and honoured in the currency of the reimbursement authorisation or reimbursement undertaking.205 Claims made by the claiming bank must be sent by teletransmission or signed letter and must contain specific information concerning the credit and the claim.206 The reimbursing bank will not process claims for value dated prior to the date of the claim.207 A claim must not indicate that a payment, acceptance or negotiation has been made under reserve or against an indemnity.208 Upon receipt of a claim, the reimbursing bank has a reasonable time, not exceeding three banking days, to process the claim. If the claim is not accepted, notice must be given by telecommunication to the claiming bank and the issuing bank no later than the close of the third banking day following the day of receipt of the claim and where a reimbursement undertaking has been given it must state the reason for non-payment.209 The reimbursing bank has no obligation to honour a claim except in accordance with a reimbursement undertaking that it has given.210 4–79 The reimbursing bank may be authorised to pay the claim or to accept and pay time drafts.211 Reimbursement will only be made to the claiming bank unless expressly agreed between the reimbursement bank and the claiming bank.212 Upon making payment of a claim, the reimbursing bank is entitled to debit the issuing bank’s account with the amount paid. Charges are for the account of the issuing bank and may be debited from its account with the reimbursing bank unless it has been agreed in the credit and indicated in the reimbursement authorisation that charges are for the account of another party.213 Where the reimbursing bank’s charges are for the account of another party, the reimbursing bank deducts them when the claim is honoured.214 If a claim is not made, the issuing bank must pay the reimbursing bank’s charges.215 196

Article 3 of the URR. The issuing bank’s reimbursement authorisation must not require a certificate of compliance with the terms and conditions of the credit to be given by the claiming or reimbursing banks—see article 6(c).

197

Article 2(c) of the URR. Article 6(a) of the URR. 199 Article 6(b) and (d) of the URR. 200 Article 8 of the URR. Depending on the terms of the credit, the cancellation of the reimbursement authorisation may be a breach of the agreement between the issuing bank and the intermediary bank. Article 8(b) of the URR provides that where cancellation occurs prior to expiry of the credit, the issuing bank must provide the nominated or advising bank with new reimbursement instructions. 201 Article 2(g) of the URR. 202 Article 9(h) of the URR. 203 Article 9(g) of the URR. 204 Article 14(e) of the URR. A reimbursement authorisation that does not contain a request to issue a reimbursement undertaking should not be time limited—see article 7. 205 If the currency is that of a state which has adopted the euro, from 1 January 1999, claims maybe made and honoured in the euro equivalent and from 1 January 2002 claims must be made and honoured in the euro equivalent—see the ICC Policy Statement on the Impact of the Euro on monetary obligations related to transactions involving ICC Rules, discussed at paragraphs 4–112 to 4–113 below. 198


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4–80 The liability of the reimbursing bank is strictly limited by the URR to its obligations to meet a reimbursement undertaking and to process claims in accordance with the provisions of the URR.216 The reimbursing bank is not liable for claims in respect of loss of interest or loss of value due to exchange rate fluctuations, revaluations or devaluations unless they result from the non-performance of the reimbursing bank’s obligation under a reimbursement undertaking. Liability for any such losses is determined according to the agreement between the issuing bank and the claiming bank.217 The issuing bank is bound by and must indemnify the reimbursing bank against obligations and responsibilities imposed by foreign laws and usages.218 The effect of frustration as between the issuing bank and the intermediary bank 4–81 A credit may be frustrated, giving rise to difficulty between the issuing and intermediary banks, from conditions for which neither bank is responsible. This might occur where the intermediary bank (not being a nominated bank) accepts a presentation of documents and pays against or negotiates them, but then finds that it is not possible physically to get the documents to the issuing bank before the credit expires because either there is no post or the airports of the country of the issuing bank are closed. In such circumstances unless the issuing bank (and necessarily the buyer) agrees to extend the validity period of the credit and accept the documents, the intermediary bank will be left with the documents in its hands without any right of recourse to the beneficiary or to its principal. This seems to follow from article 17 of the UCP,219 which provides that banks assume no liability or responsibility for the consequences of the interruption of their business by acts of God, riots, civil commotions, insurrections, wars or other cases beyond their control or by any strikes or lockouts. However, if the buyer suffers loss by 206

Article 10 of the URR. Multiple claims must not be made in one teletransmission or letter. For claims in respect of reimbursements due on a future date, see article 11 (c) of the URR. 207 Article 11(b) of the URR. 208 Article 10(c). If the reimbursing bank nevertheless honours a claim so indicating, it assumes no liability. For payment made under reserve or against indemnity, see paragraphs 6–26 to 6–39 below. 209 Article 11 (a) of the URR. 210 Article 4 of the URR. 211 Article 2(c) of the URR. Additional information must be given in the reimbursement authorisation and the reimbursement claim if the authorisation is to accept and pay time drafts—see articles 6(e), 9(c) and 10(b). Where a time draft is to be accepted by the reimbursing bank, it must be forwarded by the claiming bank to the reimbursing bank for processing with the reimbursement claim. 212 Article 11(d) of the URR. 213 Article 16 of the URR. If the issuing bank fails to provide instructions in relation to charges, all charges are for the account of the issuing bank—see article 16(e). 214 Article 16(c) of the URR. 215 Article 16(c) of the URR. 216 See articles 4, 5, 6(h), 10(d), 11(e), 14 and 15 of the URR. The reimbursing bank may also be liable if it fails to inform the issuing bank without delay that it is not prepared to


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reason of the documents not being delivered in time to comply with the requirements of a contract with a sub-buyer, the issuing bank could rely upon articles 16, 17, 18(a) and/or 18(b) of the UCP220 to relieve it from liability for damages. Article 18(d) of the UCP221 might also to some extent relieve but would cover the position only if the enforced delay or loss was the result of a foreign law or usage. The contract between the intermediary bank and the seller (beneficiary) Introduction 4–82 The rights and obligations of the intermediary bank and the seller depend upon the role that the intermediary bank is instructed or permitted by the act under a reimbursement authorisation or a reimbursement amendment—see article 6(g).

issuing bank to perform. The intermediary bank must act in accordance with its instructions. As stated above, it may be asked to advise, to examine the documents and pay without liability on its part, or to add its confirmation to the credit.222 Intermediary bank instructed to advise 4–83 A bank instructed to advise, but not confirm, a credit does not incur an obligation to the beneficiary to make payment to the beneficiary or to accept or negotiate drafts. As stated above,223 under article 7 of the UCP an advising bank must take reasonable care to check the apparent authenticity of the credit which it advises. If it cannot establish the apparent authenticity of the credit, but nevertheless elects to advise the credit it must advise the beneficiary that it has not been able to establish the authenticity of the credit. A breach of these obligations that causes loss to the beneficiary is actionable by the beneficiary. Except in the respect provided by article 7, the advising bank does not owe a duty of care to the beneficiary.224 4–84 When the intermediary advising bank is asked by the beneficiary to act as the latter’s collecting agent, a further question arises, whether the bank is under a duty to check the documents. It is submitted that it is not; it undertakes no responsibility apart from advising the credit and cannot be called upon to do anything else; if it goes further, it does so of its own accord and cannot rely on the indemnity of the issuing bank,225 but must look to the beneficiary if it can. If, however, it advances money on the documents it may be able to argue that it has a pledge over the documents and a claim against any bank that releases the documents without its authority.226 217

Article 17 of the URR. Article 13 of the URR. 219 Set out in paragraph 4–09 above. 220 Set out in paragraph 4–09 above. 221 Set out in paragraph 4–09 above. 218


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222

See paragraph 4–65 above. See paragraph 4–69 above. 224 But see International Banking Corporation v Barclays Bank Ltd (1925) 5 Legal Decisions affecting Bankers 1, where it was held that an intermediary bank which advised that a credit was irrevocable when it was revocable was liable for breach of warranty of authority. In New York there are dicta to the effect that the advising bank also owes a duty to the beneficiary accurately to transmit the terms of the credit even though such duty is not provided for in the UCP—see Merchants Bank of New York 585 F. Supp. At 308, General Cable Ceat SA v Future Trading Inc 82 Civ. 1087, 1983 WL 1156 (S.D.N.Y. 1983) and First National Bank 64 N.Y. 2d at 296. Cf Bank One, Texas v Little 978 S.W. 2d 272 (1998). See also Michael Doyle & Associates Ltd v Bank of Montreal (1982) 39 BCLR 186, affirmed (1984) 55 BCLR 196, where the advising bank was held liable on its acceptance of a draft presented with the documents and it was held that the bank did not have a restitutionary claim for recovery of the money because the discrepancies in the documents that prevented it from obtaining reimbursement from the issuing bank were patent and not latent. The question whether the advising bank owed an independent duty of care to the beneficiary in the circumstances of the case was left open by the majority of the British Columbia Court of Appeal. 225 Cf Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134. 226 Harlow & Jones Ltd v American Express Bank Ltd [1990] 2 Lloyd’s Rep 343 at 350–1. 223

Intermediary bank instructed to act as nominated bank 4–85 As stated above,227 unless the nominated bank has confirmed the credit or unless it has expressly agreed to pay, incur a deferred payment obligation, accept drafts or negotiate and such agreement has been communicated to the beneficiary, the nominated bank has no obligation to the beneficiary to make payment and will only do so in accordance with instructions received from the issuing bank. If, upon presentation of documents, the nominated bank does not pay the beneficiary, the beneficiary’s right of action is against the issuing bank or the confirming bank, if any. Intermediary bank instructed to confirm 4–86 The liability of a confirming bank to the beneficiary depends on the terms in which it gives its confirmation, but in general it adopts the obligation of the issuing bank as contained in the credit.228 Under the UCP the liability of a bank that confirms a credit is provided for in article 9(b), which states: (a) A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment—to pay at sight; (ii) if the Credit provides for deferred payment—to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; (iii) if the Credit provides for acceptance:


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(a) by the Confirming Bank—to accept Drafts(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or (b) by another drawee bank—to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity, (iv) if the Credit provides for negotiation—to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit.229 227

See paragraph 4–70 above. The position of the confirming bank was stated by Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 183, set out in paragraph 4–41 above. In Barclays Bank Ltd v Mercantile National Bank [1973] 2 Lloyd’s Rep 541 it was held that a bank may confirm a credit issued by an organization which was not a bank. 229 For the liability of a confirmer of a standby credit issued subject to ISP 98, see rule 2.01 (d). 228

These provisions mirror the provisions of article 9(a) in relation to the obligations of the issuing bank and the discussion at paragraphs 4–47 to 4–56 above is relevant. By confirming a credit, the confirming bank does not guarantee the fulfilment of the obligations of the issuing bank. The confirming bank gives an independent undertaking to the beneficiary so that, as article 9(b) makes clear, the beneficiary may have the right to look to both issuing bank and confirming bank.230 4–87 As stated above,231 confirmation should only be advised when complete and clear instructions have been received,232 the credit can only be amended with the confirming bank’s consent233 and the confirming bank may choose whether or not to extend its confirmation to an amendment.234 4–88 A situation may arise in which the beneficiary presents his documents with a “time” draft or under a deferred payment credit, not to a confirming bank but to the issuing bank. If, for any reason, the issuing bank, after acceptance of the draft or prior to the maturity date of the deferred payment undertaking, becomes insolvent, the beneficiary’s right against the issuing bank is limited to proving in the liquidation. Unless the issuing bank was the nominated bank under the credit (which as a matter of practice is unlikely where the credit has been confirmed), the beneficiary cannot resort to the confirming bank because the confirming bank’s liability under article 9(b) is subject to the documents being presented to the confirming bank or any other nominated bank and, by reason of the fact that the documents are no longer available to him, the beneficiary cannot comply with the conditions on which the confirming bank undertook to negotiate. He would be entitled to look to the buyer for payment unless payment under the sales contract was to be considered satisfied by the issue of the credit.235 4–89 Thus the position of a confirming bank is reasonably clear. If the documents are in order the bank’s transaction with the beneficiary cannot be reopened because it has given its “definite undertaking” in relation to payment of the beneficiary.236 If they are not, the bank will normally reject them upon presentation. The important question in this connection is in what circumstances the intermediary bank may be entitled to look to the beneficiary if


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it negotiates documents not on their face what were called for, and accordingly fails to recover from the issuing bank. In such case the bank can, it is submitted, look to the beneficiary only if it accepted the documents on that basis or if the beneficiary was fraudulent in representing that the documents were what they should be or so grossly negligent as to be estopped from denying responsibility.237 However, the confirming bank has only to satisfy itself that the documents are on their face correct, in which case the issuing bank is bound to accept them. Payment 4–90 As in the case of the issuing bank, once documents are properly presented and all the terms and conditions of the credit are complied with, the manner in which the issuing bank must fulfil its obligation to make payment depends on whether the credit provides for sight payment, deferred payment, acceptance or negotiation. The obligation of the confirming bank in relation to each type of payment is dealt with in paragraphs 4–91 to 4–113 below. The beneficiary’s remedy if the bank does not fulfil its obligations is dealt with in chapter 9. Rights and obligations in relation to payment Introduction 4–91 Once documents are properly presented and all the terms and conditions of the credit are complied with, the manner in which the issuing bank must fulfil its obligation to make payment depends on whether the credit provides for sight payment, deferred payment, acceptance or negotiation.238 Articles 9(a) and (b) of the UCP239 set out the obligations of the issuing bank and the confirming bank respectively in relation to each type of payment. Sight payment

230

The obligation of the intermediary bank may not be additional in the sense of article 9(b) where the intermediary confirming bank issues its own credit, stating that its credit is given pursuant to the irrevocable credit of another bank. Here, however, the intermediary bank is not really a confirming bank. It is the beneficiary of a letter of credit issued in its favour, on the security of which it issues its own credit in favour of the seller. In these circumstances privity does not exist between the original issuer and the beneficiary and the beneficiary has no right to look to the original issuer as well as to the intermediary. 231 See paragraph 4–72 above. 232 Article 12. 233 Article 9(d)(i). 234 Article 9(d)(ii). 235 As to which, see paragraphs 3–25 to 3–26 and 3–32 to 3–39 above. 236 Article 9(b).


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4–92 If the credit provides for sight payment the obligation of each of the issuing and confirming banks is “to pay at sight”.240 This means on demand when the beneficiary presents the documents to the nominated bank or, if different from the nominated bank, to the issuing bank or confirming bank (as the case might be). Credits sometimes state that they are available “by payment”. Usually this will be construed as creating an obligation to pay at sight rather than pursuant to a deferred payment undertaking.241 The matter may, however, be complicated if the issuing bank includes a statement in the credit addressed to a nominated bank which has not confirmed the credit to the effect that the issuing bank will “cover” the nominated bank a number of working days after presentation of conforming documents.242 The nominated bank will not then make payment to the beneficiary until it receives payment from the issuing bank and the payment will thus not be made immediately the documents are accepted, but a stipulated number of days later.243 Since such provisions are typical in unconfirmed credits expressly stated to be payable at sight and such credits are routinely accepted as payable at sight,244 the better view is that the inclusion of such a provision in a credit which states simply that it is available “by payment” does not prevent the credit being payable at sight and does not create a deferred payment credit.245 4–93 A sight credit may call for presentation by the seller of a sight draft drawn on the issuing bank or the confirming bank, or possibly on the buyer.246 It is difficult to see what legal effect a sight draft has or what useful purpose it serves.247 However, although it is ancillary, the presentation of the shipping documents being the significant feature of the transaction, a presentation of documents which does not include the draft in the terms stipulated in the credit is defective.248 If a credit requires a draft, a bank is thus strictly in breach of its mandate if it pays without it. If the documents are correct, the buyer might ignore any technical deficiency of the absence of a draft, but if he suspects that the goods are not what he has ordered or has other reasons for not wishing to take up the documents, he could refuse. In doubtful cases a bank is therefore

237

See Bank Russo-Iran v Gordon Woodroofe & Co Ltd (1972) 116 SJ 921. Article 10(a) of the UCP provides that credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation, although they often do not. See paragraph 2–06 above. 239 Set out at paragraphs 4–42 and 4–86 above. 240 Articles 9(a)(i) and 9(b)(i) of the UCP. 241 For which, see paragraphs 4–94 to 4–95 below. 238

242

This will only occur where the issuing bank does not hold funds in the currency of the credit with the nominated bank and reimbursement has to take place through a third bank. 243 Typically 2 or 3. 244 See, for example, Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 at 354. See also Opinions of the ICC Banking Commission R375. 245 The issue might be important where there is a dispute between the buyer and the seller as to whether a “sight” credit has been opened in accordance with the contract of sale. 246 Although drafts drawn on the buyer are discouraged by the UCP, at least in relation to negotiation credits. Articles 9(a)(iv) and 9(b)(iv) state that a credit should not be issued available by drafts on the applicant.


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wise to obtain its customer’s consent before paying without a draft where one is called for. Payment by deferred payment undertaking 4–94 If the credit provides for deferred payment, the obligation of each of the issuing and confirming banks is “to pay on the maturity date(s) determinable in accordance with the stipulations of the credit”.249 Deferred payment credits normally state that payment will be made on a stipulated future date, for example 30, 60, 90 or 180 days from the bill of lading date, in circumstances where the expiry date for presentation of documents under the credit is well before such date for payment. The effect of this is that the seller has to ship goods well before the date when he will be paid and must finance the shipment in the meantime. In consequence a practice has grown up whereby banks will make advances to sellers on the security of the deferred payment undertaking of the issuing bank.250 4–95 This practice was considered in Banco Santander SA v Bayfern Ltd.251 In that case Paribas issued a deferred payment letter of credit payable 180 days from the bill of lading date in favour of Bayfern. Santander confirmed the credit. No authority was given by Paribas to Santander to pay Bayfern on a date earlier than the maturity date specified in the credit. Bayfern presented documents to Santander under the credit, whereupon Santander advanced a discounted sum to Bayfern against the security of the payment due from Paribas to Bayfern under the credit. Santander also obtained an assignment from Bayfern of Bayfern’s rights against Paribas. Prior to the maturity date it became clear to both Paribas and Santander that the documents presented by Bayfern were false or forged.252 As a result, pursuant to the fraud exception, Paribas was under no obligation to pay at maturity unless it had undertaken to Santander that it would do so. The Court of Appeal held that, while Santander had not acted in breach of its mandate in discounting the sum due to Bayfern under the credit, Paribas had not authorised Santander to do so and consequently Santander did so at its own risk. Santander ought to have obtained Paribas’ authority to discount and an undertaking that it would be reimbursed when it did so.253 To this extent a bank that discounts another bank’s obligation to the beneficiary under a deferred 247 Nevertheless, it has been usual in the United Kingdom and the United States for credits to call for a sight draft, often if there are no instructions to that effect, but this is not the case on the continent of Europe and elsewhere where credits avoid the use of drafts because they attract stamp duty. A sight draft is rarely negotiated apart from the relative documents, as there is usually no commercial purpose in doing so. Value can be obtained at sight from the issuing bank or the confirming bank, if any. If drawn on the issuing bank or confirming bank, which properly declines to pay it for the reason that the documents presented with it are not in order, neither the seller nor anyone else has any right of action against the issuing bank or the confirming bank either on the draft or on the credit contract. A bank does not “accept” drafts so as to make itself liable on them when it stamps and initials them for the purpose of acknowledging the date of receipt and the time from which they are payable— see Fanshaw v The Northern Trust Company 700 N.E. 2d 692 (1998). 248 Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 75 and Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 457. 249 Articles 9(a)(ii) and 9(b)(ii) of the UCP. 250 The practice is known as “forfaiting”—see paragraph 5–30 below. 251 [2000] Lloyd’s Bank Rep Bank 165. For a discussion of this case, see Proctor “Confirmed Letters of Credit—A New Twist” [2000] JIBFL 109. 252 At least this was assumed for the purpose of the hearings. 253 [2000] Lloyd’s Rep Bank 165 at 172. Reference was made to European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 (discussed at paragraph 4–108 below)


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where, although negotiation of an acceptance credit was restricted to the confirming bank, the plaintiff agreed to discount the draft and then presented the documents to the issuing bank and obtained confirmation that the draft would be paid on the due date before crediting the seller’s account and permitting him to draw against the sum credited.

payment letter of credit is in a different position from a bank that discounts an accepted draft.254 Payment by acceptance of drafts 4–96 Credits often stipulate that payment is to be made against drafts payable at a determinable future date (“time drafts”) rather than at sight.255 They are a means whereby a buyer obtains credit from the seller. Where credits require such a draft to be accepted by a bank upon presentation of documents they are referred to as acceptance credits. Acceptance credits may provide for drafts to be drawn by the beneficiary on the issuing bank, the confirming bank or on another bank.256 Upon presentation of the documents to the bank, the drafts are accepted257 and returned to the beneficiary who can then discount them either with his own bank or another. Often the confirming bank will discount the drafts upon presentation of the documents. 4–97 The credit will stipulate on which bank the draft is to be drawn and a draft drawn in accordance with the credit must be presented with the shipping documents. The nominated bank must reject documents where the draft does not comply with the terms of the credit. Upon presentation of conforming documents, the issuing bank or the confirming bank (depending upon on which the draft must be drawn) has an obligation to accept drafts drawn on it and pay them at maturity.258 Where the drafts are drawn in accordance with the terms of the credit on another drawee bank,259 254

Contrast, however, Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 205 where Rix J expressed the provisional view that confirming banks which are referred to in letters of credit as “negotiating banks” and which give value prior to the maturity date under a deferred payment letter of credit are entitled to reimbursement notwithstanding discovery of fraud prior to the maturity date. 255 “Time” drafts are often referred to as “usance” drafts and the time up to which they are payable is referred to as the “usance period”. 256 Sometimes credits provide for drafts drawn on the buyer. In such cases the bank’s obligation is to pay if the buyer does not do so. Cases have been known of issuing banks asserting, in the case of time drafts on the buyer, that their responsibility was limited to ensuring that the buyer accepted and that, thereafter, they were mere collecting agents. This is in no sense a bank’s irrevocable credit 257 The issuing bank (or the confirming bank as the case may be) normally signifies its acceptance by advising the due date for payment. If the usance period is expressed to be from sight, it begins when the issuing bank receives the documents. If the drafts are drawn on the confirming bank, the usance period begins when the confirming bank receives the documents. 258 Articles 9(a) (iii) (a) and 9(b) (iii) (a) of the UCP. Credits issued in some jurisdictions may provide for the issuing or confirming bank to “avalise” the draft, that is guarantee that the draft will be paid in accordance with its terms. 259 Which may be the confirming bank in the case of the issuing bank and the issuing bank in the case of the confirming bank.


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the obligation of the issuing bank and the confirming bank depends upon whether the drawee bank has not accepted the draft or refused to pay an accepted draft. If the former, the obligation is to accept a draft of like tenor drawn by the beneficiary on the issuing bank or the confirming bank (as the case may be). If the latter, the obligation is to pay the accepted but unpaid draft at maturity.260 4–98 After acceptance of the drafts, the beneficiary can discount them. Subsequent holders of the drafts take them free from conditions deriving from the credit.261 The fact that the draft bears a reference to the credit262 in no way puts them on inquiry as to whether the terms of the credit have been fulfilled. Any person giving value for the draft will be a holder in due course. Such a holder is entitled to payment of the accepted draft regardless of subsequently discovered fraud.263 When the issuing bank or confirming bank pays the draft under its acceptance, it does so as a result of it having placed the acceptance on the draft pursuant to its mandate and is entitled to be reimbursed. Similarly the bank is entitled to reimbursement where its own rights under the draft acquired upon the draft being discounted to it are discharged because it is the holder of the draft at maturity.264

260

Articles 9(a)(iii)(b) and 9(b)(iii)(b) of the UCP. Maitland v Chartered Mercantile Bank (1869) LJ Ch 363, where the transferee of drafts was unaware of the terms of the credit under which they were allegedly drawn, but was entitled to recover on the drafts as a bona fide holder for value. If holders of drafts were divested of their rights unless the credit conditions were complied with, this might entail that the drafts were conditional, in which case they would not be bills of exchange. This would seriously prejudice the efficacy of credits calling for “time” drafts. But this does not tell what, if anything, would be enough to vest the holder with notice of the terms of the credit so as to bind him. The judgments in three other cases (Brazilian & Portuguese Bank v British & American Exchange Banking Corporation (1868) 18 LT 823; Chartered Bank of India, Australia and China vMacfadyen & Co (1895) 1 Com Cas 1 and Union Bank of Canada v Cole (1877) 47 LJ CP 100 (discussed at paragraph 4–107 below)) emphasize not that the holders were not bona fide holders for value, but that the defendants, under whose credits the bills had been drawn, were not under obligation to meet the bills, because to the knowledge of the plaintiffs the conditions of the credits had not been fulfilled. Usually, however, if the bill is drawn on the issuing bank, it will not have been accepted unless the documents had been in order. 262 Most credits contain the requirement that drafts drawn under them must bear the note “Drawn under _ Bank credit _ No. _ dated _”. 263 Guarantee Trust Company of New York v Hannay [1918] 2 KB 623, in which the Court of Appeal held that a finance house which discounts a draft and sends it with the documents for acceptance does not warrant the genunineness of the documents. See also section 38 of the Bills of Exchange Act 1882 and Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Rep Bank 165 at 169. 264 See section 61 of the Bills of Exchange Act 1882 and Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Rep Bank 165 at 169. 265 See paragraph 4–101 below. 261


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4–99 The further question arises as to whether the holder of a draft accepted under an acceptance credit is entitled to have recourse against the drawer of the draft if the draft is dishonoured. Unlike the provision in relation to negotiation credits,265 the paragraphs of article 9 of the UCP dealing with acceptance credits do not expressly provide that the issuing bank and the confirming bank under an acceptance credit have no right of recourse against the drawer of the draft and/or bona fide holders of the draft. As a matter of principle, however, the issuing bank and the confirming bank do not have such a right. The contrary would result in circuity of action, because in the event of non-payment of the draft followed by an action by the issuing bank or the confirming bank against the drawer the latter would be in a position to allege a set off or to counterclaim under the confirmed credit for an equivalent amount. 266“On the other hand, a bank (other than an issuing bank or a confirming bank) that discounts a draft has a right of recourse against the beneficiary as drawer of the draft in the event of dishonour. Payment by negotiation 267

4–100 A negotiation credit is an invitation to a named bank or banks generally (as stipulated in the credit) to act on the credit by purchasing the benefit of it from the beneficiary against the promise of the issuing bank to pay in accordance with the terms of the credit on presentation of the documents. Where the credit provides for negotiation, it may provide for presentation of documents with or without drafts drawn by the 266

See M.A Sasoons & Sons Ltd v International Banking Corporation [19271 AC 711, where such a defence was rejected on the basis that the seller specifically authorised the negotiating bank to present the documents direct to the buyer and because, in any event, the negotiating bank was not the confirming bank; cf Chandanmull Benganey v National Bank of India (1924) 51 I.LR. (Calc.) 43. 267 The term “negotiation” is sometimes used for the process of tendering documents for payment under the credit. This usage is confusing and was described by Megaw LJ as “unfortunate” in Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 334. Credits that are not “negotiation” credits are sometimes referred to as “straight” credits. 268 Credits should not be issued available by drafts on the applicant (buyer), although if they are, banks must consider such drafts as additional documents: article 9(a)(iv). 269 For an early case where evidence was given as to banking practice on this point, see M.A.Sassoon & Sons Ltd v International Banking Corporation [1927] AC 711 at 723–4. 270 Article 10(b)(ii), which states “mere examination of the documents without giving value does not constitute negotiation”. Thus, some credits issued from outside the United Kingdom are stated to be available “for the face amount of the draft” for negotiation by a United Kingdom bank; this is no true negotiation, the face value of the draft being paid against the requisite documents by the “negotiating” United Kingdom bank, which immediately debits the account of the foreign issuing bank with that amount. 271 “Bona fide holder” is not a term found in the Bills of Exchange Act 1882, but is probably synonymous with the term “holder in due course”, as to which, see section 29 of the 1882 Act and Chalmers & Guest on Bills of Exchange, 15th ed, paras 819 and following. The expression may, however, mean simply that the holder has taken the bill in good faith. If so, the holder need not have given value, although value will have to have been given at some stage otherwise negotiation within the meaning of article 10(b)(ii) cannot be said to have taken place. Section 90 of the 1882 Act provides that “a thing is deemed to be done in good faith…where it is in fact done honestly, whether it is done negligently or not”.


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beneficiary.268 The issuing bank’s obligation is to pay drafts according to their tenor and, if drafts are not required, to pay according to the terms of the credit. In either case documents must be presented in accordance with the terms of the credit. Presentation can be by the beneficiary or any bank to which the credit has been negotiated.269 Negotiation means the giving of value for the drafts or documents and mere examination of the documents without giving value for them does not constitute negotiation.270 The issuing bank must pay without recourse to the drawer or bona fide holders271 of the drafts or documents. Where the intermediary bank has confirmed the credit at the instance of the issuing bank and negotiated the seller’s drafts or the documents it has no right of recourse against the beneficiary or bona fide holders. 4–101 Thus, where the credit provides for negotiation, the issuing bank undertakes: to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or documents(s) presented under the Credit.272 Where a negotiation credit is confirmed, the confirming bank undertakes: to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or documents(s) presented under the Credit.273 Accordingly the issuing bank must pay and the confirming bank must negotiate in accordance with the terms of the credit. The credit may, but need not, specify payment against and negotiation of drafts drawn by the beneficiary. Where drafts are not specified, the documents with the original letter of credit are negotiated by the beneficiary to the bank providing finance for presentation by such bank to the nominated bank in accordance with the terms of the credit. 4–102 A negotiating bank negotiates on the invitation contained in the credit and not as agent.274 The credit constitutes an offer, which is accepted when the negotiating bank acts on it. Where the drawer negotiates his time draft and documents the negotiating bank may, in the event of the draft being dishonoured by non-acceptance or non-payment by the drawee, sue on it as holder in due course where the seller is himself the payee (having drawn to his own order) or as holder for value where the seller draws in favour of the negotiating bank.

272

Article 9(a)(iv). Article 9(b)(iv). 274 European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 618. 275 See Position Paper No 2 produced by the ICC Commission on Banking Technique and Practice. 273


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4–103 Where a credit allows for negotiation without stipulating the bank through which the drafts must be negotiated, it is not necessary for the beneficiary to seek or secure negotiation from the nominated bank named in the credit and the failure of the beneficiary to seek or secure negotiation from the nominated bank does not affect the undertakings of the issuing bank and confirming bank (if any) or constitute noncompliance with the terms of the credit.275 4–104 If a credit carries no obligation to anyone but a named bank the issuing bank’s obligations are restricted to that bank. A common form, where negotiation is restricted to a named bank, is one addressed to that bank and authorizing negotiation “only by you”. It would seem that there can be no privity between the issuing bank and any other than the bank named and thus no other bank choosing to negotiate may look to the issuing bank on the credit. Such other bank negotiates at its own risk, although in the event of non-payment it has recourse to the beneficiary and a pledge of the documents (if it possesses them) so that it can, if necessary, take possession of and sell the goods in order to recoup. The position is different where the credit is an open invitation to any bank to negotiate, because acceptance of the offer places the negotiating bank in privity with the issuing bank, with the consequences that naturally follow. Whether the beneficiary draws at sight or at term, he may clearly negotiate if the credit in his favour is not restricted. If the drawing is at sight, the draft and documents remain together and there is little chance of negotiation beyond the nominated bank. If the drawing is at term, the draft may become divorced from the documents by a further negotiation, in which case a bona fide transferee for value is a holder in due course, with a right over against all parties to the draft.276 4–105 The invitation to negotiate is contained in the wording of the credit and is implied in a promise to honour drafts properly drawn. It is not necessary that the credit should state in terms that the seller is empowered to negotiate his drafts, if such is the reasonable inference to be drawn from its language, but unless it follows from the language used in the letter of credit and from the surrounding circumstances that it was contemplated that the seller should have the right to negotiate,277 a person other than the seller will not obtain any rights under the credit. 4–106 In Re Agra and Mastermans Bank, ex. parte the Asiatic Banking Corporation278 the credit was as follows: 276

For the right of recourse of a negotiating bank other than an issuing or confirming bank, see paragraph 4–109 below. 277 As to which, see for example, European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 617 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 205. Cf Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134. 278 (1867) LR 2 Ch 391. The principle established by this decision will not apply where drafts are negotiated other than on the faith of the invitation in the credit—see M.A. Sassoon & Sons Ltd v International Banking Corporation [1927] AC 711 at 729–30, where Lord Sumner said: “If the respondents discounted the drafts on the faith of the invitation (if any) contained in the letter of advice, the decision in Re Agra and Masterman’s Bank entitled them, if they chose to do so, to sue on the credit… If they had not discounted on the faith of that invitation, the principle would not apply…”


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To Messrs. Dickson, Tatham and Co. You are hereby authorised to draw on this bank at 6 months sight to the extent of £15,000 (fifteen thousand pounds sterling) and such drafts we hereby undertake duly to honour on presentation. This credit will remain in force for twelve months from this date and parties accepting bills under it are requested to endorse particulars on the back thereof. Bills must specify that they are drawn under credit No. 394 of 31st October 1865. The beneficiaries drew bills under the credit, which were discounted by the Asiatic Banking Corporation. The Agra Bank went into liquidation, and the Asiatic Banking Corporation proved for the amount of the bills. The liquidator sought to set off a debt due to the Agra Bank from Dickson, Tatham & Co, but the court refused to allow this. The principles underlying the decision are stated in the judgments. Turner LJ, observed279 that whatever might be the effect of the letter at law, the persons who bought bills under it had a “plain right in equity to compel the Agra Bank to accept and pay the bills” inasmuch as the bank from the very wording of the letter280 held out to the person negotiating the bills a promise that it would pay the bills; and it would be impossible to allow the bank after having sent the credit into the world to say that because there was a debt due to it from the beneficiaries it would not pay the bills. Cairns LJ was equally emphatic. He said:281 I am of the opinion that upon the offer of this letter being accepted and acted on by the Asiatic Banking Corporation there was constituted a valid and binding legal contract against the Agra and Masterman’s Bank in favour of the Asiatic Banking Corporation. Cairns LJ was further of opinion that the contract between the bank and the beneficiaries was one which was assignable in equity, and that it must be taken, if necessary, that the beneficiaries had assigned to the holders of the bills the engagement in the letter of credit providing for the acceptance of the bills. He met the point that in such a case the assignment would be subject to equities (that is to say, to the state of the account between the bank and the beneficiary), by saying:282 4–107 The circumstances in which a credit may be regarded as conferring a power of negotiation were also considered in Union Bank of Canada v Cole.284 279

(1867) LR 2 Ch 391 at 395. That is to say “Parties negotiating bills are requested to endorse particulars on the back”. 281 (1867) LR 2 Ch 391 at 396–7. 282 (1867) LR 2 Ch 391 at 397. 283 In this connection, see also Malins V-C in Re Hercules Insurance Co (1874) LR 19 Eq 302 at 315. For transfer and assignment, see chapter 5, and in particular paragraph 5–32. 284 (1877) 47 LJ CP 100. Cf M.A.Sassoon & Sons Ltd v International Banking Corporation [1927] AC 711 at 722. 280


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But assuming the contract to have been at law a contract with Dickson, Tatham & Co, and with no other, it is clear that the contract was in equity assignable, and that Dickson, Tatham & Co must be taken to have assigned (if assignment were needed) to the Asiatic Banking Corporation, and to have been by the writers of the letter intended to assign to them, the engagement in the letter providing for the acceptance of the bills. Generally speaking, a chose in action assignable only in equity must be assigned subject to the equities existing between the original parties to the contract; but this is a rule which must yield when it appears from the nature or terms of the contract that it must have been intended to be assignable free from and unaffected by such equities.283 The defendants had issued a credit to a firm of corn merchants authorizing the latter to draw bills on them against shipments of grain provided that certain conditions were complied with. The corn merchants drew bills on the defendants and discounted the bills with the plaintiff bank, which was aware of the terms of the credit and also of the fact that the conditions on which the corn merchants were empowered to draw had not been complied with. The bank sued the defendants for non-acceptance of the bills. The Court refrained from deciding the question whether there was a contract between the defendants and the plaintiff bank, as it was not necessary to do so seeing that, in any case, even if there was a contract, the defendants could not be held liable because the contract would be subject to compliance with such of the conditions as were not necessarily subsequent to the negotiation of the bills. But in the course of his judgment, Brett LJ remarked that the credit, though addressed only to the corn merchants, might conceivably be construed as addressed to the world at large. He said: I cannot go so far as to say that no document could be an open letter of credit if addressed to an individual. If that which is asserted to be a letter of credit is addressed to all the world, then those who act upon it have, in fact, the advantage of an actual legal contract with the giver of the letter— an actual contract, either because it was intended by the giver of the letter that they should act upon it, or because he has so acted that persons dealing with him would have a right to infer that he so intended. Then, whether he intended or not, on ordinary principles of law he becomes bound. That establishes a privity between the persons giving the letter and persons acting on it, and on ordinary principles creates a contract at law. But it does not follow that where a letter is not addressed to the public there may not arise a contract between the person who acts upon and the person who signs the letter. If the person in whose favour the bill is to be drawn has some authority given to him—e.g., if an express authority in writing can be proved to have been given, and acted upon—then there is a 285

[1983] 1 Lloyd’s Rep 611. See also Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134.


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contract between the person who has signed the letter and the person who has acted upon it, to the same extent as if the letter had been addressed in terms to the party so acting. 4–108 Any other than a negotiation credit concerns only the bank paying and the beneficiary. The paying bank offers to receive the documents from the beneficiary. The same applies where, under a negotiation credit, negotiation is restricted to a named bank—there is privity between that bank only and the issuing or intermediary bank. However, the issuing bank may act in such a way when the documents are negotiated so as to assume a liability to a bank other than that stipulated in the credit. In European Asian Bank AG v Punjab and Sind Bank (No 2)285 the defendant issued a letter of credit in favour of the sellers and advised it through Algemene Bank Nederland (ABN). The credit provided that negotiations under the credit were restricted to ABN.286 ABN subsequently confirmed the credit. The sellers presented the documents and a draft drawn on the buyer to the plaintiffs, stating that they had negotiated documents under the credit and that at maturity they would reimburse themselves on the bank stipulated for that purpose in the credit, and asking the defendants to advise acceptance. The plaintiffs endorsed the draft and sent it to the defendants, who caused the buyer to accept it and returned it to the plaintiffs stating that the documents had been “accepted by the party to fall due on 3.2.1980”. That was confirmed by tested telex that included the statement “the documents are accepted by drawee to mature on 3.2.80”. Upon receipt of that telex, the plaintiffs credited the sellers account with the discounted value of the draft and permitted the sellers to draw down on that account. The plaintiffs were unable to obtain reimbursement and sued the defendants, claiming to be negotiating bankers. The Court of Appeal held that the defendants were estopped from denying that the plaintiffs were entitled to negotiate the letter of credit. In response to the argument that the defendants’ telexes had indicated only that the buyer would pay the drafts, Robert Goff LJ said:287 As a matter of commerce, the [plaintiffs] could not have had the slightest interest in whether [the buyer], a trading company of whom they knew nothing, were promising to pay on the draft at maturity. After all, it was obvious that the [plaintiffs], as negotiating bankers, would be discounting the letter of credit and so paying out a very large sum of money on the faith of these messages. As negotiating bankers, they would be relying on the undertaking of the issuing bank under the letter of credit. That was the only matter that they were interested in…consistently with the obvious conclusion that all the [plaintiffs] were concerned with was the liability of the [defendants] under the letter of credit, the [defendants] retained all the documents, including the drafts, which were never returned to the [plaintiffs]. In all the circumstances, we have no doubt that, on a true construction of the relevant documents, the [defendants] did indeed unequivocally represent to the [plaintiffs] that they, the [defendants], recognised that the [plaintiffs] were entitled to act as negotiating bankers under the letter of credit and that the documents were in order so that there


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was, on the face of the documents, a liability upon the [defendants] to pay the [plaintiffs] the sum due under the letter of credit on the due date. 4–109 Where the credit permits negotiation, recourse by an issuing or confirming bank to “drawers and/or bona fide holders” is prohibited.288 As the obligation of the issuing bank and the confirming bank is to negotiate “Draft(s) drawn by the beneficiary and/or document(s) presented under the Credit”, the 286

It was argued that another term in the credit showed that negotiation was not restricted to ABN, but this issue was decided in favour of the defendant. 287 [1983] 1 Lloyd’sRep 611 at 621. 288 Articles 9(a)(iv) and 9(b)(iv). See paragraph 4–101 above.

recourse”. Banks will normally not negotiate drafts so drawn and even where a bank is willing to waive its recourse it prohibition on recourse applies whether the credit is payable pursuant to a draft or by payment (at sight or deferred). If the credit is open to negotiation by any bank, an intermediary bank purchasing or negotiating drafts may make whatever terms it likes as a condition of the negotiation and may retain recourse to the beneficiary in case the issuing bank fails for whatever reason to meet its obligation. That obligation is dependent upon the beneficiary’s compliance with the terms and conditions of the credit, which include the presentation of the proper documents. It has been suggested that there should not be any right of recourse because the negotiating bank looks solely to the credit of the drawee bank and impliedly releases the drawer. There seems, however, to be no foundation for this view;289 it is a question of fact. No doubt the purchaser of the draft places his chief reliance on the credit of the bank but, except for article 9 of the UCP, this will not of itself suffice to release the beneficiary. If the beneficiary desires to escape liability he can sign his draft “without recourse”,290 and if he fails to do so or is prohibited by the terms of the credit from doing so he must be taken to have accepted the usual liabilities of the drawer of a bill of exchange. The right of recourse to the beneficiary is of value and renders purchase or negotiation more likely. If a bank buys or negotiates the drawer’s draft it would normally have a right of recourse to the drawer in the event of dishonour, such right deriving from the law relating to negotiable instruments. Moreover it may be that where the documents, though apparently what they should be, are in fact not and the beneficiary (not fraudulent) is himself responsible for the discrepancy, the bank should be able to recover the money it has paid against them as paid in mistake of fact, unless it has expressly contracted not to have recourse. The mistake is certainly between the payer and the payee and is a mistake as to the correctness of the documents. 289

See M.A.Sassoon & Sons Ltd v International Banking Corporation [1927] AC 711 at 730, where Viscount Sumner referred to “the ordinary right of recourse” between a non-confirming negotiating bank and the beneficiary drawer of a draft. 290 As to which, see paragraph 4–110 below.


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4–110 A beneficiary may exclude liability by signing his draft “without recourse”, but this is a defence only on the draft. Any irregularity in the documents tendered will vitiate the intermediary bank’s promise or offer to negotiate and the drawing “without recourse” will be of no avail. The advantage of restricting liability on the draft only arises where a “time” draft becomes divorced from the documents and is in the hands of a transferee for value. There is no advantage to the drawer in a drawing “without recourse” where both draft and documents remain in the negotiating bank’s possession until they are presented to the issuing bank, except where for some reason the documents are refused by the latter. Whether or not a beneficiary is permitted to draw “without recourse” depends upon whether the buyer is willing to make provision for it in the credit—a matter to which he may not be indifferent. Documentary credits do not usually permit drawing “without usually does so not by authorizing the beneficiary to draw “without recourse” but in the intimation that the credit is a “without recourse” credit.291 The effect of the introduction of the Euro 4–111 On 1 January 1999 the euro was substituted for the national currencies of states participating in the European Economic and Monetary Union. Until 31 December 2001, the euro is divided into the national currency unit of such states according to fixed conversion rates. Until that date no-one is under an obligation to make or receive payment in euro (unless they have contractually agreed to do so) and the euro or national currency units may be used. From 1 January 2002 the national currencies will cease to exist and it will not be possible to issue credits in them. In the meantime, where the euro or the national currency unit of a state participating in the European Economic and Monetary Union is specified in a credit (wherever it originates or whatever the parties to it), the laws relating to the establishment of the euro apply to determine what constitutes legal tender.292 4–112 On 6 April 1998 the ICC Commission on Banking Technique and Practice issued a policy statement on the impact of the euro on monetary obligations related to transactions involving ICC rules. This deals with the effect of the introduction of the euro on credits issued under the UCP or ISP98 during the period between 1 January 1999 and 31 December 2001 (the transitional period) in the euro or in one of the currencies that the euro replaces. The issues that arise concern not only the currency in which payment is to be made, but also whether documents specifying monetary amounts conform to the credit. 291

Practice varies considerably, both in regard to relieving the beneficiary of responsibility and to the method of doing so. For instance, some of the Eastern banks headed their credits “Irrevocable Without Recourse Credit”, the effect of which has not been judicially considered, in their desire to emphasize the irrevocable nature of their credits, though this is not the same as authorizing the drawing of drafts “without recourse” but amounts to an undertaking by the issuing bank not to exercise recourse. Sometimes also Eastern banks called for drafts on the buyers “without recourse”, and authorised the advising bank to honour the bill on a sight basis against immediate reimbursement by the issuing bank. It is not always easy to put a label to such credits. 292 Dicey & Morris, The Conflict of Laws, 13th ed, pp 1576–8.


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4–113 In relation to credits issued and payable during the transitional period, payment must be made in the currency of the credit, but the issuing bank has an option to make payment in euro where payment is to be made in a national currency by crediting an account located in the participating state whose currency is to be used. Documents may be presented either (i) in the currency of the credit or (ii) in the euro equivalent or the national currency equivalent at the beneficiary’s place of business (as the case may be). In relation to credits issued during the transitional period but payable after it, payment must be made in euro. Documents issued during the transitional period may be presented either (i) in the currency of the credit or (ii) in euro or in the national currency of the beneficiary’s place of business (as the case may be). In either of the cases discussed, documents are not considered as being inconsistent with one another if any of them are denominated in the currency of the credit or the euro or in the national currency unit of the beneficiary’s place of business. Documents issued after the end of the transitional period must be denominated in euro. The seller’s rights on the failure of banks to fulfil obligations in relation to payment 4–114 If the issuing bank or the confirming bank does not fulfil its obligations under the credit, the seller’s right to sue is for breach, not debt. Ordinarily the value of the claim will be the amount that the bank should have paid under the credit. Where, however, the letter of credit covers a number of shipments and the bank refuses payment in relation to one shipment, the seller is entitled to treat the bank’s undertaking to pay as repudiated and claim damages in respect of the bank’s failure to accept documents in relation to all outstanding shipments.293 Thus in Urquhart Lindsay & Co v Eastern Bank Ltd,294 where the sellers were manufacturing goods for shipment by instalments and the bank refused to pay against the documents in respect of one such shipment, Rowlatt J held that the sellers were entitled to the difference between (i) the value of the materials left on their hands and the cost of such as they would have further provided and (ii) what they would have been entitled to receive for the manufactured machinery from the buyers, subject to a limit of the amount that they could have in fact shipped before the expiry of the letter of credit. The amount of damages recoverable by the seller in the event of wrongful refusal of the bank to honour drafts or pay against documents is discussed in paragraphs 9–06 to 9–21 below. 293

In relation to a standby credit issued subject to ISP98, a bank’s refusal to honour one presentation does not constitute dishonour of any other presentation or a repudiation of the credit— see rule 3.07(b). 294 [1922] 1 KB 318 (discussed at paragraph 9–13 below).

Chapter 5 TRANSMISSION OF THE BENEFIT OF A CREDIT1 1

The author of this book thought that transfer was a matter which could more appropriately be settled in the light of business requirements than by working it out along the rules of the law of contract. This is, perhaps, what may have happened in the formulation of article 48 of the UCP.

Introduction 5–01 The main purpose of making an irrevocable credit transferable to a third party is to enable the beneficiary to acquire and pay for contract goods that he cannot supply himself and may therefore have to get from elsewhere. As Denning LJ said in Trans Trust S.P.R.L v Danubian Trading Co Ltd:2 [A banker’s confirmed credit] is irrevocable by the banker; and it is often expressly made transferable by the seller. The seller may be relying on it to get the goods himself. If it is not provided, the seller may be prevented from getting the goods at all. The usual method by which this object is achieved is by transfer pursuant to article 48 of the UCP.3 Another method of meeting the same need is by a back-to-back credit, where the prime beneficiary’s bank issues its own credit against the security of the original credit.4 Where the beneficiary wants to raise finance pending honour of the bank’s obligations, he may seek to pass the benefit of a credit to a third party by assignment.5 Moreover the provisions of article 48 are inappropriate to standby credits. Accordingly transfer and assignment under standby credits is dealt with separately.6

2

[1952] 1 Lloyd’s Rep 348 at 356. See paragraphs 5–02 to 5–20 below. 4 See paragraphs 5–21 to 5–24 below. 5 See paragraphs 5–25 to 5–37 below. When referring to the “benefit” of the credit, it is necessary to distinguish between the right to the proceeds of the credit and the right to perform under the credit itself—see paragraph 5–25 below. 6 See paragraphs 5–38 to 5–47 below. 3

Transmission of the benefit of a credit

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Transfer Introduction 5–02 Transferable credits are used where the seller is not intending to ship the goods himself, but to purchase them from a supplier who is to ship the goods. The seller therefore requires the buyer to arrange for the issue of a credit under which the seller can obtain payment by having his supplier obtain and present the documents called for under the credit. In this situation the supplier will want assurance of payment. It will usually be cheaper for the seller, rather than arranging for his bank to issue a credit in favour of the supplier, to arrange for the buyer to issue a credit that can be drawn on by the supplier. To meet this situation banks are willing to issue (on the application of the buyer) credits that are transferable so that the supplier (rather than the seller) can present the documents and obtain payment. 5–03 This would be unacceptable to the seller, however, without some modification to permit him to substitute his invoice for that of the supplier (whose invoice will in any event be made out to the seller rather than the buyer) and to take his profit on the transaction. Accordingly the credit will usually be transferred on terms that enable the supplier to present a commercial invoice made out to the seller and to draw for the agreed price as between himself and the seller and for the seller to substitute his commercial invoice and draw for the difference between the price receivable from the buyer and the price payable to the supplier before the documents are sent to the issuing bank. The effect of the transfer is therefore that the transferee (second beneficiary) must present the documents called for by the credit and is entitled to receive payment in the manner stipulated in the credit up to the amount of his invoice (provided that this is not greater than the amount of the credit as transferred to him). By substitution of his invoice for that of the transferee the first beneficiary is entitled to receive payment of the sum which amounts to his profit on the transaction. The UCP provides expressly for these matters in article 48. Establishing a transferable credit 5–04 The buyer, who applies for a credit, may require that the credit contain whatever condition he likes, provided that the issuing bank will agree to include it. If the buyer applies for a transferable credit he is responsible for all that flows naturally from the 7

Article 48(b) of the UCP. Article 48(b) also provides that terms such as “divisible”, “fractionable”, “assignable” and “transmissible” do not render the credit transferable and such terms, if used, must be disregarded. For examples of the use of “divisible”, see Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyd’s Rep 445 and European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 (discussed in next footnote). Article 48(g), which provides for fractions of a credit to be transferable separately provided that partial shipments/drawings are not prohibited (see paragraph 5–09 below), makes the use of such terms unnecessary.


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transfer. The mandate to the issuing bank and the request for transfer would seem to carry an implied promise to indemnify the issuing bank in respect of any liability arising from the carrying out of the buyer’s instructions. Transfer without authority under the terms of article 48 may be a breach of the buyer’s mandate and the issuing bank permitting unauthorised transfer might be unable to look to the buyer for reimbursement or indemnification; similarly, the intermediary bank vis-à-vis the issuing bank. Unless the mandate to the issuing bank (and intermediary bank) expressly instructs it to permit transfer at the instigation of the beneficiary and, impliedly, to whomsoever the beneficiary nominates, the intermediary bank cannot be assailed if it refuses, providing always that it remains willing to pay the named beneficiary. 5–05 Under the UCP a credit can be transferred only if it is expressly designated as “transferable” by the issuing bank.7 It is therefore essential that a seller who wishes to transfer the benefit of a credit to his supplier should ensure that the contract between himself and the buyer provides that the credit to be opened by the buyer should be transferable. If the contract so provides, the buyer must instruct the issuing bank to issue a credit that states that it is transferable. Designation may be by label or as part of the text of the credit.8 5–06 If a credit is designated as being transferable, the beneficiary named in the credit has the right to request the paying bank to make the credit available to another person. Thus article 48(a) of the UCP states: A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate (the “Transferring Bank”), or in the case of a freely negotiable Credit, the bank specifically authorised in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more other Beneficiary(ies) (Second Beneficiary(ies)). 8

See European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 617 where the words “Letter of credit…should be divisionable n unrestricted for negotiation” were held to indicate that the credit was transferable so as to enable the beneficiary’s suppliers to draw directly on the issuing bank under the credit instead of doing so through the beneficiary or a bank entitled to act as negotiating bank. This construction was, however, necessary in order to reconcile 2 apparently irreconcilable clauses in the credit referring to negotiation. Under the current revision of the UCP, it may not have been open to the Court of Appeal to reason as it did, as the word “divisionable” (interpreted to mean “divisible”) would have had to have been disregarded—see previous footnote. 9 As to which, see paragraphs 4–70 and 4–71 above. 10 [1988] AC 583. 11 Article 46(a) of the 1974 Revision, which provided: “A transferable credit is a credit under which the beneficiary has the right to give instructions to the bank called upon to effect payment or acceptance or to any bank entitled to effect negotiation to make the credit available in whole or in part to one or more third parties (second beneficiaries).” 12 Article 46(b) of the 1974 Revision, which provided: “The bank requested to effect the transfer, whether it has confirmed the credit or not, shall be under no obligation to effect


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The paying bank will usually be the confirming bank, but in an unconfirmed credit it will be the bank nominated to make payment.9 5–07 In Bank Negara Indonesia 1946 v Lariza (Singapore) Pte Ltd,10 the question arose whether an unconfirmed credit payable at the counters of the issuing bank could be a transferable credit under the equivalent provisions of the 1974 Revision of the UCP. In that case the bank opened an irrevocable transferable credit in favour of a seller. The seller instructed the bank to transfer part of the credit to its supplier but the bank refused to do so. The seller was unable to perform its contract with its supplier and claimed damages against the bank. It was argued that the equivalent of article 48 (a)11 did not envisage transfer by the issuing bank, but only by other banks (such as the confirming bank, advising bank or other bank authorised and willing to pay, accept or negotiate under the credit), and accordingly that the beneficiary was not entitled to require the issuing bank to transfer the credit at all. The House of Lords acknowledged the force of the argument based on the wording of the 1974 Revision equivalents of articles 48(c)12 and 48(i),13 but refused to decide the point in the absence of expert evidence on relevant banking practice. 5–08 Under the 1993 Revision the arguments considered in Bank Negara Indonesia 1946 v Lariza (Singapore) Pte Ltd lose some, but not all of their force.14 In particular article 48(c) does not carry the implication of the 1974 Revision equivalent that only banks capable of being confirming banks can be requested to transfer a credit. On the other hand, the words in article 48(a) “the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate” are less apt to describe the issuing bank than the equivalent words in the 1974 Revision.15 It follows that the 1993 Revision does not clear up the issue and the question remains an open one. In practice the situation will arise rarely because most transferable credits nominate a bank authorised to pay, incur a deferred payment undertaking, accept or negotiate within the meaning of article 48(a). There is no reason in principle, however, why the provisions of article 48 should not apply to a situation where the issuing bank is the transferring bank. Where buyer and seller have agreed that a credit transferable by the issuing bank be issued subject to the UCP, it is likely that they contemplate that all provisions of the code (including article 48) will apply. The alternative is that they and the issuing bank agree express terms in the credit as to the rights and obligations of the parties on transfer, which is unlikely.

such transfer except to the extent and in the manner expressly consented to by such bank …” 13 Article 46(f) of the 1974 Revision, which is in materially similar terms to article 48(i). 14 The respective arguments are set out in [1988] AC 583 at 585F–587F, 589F–593B and 593F–G. 15 Cf article 10(b)(i) of the 1993 Revision. 16 Article 48(g). 17 Article 48(g). The ICC is not in favour of what is called “vertical” transfer, where a second beneficiary transfers to a third beneficiary.


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Fractional and successive transfers 5–09 Provided that partial shipments and drawings are not prohibited by the credit, fractions of a transferable credit can be transferred separately to different second beneficiaries, although the aggregate amount of such transfers must not exceed the amount of the credit.16 Such transfers are considered as constituting only one transfer of the credit. 5–10 Subject to this, a credit is transferable only once unless it expressly provides that it can be transferred more than once.17 Article 48(g) provides: Unless otherwise stated in the Credit, a transferable Credit can be transferred once only. Consequently, the Credit cannot be transferred at the request of the Second Beneficiary to any subsequent Third Beneficiary. For the purpose of this Article, a retransfer to the first Beneficiary does not constitute a prohibited transfer. The UCP does not therefore prohibit successive transfers, but there are difficulties with them and letters of credit that are expressed to be transferable more than once occur rarely.18 Banks are unfamiliar with them and may be reluctant to handle them.19 They are, however, a valid and workable instrument. Their effectiveness is improved if the second beneficiary requests that payment or negotiation is effected at the place to which the credit is finally transferred.20 This enables the third beneficiary to present documents in his own country and, if the documents are compliant, examination by that bank forms the basis of the third beneficiary’s right to payment. The documents can then be passed back through the banks of the second and first beneficiaries to the issuing bank, with invoices being substituted as appropriate.21 The only difficulty for the third beneficiary will be that, if payment is not forthcoming and a bank in his country has not confirmed the credit, he may have to sue the issuing or confirming bank in a different jurisdiction. In this respect, however, he will be in the same position as a second beneficiary under an unconfirmed (once) transferable credit. 18

The present editor has encountered one case where the credit was expressed to be “twice” transferable. The case involved the middle two parties in a chain of 3 contracts of sale. One question was whether the buyer had fulfilled the obligation in the contract to provide a credit by arranging for the issue of a twice transferable letter of credit in his favour and transferring it to the seller with the intention that the seller transfer it on to his supplier. The case was settled. 19 In Ian Stach Ltd v Baker Bosly Ltd [1958] 2 QB 130 at 138 (cited at paragraph 5–22 below), Diplock J said that in banking practice a transferable credit is regarded as transferable once only. 20 As to which, see paragraph 5–11 below. 21 As to which, see paragraph 5–15 below. 22 As to which, see paragraphs 4–70 and 4–71 above. 23 Article 48(h). See also F.H.Bertling Ltd v Tube Developments Ltd [1999] 2 Lloyd’s Rep 55 at 61. 24 Article 48(h). 25 Article 48(h). For the amount of insurance cover, see paragraph 7–116 below.


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The terms on which transfer may be effected 5–11 Once a transferable credit has been advised to the beneficiary, if the beneficiary wishes to transfer it he must request the paying bank22 to transfer the benefit of the credit to his supplier. Subject to certain exceptions, the credit must be transferred only on the terms and conditions specified in the original credit.23 This means that the transferee must present documents that comply in all respects with the requirements of the credit within the time and at the place stipulated in the credit. The exceptions are: (1) The first beneficiary may request that the amount of the credit and/or the unit price of the goods be reduced.24 In so doing the first beneficiary can prevent the second beneficiary from obtaining the full sum payable under the terms of the credit. This is the means by which the first beneficiary can recover his profit from the transaction. It should be noted, however, that the percentage for which insurance cover must be effected can be increased to provide for the amount of cover stipulated in the original credit or by article 34(f)(ii).25 (2) The expiry date for presentation of documents, the period after shipment within which the documents must be presented and the period for shipment may be curtailed. This enables the first beneficiary to require the second beneficiary to ship the goods and present the documents before the expiry of the periods provided for him to perform these acts in the credit. As a result the first beneficiary provides an opportunity for the bank to which the documents are presented to check that the documents are in order before the expiry date stipulated in the original credit. If the documents are not in order, the second beneficiary can be given an opportunity to represent them before that date. The curtailment of the shipment date and the expiry date may also be necessary to enable the transferring bank to have time to place the documents in the hands of the issuing bank before the expiry date in the original credit in circumstances where the credit stipulates that presentation is required at the counters of the issuing bank. The curtailment of the expiry date also gives the first beneficiary the opportunity to substitute his invoice (and draft) for that of the second beneficiary before the expiry date of the original credit.26 (3) The name of the first beneficiary can be substituted for the buyer in the documents.27 Except in relation to the invoice, however, if the name of the buyer is specifically required to appear on any document by the original credit it must do so. If the name of the buyer is required to appear on the invoice by the original credit, this requirement will be satisfied by the substitution of the first beneficiary’s invoice to the buyer for 26

As to which, see paragraphs 5–17 to 5–19 below. Article 48(h). 28 As to which, see paragraph 5–17 to 5–18 below. 29 Article 48(j). This is without prejudice to the first beneficiary’s right later to substitute his own invoice for that of the second beneficiary and claim any difference due to him. 27


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the second beneficiary’s invoice to the first beneficiary. The fact that the name of the first beneficiary can be substituted for the buyer in the documents means that in an acceptance credit the second beneficiary can be the drawer of the draft and can require the issuing bank to accept such document as compliant where the first beneficiary does not substitute his own draft.28 (4) The place at which payment or negotiation is effected to the second beneficiary may be changed to the branch of the bank through which the credit is advised to the second beneficiary.29 This enables the second beneficiary to present documents to a bank in his own country, which is then the nominated bank for the purpose of the credit. The first beneficiary may not request the transferring bank to do this, however, if the original credit expressly states that it may not be made available for payment or negotiation at a place other than that stipulated in the credit. 5–12 When requesting the transfer of the credit (and in any event before the credit is transferred) the first beneficiary must irrevocably instruct the transferring bank whether or not he retains the right to refuse to allow the transferring bank to advise amendments to the second beneficiary.30 If the first beneficiary does not retain the right to refuse to allow the transferring bank to pass on amendments, the transferring bank will automatically amend the credit as transferred so that it accords with the original credit as amended. Although it is common for first beneficiaries and transferring banks to reserve the right not to pass on amendments, such amendments will usually be passed on. This is because the need for amendment of the credit generally arises as a result of the second beneficiary’s inability to comply with the terms of the credit. Once this becomes clear, assuming that it is not a deal breaking issue, the first and second beneficiary agree that the credit will be amended, subject to the agreement of the buyer. If the buyer agrees, he asks the issuing bank to amend the credit, which usually the issuing bank will agree to do, and the credit as transferred will be amended. An amendment will only not be passed on where it arises out of an amendment to the contract between the buyer and the first beneficiary that does not affect the contract between the first beneficiary and the second beneficiary. A second beneficiary can refuse to accept an amendment (assuming that he has not bound himself by contract with the first beneficiary to accept it) and should communicate his acceptance or rejection to the bank that advised him of it.31 5–13 Where fractions of the credit are transferred to more than one second beneficiary, the refusal of an amendment by one second beneficiary does not invalidate an acceptance by another second beneficiary and the second beneficiary who rejects the amendment must present documents that comply with the terms of the unamended credit.32 30

Article 48(d). Article 9(d), discussed at paragraph 4–50 above. 32 Article 48(e). 33 This article is strangely worded. It relieves an intermediary from the obligation to transfer “except to the extent and in the manner expressly consented to by such bank”. In the absence of article 48(c), it could be argued that failure to transfer renders the 31


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The bank’s right to refuse to transfer 5–14 The fact that the credit an intermediary bank is asked to advise is transferable would seem to entail that if requested by the beneficiary the bank must make the transfer and, if it were not willing to do so, should advise the issuing bank immediately. In fact there is little reason to refuse the beneficiary’s request to transfer because if the intermediary bank acts in strict accordance with its instructions it is entitled to be indemnified by the issuing bank. Its notification to the second beneficiary leaves it with the duty of receiving the proper documents and presenting them to the issuing bank. Transfer imposes no other burden on it than to satisfy itself that all the conditions of the credit are fulfilled, in which case it can “pay”. Nevertheless, article 48(c) leaves it open to an intermediary bank to effect the transfer on its own terms.33 Thus the transferring bank need not act on the request, unless it has agreed to do so in advance and then only to the extent and in the manner to which it has expressly consented.34 Usually the first beneficiary will have ascertained the willingness of the paying bank to transfer the credit before agreeing to the nomination of such bank in the credit. If, however, the first beneficiary and the transferring bank cannot agree upon whether the first beneficiary retains the right to refuse to allow the transferring bank to advise amendment, the transferring bank can refuse to act on the first beneficiary’s request to transfer.35 Moreover, unless otherwise agreed, charges made by the transferring bank are for the first beneficiary’s account and the transferring bank is under no obligation to effect the transfer until such charges are paid.36 If a bank confirms a transferable credit its covering notification to the transferee sets up a direct relationship with him. 34

Bank Negara Indonesia 1946 v Lariza (Singapore) Pte Ltd [1988] AC 583 (discussed at paragraph 5–07 above). The House of Lords held that a bank that had issued a transferable credit could refuse a request to transfer the credit. It said: “The consent contemplated by [article 48(c)] is a consent to effect the transfer to that particular extent and in that particular manner. Such a consent cannot be given in blanket form in advance, so as to apply to any request for transfer which may subsequently be made, whatever its extent or manner may be. It has to be an express consent made after the request and it has to cover both the extent and the manner of the transfer requested.” See also Bank One, Texas v Little 978 S.W. 2d 272 (1998). 35 See article 48(d). 36 Article 48(f). 37 SWIFT MT720 is used for transfer of a credit. 38 For an example of the terms of a transferred credit, see F.H.Bertling Ltd v Tube Developments Ltd [1999] 2 Lloyd’s Rep 55 at 58–59. 39 As to which, see paragraph 5–11 above.


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The process of transfer 5–15 Upon receipt of a transfer request from the first beneficiary, the bank will usually act upon it by sending a SWIFT37 or telex to the second beneficiary’s bank (or in hard copy to the second beneficiary) stating words such as “At the request of [the first beneficiary] we hereby transfer irrevocable documentary letter of credit number [X] issued by [the issuing bank] for an amount of [US$X]” and setting out the terms of the credit.38 The document sent by the paying bank to the second beneficiary’s bank (or

direct to the second beneficiary) therefore contains the terms in which the credit is made available to the second beneficiary and expressly states that it is a transfer of a credit. It will also indicate whether or not the transferring bank has confirmed the credit. Any changes requested by the first beneficiary that he is entitled to request39 will be incorporated. If any changes are incorporated that the first beneficiary is not entitled to request there is a serious risk that documents compliant with the credit as transferred will not intermediary bank liable to the beneficiary because, by its acceptance of the issuing bank’s mandate and communication of the credit to the beneficiary, the intermediary bank will not only be in breach with the issuing bank but with the beneficiary also. To the extent that article 48(c) entitles the intermediary bank to refuse a request to transfer for no good reason it makes little sense.

be compliant with the credit as originally issued. If so, payment (or reimbursement of the paying bank) will not be forthcoming from the issuing bank. 5–16 If the transfer is sent through the second beneficiary’s bank, once that bank has received the transferred credit, it will advise the second beneficiary of it. As an advising bank it must act in accordance with article 7.40 Presentation of documents and payment 5–17 The second beneficiary must present the documents called for by the credit within the time and at the place stipulated in the transferred credit. The documents are then examined and, if compliant, they are accepted and payment is due to the second beneficiary in accordance with the terms of the transferred credit. At this point the first beneficiary may substitute his own invoice and, where appropriate, his draft for that of the second beneficiary. This enables the first beneficiary to obtain his profit from the transaction and may enable him to keep the name of his supplier (the second beneficiary) confidential from the buyer.41 Article 48(i) provides: The First Beneficiary has the right to substitute his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount stipulated in the Credit and for the original unit prices if stipulated in the credit, and upon such substitution of


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invoice(s) and (Draft(s)) the First Beneficiary can draw under the Credit for the difference, if any, between his invoice(s) and the Second Beneficiary’s(ies’) invoice(s). When a Credit has been transferred and the First Beneficiary is to supply his own invoice(s) (and Draft(s)) in exchange for the Second Beneficiary’s(ies’) invoice(s) (and Draft(s)) but fails to do so on first demand, the Transferring Bank has the right to deliver to the Issuing Bank the documents received under the Credit, including the Second Beneficiary’s(ies’) invoice(s) (and Draft(s)), without further responsibility to the First Beneficiary. 5–18 Article 48(i) is confusingly worded in that it does not make clear the point at which the first beneficiary should substitute his invoices for those of the second beneficiary. Usually the substitution will be made when the documents have been presented by the second beneficiary to the transferring bank42 and the demand referred to in the second paragraph will usually be made by the transferring bank, which should remit the documents to the issuing bank as soon as it has determined that they comply with the terms of the credit. The first beneficiary’s failure to substitute does not affect the right of the second beneficiary to receive payment because the transferring bank is entitled to deliver to the issuing bank the documents that it receives from the second beneficiary. Provided that it has demanded the substitute documents from the first beneficiary the transferring bank can do this without responsibility to the first beneficiary. If, in response to the demand, the first beneficiary tenders his invoice and draft for substitution, the transferring bank must substitute them.43 The first beneficiary is then entitled to receive the difference between the sum he has to pay the second beneficiary and the sum he receives under the credit. 5–19 The substitution of the first beneficiary’s invoice and draft may take place after the expiry date stipulated in the original credit. Article 48(j) provides that the first beneficiary may request that payment or negotiation be effected at the place to which the credit has been transferred44 “up to and including the expiry date of the credit”. The effect of this is that, where there has been no curtailment of the expiry date of the credit on transfer,45 the second beneficiary can present documents at the last moment stipulated in the original credit without the first beneficiary having the opportunity to provide its substitute invoice or draft. Provision is therefore made in article 48 (j) for the first beneficiary to have the right to substitute subsequently his own invoice and draft for those of the second beneficiary and to claim any difference due to him. 40

See paragraph 4–69 above. See F.H.Bertling Ltd v Tube Developments Ltd [1999] 2 Lloyd’s Rep 55 at 62. 42 The last edition of this book stated: “It seems clear that the first beneficiary has the right to require the second beneficiary to offer his own invoices and drafts to the first beneficiary and only if on first demand the first does not avail himself of the right may the second tender his documents to the paying, accepting or negotiating bank.” It is questionable whether the first beneficiary can (or would want to) require the second 41


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The legal nature of transfer 5–20 It may be difficult to categorise legally the transfer of a credit. What is significant is the relationship between the several parties, as derived from the credit and the request of the first beneficiary and the advice to the second beneficiary by which the transfer is effected. This transaction may be an equitable assignment or a novation.46 Whatever its nature the first beneficiary is not excluded by the second beneficiary tendering his documents direct to the intermediary bank, except where the first beneficiary fails to substitute his invoices when demand is made.47 A credit is not an assignment of the moneys which it undertakes to pay,48 nor is it a negotiable instrument;49 and transfer by way of indorsement and delivery does not vest rights in the transferee. The credit contract is between the issuing bank and the beneficiary, with an intermediary bank brought in for convenience or perhaps at the instance of the seller who wishes to have a paymaster in his own country. That contract depends for its fulfilment on the promises made by the issuing bank and the intermediary bank and at the beginning of the line the conditions on which those promises are made. When a transferee is introduced a fresh contract is set up between the first beneficiary, the second beneficiary, the issuing bank and, when the credit is confirmed, the confirming bank.50 That contract depends both on the terms on which the transfer is made and the provisions of article 48. The issuing bank is not in privity with the transferee.51 Back-to-back credits 5–21 The benefit of an irrevocable credit which is not expressed to be transferable may be made available to a third party where a beneficiary uses the original credit in his favour as a security for a credit in favour of his supplier opened either by the intermediary bank52 or by his own bank.53 This is called a back-to-back credit. The original credit is delivered by the prime beneficiary to the bank issuing the back-to-back credit. There are thus three banks involved: (i) the bank issuing the original credit, (ii) the intermediary bank through which the credit is advised to the beneficiary and to which the documents required must be

beneficiary to present to the transferring bank the first beneficiary’s invoices, although the first beneficiary clearly can require substitution in the hands of the transferring bank. 43 If the first beneficiary presents documents that do not conform to the credit, the transferring bank should remit the second beneficiary’s documents to the issuing bank otherwise it will not obtain reimbursement—see Opinions of the ICC Banking Commission R375. 44 See paragraph 5–11 above. 45 See paragraph 5–11 above. 46 See R.M.Goode, Reflections on Letters of Credit, Journal of Business Law (1981) 151. This appears to be the position in United States law, see Smith v Morin Bros Inc 233 App. Div. 562, 253 N.Y.Supp. 368 (1931); Meb Export Co v National City Bank Co 131 N.Y.L.J. 4 (1954); but see in relation to standby credits Banco del Sempione v Provident Bank of Maryland 160 F. 3d 992 (4th Cir. 1998).


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presented, and (iii) the bank issuing the second credit against the security of the first. The supplier to the prime beneficiary presents his draft and documents to the bank issuing the second credit; that bank makes any necessary substitution of documents for those of the prime beneficiary and presents them to the intermediary bank for payment under the first credit. 5–22 Back-to-back credits are used in cases where there are a string of contracts, as explained in Ian Stach Ltd v Baker Bosly Ltd,54 where Diplock J said:55 Where, as in the present case, there is a string of merchants’ contracts between the manufacturer or stockist and the ultimate user, the normal mechanism for carrying out the various contracts is the familiar one which was intended to be used in this case: the ultimate user, under the terms of his contract of sale, opens a transferable, divisible credit in favour of his seller for his purchase price: his seller in turn transfers so much of the credit as corresponds to his own purchase price to his seller or, more probably, if his own contract with another merchant also calls for a transferable, divisible credit, procures his own banker to issue a back-to-back credit—that is to say, he lodges the credit in his favour with his own banker, who in his turn issues a transferable, divisible credit for the amount of his purchase price to his own seller; and so on, through the string of merchants, until the banker of the last merchant in the string issues the credit in favour of the actual manufacturer or stockist. The reason why they issue fresh credits is that in banking practice a transferable credit is regarded as transferable once only, and, also as is obvious in this sort of trade, it is desired, naturally enough, by any

47

See paragraph 5–18 above. See Morgan v Larivière (1875) LR 7 HL 423, in which a letter from London bankers stating that a credit had been opened and that payment would be made against given documents was held not to be an equitable assignment or a specific appropriation so as to impress moneys in hand with a trust. 49 See Shaffer v Brooklyn Park Garden Apts 20 U.C.C. Rep. Serv. 1269 (Minn. 1977). 50 See Agritrade International Pte Ltd v Industrial and Commercial Bank of China [1998] 3 SLR 211, where it was held that the second beneficiary’s claim was not affected by an agreement between the first beneficiary and the applicant to cancel the credit, and Banca del Sempione v Provident Bank of Maryland 160 F. 3d 992 (4th Cir. 1998), where it was held that the second beneficiary’s claim was not affected by the first beneficiary’s fraudulent conduct (a case involving a standby credit). 51 But see section 1 of the Contracts (Rights of Third Parties) Act 1999. 52 For discussion of whether the intermediary bank acts in breach of mandate by opening such a credit, thereby facilitating presentation of third party documents under a non-transferable credit, see Benjamin’s Sale of Goods, 5th ed, para 23–063. There can, however, be no serious objection to this practice, which is widespread. A non-transferable credit does not necessarily require presentation of documents procured in the first instance by the beneficiary (cf paragraphs 5–34 and 5–35 below) and provided that documents are compliant the issuing bank must accept them. It is not therefore a breach of mandate for an intermediary bank to facilitate presentation of third party documents under a non-transferable credit. Under some credits there may, of course, be difficulty in presenting compliant documents obtained by a third party rather than the beneficiary. 53 Such was the case in Erickson v Rejners Export Co 264 App. Div. 525,35 N.Y.S.(2d) 829 (1942). 48


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merchant in the string to conceal from his buyer and his seller who his own customer is. That is the way, as both parties to the present transactions knew, in which this type of business is normally carried on. 5–23 Back-to-back credits are not without risk. The documents tendered to the issuing bank by the intermediary must be those called for by the issuing bank or the credit will not be realizable and the bank issuing the back-to-back credit will not have the security of the original credit, for he will not be able to comply with its terms. Moreover, if the prime beneficiary becomes insolvent before the whole contract is completed, the bank issuing the back-to-back may find itself liable to the beneficiary of the second credit and yet unable to complete the transaction.56 5–24 A variation upon the theme of a back-to-back credit is illustrated by Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd,57 a case tried in the Supreme Court of New South Wales, in which the decision of the trial Judge was upheld by the Privy Council. The appellants, Patrick Intermarine Acceptance Ltd (PIAL) borrowed A$1.5 million from State Electricity Commission of Victoria (SECV) to lend on to First Leasing Australia Ltd (FLAL), an affiliate of the First National Bank of Boston (FNBB). As security for the prime loan, PIAL obtained from the Commercial Banking Company of Sydney (CBCS) a credit in favour of SECV to be operated by SECV’s drawings accompanied by their statement that repayment of the loan had been called for but not received. In turn PIAL required security from FLAL, which was given in the form of a credit by the FNBB, giving PIAL the right to draw in respect of the loan to FLAL. Thus there were two quite separate credits, one requisitioned by PIAL, which was the beneficiary of the other. PIAL undertook to CBCS that if there were drawings under CBCS’ credit PIAL would lodge with CBCS its draft and accompanying documents as required by FNBB’s credit. PIAL went into liquidation before the loans became repayable. SECV drew and were paid by CBCS. The latter then argued that it had a proprietary interest by way of equitable charge on FLAL’s debt to PIAL. The trial Judge and the Privy Council refused to accept this. As it was put by Lord Diplock: Their Lordships find it impossible to imply, from the provision that in a certain event the Commercial Bank should have a proprietary interest in Boston’s liability to PIAL, a provision that, if that liability should never arise, the Commercial Bank should have a proprietary interest in a different liability of a different person to PIAL. 54

[1958] 2 QB 130. [1958] 2 QB 130 at 138. See as to US law, Kingdom of Sweden v New York Trust Co 197 Misc. 431, 96 N.Y.S. (2d) 779 (1949) and Meb Export Co v National City Bank 131 N.Y.L.J.4 (1954). For a Canadian case, see Canadian Pioneer Petroleums Inc v Federal Deposit Insurance Corp [1984] 2 WWR 563. 56 A further possible difficulty is that the credits may be governed by different laws—see paragraph 10–48, note 119. 55


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Assignment Introduction 5–25 Assignment of the right to receive the proceeds of a credit must be distinguished from assignment of the rights created by the contract between the beneficiary and the issuing bank and/or the confirming bank embodied in a credit. Until recently58 the effect of assignment in relation to credits seems not to have received judicial consideration in the United Kingdom. There were cases involving credits which are assigned but the effect was not in question.59 An assignment is a better financing medium than is transfer, which is better suited to payment for an export of goods. The transfer of a credit subject to the UCP may not be appropriate to a financing, rather than a commercial, transaction. There is no material practical difference between presentation by a negotiating bank and by an assignee, although an assignee is in a worse position than a person to whom documents or drafts have been negotiated if the bank has a right of set off against the assignor60 or if documents have been presented fraudulently.61 Stamp duty may also have to be paid on an assignment. Assignment of the right to receive the proceeds of a credit 5–26 The situation under consideration here occurs where the beneficiary has presented documents under the credit and is entitled to receive payment in the future of the sums due under the credit. Leaving aside standby letters of credit, this will most commonly arise in the case of a deferred payment credit,62 where the beneficiary has the right to receive payment at a fixed future date and may wish to obtain finance in the interim against the security of the obligations of the issuing and confirming banks under the credit. The assignment of the right to receive the proceeds of the credit in this way is permissible under the UCP. Article 49 provides: The fact that a Credit is not stated to be transferable shall not affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under such Credit, in accordance with the provisions of the applicable law.63 5–27 In the United Kingdom rights64 under a contract are a chose in action and are normally assignable either legally pursuant to section 136 of the Law of Property Act 57

(1978) 52 ALJR 404. See also Elmford Construction Co Ltd v South Winston Properties Inc (1999) Lexis 1049 (Ont. Sup. Co). 58 See now Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460 and Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165. See also Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134. 59 See, for example, Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68, where the assignor assigned “all its right, title and interest in and to the benefit of the letter of credit including all claims of whatsoever nature arising thereout".


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1925 or equitably where the circumstances are such as to vest in a third party the rights embodied in the contract. To create a legal assignment under section 136 so that the assignee can sue for a debt in his own name without joining the assignor as party to the proceedings, the assignment must be an absolute assignment in writing for the whole amount due and notice of it must be given to the debtor. A debt due and a debt which will become due, as well as something which may or may not become a debt, may be assigned. In this last case the assignment will be enforceable in equity if the debt materialises and there has been consideration for the assignment.65 5–28 Any clear written intention to assign the whole of the proceeds of a credit will be enough, with notice by the assignor or assignee to the issuing or confirming bank before it is called upon to pay.66 The notice may come either from the beneficiary or from the assignee. It is doubtful whether the advising bank has authority to receive notice of assignment on behalf of the issuing bank (or the confirming bank if the advising bank is not the confirming bank).67 Although once it receives notice the bank can only obtain a discharge of its obligation by paying the assignee, it is prudent for the bank promptly to verify the assignment by reference to the beneficiary (assignor) upon receipt of notice. 5–29 There is nothing that can be paid pursuant to an assignment until the bank’s promise becomes a debt, which is dependent upon the beneficiary’s strict compliance with the conditions of the credit. Usually an assignee cannot know before the documents have been presented whether or not the conditions will be complied with and thus cannot be sure in advance that the proceeds will be forthcoming. He may require the documents to be delivered to him so that he may check them. Where an assignment is made before the beneficiary fulfils his part of the credit contract by presenting the documents, there is an enforceable contract between the beneficiary and the assignee provided that the assignee has given consideration. The assignee’s right to receive the proceeds on the due date comes into existence as soon as the beneficiary has presented compliant documents.68 The beneficiary may cancel the assignment before any action is taken on it unless the assignee has give consideration for the beneficiary’s promise to assign.69 5–30 Assignments of the right to receive the proceeds of a credit now commonly occur in relation to the obligations of the issuing and confirming banks under a deferred payment letter of credit. There is a well established market (known as the forfaiting market) for the sale and purchase of the rights created by such credits, where a party 60

Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460. With Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165, compare Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187. 62 Where a credit calls for a “time” draft, the documents are delivered in exchange for the acceptance and payment will ultimately be made to the holder of the draft and not otherwise. If the beneficiary of the credit has not negotiated the draft he can ensure that the moneys payable under it go to a third party merely by indorsing the draft over to him. If the draft is accepted and negotiated, it is no longer in the hands of the beneficiary and the proceeds cannot be assigned. 63 As to determination of the applicable law, see paragraph 10–54 below. 64 It is important to distinguish the rights of a beneficiary (for example, to receive the proceeds once compliant documents have been presented) and the obligations of a beneficiary (see paragraph 5– 33 below). 61


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independent of the credit (referred to as a forfaiter) engages in the trade of paper by purchasing the obligations such paper represents. The documentation in such trades provides for the forfaiter to obtain an assignment from the beneficiary of his own rights under the credit70 and that the forfaiter will give notice that it has done so to the banks whose obligations it has bought. The forfaiter’s rights to receive payment of the proceeds of the credit from the issuing and confirming banks is embodied in the assignment, because the forfaiter is not a party to the credit itself. 5–31 It is not uncommon for the forfaiter to be the confirming bank under the credit, which discounts the obligations of itself and the issuing bank to make a future payment to the beneficiary. This situation arose in Banco Santander SA v Bayfern Ltd.71 In that case the confirming bank took an assignment of the defendant’s right to receive from itself and from the issuing bank the proceeds of a deferred payment credit. Before the due date for payment it was discovered that the defendant had presented fraudulent documents. As a consequence the issuing and confirming banks were relieved of their obligation to make payment to the defendant. The confirming bank claimed reimbursement from the issuing bank (which was also a defendant in the proceedings). It was argued on behalf of the confirming bank (relying on Re Charge Card Services Ltd72 ) that the assignment by the beneficiary to the confirming bank did not in fact operate as an assignment, but extinguished the liability of the issuing and confirming banks to the beneficiary at the date when the confirming bank made a discounted payment to the beneficiary in return for the beneficiary giving up to the confirming bank his rights against the issuing and confirming banks. Accordingly since the confirming bank had thereby effectively paid the beneficiary prior to discovery of the fraud the confirming bank was entitled to reimbursement from the issuing bank.73 Langley J and the Court of Appeal rejected the argument. The liability of the issuing and confirming banks was joint and several and the documents demonstrated an intention to keep alive the joint and several obligation. The principle of Re Charge Card Services Ltd did not therefore apply.74 5–32 An assignee’s right to receive an assigned debt is subject to any set-off which the debtor may be entitled to exercise against the assignor.75 Normally 65

See Brice v Bannister (1876) 3 QBD 569, Re Clarke, Coombe v Carter (1887) 36 Ch D 347, Tailby v Official Receiver (1888) 13 App Cas 523 at 533 and 543 and Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460 at 465–7. See also Chitty on Contracts, 28th ed, paras 20–028 to 20–032. These matters are rarely likely to affect a bank issuing an irrevocable credit. 66 In Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134, the fact that the person said to be an assignee was named as payee in a draft sent by the payee to the issuing bank with a request for collection was said to give rise to notice. The point was not decided. 67 Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460. 68 See Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460 and Chitty on Contracts, 28th ed, para 20–032. 69 Bruce v Shearman [1898] 2 Ch 582 at 588. 70 See Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165 71 [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165. 72 [1987] Ch 150.


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also, the assignee is subject to any equity which the debtor can raise against the assignor when the assignment becomes operative. The question that arises is whether the assignment of the benefit of a credit is different from the assignment of anything else. This point also arose in Banco Santander SA v Bayfern Ltd,76 the issue was whether the issuing bank remained under an obligation to reimburse the confirming bank, which had taken the assignment without notice of the fraud. It was argued (relying on Stoddart v Union Trust Ltd77) that the rights of an assignee of the proceeds due under a deferred payment letter of credit were unaffected by defences available to the issuing bank against the assignor. Langley J and the Court of Appeal rejected the argument and held that an issuing bank78 is entitled to raise a defence of fraud, which would have been available against an assignor, against a bona fide assignee for value. Accordingly the claim failed.79 Assignment of the right to perform under the credit 5–33 The question that arises here is whether the beneficiary can transfer by assignment the right to present documents under the credit and to receive payment. Obligations under a contract cannot be assigned without the consent of the assignee and the person to whom the obligation is owed. It follows that if presentation of documents is an obligation of the

73

This step in the argument was also rejected. The confirming bank’s right to reimbursement arose at the due date for payment and not before, whether or not the confirming bank had made an earlier payment to the beneficiary: [2000] Lloyd’s Rep Bank 165 at 172. 74 [2000] Lloyd’s Rep Bank 165 at 168. 75 See Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460. Cf Bamberger Polymers International Corporation v Citibank NA (New York District Court, 27/12/83), where it was held that an advising and paying bank under an irrevocable credit which has been assigned by the beneficiary cannot withhold payment from the assignee because of a right of set-off it had against the assignor-beneficiary. The bank being a pure agent for the issuing bank cannot set up against the assignee any title to the proceeds that it might have exercised against the beneficiary. 76 [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165. See also Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] CLC 466. But cf paragraph 4–106 above. 77 [ 1912] 1 KB 181. Cf Chitty on Contracts, 28th ed, para 20–069. 78 A confirming bank is entitled to raise the same defence against a forfaiter who is independent of the credit. 79 The position would have been different if the credit had been an acceptance credit: [2000] Lloyd’s Rep Bank 165 at 169. 80 See Chitty on Contracts, 28th ed, para 20–077. See also Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134. 81 [1902] 2 KB 660, affirmed by the House of Lords [1903] AC 414. 82 [1902] 2 KB 660 at 668. Cf Brice v Bannister (1878) 3 QBD 569 at 588 where Brett LJ said82: “I cannot bring myself to agree that, either by virtue of the Judicature Act or otherwise, business transactions are hampered by any doctrine which will prevent a man from doing what he otherwise might do, merely because something has happened between other parties. I would therefore confine this remedy to a case where a debt has actually accrued due from one person to another, or at least I certainly would confine it simply to the case where nothing remains to be done by the person who is the assignor. In that case nothing remains to be done by him but to receive money from the person who is to pay him, and that money he makes over to the equitable assignee. But I cannot bring my mind to think that this doctrine


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beneficiary, assignment of that obligation to a third party is not possible without the consent of the issuing and confirming banks. An interesting question arises, however, whether presentation of the documents is an obligation cast on the beneficiary in this respect or simply a condition with which the beneficiary must comply in order to obtain payment of the proceeds. It is arguable that it is the latter.80 In Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd,81 the right to acquire chalk for a particular purpose was assigned. It was held that the obligation to supply chalk could be enforced on the basis that the assignee was prepared to pay for it under the terms of the contract. However, Collins MR said:82 The special rights of ignoring altogether the consent of the person upon whom the obligation lies to the substitution of one person for another as the recipient of the benefit would seem in principle and in common justice to be confined to those cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it, and I think the right of dropping the original contractee out of the discussion must be limited to those cases only in which the contract— that is the benefit of all that remains to be done under it—has been assigned; and it is in this sense only as it seems to me, that contracts can be said in strictness to be assignable. 5–34 In any event there appears to be no reason why the beneficiary cannot vicariously perform the obligation to present documents through an assignee of the sums due under the credit or make such assignee his agent to present documents83 unless the contract embodied in a credit is essentially personal to the beneficiary and it is the beneficiary’s personal obligation to present the documents.84 The personal element lies in the buyer’s concern that his sales contract is carried through by the seller and not by the seller’s nominee. The buyer is best served by ensuring that he deals with a trustworthy seller. He is entitled to select the person with whom he chooses to deal and exclude others. It has been said of the American courts that, for this reason, they have— 83

See Chitty on Contracts, 28th ed, paras 20–079 to 20–082. In Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134 it was alleged that the fact that the issuing bank did not object to the documents coming from a third party was evidence that it had assented to negotiation or assignment of the credit. It is implicit in this argument that the third party could not present the documents without the consent of the issuing bank. The point was not decided. 84 See British Wagon Co v Lea (1880) 5 QBD 149 and Fratelli Sorrentino v Buerger [1915] 1 KB 307 at 314–5 (affirmed [1915] 3 KB 367). There may be a practical difficulty in that a third party may not be able to obtain and present compliant documents. 85 Harfield, Bank Credits and Acceptances, 5th ed, pp 180–181. 86 For the principle of autonomy, see paragraph 1–25. 87 Article 49 of the UCP may have this effect—see paragraph 5–37 below. As to prohibition of assignment generally, see Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85.


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pretty generally held that a letter of credit in favour of a specific beneficiary is non-assignable.85 5–35 If this means that the operation of the credit is limited in favour of a specific beneficiary it is right but it would be surprising if credits generally were so limited. The credit agreement between the issuing bank and the beneficiary is autonomous86 and it is not permissible to imply restrictions arising from the buyer’s concerns which are not reflected in the terms of the credit. Where the personal element is significant the buyer can (if permitted by the sales contract) insist on the issuing bank introducing into the credit a prohibition against transfer or assignment, thereby ensuring that his seller alone shall complete the sales transaction.87 should be extended, so as to prevent the parties to an unfulfilled contract from either cancelling or modifying, or dealing with regard to it in the ordinary course of business.”

5–36 The assignment of a credit and the tender of documents by an assignee came before the Austrian Commercial Court in 1980 in the case of Singer & Friedlander v Creditanstalt Bankverein.88 The facts as given in an English translation of the judgment were that by a telex dated 17 October 1974 the defendant notified the plaintiff of irrevocable instructions to open the following letter of credit at the latest on 22nd November 1974: letter of credit 910,725 in favour of A.M.Aronson, Amstel 244, Amsterdam, $9,700,000—valid until 5th December 1975 at our counters against invoice in quadruplicate and warehouse receipt made out in the name of Zurich Airport concerning 10,000 bottles with 1,000 capsules each of 300 mg antibioticurn Spectrulatin at the price of $97.—per 100 capsules ex warehouse Zurich Airport. The documents must be presented between 1st and 5th December 1975. The credit is payable at our counters… We undertake to open the credit definitively by telex at the latest on 22.11.74. Singer & Friedlander were financing Aronson, who on 21 October 1974 wrote to Singer & Friedlander: I hereby irrevocably and unconditionally assign to you all my rights and benefits under documentary credit of ten million capsules of antibioticurn Spectrulatin US$9,700,000—issued by Creditanstalt Bankverein respectively undertaken by Creditanstalt Bankverein Vienna to open this L/C in our favour by order of Allgemeine=Finanz-and-WarenTreuhandgesellschaft Vienna. (English original) In due course, Aronson delivered to Singer & Friedlander the documents called for by the credit which Singer & Friedlander, by arrangement with Creditanstalt, in turn submitted


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to the latter for approval, which was forthcoming. Important aspects of the judgment are first: A transfer of the letter of credit itself, with the result that a second beneficiary would have been entitled to present his documents, did not take place. Next, It would contradict the nature of the non-transferable letter of credit if in addition to the proceeds the beneficiary could also transfer the right to realise his claim by presentation of documents in conformity with the letter of credit or to impede the paying out of the proceeds by not presenting the documents. If also the right to present (or not to present) the documents were declared transferable the non-transferable letter of credit would come close to the transferable letter of credit so that the two notions could hardly be distinguished. 88

[1981] Com LR 69.

There is force in this argument.89 The point is confusing in the light of a statement by the Court that “The fact that the L/C is not transferable does therefore not yet mean that the beneficiary cannot assign his right to the benefits” unless “benefits” means proceeds only. The assignment was of the assignor’s “full rights and title to the benefits under the credit”. The Court maintained that an assignee could tender the documents called for only as agent for the beneficiary and could possibly sue only in the agent’s name. In the circumstances of the case, Creditanstalt would seem to have waived any such contention. There was nothing in the credit to restrict negotiation and it is permissible to ask what is the difference in this respect between an assignee and a negotiating bank.90 89

In the last edition of this book, the editor’s commentary on this case including the following: “Nevertheless, so long as assignment of a chose in action is possible according to law the answer to this contention lies in a further amendment of article 46 [now 48] or the prohibition of assignment in the credit itself.” The addition in the 1993 Revision of the second sentence of article 49 (see paragraph 5–37 below) is an amendment that has the effect suggested. 90 The protection for the assignee where fraud occurs may, of course, be less than that of a person to whom the credit is negotiated—with Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165, compare Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187. 91 Cf Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134 and the discussion in note 83 above. 92 In the last edition of this book, the editor concluded this Chapter by saying: “The incongruity of the position regarding transfer or other transmission of the benefit of a credit would probably best be remedied by the inclusion in article 46 [now 48] of a provision to the effect that transmission of the benefit of the credit shall be achieved only within the terms of the article and by the method therein laid down and no other. Or, as all credits stipulate that they are subject to the Uniform Customs they might expressly prohibit transmission except as provided in the article; or again they could simply


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5–37 The judgment of the Austrian Commercial Court left unanswered whether the application of the UCP in relation to transfer prohibits any other method of transmitting the benefit of a credit. This appears now to be dealt with by article 49, which provides: The fact that a Credit is not stated to be transferable shall not affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under such Credit, in accordance with the provisions of the applicable law. This article relates only to the assignment of proceeds and not to the assignment of the right to perform under the Credit itself. The effect of the second sentence is not as clear as it might be. It is, however, implicit in the provision that the article now expressly states that it does not apply to the assignment of the right to perform under the credit that a credit which is not stated to be transferable does not permit assignment of the right to perform under the credit.91 The effect therefore is to make transfer under article 48 the only method by which the right to perform can be transmitted to a third party.92 Standby letters of credit issued subject to ISP98 Introduction 5–38 Where standby letters of credit are issued subject to the UCP, articles 48 and 49 apply. As stated above, however, article 48 is not apt to cover transfers of standby letters of credit. Article 48 is drafted on the basis that the contract underlying the credit will involve the shipment of goods and that the first beneficiary remains entitled to receive part of the proceeds of the credit. Article 49 preserves whatever right the law governing the credit gives to assign the benefit of the credit and does not enable the issuing bank to control of the process. Rule 6 of ISP98 addresses these problems and also provides for transfer by operation of law, for example on death or insolvency. Transfer of drawing rights 5–39 ISP98 envisages a request by the beneficiary to the issuer or the nominated person to honour a drawing by another person as if that person were the beneficiary.93 This transfers the right to draw under the credit from the beneficiary to another person and gives that other person the right to present the documents called for by the credit and to receive the sum due under it.94 The process can be and is much simpler than transfer of a commercial credit under article 48 of the UCP. 5–40 A beneficiary may only transfer the right to draw under a standby credit issued subject to ISP98 if the credit states that it is transferable.95 If the credit permits transfer, the drawing rights may be transferred in their entirety more than once, but may not be partially transferred.96 Transfer may only take place if prohibit assignment of the whole benefit of the credit. This last would be the best solution if all banks were to follow it, for assignment can normally only be a nuisance to banks and would give


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rise to problems which they could not readily solve and should not be called upon to face. They could not be expected always to recognize a notice of assignment, even of proceeds, or its possible legal effect and implications. Assignment is, therefore, to be discouraged and transfer within article 46 should be the only way of transmitting rights under a credit. A credit may contain whatever conditions the parties agree upon; it may thus contain a prohibition against assignment. The only party who might complain would be the beneficiary, in respect of the one occasion upon which it might be essential for him to obtain finance by granting an assignment of the benefit of a credit or obtaining a back-to-back credit; and he would have no legal ground for objecting if the article or the credit were to prohibit assignment.” The proposed solution has now been adopted. It should be noted, however, that credits can expressly permit assignment in a manner different from transfer under article 48.

the issuer or confirmer or another person specifically nominated in the credit to do so gives consent.97 5–41 Once consent to transfer has been given, the issuer or nominated person need not effect a transfer unless it is satisfied as to the existence and authenticity of the original credit. The issuer or nominated person may also require the beneficiary to give notice of the effective date of transfer and the name and address of the transferee, submit the original credit, provide verification of the signature of the person signing for the beneficiary and the authority of that person, pay the transfer fee and comply with any other reasonable requirements.98 5–42 Once an effective transfer has taken place, the transferee must sign any draft or demand presented for the purpose of drawing under the credit and the name of the transferee must be used instead of the name of the beneficiary in any other document.99 An issuer or nominated person paying under a transfer made in accordance with the rules is entitled to reimbursement as if it had made payment to the beneficiary.100 93

Rule 6.01. See Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (1978) 52 ALJR 404, the facts of which are set out in paragraph 5–24 above. In that case PIAL transferred the drawing rights under FNBB’s credit to CBCS. 95 Rule 6.02(a). 96 Rule 6.02(b)(i)and(ii). 94

97

Rule 6.02(b)(iii). Rule 6.03. 99 Rule 6.04. 100 Rule 6.05. 101 Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLR 460. 102 For the purpose of determining whether the credit is assignable, the law governing the contract embodied in the credit applies, not the law governing the contract between the assignor and assignee—see paragraph 10–50 below. 98


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Assignment of proceeds 5–43 As stated above, the right to receive the proceeds of a credit can be assigned legally pursuant to section 136 of the Law of Property Act 1925 or may be assigned equitably. A legal assignment of a chose in action places an obligation on the debtor to pay the assignee and he cannot obtain a good discharge from the assignor. So, where an absolute assignment of a present debt is in writing, an issuer can be required to pay the assignee once it has received notice of the assignment. If the debt does not exist at the date of the assignment (as where no demand has been made), the assignment will take effect in equity.101 If the issuer has notice of the assignment, payment to the assignor will not discharge its liability. It follows that the issuer has no control over the assignment. 5– 44 Rule 6–07(a) of ISP98 attempts to change this situation by providing that an issuer or nominated person is not required to give effect to an assignment of proceeds that it has not acknowledged and that the issuer or nominated person is not required to acknowledge the assignment. This provision takes effect unless the “applicable law otherwise requires”.102 Accordingly the question that arises is whether rule 6–07(a) has the effect of prohibiting assignment of the proceeds of a credit issued subject to ISP98. In English law a prohibition on assignment is lawful.103 It is therefore necessary to consider the effect of the words used in the contract.104 The difficulty is that rule 6.07(a) does not purport to prohibit assignment. It provides that the issuer is not required to give effect to an assignment which it has not acknowledged, unless the law otherwise requires. English law does, however, require the issuer to give effect to an assignment that it has not acknowledged. It follows that in relation to a credit subject to English law, it is questionable whether the provisions in ISP98 relating to acknowledgement are effective.105 103

Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85. An attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. 104 For this purpose the words used in the contract are the words of ISP98 that have been incorporated into the credit. 105 There would be no difficulty if the words “Unless applicable law otherwise requires” had been omitted from rule 6.07(a). Rule 6.06 provides: “…these Rules on acknowledgment of an assignment of proceeds apply except where applicable law otherwise requires.” These words are sufficient to prevent conflict in jurisdictions where the law provides an absolute prohibition on limitation of assignment and it was not necessary to include the qualifying words at the beginning of rule 6.07(a). 106 Rule 6.09. 107 Rule 6.10.


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5–45 Rule 6.08 provides for the issuer or nominated person to place conditions on its acknowledgment of an assignment. Such conditions may include (a) submission of the original credit for examination or notation, (b) verification of the signature of the person signing for the beneficiary and of the authority of that person, (c) submission of an irrevocable request signed by the beneficiary for acknowledgement of the assignment, (d) payment of a fee and (e) fulfilment of other reasonable requirements. The issuer or nominated person may require that the irrevocable request contain statements, covenants and indemnities relating to (i) the identity of the affected drawings if the credit permits multiple drawings, (ii) full details of the beneficiary and the transferee, (iii) details of any request affecting the method of payment, (iv) limitation on partial assignments and prohibition of successive assignments, (v) statements regarding the legality and relative priority of the assignment and (vi) the right of recovery by the issuer of any proceeds received by the assignee that are recoverable from the beneficiary. 5–46 Rule 6.07(b) provides that where an assignment is acknowledged, the assignee obtains no rights in relation to the credit itself. The rule makes it clear that the assignee’s rights may be affected by amendment or cancellation of the credit and that acknowledgement does not confer on the assignee any greater right than the assignor has under the credit. If there are conflicting claims to the proceeds of a credit, payment to an acknowledged assignee may be suspended pending resolution of the conflict.106 An issuer or a nominated person paying to an acknowledged assignee in accordance with the rules is entitled to reimbursement.107

Transfer by operation of law 5–47 The situations contemplated under this part of rule 6 are the death or insolvency of a beneficiary or a similar situation where a person is designated by law to succeed to the interests of the beneficiary. Rule 6.12 provides that a person to whom rights have devolved may be treated as if he is an authorised transferee of the entirety of the beneficiary’s drawing rights provided that he presents documents which establish his credentials. Where an issuer or nominated person receives a presentation from a claimed successor complying with the credit in all respects except for the name of the beneficiary it may request to be supplied with documents establishing the successor’s credentials and the issuer’s obligation to make payment is suspended until satisfactory documents are received.108 It is not, however, necessary for such documents to be presented before the expiry of the credit. An issuer or a nominated person paying a person who succeeds to the rights of the beneficiary by operation of law in accordance with the rules is entitled to reimbursement.109 108 109

Rule 6.13. Rule 6.14.

Chapter 6 THE DUTY OF THE PARTIES UPON PRESENTATION OF DOCUMENTS UNDER A CREDIT Introduction 6–01 The beneficiary must present documents to the nominated bank in accordance with the terms of the credit. The nominated bank and the other banks concerned in the process must then deal with documents in accordance with the provisions of the UCP, which are invariably incorporated into the credit. This chapter deals with the issues relating to the process of presentation of documents and, in particular, the obligations of the banks throughout that process. The issues covered are as follows: (a) the date and place of presentation1 (b) the time that the bank has to examine of the documents2 (c) the bank’s obligations if the documents comply3 (d) the bank’s obligations if the documents do not comply4 (e) payment under reserve5 (f) loss of the documents6 (g) defective documents.7 Issues concerning whether or not documents comply with the requirements of a credit are dealt with in chapter 7. The date and place of presentation 6–02 Credits must state the date on which they expire and, save where the credit is freely negotiable, the place at which documents should be presented.8 It is an obvious requirement that the presentation must be made before the expiration of the credit.9 Where the expiry date of the credit falls on a day on which the bank to which presentation must be made is closed other than for reasons of force majeure, the stipulated date is extended to the first following day 1

Paragraphs 6–02 to 6–04 below. Paragrapahs 6–05 to 6–08 below. 3 Paragrapahs 6–09 to 6–10 below. 4 Paragrapahs 6–11 to 6–25 below. 5 Paragrapahs 6–26 to 6–39 below. 6 Paragrapahs 6–40 to 6–56 below. 7 Paragraphs 6–57 to 6–72 below. 2


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on which the bank is open.10 Where documents are presented in accordance with this extension, the bank to which presentation is made must provide a statement that the documents were presented within the time limits as extended.11 The failure to provide such a statement does not, however, prevent the bank to which the documents are presented from obtaining reimbursement, although the failure to provide the statement could give rise to a claim for damages if any were suffered by reason of the failure.12 6–03 The expiry date stipulated in a credit may be (and frequently is) extended by the issuing bank with the consent of the buyer.13 Where a complete presentation is not made before the expiry of the credit, the presentation of any necessary document after the expiry date so as to complete the presentation can constitute an implied request by the seller to extend the date for presentation. If the buyer then accepts the documents, he is treated as having accepted the request for extension by conduct.14 6–04 The place of presentation is often stipulated in the credit by reference to its being available at the “counter” of a bank against presentation of stipulated documents. In modern practice this requirement is complied with by remittance of the documents to the bank by post or courier rather than by presentation in person.15 The bank may refuse a presentation made outside its normal banking hours.16 8

Article 42(a). An expiry date stipulated for payment, acceptance or negotiation is construed to express an expiry date for presentation. Cf Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 334. If the expiry date is fixed by reference to a period of time during which the credit is available, this runs from the date of issue of the credit by the issuing bank unless a specific date for commencement of the period is provided—see article 42(c). In relation to standby credits issued subject to ISP98, rule 3–01 provides that the credit should indicate “the time, place, location within that place, person to whom, and medium in which the presentation should be made”. See also rule 9.01 (a), which states that the credit should contain an expiry date. 9 Article 42(b). See also Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123 at 127. In relation to standby credits issued subject to ISP98, rule 3.05(a) provides that a presentation is timely if made at any time after issuance and before expiry on the expiration date. Rule 3.03(c) provides that if the issuer cannot determine from the face of a document received that it should be processed under a credit or cannot identify the credit to which it relates, presentation is deemed to have been made on the date of identification. 10

Article 44(a). In relation to standby credits issued subject to ISP98, see rule 3.13, which is to similar effect, and rule 3.14, which provides for what happens if the place for presentation is closed on the last business day for presentation. 11 Article 44(c). The statement need not be signed—see Howard N Bennett, “Stern doctrine and commercial common sense in the law of documentary credits” [1999] LMCLQ 507 at 508. The standard form of transmittal letter sent by a confirming bank to the issuing bank may expressly represent that the documents were received before expiry of the credit—see Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 Lloyd’s Rep 218 at 223. 12 Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 (Mance J). If the buyer suffers loss and the bank which fails to provide the statement is an intermediary bank to which the documents are presented, article 18 (a) of the UCP will prevent the issuing bank from being liable to the buyer.

The duty of the parties upon presentation of documents under a credit

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The time that the bank has to examine the documents 6–05 Once documents have been presented to the nominated bank it must examine them in order to determine whether they comply with the terms of the credit.17 The nominated bank must do this, decide whether it will take up or refuse the documents and inform the beneficiary accordingly within “a reasonable time, not to exceed seven banking days following receipt of the documents”.18 The issuing bank is under the same obligation when it receives the documents from the nominated bank.19 Once a bank to which the documents are presented or to which they have been passed has come to a decision to refuse the documents the bank must inform the beneficiary or the bank from which it received the documents “without delay”.20 6–06 The time that it takes to examine documents depends upon the complexity of the documents21 and whether the internal practice of the bank requires more than one person to perform the check. In a straightforward case a check on documents can take less than half an hour22 and customers will expect banks to respond accordingly.23 In other cases the number of documents stipulated may mean that a period of hours is required for the check to be carried out. Where substantial sums are involved a bank may require documents to be checked by 2 or 3 checkers.24 The time taken to determine whether to take up or refuse the documents may depend on 13

In Offshore International SA v Banco Central SA [1976] 2 Lloyd’s Rep 402 (discussed at paragraph 10–43 below), the credit was issued by way of guarantee of the performance of a construction contract and provided for automatic extension in the event of a reference to arbitration. Ackner J held that there had been no extension because an arbitration had not been commenced prior to the expiry date stipulated in the credit. As to “extend or pay” demands under standby credits, see ISP98, rule 3.09. 14 Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250. 15 See Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 37. In relation to standby credits issued subject to ISP98, rule 3.04 provides for presentation at the place and the location within that place stipulated and for where presentation must be made if a place or a location within a place is not stipulated. 16 Article 45. Under ISP98, a presentation made after close of business is deemed to have been made on the next business day—see rule 3.05(b). 17

Rule 3.02 of ISP98 provides that a bank must examine any document presented when received even if not all the required documents have been presented. 18 Article 13(b). Where a bank is open for a half day on a Saturday for dealing with letter of credit business that day counts as one of the 7 banking days—see Opinions of the ICC Banking Commission R325. 19 Article 13(b). 20 Article 14(d)(i) (set out in paragraph 6–13 below). 21 See Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 4L 22 Evidence was given in Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [1998] 1 Lloyd’s Rep 684 at 698, affirmed [2000] 1 Lloyd’s Rep 218 and [2001] 1 QB 167, that the checking target for one of Standard Chartered Bank’s document checkers was 20 sets per day. 23

In Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 evidence was given that the London clearing banks impose a limitation of 3 days within which to send a rejection telex and that in the case of export credits the market expects the payment or a


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reason for non-payment within 48 hours. Extra time was added for import credits to allow for consultation with the buyer. For banks involved in wholesale as opposed to retail banking the market expectation of the time taken to whether the bank requires the decision to reject documents, which is a serious step, to be taken by an employee with greater authority than the checker.25 The fact that the documents are being considered by the staff of a large bank at a busy financial centre may also be taken into account.26 Where necessary, the bank may consult a translator, if a document is in a language with which the bank’s staff are not conversant, or an expert, where the technical nature of a document requires an explanation, and the need to do these things must be taken into account in deciding what constitutes a reasonable time for examining the documents and determining whether or not to take up or refuse them.27 6–07 It is common practice for an issuing bank, finding inconsistency or irregularity in documents presented or where uncertain whether there is proper compliance with the conditions of the credit, to refer to its customer in the hope that the fault may not be such as to result in rejection.28 This practice is now expressly permitted by article 14(c) of the UCP. In Bankers Trust Co v State Bank of India,30 decided on the basis of the 1983 revision of the UCP which did not contain an equivalent to article 14(c), the Court of Appeal had to resolve whether the time taken to determine whether to take up or refuse documents could include time taken in consulting the buyer about the documents. By a majority the Court held that the bank could consult the buyer for the limited purpose of enquiring of the buyer whether he wished the bank to reject the documents in reliance on the discrepancies that the bank had found.31 The Court made it clear, however, that the period of time permitted did not contemplate a period of time for the buyer to go through the documents to see if it could find further discrepancies. Article 14(c) now makes it clear that consultation by the bank with the buyer does not extend the period that the bank has for examining the documents and determining whether or not to take up or refuse them.32 examine documents and make a determination is considerably less than 48 hours and in straightforward cases “same day” turnaround will be required. See also Banco General SA v Citibank International 97 F 3d 480 (11th Cir. 1996) and Rhode Island Hospital Trust National Bank v Euston General Contractors Inc 674 A. 2d 1227 (R.I. 1996). It is the understanding in some parts of the banking community that a bank cannot be precluded from rejecting documents if it gives notice of rejection within 3 days. This is reflected in rule 5.01 (a)(i) of ISP98 and the US Uniform Commercial Code, section 5–112 (which only applies if the law of a state within the US governs the credit and if the credit is not issued subject to the UCP). 24 In Standard Chartered Bank v Pakistan National Shipping Corporation, 3 checkers were required to check a presentation where the sum to be paid was US$1.15 million. 25

See Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 at 450 and Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513 at 530–1 (Hirst J). 26 Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 at 455. 27 Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 at 454–5. 28 A waiver by the customer in relation to discrepancies brought to his attention by the issuing bank does not constitute waiver of materially different discrepancies not brought to his attention—see Oei v Citibank (Kools) 96 Civ. 3737 (S.D.N.Y. 1997).


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29

If the buyer waives the discrepancy the issuing bank does not have to do so and may persist in its rejection of the documents—see Opinions of the Banking Commission R327, R333. This is stated expressly in respect of standby credits issued subject to ISP98—see rule 5.06(c)(iii). 30 [1991] 2 Lloyd’s Rep 443. 31 Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443 at 445 and 457. The Court had evidence that discrepancies were found in nearly half of all presentations, that in the case of import credits banks commonly consulted buyers as to whether the discrepancies should be waived (although they did not usually submit the documentation to the buyer for inspection) and that in 90% of cases the bank was instructed by the buyer to accept the documents. 32 For a US case where consultation exceeded proper limits, see E&H Partners v Broadway National Bank 96 Civ. 7098 (RLC) (S.D.N.Y. 1998).

6–08 While the bank may consult the buyer, it is the bank which has to make the decision whether to reject. Where the bank passes the documents onto the buyer and upon receiving its comments passes those comments back to the beneficiary or confirming bank (as the case may be) it is likely in the process to take more than a reasonable time.33 The bank’s obligations if the documents comply 6–09 If the documents presented comply with the terms of the credit the bank to whom they are presented must act in accordance with the terms of the payment obligation that it has undertaken.34 Such act must be carried out in accordance with the authority provided by the issuing bank and, if it is, the issuing bank is under an obligation (i) to reimburse the nominated bank which has paid, incurred a deferred payment undertaking, accepted drafts, or negotiated and (ii) to take up the documents.35 Upon taking up the documents, if satisfied that they are compliant, the issuing bank will pass them to the buyer in accordance with the terms of the agreement between them. 6–10 If a bank does not make payment to the beneficiary in accordance with the terms of the credit, the beneficiary is entitled to damages.36 The bank’s obligations if the documents do not comply 6–11 Article 14(b) of the UCP provides that if the documents appear on their face not to be in compliance with the terms and conditions of the credit, the banks involved in the transaction may refuse to take up the documents. Although the word “may” is permissive, as a bank taking up documents that are not compliant will not be entitled to reimbursement, such bank will usually refuse to take up the documents where there are discrepancies in the documents. In the case of the issuing bank, it will usually first seek its customer’s instructions as to whether to waive the discrepancies.37 If the bank does not notice discrepancies which exist in the documents, it is precluded from afterwards complaining that the documents are not in compliance with the terms and conditions of the credit.38 It is not entitled to reimbursement and must pay the beneficiary or reimburse the confirming bank as the case may be. If the buyer


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will not waive the discrepancies the bank must then sell the documents (or the goods that they represent) in order to recoup itself.39 6–12 Upon being notified that the documents are not compliant, the beneficiary may either seek to remedy the deficiency by presenting a fresh document which is not discrepant,40 or if he is unable to do this because either there is not time or he is unable to comply with the terms of the credit, he may ask the confirming bank to seek a waiver from the issuing bank in relation to the discrepancy.41 Whether or not the waiver is forthcoming will depend upon what instructions the buyer gives. It is common for beneficiaries not to be able to present compliant documents and in most cases the buyer will agree to waive the discrepancies.42 6–13 If a bank refuses the documents it must give notice to that effect to the person from whom the documents are received. Article 14 of the UCP43 provides as follows: (d) (i) If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but not later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him. 33

Bayerische Vereinsbank Aktiengessellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 69 (Mance J). 34 See paragraphs 4–91 to 4–113 above for a discussion of the obligations of the paying bank. 35 Article 14(a) (see paragraph 4–66 above). 36 See paragraphs 9–06 to 9–21 below. 37 See article 14(c) (see paragraph 6–07 above). As to the right of a bank issuing a standby credit subject to ISP98 to waive certain discrepancies without reference to the applicant, see rule 3.11. 38 Article 14(e) (set out in paragraph 6–13 below). 39 No provision is made in the UCP for the buyer to be precluded from relying on discrepancies unless he brings them to the attention of the issuing bank within a set period of time. If there is delay, the buyer may still reject unless the issuing bank can establish that the buyer has ratified the bank’s waiver of the discrepancies or unless the issuing bank can establish an estoppel. As to ratification, see paragraphs 6–24 to 6–25 below. See also Oei v Citibank (Kools) 96 Civ. 3737 (S.D.N.Y. 1997). 40 This is expressly provided for in ISP98—see rule 3.07(a). 41 As to waiver under ISP98, see rules 5.05 and 5.06. For discrepancies that can be waived without the applicant’s authority, see rule 3.11. 42 For the position where the buyer ratifies the issuing bank’s acceptance of the documents, see paragraphs 6–24 to 6–25 below. 43 For provisions to similar but not identical effect in relation to standby credits issued subject to ISP98, see rules 5.01 to 5.04 and 5.07. Note that rule 5.01 (a) (i) provides that notice that the documents are discrepant given within 3 business days of presentation is deemed to be not unreasonable. Cf paragraphs 6–05 to 6–06 above and paragraph 6–17 below.


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Compare also Hellenic Republic v Standard Chartered Bank (1997) N.Y. App.Div. Lexis 11716 (3 banking days to reject documents submitted under a standby credit not subject to ISP98 held to be too long). Rule 5.08 provides that the issuer can rely upon statements or representations made during the process of presentation, although a statement of a nominated person that documents are discrepant does not relieve the issuer of the obligation to examine them. Rule 5.09 provides that an applicant must object to an issuer’s honour of non-complying documents promptly and failure to do so precludes assertion of any discrepancy in the presentation received by the applicant against the issuer. These provisions have no counterpart in the UCP—see footnote 39 above.

(ii) Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter. (iii) The Issuing and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank. (e) If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit. 6–14 In the light of article 14(e) it is essential that banks comply fully with the requirements of article 14(d). A confirming bank that does not do so in relation to the beneficiary has no right to reimbursement from the issuing bank and an issuing bank that does not do so in relation to the confirming bank (or the beneficiary if there is no confirming bank) has no right to reimbursement from the buyer. Such banks must then seek a waiver from the buyer and if the buyer refuses to waive the discrepancies must recoup themselves from a sale of the documents or the goods that the documents represent. 6–15 Articles 14(d) and 14(e) specify requirements in relation to (i) notification of refusal of the documents and (ii) what is to be done with the documents. 6–16 The requirements in relation to notification concern the timing of the notification, the means of notification, the person to whom the notice must be given and the contents of the notice. 44

Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 39. The decision related to article 16(d) of the 1983 Revision, which was in slightly different terms. The decision contains discussion of whether the bank is bound to give notice by telecommunication where to do so would be futile. The Court of Appeal found it unnecessary to decide the point. 45 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 41 and Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 279. See also Bankers Trust Co v State Bank of India [1991] 1 Lloyd’s 587 at 601 (Hirst J), affirmed [1991] 2 Lloyd’s Rep 443. As to article 13(b), see paragraphs 6–05 to 6–06 above.


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6–17 So far as time is concerned, the bank must act without delay, whatever means of notification is used.44 The obligation is separate from and additional to the bank’s obligation under article 13(b) to inform the beneficiary (or other bank) within a reasonable time.45 Thus the issue is whether the bank has acted “without delay” after it has decided to refuse the documents, not whether the total time that the bank has taken to examine the documents, make a decision and give notification is “reasonable”. Whether the bank has acted without delay is a question of fact, but it may be difficult to justify a delay to the next following business day unless the decision to refuse the documents is taken at or shortly before the close of business, in which case notification on the next banking day would be expected.46 There is an overall time limit for giving notice of the seventh banking day following the day of receipt of the documents. 6–18 The means of giving notice must be by telecommunication where this is possible. The usual means is by telex, although increasingly this is done by encrypted email. The notice may be given orally by telephone or in person.47 Notice to a company at its office is possible even though the individual who will act on the notice is not present at the office.48 Notice by courier does not satisfy the requirement where notice by telex is possible.49 Where it is not possible to give notice by telecommunication, it must be given by other expeditious means. The fact that the notice must be given “without delay” suggests that such expeditious means should be the most expeditious means. The notice must be given to the person from whom the documents are received, so the issuing or 46

Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 42. In that case the Court of Appeal held that the beneficiary had not proved that notification on the morning of the next but one business day after the decision to refuse the documents was not too late, although this was based on the fact that the beneficiary’s delay in making the allegation of delay meant that there was no evidence as to why the delay had occurred. See also Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513 at 530–1, which shows the importance of identifying the time when the decision to reject is taken. In that case Hirst J held that the decision was taken when the supervisor of the document checker authorised the sending of the rejection letter. 47 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 39, where it was held that there was an implied requirement that notice can be given in person where a senior official of the beneficiary or the remitting bank as the case may be, under whose aegis the documents were presented, is present at the bank to receive notice. The Court of Appeal did not say whether the bank must give notice in that way in those circumstances. However in Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513 at 531, Hirst J stated that, having regard to the importance of the rejection of documents and the need to identify the discrepancies, a bank might justifiably consider that a rejection notice should normally be sent in writing by telex. 48 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 39. 49 Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 70. In that case a copy of a letter from the beneficiary to the confirming bank was sent by the confirming bank to the issuing bank. Mance J expressed doubt as to whether such a letter could constitute a sufficient refusal on the part of the confirming bank.

confirming bank (or other nominated bank) to whom the beneficiary presents documents must give notice to the beneficiary and the issuing bank to which the


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confirming bank or other nominated bank remits documents must give notice to that remitting bank. 6–19 The notification must state (a) all discrepancies in respect of which the bank refuses the documents and (b) whether the bank is holding the documents at the disposal of the presenter or is returning them to the beneficiary. The effect of requirement (a) is that where the bank does not specify a particular discrepancy it is precluded thereafter from relying upon it.50 It is, however, no answer to a bank’s refusal to take up documents by reason of an irregularity that the bank had in the past paid in spite of a similar irregularity. In Cape Asbestos Co v Lloyds Bank Ltd51Bailhache J said that the case of Panoutsos v Raymond 50 Floating Dock Ltd v The Hongkong and Shanghai Banking Corporation [1986] 1 Lloyd’s Rep 65 at 80 (Evans J). See also Bankers Trust Co v State Bank of India [1991] 1 Lloyd’s Rep 587 at 601 (Hirst J), affirmed [1991] 2 Lloyd’s Rep 443, in which it was held that an inadequate telex which does not specify discrepancies cannot be read together with a later one, which does, and Credit Agricole Indosuez v Credit Suisse First Boston [2001] Lloyd’s Rep Bank 208 at 221. For the position in the US, see Toyota Tsusho Corp v Comerica Bank 929 F. Supp. 1065 (E.D.Mich. 1996). See also Hamilton Bank NA v Kookmin Bank 98 Civ. 2162 (LAK) (S.D.N.Y.1999), where the issuing bank rejected documents remitted by the negotiating bank without specifying any discrepancy. The documents were remitted a second time 4 days later and again rejected. On this occasion the discrepancy was identified. Kaplan J held that the issuing bank was precluded from relying on the discrepancy because it was not mentioned on the first occasion and, when it was mentioned on the second occasion, more than 7 banking days had elapsed since the first remission of the documents. See also Opinions of the ICC Banking Commission R328. In Todi Exports vAmrav Sportswear Inc 95 Civ. 6701 (BCJ) (S.D.N.Y. 1997) it was held that failure to state expiry of the credit as a reason for rejection did not preclude subsequent reliance on it. This is consistent with rule 5.04 of ISP98, which states: “Failure to give notice that a presentation was made after the expiration date does not preclude dishonour for that reason.” The position under article 14(d) and (e) of the UCP is different from the position at common law. In Skandinaviska Aktiebolaget v Barclays Bank Ltd (1925) 22 Ll.L.R. 523 at 525 Greer, J said: “It is suggested in the correspondence by the plaintiff bank that they have a grievance because the defendant bank did not in the first instance raise the objections that are now raised to the documents, but referred the matter to their customer in Hull and simply sent forward the customer’s complaints, which were not in the first instance based upon the documents, but which were based on some untenable contention which he put forward; and it is suggested that by that means the defendants had either by estoppel or waiver, by some rule of law applicable in this country, deprived themselves of the right that they would otherwise have had of resisting the claim. I am clearly of opinion that they have not done so. They were in an intermediate position. They had the usual feelings of banking courtesy towards the foreign bank with whom they had had dealings for a long time, and they desired, and the intention was, to see whether, notwithstanding those objections which were being raised by the customer, the transaction could not be carried through as it ought to have been. I do not think that by doing that and by leaving unstated until the later stage the valid objections—valid in law—to the documents which had been taken by the plaintiff bank, English law can deprive them of any right whatsoever.” The position would have been different if “the circumstances are such as to create a factual or promissory representation with regard to any or all of the objections now raised and if so whether the plaintiffs acted upon such representation so as to preclude the defendants from now raising such matters”—see Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 79. The position was summed up in the previous edition of this work in the following terms: “Unless the bank has misrepresented the matter to the beneficiary who has acted on it on the reasonable assumption that there was no further objection, only to find that other irregularities are alleged against him, the bank is justified in raising the further objections.”


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Hadley Corporation52 was no authority for the proposition that where an act had to be done periodically the fact that it had been done irregularly in the past justified the assumption that the irregularity would be waived in the future. 6–20 As to (b), the bank must state that it is holding the documents at the disposal of the presenter or is returning them to the beneficiary and act accordingly by placing the documents at the disposal of the presenter. If it does not do so, it will be precluded from claiming that the documents are not in compliance with the credit.53 The purpose of this is to ensure that the documents are put back into circulation and the bank is not entitled to retain the documents as security for repayment of any sum that it has advanced to the beneficiary.54 6–21 It is possible to envisage a situation where the issuing bank cannot return all the documents through no fault of its own. For instance, a foreign bank instructs its London correspondent to open its irrevocable credit in favour of a British exporter. The instructions require that two of three bills of lading should be presented with the other documents to the issuing bank and the third sent to a third party; payment is made under the indemnity of the intermediary bank but the issuing bank refuses the documents. The issuing bank will return the documents it received, including the two bills of lading, but it may not be able to see that the third is returned. Is the issuing bank deemed to have accepted the documents? The bank would probably do its best to obtain the return of the third bill of lading, but if it did not succeed the fault would not lie with it and the risk would probably be the beneficiary’s under the terms of its indemnity agreement with the intermediary bank,55 although in the absence of an appropriate term in the indemnity agreement the intermediary bank may bear the loss for having paid against irregular documents. Article 18(b) might also have the effect of relieving the issuing bank, since its liability would result from the intermediary bank not carrying out the issuing bank’s instructions. 51

[1921] W.N. 274 at 275 (2). See also Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513 at 530 (Hirst J).52 [1917] 2 KB 473, more fully reported in 22 Com Cas 207.

53

See Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123 at 125 and 126. See also Bombay Industries Inc v Bank of New York N.Y.L.J. (13.6.97) at 25, where the New York Supreme Court held that notice that discrepancies had been found does not of itself constitute notice that the bank is not accepting the presentation. As to the difficulties that can ensue where a nominated bank, having found discrepancies, forwards them to the issuing bank on “a collection basis”, see Glencore Ltd v Chase Manhattan Bank NA 92 Civ. 6214 (JFK) (S.D.N.Y. 1998) and Rudolf Robinson Steel Co v Nissho Iwai Hong Kong Corp Ltd [1998] 2 HKC 462. 54 Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443. In that case the bank’s telex stated: “Documents held at your risk and will be at your disposal after payment to us.” The Court of Appeal held that in so stating and in holding the documents as security, the bank did not comply with article 14(d) and 14(e). Cf Co-operative Centrale Raiffeisen-Boerenleenbank SA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250, where the Court of Appeal held that the bank’s rejection telex which stated “Please consider these documents at your disposal until we receive our Principal’s instructions concerning the discrepancies…” as placing the documents at the unconditional disposal of the beneficiary. 55 As to which, see paragraphs 6–26 to 6–39 below.


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6–22 A bank may also be placed in difficulty if its notification that it is holding the documents to the order of the beneficiary produces no response and the cargo is perishable or otherwise liable to deterioration. Article 14(e) would seem to permit of no variation which circumstances might otherwise justify, but if notification brings no positive response and the cargo is liable to deterioration the issuing bank may find itself in a difficult position.56 Rigidly construed Article 14(e) gives no licence to an issuing bank to do more than return the documents or to hold them at the disposal of the bank from which they were received. It is essential that the intermediary bank should know as early as possible of the irregularity and of the issuing bank’s refusal to pay, but then it should be required to decide immediately or within a short space of time what it and its customer, the beneficiary of the credit, intend to do in relation to the goods. By its cable or other expeditious advice the issuing bank passes the responsibility for the next step to the intermediary bank. But if the issuing bank is left in the air 56

The position is illustrated by Bank X v United Commercial Bank B.G.E. 90 II 302 ff., a case before the Swiss Federal Court in July 1964. In that case, a sale of ethyl alcohol by an Indian seller to a Swiss buyer was financed by an irrevocable credit opened by a Swiss bank through an Indian bank, the latter being asked to advise the credit but not to confirm it. The Indian bank was authorized to reimburse itself by reference to a named London bank. The documents were to be sent by the Indian bank direct to the Swiss bank. The Indian bank paid the beneficiary in due course in spite of the fact that the documents were irregular, and instructed its London office to indemnify the London bank in respect of payment, but the latter refused to pay even against indemnity. The cargo being liable to fouling, costly to transport and store, and the carrying ship, moreover, being soon under further charter, the Swiss bank felt it essential to take delivery and store, which it did (not in Felixstowe, to which the alcohol had been consigned, but in Amsterdam) in the name of the Indian bank. The Indian bank maintained that by its action the Swiss bank had taken up the documents and was thus under an obligation to pay for them. The Tribunal de Commerce de Zurich held, as was the fact, that the Swiss bank had acted contrary to the Uniform Customs (1951 Revision). On appeal the Swiss Federal Court sent the case back to the Tribunal de Commerce in order that evidence might be obtained from specialists whether the action of the Swiss bank constituted an acceptance of the documents. The Tribunal de Commerce, upon hearing expert evidence from six other Swiss banks, found that there had been an infraction. The Federal Court on further appeal upheld the decision of the Tribunal de Commerce. By advising the Indian bank that it was not prepared to pay, the Swiss bank virtually informed the former that it was within article 8 and the Indian bank was under a moral duty at least, especially in view of the nature of the cargo, to tell the Swiss bank what it wanted done with the documents or cargo. In other words, the virtual certainty, considering the nature of the cargo, that the seller would have been put to great expense and loss if the documents had been returned to India, coupled with the Indian bank’s failure to instruct the issuing bank, placed the latter in a position which demanded the action it took to protect the beneficiary’s interest. It appears that the Swiss bank pleaded the Swiss equivalent of agency of necessity (which in English law has a limited application—see Sachs v Miklos [1948] 2 KB 23 at 35 and Bowstead on Agency, 16th ed, para 4–001 and following), but this was rejected by the Court on the ground that the UCP which applied were quite clear, as indeed in that respect they were and are. It is natural that technical experts would say precisely what they said before the Tribunal de Commerce. They should not have been asked because in effect they were asked to construe the UCP, which was a matter for the Court and not for banking witnesses.


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and, because of the nature of the goods, takes action in the best interests of the seller, it is not reasonable that it should be held to have accepted the documents and to be liable to pay for them accordingly. From the point of view of promoting rather than hindering international commercial transactions, article 14(e) leaves something to be desired since it prevents the issuing bank from acting in the interests of the beneficiary (and of international commerce) by disposing of the goods. Nevertheless the only legally prudent course for the bank to take if the goods are perishable is, while seeking authority to dispose of the goods as best it can, to act in accordance with article 14(e), or it may be held to have taken up the documents. What it does will be in order if it complies with and goes no further than the requirements of article 14(e). 6–23 Where the issuing bank returns documents to the paying bank, it naturally does not pay, and if it has been debited in account it can insist on being re-credited provided that it has complied with the requirement set out above.57 If, despite the fact that the documents are non-conforming, the bank accepts the documents, the question arises as to the date when the issuing bank ought to reimburse the confirming bank. In most cases the reimbursement will take place according to the terms of the credit. If, however, the issuing bank has delayed and reimbursement is due under the credit upon acceptance of the documents, the question arises as to whether the confirming bank is entitled to payment on the date when the issuing bank ought to have accepted or rejected the documents.58 This is probably so, because once a reasonable time for examination of the documents has expired the issuing bank is precluded from rejecting the documents and is accordingly deemed to accept them on the expiry of that reasonable time. 6–24 If an issuing bank does not comply with the requirements of article 14(d)(e) and does not obtain a waiver from the buyer, it may still be entitled to reimbursement if the buyer ratifies its acts. There is nothing to prevent a buyer from ratifying the action of the issuing bank in paying notwithstanding irregularities in the documents. In fact ratification happens more often than not, by the ultimate acceptance of the documents. Moreover ratification can also be inadvertent—the intention which is necessary for ratification being implied from the action of the buyer. In Westminster Bank Ltd v Banca Nazionale di Credito,59 Roche J said:60 If parties keep documents which are sent them…in consequence of some mandate which they themselves have issued, and keep them for an unreasonable time, that may amount to a ratification of what has been done as being done within their mandate. 57

Article 14(d)(iii). This point was left open in Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250. 59 (1928) 31 Ll.L.R. 306. 60 (1928) 31 L1.L.R. 306 at 312. 58


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In Bank Melli Iran v Barclays Bank (Dominion, Colonial and Overseas)61 McNair J said: It is, I think, clear on authority (1) that it is immaterial whether the act relied upon as ratification was done to the person seeking to avail himself of it or to another; (2) that ratification for a time operates as ratification altogether (see per Lord Blackburn in M’Kenzie v British Linen Bank (1878) 6 App.Cas. 82, at pp 99 and 100) and (3) that a party cannot affirm in part and disaffirm in part (see per Lord Justice Chitty in Republic of Peru v Peruvian Guano Co (1887) 36 Ch. D. 489 at p 499). There was considerable debate before me as to whether or not mere inaction or silence can amount to ratification. In my judgment, it is plain that mere inaction or silence may be evidence from which a jury might infer an intention to ratify: see the direction of Chief Justice Abbott in Prince v Clark (1823) 1 B. & C. 186. I am unable to accept the submission made on behalf of Bank Melli that this decision is in any way inconsistent with the speeches delivered in M’Kenzie v British Linen Bank. 6–25 It follows that in appropriate circumstances the failure by the buyer to raise objection to the documents when he becomes aware of their contents may give rise to ratification of the payment of the issuing bank with the consequence that the buyer is liable to reimburse the issuing bank. Payment “under reserve” 6–26 Payment under reserve or against an indemnity is sometimes62 agreed by a bank to whom documents are tendered under an irrevocable credit as a means of overcoming a beneficiary’s failure to present documents strictly conforming with the credit, usually resorted to when both parties are known to and trust each other. This gives the bank the chance of seeing if the buyer will accept the 61

[1951] 2 Lloyd’s Rep 367. This case involved ratification as between the issuing bank and the confirming bank, an analysis that would now be performed by reference to articles 13(b) and 14(d)(e) of the UCP—see paragraphs 6–05 to 6–06 and 6–13 to 6–23 above. 62 Save where it has agreed to do so the bank is under no obligation to pay under reserve or against an indemnity, although a United States court has held that a bank must accept an indemnity for a missing bill of lading where there was a general and uniform custom among New York banks, exporters and importers that, in lieu of a missing bill of lading presented under credits calling for a full set, banks issuing credits would accept an indemnity satisfactory in form, if satisfied as to the responsibility of the bank giving it—see Dixon, Irmaos & Cia Ltda v Chase National Bank of the City of New York 144 F.2d 759 (1944) cert, denied 324 U.S. 850, 65 Sup. Ct. 687, in which the court held that the custom was incorporated into the credits by implication. This decision should not be stretched further than it goes, and it refers only to missing bills of lading. Banks in the United Kingdom might accept an indemnity in respect of a missing bill of lading, but they reserve their right to refuse. If, however, a course of business has been set up the bank could only decline to accept an indemnity after giving reasonable notice to determine the arrangement.


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documents and thus complete the sales transaction. Such payment usually is made only where discrepancies appear not seriously to affect the transaction and the bank has reason to think that the buyer will accept the documents. 6–27 Payment under reserve or against indemnity should permit of no doubt if the agreement to make the payment is in writing and contains the terms agreed between the parties; the payment is the consideration for this extra-credit contract between the presenter and the presentee. If, however, payment is made under reserve pursuant to an agreement not made in writing, there is room for dispute as to what the parties meant. In such circumstances the paying bank must assert that it has made the payment notwithstanding its right and duty to reject the documents, but that it is willing to see if the buyer will accept the documents in spite of the alleged irregularities and that if not, the party accepting payment under reserve will promptly repay, with interest. 6–28 It is obvious that such a contract is better reduced to writing, although the Court of Appeal has now held in Banque de l’Indochine et de Suez SA v J.H. Rayner (Mincing Lane) Ltd63 that an oral agreement to pay “under reserve” has the meaning suggested above. The case concerned a presentation by the defendant to the bank of documents alleged by the bank to be irregular and in which payment was made under reserve pursuant to a telephone conversation between the parties. Parker J, at first instance, said:64 In the absence of any established custom the question I have to determine is what is the meaning of the expression “in the light of surrounding circumstances” or, as it is now called, “the factual matrix”. The circumstances in which such payments, and in particular the present payment, are made are (i) that the remitting bank genuinely believes that there are one or more discrepancies justifying non-payment; (ii) that the beneficiary believes that the bank is wrong and that he is entitled to payment; and (iii) that both parties hope that, notwithstanding the alleged irregularities, the issuing bank will take up the documents and reimburse the remitting bank. The question which arises appears to me to be “did the parties, in such circumstances, by paying and accepting under reserve intend that the bank should be entitled to repayment notwithstanding that it was in law obliged to pay when it did? Or was it merely intended that the position of the bank should be protected to the extent that the customer should not thereafter be entitled to resist a demand for repayment on the ground that the payment was unqualified and that he was therefore entitled to retain the payment even if one or more of the irregularities was in law valid?” The first of these two possibilities appears to me to import into the expression “under reserve” more than the words can fairly bear. It would 63 64

[1983] QB 711. [1983] QB 711 at 716.


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do more than reserve something. It would create a right, albeit perhaps temporary, to have money repaid notwithstanding that at the time of original payment that money was contractually payable. A more natural and, as I think, commercially sensible meaning to give to the words is that the bank reserves the right to have the money back if it was not at the date of payment contractually payable. However, the Court of Appeal thought otherwise.65 Counsel for the plaintiffs characterised Parker J’s view as “a lawyer’s view”, as contrasted with a “commercial view”. This the Master of the Rolls thought right.66 Kerr, LJ said:67 What the parties meant, I think, was that payment was to be made under reserve in the sense that the beneficiary would be bound to repay the money on demand if the issuing bank should reject the documents, whether on its own initiative or on the buyer’s instructions. 6–29 Article 14(f) of the UCP makes it clear that a contract between a bank and the beneficiary to pay under reserve or against an indemnity does not alter the obligations of banks under the credit transaction except for those of the bank which has agreed to pay under reserve or against indemnity. Article 14(f) provides: If the remitting bank draws the attention of the Issuing Bank and/or Confirming Bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated under reserve or against an indemnity in respect of such discrepancy(ies), the Issuing Bank and/or Confirming Bank, if any, shall not be thereby relieved from any of their obligations under any provision of this Article. Such reserve or indemnity concerns only relations between the remitting bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained. 65

Sir John Donaldson MR noted that the use of the expression “payment under reserve” was “widespread and would undoubtedly serve a very useful purpose if it had a defined and generally accepted meaning. Unfortunately it seems that it has not. If this is correct, banks would be most unwise to use it without at the same time stating precisely what they mean by it”: [1983] QB 711 at 727. Cf United Commercial Bank v Bank of India [1981] AIR 1426, in which it was said that “A payment ‘under reserve’ is understood in banking transactions to mean that the recipient of money may not deem it as his own but must be prepared to return it on demand. The balance of convenience clearly lies in allowing the normal banking transaction to go forward.” 66 [1983] QB 711 at 727. 67 [1983] QB 711 at 734.


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6–30 A number of matters follow from this. The first is that the bank making the agreement to pay under reserve or against indemnity is not expressly required to make that fact known to the issuing bank (or confirming bank) and the article proceeds on the basis that the paying bank has a choice whether to make the agreement known or not.68 Moreover, if the issuing bank ultimately rejects the documents because the buyer refuses them, that bank must deal with the documents in accordance with article 14 of the UCP. Thus the fact that the issuing bank knows that a payment under reserve has been made does not extend the period that it would otherwise have had for examining the documents and deciding to reject them; nor does it relieve the issuing bank of its obligation to return the documents or hold them to the order of the paying bank.69 The further question that arises is whether the bank which has paid against an indemnity is relieved of any of its 68

The previous edition of this work argued that there was a duty to inform the issuing bank that payment had been made against defective documents, but the UCP does not provide for such a duty. The argument that a duty exists arises because the paying bank has acted outside its mandate—see Westminster Bank Ltd v Banca Nazionale di Credito (1928) 31 Ll.L. R. 306 at 310, 312. Where a bank pays under reserve or against an indemnity it will usually be acting outside its mandate and the consequence of this is that it will not recover reimbursement from the issuing bank (or the buyer). The point will only therefore be of significance if the issuing bank or buyer can say that it would not have accepted the documents if it had been told of the agreement between the paying bank and the beneficiary. Since the issuing bank and the buyer each has an opportunity to examine the documents before accepting them and thus will have actual or constructive notice of discrepancies, it is unlikely that it will be able to satisfy the court that it would not have accepted the documents if it had been told of the agreement between the paying bank and the beneficiary. 69 The buyer has no right to inspect before deciding whether to reject the documents. Unless he has the seller’s consent to wait until they arrive he cannot take advantage of a technical irregularity— whether it has any connection with the goods or not—to delay dealing with the documents until, by reference to the goods, he can decide whether he will accept them. The issuing bank must not do anything to prejudice the position of the seller, as by releasing documents to the buyer without payment in order that the latter may take delivery and inspect the goods. 70 In Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250, a point as to whether article 8 of the 1974 Revision of the UCP (now article 14) “applies, mutatis mutandis, between remitting or confirming bank on the one hand and the beneficiary on the other” was left open by the Court of Appeal. Since article 9 of the UCP provides for the issuing and confirming bank to have a “definite undertaking” to the beneficiary if the stipulated documents are presented and article 14 places obligations on the issuing and confirming banks as to what they should do upon receipt of such documents, it is difficult to see why the banks’ obligations to pay the beneficiary should not be subject to article 14. If article 14 does not apply as between paying bank and beneficiary, there arises the possibility that the paying bank owes different obligations to the issuing bank and the beneficiary, which would be undesirable, as to which see Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1987] 1 Lloyd’s Rep 345 at 352 (Gatehouse J). Cf the duty under article 13(a), which does not appear to be owed to the beneficiary—see paragraph 4–07 (footnote 13) above. 71 Cf Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250 at 254.


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obligations to the beneficiary under article 14 of the UCP.70 Unless it has been expressly or impliedly relieved of that responsibility by the agreement as to payment under reserve, the paying bank must comply with those requirements.71 Otherwise by virtue of article 14(e) it may find itself fixed with having taken up the documents and able to look neither to its customer nor necessarily to the seller. 6–31 Payment under reserve or indemnity is commonplace probably because it usually settles the problem and permits the sales contract to be completed. An indemnity, which is generally in writing, usually covers only the specific loss deriving from the cause of action in respect of which it is given. For instance, an indemnity in respect of payment against “stale” bills of lading72 may be no protection against loss resulting from some other cause, and perhaps not against loss from some source which is a natural though incidental consequence of payment against “stale” bills. The bank which pays under indemnity against irregular documents may find itself left with documents in respect of goods depreciating in value and, unless the indemnity is drawn specifically to cover the refusal by the buyer to take up the documents, may have to look solely to the goods and, in addition, find that the insurance does not extend to the particular risk it has run in paying.73 Too often counter-indemnities may similarly be found wanting. 6–32 In Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd,74 the beneficiary issued a telex stating: “…we assume full responsibility for discrepancies…so please effect payment as requested”. The confirming bank made payment, but the documents were rejected by the issuing bank. The confirming bank claimed repayment, but before this was made the beneficiary tendered a fresh document and asked the confirming bank to present this to the issuing bank despite the fact that the credit had expired. The issuing bank, acting 72

As to “stale” bills of lading, see paragraphs 7–61 to 7–62 below. See a report in February 1950 in the Journal of the Institute of Bankers in South Africa. A Canadian importer bought from South African suppliers under a contract to be financed by irrevocable credit calling for the goods to be shipped in one shipment from a specified South African port to a specified Canadian port. The sellers shipped on an American ship under a bill of lading expressing as ‘Port of Discharge…[the specified Canadian port] via New York’, and stating that transhipment was at the ship’s expense but at the shipper’s risk. There were two breaches of the credit contract, part shipment and transhipment, which breaches the sellers met by an indemnity to the South African negotiating bank in the following terms: “In consideration of your negotiating our draft under the above letter of credit, we hereby hold you harmless and indemnified against any consequences which may arise from or any loss sustained by the bank in the event of the draft being dishonoured by reason of irregularities of any nature whatsoever or any departure from the terms of the respective credit” and the negotiating bank indemnified the issuing bank. The goods were discharged at New York and sent by rail to their Canadian destination, which meant that they attracted customs duty at a higher rate than would have been applicable if they had not reached Canada from the United States. The South African bank was called upon to meet the additional cost incurred by the Canadian importers, but found that on the wording of the indemnity received by it from the sellers there was no claim against them, their liability having been limited to loss arising from a dishonour of the draft. 74 [1988] 2 Lloyd’s Rep 250. See also Moralice (London) Ltd v E.D.&F. Man [1954] 2 Lloyd’s Rep 526, which involved an indemnity of a supplier to the beneficiary and of the beneficiary to the bank, and where McNair J held in relation to the former indemnity that the fact that the beneficiary was willing to pay the suppliers although the beneficiary was under the honest but mistaken belief 73


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that he would be justified in refusing to pay in respect of a short shipment was ample consideration for the suppliers’ indemnity in respect of payment notwithstanding the short shipment.

on the instructions of the buyer, agreed to accept the documents presented but only after considerable delay. The confirming bank was then reimbursed by the issuing bank. The confirming bank sought to set off interest charges from the date of its payment to the beneficiary until the date of reimbursement from a further payment due to the beneficiary. The Court of Appeal held that the terms of the beneficiary’s assumption of responsibility covered interest resulting from the issuing bank’s rejection of the documents, but not interest charged in respect of the period after the complete set of documents had been accepted by the issuing bank. The confirming bank bore the consequences of the delay in reimbursement after that date. 6–33 An indemnity is normally tendered by the beneficiary of a credit to the intermediary bank in the hope that the irregularity in the documents may not result in the buyer refusing to accept them—this, presumably, in circumstances in which the irregularity cannot be rectified easily or in time. Neither the issuing bank nor the buyer is in need of the benefit of indemnity cover because each has the right to reject—the issuing bank a duty to reject. Nevertheless, the existence of indemnity cover, if available to the buyer, might well dispose him to accept the document. Thus the question of availability of the indemnity to the issuing bank and the buyer is of importance. This depends upon the intention of the parties as expressed in the document. The questions which arise are: (a) whether the benefit of an indemnity given by the seller-beneficiary to the intermediary bank is available to the issuing bank and the buyer; (b) whether the indemnity carries the implied authority of the signatory—the beneficiary or, perhaps, his bank—to indemnify the issuing bank in order to obtain payment. 6–34 The proposition that an indemnity avails only for the benefit of the bank to which it is given is not universally accepted, though in the United Kingdom, at any rate, this is the correct view.75 It is not uncommonly thought by banks and traders elsewhere that the indemnity given by the beneficiary to the intermediary bank is available to the issuing bank and the buyer as well, an attitude which is not unreasonable, for unless the buyer is similarly covered, the attempt to bring the transaction to a successful conclusion may fail. Yet when he asks his bank to indemnify an intermediary bank or the issuing bank, a beneficiary has no right to believe that it will rectify his breach of contract with the buyer; he merely hopes that it will, knowing that he should not be worse off, and his hope is usually 75

The doctrine of privity of contract prevents a person not a party to a contract from enforcing the contract for his benefit—see Beswick v Beswick [1968] AC 58, Vanderpitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 at 79 and Scruttons Ltd v Midland Silicones Ltd [1962] AC 446. But see now section 1 of the Contracts (Rights of Third Parties) Act 1999, pursuant to which the issuing bank or the buyer can enforce the indemnity if (a) the contract of indemnity expressly provides that they may or (b) (unless it appears from the contract that the beneficiary and the confirming bank did not intend the term to be enforceable by them) a term of the contract of indemnity purports to confer a benefit on them. It follows from this that a suitably drafted indemnity could confer a right on the issuing bank or the buyer or both.


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justified if the irregularity is a nominal and purely technical one. It is simply a ready means of saving time and of achieving the result which would in all probability follow in any event, though with some loss of time and possibly some expense. 6–35 An indemnity is a contract, and unless there can properly be read into it that the benefit of it is intended to be available to anyone else, then the bank to whom it is given is alone able to rely on it and to enforce it76 and it cannot be made to enforce it for the benefit of anyone else. Moreover article 14(f)77 prevents the issuing bank or the buyer from taking advantage of it. The reason for this is that the issuing bank must determine whether to accept or reject the documents. Except with the express consent of the beneficiary, it cannot accept the documents subject to the indemnity and then at a later date reject them, for to do so would place it in breach of the provisions of article 14(d) and (e).78 Thus, where the buyer has sold on, he may tender irregular documents to his purchaser, but he does so at his peril, for if the purchaser declines to accept them the buyer has no recourse under indemnity and no right to return the documents unless he expressly accepted them under reserve or against an indemnity. The practical recourse of the buyer to the seller on the credit contract must be through the issuing and intermediary banks and the chain of recourse could be broken if the intermediary bank went further in indemnifying the issuing bank than the seller’s indemnity warranted. 6–36 There is the reverse question,79 whether the buyer or the issuing bank may assert a right to the benefit of a contract to which he or it is not a party, of the existence of which neither has any certain right to be informed and which is made primarily for the benefit of the beneficiary of the credit? Neither has given consideration for the contract of indemnity. The buyer has, ordinarily, no need of it, for he may decline the documents. But he may want the goods and yet be reluctant to take up the documents especially if the irregularity in them points to the possibility of the goods not being the contract goods. In such circumstances he may wish to avail himself of the indemnity until he has satisfied himself that he will accept the goods or perhaps to cover charges incurred by reason of the documents not being in order. For this purpose it may not be unreasonable for him to see the goods first (which probably depends on the nature of the irregularity). It may also even be to the seller’s 76

See footnote 75 above. See paragraph 6–29 above. 78 The previous edition of this work stated: “If the irregularity in the documents is such that the seller would doubt whether the buyer would accept the goods without seeing them, it is conceivable that he impliedly authorizes the buyer to inspect the goods and the bank to delay dealing with the documents.” Such an implication seems contrary to the final sentence of article 14(f). 79 That the question is not academic may be seen from the following facts of an actual transaction. A shipment from Australia to London was covered by an irrevocable credit opened by a London bank, a term of which was that documents were to be presented to the Australian advising bank within ten days of the date of the bill of lading, but also, of course, within the validity period of the credit. The documents were in due course presented to the issuing bank in London with an indemnity in respect of the fact that they had not been tendered in Australia within the limit of ten days from the date of the bill of lading. The buyer refused to accept the documents except on the assumption that the indemnity of the Australian bank was intended for his benefit and covered the loss which he was bound to suffer, in respect of charges—storage in bonded warehouse, insurance, porterage and cables—which were the consequence of the tender being out of time. 77


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advantage that he should. Nevertheless, the issuing bank’s obligation is to accept or refuse documents within a reasonable time80 and, if it does not determine to reject the documents without delay, give the appropriate notice to the confirming bank and return the documents (or hold them to the confirming bank’s order), it is precluded from claiming that the documents are not in compliance with the credit.81 6–37 The question whether the bank to whom the seller gives an indemnity is impliedly authorized to indemnify the issuing bank depends in some measure on the circumstances. Where, for instance, the seller intends his indemnity to cover the buyer as well as the intermediary bank, it follows that he impliedly authorizes the latter to indemnify the former, or the former’s bank—but only in similar terms. All parties interested should, therefore, visualize the possible contingencies arising from the documents not being in compliance with credits and should draw indemnities in such terms as will give effect to their intentions. If the beneficiary wishes everything done to ensure payment of his draft in spite of irregularity in the documents, this may mean the indemnification of the issuing bank by the intermediary bank and the beneficiary’s indemnity should provide the authority. Further, the indemnity to the issuing bank should be in similar terms to the one given to the intermediary bank. 6–38 The intermediary bank may find it advisable to indemnify the issuing bank whether it has the beneficiary’s consent or not. The position of an intermediary negotiating bank differs from that where it pays pursuant to a mandate from the issuing bank. When it pays or negotiates in accordance with the issuing bank’s authority it is, of course, an agent with an agent’s right of indemnity, providing that it exercises its authority in accordance with the conditions governing it; but if it acts pursuant to the indemnity of the beneficiary it must be because those conditions cannot all be met, in which case it can look only to the beneficiary if the issuing bank repudiates the documents. Where the beneficiary draws a “time” bill, documents to be delivered against acceptance, the negotiating bank’s position depends on the party, buyer or issuing bank, on which the bill is drawn. The intermediary may find that it cannot obtain the drawee’s acceptance, the documents being irregular, except where it is willing to give its own indemnity to the issuing bank or the buyer. If it is itself the drawee the intermediary bank takes the risk that it may not be able to obtain reimbursement while at the same time being liable on its acceptance. In such circumstances it can look to the goods for what that may be worth, and may succeed against the beneficiary not on the bill but on the indemnity the beneficiary has given. 6–39 For how long an indemnity in respect of missing or irregular documents remains effective, if it specifies no period of limitation, must depend on the purpose underlying the indemnity. In theory, its validity is six years from the time a cause of action arises. In practice it will be for a much shorter time, until no right of action under it can arise because of the solution of the difficulty that gave rise to it. It is customary for banks in the United Kingdom to put a limit, generally six months, to the period of validity of an indemnity. While this may seem to be effective in practice, in the sense that the 80 81

As to which, see paragraphs 6–05 to 6–08 above. As to which, see paragraphs 6–11 to 6–22 above.


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irregularities for which it is given would ordinarily be disposed of within that period, it is not certain that it would be legally effective in circumstances in which it was not possible to resolve the question in that time. The indemnity is given for valuable consideration and for a specific purpose and it would be strange if a condition could be attached which was repugnant to the purpose of the undertaking. At least it would take clear and express wording to have that effect.82 Some banks endeavour to limit their responsibility as to amount also. While this would be effective, it may be practically no more reasonable, for it could largely nullify the value of the indemnity to the addressee. A margin over and above the insured value of the shipment is usually taken as the measure, but this amount could be swollen with costs of all kinds. If indemnities are to be given and accepted, no limitation is reasonable except that which clearly defines the cause upon the happening of which the instrument is to become actionable. Loss of the documents 6–40 With the mass of documents passing from one country to another, it is, perhaps, surprising that losses are not more frequent. The question that arises is who bears the risk of the loss of the documents at any particular stage of the credit transaction. Normally such matters are settled amicably between banks and problems are only likely to give rise to litigation where this cannot be done and the buyer does not want the goods or cannot take delivery or sell them on because of the loss of the documents. 82

The inclusion of such a limitation can be justified only on practical grounds—the wish of the signatory bank to clear the matter from its books—and its insertion would probably prompt or encourage the parties to this end. Any claim must ordinarily arise within a short time of the arrival of the documents at their destination and there is no reason why an arbitrary limit should be set—as if to say that if the claim does not arise within six months, then it shall be treated as not arising at all. If at the end of six months there is a valid potential claim, it is certainly against the intentions of the receivers of the indemnity that the signatory’s liability should suddenly cease. For such a limitation it would need to be spelled out so as to leave no doubt. The proper course is for the recipient of the indemnity to inform the signatory that while it may not be possible to make a definitive claim before the limit expires, the eventuality for which the indemnity was given is not yet resolved.

Delivery by the beneficiary to the intermediary or issuing bank 6–41 Credits normally specify the branch of the intermediary or issuing bank to which documents must be presented. If the documents are not delivered before the expiry of the credit, the beneficiary does not comply with the terms and conditions of the credit and he is not entitled to payment. If the documents are lost in transit, unless the beneficiary can present a replacement set in time, he will not be able to obtain payment. If follows that the risk of loss in transit falls upon him.83 Documents in the possession of the intermediary bank


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6–42 The intermediary bank has a limited time to examine the documents and determine whether they appear to be in compliance with the terms and conditions of the credit.84 6–43 If it determines that the documents are compliant, it is entitled to reimbursement pursuant to article 14(a) of the UCP. It is an open question whether the obligation to reimburse is qualified where the intermediary bank fails to deal with the documents in accordance with its instructions from the issuing or confirming bank (as the case may be). Such instructions will normally be to forward the documents to the issuing bank. If the intermediary bank complies with those instructions it has clearly fulfilled its mandate.85 6–44 If, however, the documents are lost while in the possession of the intermediary bank it is arguable that it has not complied with its mandate and so is not be entitled to reimbursement.86 Article 14(a) makes reimbursement consequent upon payment or the incurring of the obligation to pay, however, and not upon despatch or receipt of the documents by the issuing bank. Nevertheless, the subsequent delay in receipt of or failure to receive the documents may entitle the issuing bank formally to refuse them under article 14(d)(i),87 in which case the issuing bank is entitled to reimbursement of any sum it has paid the intermediary bank under article 14(d)(iii).88 If the intermediary bank has not paid the beneficiary and, not being a confirming bank, is under no obligation to do so, the beneficiary will be able to recover payment according to the terms of the credit from the issuing bank or confirming bank on whose behalf the intermediary was acting. 6–45 In these circumstances the issuing bank will be able to recover indemnity from the buyer by virtue of article 18(a) and/or (b). The position of the confirming bank is doubtful, however. It will not be able to comply with its mandate from the issuing bank to forward the documents to the issuing bank and consequently article 14(d)(iii) may entitle the issuing bank to recover any reimbursement made. Unless article 18(a) has the effect of requiring the issuing bank to reimburse the confirming bank for the account of the buyer, which is an open question, the confirming bank will be left with a claim against the intermediary bank for failing to exercise reasonable skill and care in performing its mandate. 83

The position might be different if a course of business has been established between the beneficiary and the intermediary bank pursuant to which the seller is authorized by the intermediary bank to use the post. In these circumstances the responsibility for any loss cannot be that of the issuing bank unless, by implication, which would be unlikely, the credit can be said to give authority to the beneficiary to send the documents by post to the intermediary bank, which also would be unlikely. Normally, the credit would indicate the bank at which it was available to the beneficiary and no more. 84 See paragraphs 6–05 to 6–06 above. 85 If the credit calls for acceptance of a draft by the issuing bank or another drawee bank, article 9(a) is sufficiently widely drawn to oblige the issuing bank to accept and pay a substitute draft drawn by the beneficiary in these circumstances. 86 If the intermediary bank is a confirming bank and the credit calls for acceptance of a draft by the confirming bank or another drawee bank, article 9(b) is sufficiently widely drawn to oblige the confirming bank to accept and pay a substitute draft drawn by the beneficiary in these circumstances. 87 As to which, see Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 at 66.


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6–46 If the intermediary bank determines that the documents are not compliant it must return them to or hold them at the disposal of the beneficiary.89 If the documents are lost while in the intermediary bank’s possession it fails in this duty and such failure precludes it from claiming that the documents are not in compliance with the terms and conditions of the credit.90 The beneficiary will then be able to recover the amount due under the credit or damages for breach of the bank’s duty as a bailee of the documents. Absent agreement to the contrary, the intermediary bank will not be able to recover reimbursement or indemnity from the issuing bank. 6–47 If the documents are lost during the process of returning them to the beneficiary, the bank’s liability will depend upon whether it has followed the instructions of the beneficiary as to the return of the documents. If it has it will not be liable. If it has not or has acted without using reasonable care in making the arrangements, it will be liable.91 The bank might argue that it assumes no liability in such circumstances because of article 16 of the UCP.92 It is, however, an open question whether this article applies as between the beneficiary and the intermediary bank. 6–48 If the documents are lost before the intermediary bank has had an opportunity to examine them, it will be in the position that it must pay the beneficiary because it cannot comply with the requirements of article 14(e) and it cannot claim reimbursement from the issuing bank because it has not examined the documents in accordance with the terms of its mandate and cannot say that its payment is made against documents which appear on their face to be in compliance with the terms and conditions of the credit.93 The intermediary bank will therefore bear the loss.94 6–49 The issuing bank is not liable to the buyer in respect of any damage caused to him by the loss of the documents as article 18 of the UCP95 provides (a) that banks using the services of another bank for the purpose of giving effect to the instructions of the buyer do so for the account and at the risk of the buyer and (b) that banks assume no liability or responsibility should the instructions they transmit not be carried out. Documents in transit from the intermediary bank to the issuing bank 6–50 If the documents are lost in transit from the intermediary bank to the issuing bank neither the intermediary bank nor the issuing bank is liable as article 16 of the UCP96 provides that banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any documents.97 The effect of this is that the intermediary bank, assuming that it can prove that it carried out its mandate,98 is entitled to reimbursement from the issuing bank and the issuing bank is entitled to an indemnity from the buyer. 88

For articles 14(d)(i) and (iii), see paragraph 6–13 above. Article 14(e) (set out in paragraph 6–13 above). 90 Article 14(e). 91 The damages suffered by the beneficiary may be limited if the beneficiary can obtain possession of the goods or can obtain a replacement set of documents or can otherwise resell the goods. 92 See paragraph 6–50 below. 89


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6–51 The position is different if the intermediary bank is a negotiating bank, which must present the documents to the issuing bank at the place and by the date stipulated in the credit. If the documents are lost in transit from such negotiating bank to the issuing bank so that presentation does not take place in accordance with the terms and conditions of the credit, the issuing bank will not be liable. Documents in the possession of the issuing bank 6–52 As with documents lost from the possession of the intermediary bank,99 the analysis depends upon whether the documents are compliant or not. If the documents are compliant the issuing bank is entitled, subject to the terms of its arrangements with the buyer, to indemnity from the buyer in respect of its payment of the credit or its reimbursement of the intermediary. It will, however, be liable to the buyer for any damage sustained as a result of the loss of the documents. 6–53 If the documents are not compliant, the issuing bank must return them to or hold them at the disposal of the intermediary bank.100 If the documents are lost while in the issuing bank’s possession it fails in this duty and such failure precludes it from claiming that the documents are not in compliance with the terms and conditions of the credit.101 The intermediary bank will then be able to recover reimbursement from the issuing bank. Absent agreement to the contrary, the issuing bank will not be able to recover indemnity from the buyer. 6–54 If the documents are lost during the process of returning them to the intermediary bank, article 16 of the UCP102 is difficult to apply because it says that “Banks assume no liability or responsibility for the consequences arising out of…loss in transit” and does not specify which bank will bear the loss where neither can obtain an indemnity from the buyer or the beneficiary. Nevertheless article 14(a) makes it clear that the issuing bank is only bound to reimburse the intermediary bank where payment is made against compliant documents and article 14(d)(iii) provides that upon refusing documents the issuing bank is entitled to reimbursement where it had made payment to the intermediary bank. In the light of these provisions the issuing bank, upon a proper 93

See articles 10(d) and 14(a) and paragraph 4–66 above. For the position where the intermediary bank has not paid the beneficiary and, not being a confirming bank, is under no obligation to do so, see paragraph 4–85 above. If the documents were lost while in the possession of such an intermediary, the issuing bank would have an obligation to make payment to the beneficiary, but if it could not obtain reimbursement from the buyer, it could recover its damages from the intermediary for breach of the intermediary’s duty to take care as bailee or as agent for the issuing bank. 95 Set out at paragraph 4–09 above. 96 Set out at paragraph 4–09 above. 97 See Opinions of the ICC Banking Commission R335, in which the view was expressed that article 16 is not restricted to telecommunication advices. The position might be otherwise if the credit included an express qualification that reimbursement was conditional on receipt of the documents by the issuing bank. 98 As a matter of reason the intermediary bank must satisfy the issuing bank of this, which it does normally by sending it a courier’s receipt in respect of the documents. 99 See paragraphs 6–42 to 6–49 above. 94


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refusal, is either under no obligation to make payment or has a right to recover any payment made. Thus the loss will lie with the intermediary bank, which will have to do its best to realise the value of the goods. If the intermediary bank can show that negligence on the part of the issuing bank caused the loss of the documents and has prevented the intermediary bank from recovering the full value of the goods, the intermediary bank may have a claim for damages, although such claim may be precluded by article 16 of the UCP. 6–55 If the documents are lost before the issuing bank has had an opportunity to examine them, it will be in the position that it must reimburse the intermediary bank because it cannot comply with the requirements of article 14(e) of the UCP. In these circumstances, as against the buyer, it might seek to argue that the intermediary bank’s examination of the documents showed that they were compliant. In such circumstances it might be possible to obtain a second (duplicate) set of documents that were sufficient to satisfy the buyer that the documents were compliant and enable the buyer to obtain delivery of the documents or comply with the terms of a sub-sale. If the buyer does not want the goods, however, the bank might find it difficult to prove that compliant documents had been presented and, subject to the terms of its arrangement with the buyer, could be liable for damage sustained by the buyer as a result of the loss of the documents. Documents in transit from the issuing bank to the buyer 6–56 By virtue of article 16 of the UCP,103 the buyer bears the risk of loss in transit from the issuing bank to the buyer. Defective documents Fraudulent documents 6–57 The effect of the presentation of a false document to an issuing bank under its irrevocable documentary credit depends on a number of factors, including the nature of the document and of the particular falsity, the state of knowledge of the issuing bank, the time of presentation and the knowledge (or lack of it) of the seller-beneficiary. On the assumption that the presentation is of documents which appear on their face to be in accordance with the terms and conditions of a credit, the issuing bank has no option but to “pay”, unless it can establish beyond a doubt that the beneficiary was fraudulent in some way or other, knowing that his presentation was of documents in fact not genuine or suffering from some other defect not obvious on the face of them. Where the beneficiary is honest, presenting documents which on their face conform to the requirements of the 100

Article 14(e) (set out in paragraph 6–13 above). Article 14(e). 102 Set out in paragraph 4–09 above. 101


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credit, the issuing bank must pay, no matter what knowledge it may have that the seller is in fact in breach of the contract of sale.104 6–58 In United City Merchants (Investments) Ltd v Royal Bank of Canada105 the bill of lading tendered bore a false date of shipment, it having been inserted deliberately to bring the presentation within the validity period of the credit (for which dereliction the beneficiary was in no way responsible). The shipment was in fact made on December 16, 1976, a day after the credit had expired.106 Mocatta J was of the view that this did not affect the seller’s right to claim under the credit.107 He was reversed by the Court of Appeal, but the House of Lords agreed with him. The judgment of the House may be said to be the starting point for any consideration of this aspect of the subject. What Lord Diplock called a general statement of principle was simply that a presentation of conforming documents and of compliance with the terms and conditions of a credit placed the issuing or confirming bank under a contractual obligation to the beneficiary to honour the credit, although the bank at the time of presentation might be aware that the beneficiary was in breach with the buyer. To this, he said, there is one established exception, which he expressed as follows:108 …where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases of which the leading or ‘landmark’ case is Sztejn v J.Henry Schroder Banking Corporation (1941) 31 N.Y.S. 2d 631.109 This judgment of 103

Set out in paragraph 4–09 above. A strange case, akin in this connection, is that of Banque Nationale pour le Commerce et l’Industrie v Nederlandsche Credietbank, Court of Amsterdam, First Chamber, May 16, 1963; Revue de la Banque, 1963, no. 4, 462. The French bank had issued its irrevocable credit in favour of a Dutch seller of potatoes and had asked the Dutch bank to confirm, which it did. The Dutch seller shipped the potatoes by rail, obtained the duplicate consignment notes, the same day attached the potatoes in the hands of the Netherlands Railways for other indebtedness of the consignees and presented the prescribed documents to the Nederlandsche Credietbank against payment; and the latter confirming bank reimbursed themselves as instructed from another Dutch bank, the Amsterdamsche Bank. The French buyers having failed, the issuing bank asked the confirming bank to decline to pay the Dutch seller and offered to indemnify it, but the offer was declined on the ground that the confirming bank had no option but to pay. This view was upheld in the Dutch courts, the higher Court in its judgment stating that even if the confirming bank had known of the attachment, which meant that the French buyer could not obtain the potatoes without paying the sum for which they had been attached, they, the confirming bank, would have been justified in paying. 105 [1983] 1 AC 168. 104


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106

For the complication arising from the fact that there was a breach of Peruvian exchange control regulations, see paragraph 4–53 above. 107 Although he held that the claim was unsustainable by reason of the breach by the parties of the Bretton Woods Agreement. 108 [1983] 1 AC 168 at 183–4. 109 In Sztejn v J.Henry Schroder Banking Corporation the seller shipped rubbish and passed his draft for collection to the Chartered Bank of India, Australia & China, which in due course presented it and the documents to the defendants. The buyer declined to accept the documents and obtained an injunction restraining the defendants from paying. The court asserted that “It would be a most unfortunate interference with business transactions if a bank before honouring drafts drawn upon it was obliged or even allowed to go behind the documents, at the request of the buyer, and enter into controversies between buyer and seller regarding the quality of the goods shipped. If the buyer and the seller intended the bank to do this they could have so provided in the letter of credit itself, and in the absence of such a provision the court will not demand or even permit the bank to delay paying drafts which are proper in form.” However, it made the exception that “…where the seller’s fraud has been called to the bank’s attention before the draft and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller.” It is the “unscrupulous seller”, i.e., the seller who is responsible for the fraud, who may not rely on the irrevocable undertaking of the bank. What the decision left unsaid is what amounts to the ‘calling of the bank’s attention’ to the seller’s fraud. The dissenting opinion expressed by Cardozo J in Maurice O’Meara v National Park Bank (1925) 239 NY 386 is also in point: “I dissent from the view that if it chooses to investigate and discovers thereby that the merchandise tendered is not in truth the merchandise which the documents describe, it may be forced by the delinquent seller to make payment of the price, irrespective of its knowledge. We are to bear in mind that the controversy is not one between the bank on the one side and on the other a holder of the drafts who has taken them without notice and for value. The controversy arises between the bank and a seller who has misrepresented the security upon which the advances are demanded. Between parties so situated payment may be resisted if the documents are

the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd,110 though this was actually a case about a performance false.” The Judge spoke of the ‘delinquent seller’; his conclusion is given on p. 402 of 239 N.Y. to the following effect: “I think the conclusion is inevitable that a bank which pays a draft upon a bill of lading misrepresenting the character of the merchandise may recover the payment when the misrepresentation is discovered….If payment might have been recovered the moment after it was made, the seller cannot coerce payment if the truth is earlier revealed.” It is not, however, clear from the report whether his conclusion depended on the misrepresentation being fraudulent. The point was expressed by Speziale J giving the judgment of the Appeal Court in New York Life Insurance Co v Harvard National Bank and Trust Co 22 UCC Rep 761 at 768 as follows: “Only in rare situations of egregious fraud would §429–5–114 have justified the issuer on the


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facts presented here, in going behind apparently regular, conforming documents; such fraud must be narrowly limited to situations…in which the wrongdoing of the beneficiary has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligations would no longer be served.” Sztejn was further considered in Rockwell International Systems Inc v Citibank NA (1983), where the United States Court of Appeal for the Second Circuit said: “The ‘fraud in the transaction’ defense marks the limit of the generally accepted principle that a letter of credit is independent of whatever obligation it secures. No bright line separates the rule from the exception, to be sure, but we agree with Rockwell that ‘fraud’ embraces more than mere forgery of documents supporting a call. Cf United Bank Ltd v Cambridge Sporting Goods Corp…(‘fraud in a required document’ rejected in favour of ’fraud in the transaction’ by drafters of U.C.C. §5–114(2)). The logic of the fraud exception necessarily entails looking beyond supporting documents…In this case, as in the leading case of Sztejn v J.Henry Schroder Banking Corp,…we must look to the circumstances surrounding the transaction. In Sztejn and United Bank Ltd, sellers called letters of credit after shipping goods—in the Sztejn case, garbage—that were clearly non-conforming, thus frustrating completion of the contract by non-performance. …We think that the essence of the fraud exception is that ‘the principle of the independence of [a] bank’s obligation under the letter of credit should not be extended to protect a party that behaves so as to prevent performance of the underlying obligation…” See also Warner v Central Trust Co 715 F. 2d 1121 (1983), Paris Savings and Loan Association v Walden 730 S.W. 2d 355 (1987), Brenntag International Chemicals v Norddeutsche Landesbank Girozentrale 97 Civ. 2688 (RWS) (S.D.N.Y. 1998), Prairie State Bank v Universal Bonding Insurance Co 953 P. 2d 1047 (1998), Southern Energy Homes Inc v AmSouth Bank of Alabama 709 So. 2d 1180 (1998), 3Com Corporation v Banco Do Brasil SA 171 F. 3d 730 (2nd Cir. 1999) (standby credit) and Hamilton Bank NA v Kookmin Bank 98 Civ. 2162 (LAK) (S.D.N.Y. 1999). In Discount Records Ltd v Barclays Bank Ltd [1975] 1 W.L.R. 315 Megarry J distinguished the Sztejn case on the ground that it was a case of established fraud (see paragraph 4–26 above). Moreover, the American concept of “fraud in the transaction” is wider than the fraud exception in English law—see United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554 at 561. For the position in Scotland, see Centri-force Engineering Ltd v Bank of Scotland [1993] SLT 190 and Royal Bank of Scotland v Holmes [1999] SLT 563. For the position in Australia, see Inflatable Toy Co Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243. For the position in Canada, see Bank of Nova Scotia v Angelica Whitewear (1987) 36 DLR (4th) 161 and Bank of Montreal v Mitchell (1997) 143 DLR (4th) 697, affirmed (1997) 151 DLR (4th) 574. 110 In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 at 169, Lord Denning referred to the Sztejn case in the following terms: “That case shows that there is this exception to the strict rule: the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fundamentally in circumstances in which there is no right to payment.”


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bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, “fraud unravels all”. The Courts will not allow their process to be used by a dishonest person to carry out a fraud. 6–59 The House of Lords has therefore endorsed the principle that an issuing or confirming bank is under no obligation to pay the beneficiary where the beneficiary fraudulently presents documents that contain material misrepresentations of fact that to the beneficiary’s knowledge are untrue.111 However, United City Merchants (Investments) Ltd v Royal Bank of Canada makes it clear that nothing but the fraud of the beneficiary will relieve an issuing or confirming bank of its absolute duty. The fact that the person (not being the beneficiary) who prepared the inaccurate document deliberately so prepared it with the intention that it be presented under the credit did not prevent the bank from being liable. Thus where the beneficiary presents a fraudulent draft or documents his rights against the bank depend upon whether and perhaps to what extent he himself is responsible. Misdescription in a document may amount to fraud, but unless the beneficiary is aware of the fault he cannot be charged with fraud, there being no intent, no mens rea.112 The matter may be considered from the standpoints that the beneficiary (a) may be an innocent presenter of documents which, although conforming apparently (on their face) to the terms of the credit, are false in a material particular (as in United City Merchants (Investments) Ltd v Royal Bank of Canada); (b) is or should have been aware that his documents were not what they purported to be, although he had no part in the preparation of any defaulting document; (c) has knowledge of the forgery or falsity, being himself responsible for it. Unless (b) amounts to fraud it is only (c) which permits the bank to refuse to pay. This is in accordance with the principle set out in article 15 of the UCP, which provides that banks assume no liability or responsibility for the “accuracy, 111

The principle appears to have been self evident to Bailhache J as long ago as 1922—see Société Métallurgique d’Aubrives & Villerupt v British Bank for Foreign Trade (1922) 11 L1.L.R. 168 at 170. 112 See Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] CLC 466, where the beneficiary presented a certificate which it had signed believing that it had authority to do so and only discovered that it did not have authority after presentation of the documents. HHJ Jack QC said: “It is not dishonest for a beneficiary to seek payment for goods which it has delivered against documents which it presented honestly even if by the time for payment it is known that a document was not truthful in a material respect. That is so in respect of time for payment as well as at time of trial.” The nominated bank and the issuing bank can each obtain reimbursement for any payment that they are obliged to make in such circumstances.


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genuineness, falsification or legal effect” of documents or for the “good faith or acts and/or omissions” of the consignees or forwarders.113 6–60 In establishing this principle, United City Merchants (Investments) Ltd v Royal Bank of Canada 114 left doubt, not as to the obligation, but as to its effect. This has been worked out in subsequent cases, which deal principally with the question whether the buyer can obtain an injunction restraining the bank from paying the credit or restraining the beneficiary from presenting documents under the credit.115 If at the time of presentation the bank has clear knowledge of fraud by the beneficiary,116 it would seem to be in breach with its customer if it pays and will not be entitled to reimbursement from the customer. Similarly, if the buyer can show that the bank acquired such knowledge between the time of presentation of documents and the time of payment the bank is not entitled to reimbursement.117 On the other hand unless the bank has such knowledge at the time of payment, it can pay the beneficiary without risk.118 To this extent the bank’s duty to the beneficiary is paramount.119 The position was summarised in CzarnikowRionda Sugar Trading Inc v Standard Bank London Ltd120 by Rix J as follows:121 Although the requirement of the knowledge of the bank of the beneficiary’s fraud was not specifically referred to by Lord Diplock [in 113

Article 15 is set out in full in paragraph 4–09 above. [1983] 1 AC 168. 115 Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd’s Rep 251, United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554, GKN Contractors Ltd v Lloyds Bank Ltd (1985) 30 BLR 48, Tukan Timber Ltd v Barclays Bank Ltd [1987] 1 Lloyd’s Rep 171, Dong Jin Metal Co v Raymet Ltd (unreported: CA transcript 13 July 1993), Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 Lloyd’s Rep 153, (affirmed sub nom Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 Lloyd’s Rep 345), Themehelp Ltd v West [1996] QB 84, Kvaerner John Brown Ltd v Midland Bank Plc [1998] CLC 446 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187. See paragraphs 4–23 to 4–33 above. 116 Turkiye Is Bankasi AS v Bank of China [1996] 1 Lloyd’s Rep 611 at 616–7, affirmed [1998] 1 Lloyd’s Rep 251 at 253 (applying for the test to be used in determining whether the bank has sufficient knowledge of the fraud to justify refusing payment Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 Lloyd’s Rep 166 and United Trading Corporation SA v Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554, for which see paragraphs 4–27 to 4–30 above) and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 203. 117 Banco Santander SA v Bayfern Ltd [2000] Lloyd’s Banking Rep 236 at 245 (Langley J), affirmed [2000] Lloyd’s Banking Rep 165. See paragraph 6–66 below. 118 See Montrod Ltd v Grundkotter Fleischvertriebs GmbH [2001] CLC 466 and the quotation at footnote 111 above. In that case the beneficiary had not acted fraudulently, although another party had done so. For the position where the credit calls for acceptance of drafts, see paragraph 6–65. 119 The English and American courts will enforce the terms of the credit even where the bank has been ordered not to pay by a court in its own jurisdiction—see 114


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United City Merchants (Investments) Ltd v Royal Bank of Canada], it was implicit in the argument before the Court and in Lord Diplock’s citation with approval of the Sztejn and Edward Owen cases. When, therefore, Lord Diplock stated that the fraud exception was an application of the doctrine that “fraud unravels all”, he was not, in my respectful opinion, speaking as broadly as might be thought. It would be less pithy but more accurate to fill out the dictum by saying that fraud unravels the bank’s obligation to act on the appearance of documents to be in accordance with a credit’s requirements provided that the bank knows in time of the beneficiary’s fraud. 6–61 Even though the bank must not pay if it knows of the fraud, it is under no duty to investigate an allegation of fraud. In Turkiye Is Bankasi AS v Bank of China122 Waller J said:123 It is simply not for a bank to make enquiries about the allegations that are being made one side against the other. If one side wishes to establish that a demand is fraudulent it must put the irrefutable evidence124 in front of the bank. It must not simply make allegations and expect the bank to check whether those allegations are founded or not… What is more…it is not the role of a bank to examine the merits of allegations and counter allegations of breach of contract. To hold otherwise would place banks in a position where they would in effect have to act as Courts in deciding whether to make payment or not. Of course, if a beneficiary were to admit to the bank that it had no right to make the demand, then a totally different situation would arise. 6–62 Even if the bank does not have sufficient knowledge to prevent it from obtaining reimbursement from the customer, it could still refuse to pay and force the seller to sue, raising the issue of fraud in its defence.125 If the customer can reimburse the bank, however, there is no reason for the bank to take this course. Moreover, unless there is powerful evidence of fraud,125A the seller will obtain summary judgment. If powerful evidence of fraud is adduced, however, the court will not give judgment on the ground that in such circumstances the bank has a reasonable prospect of recovering the sum payable to the beneficiary by counterclaim126 and it is therefore unjust to permit the beneficiary to obtain the sums due under the credit.127 Power Curber International Ltd v National Bank of Kuwait [1981] 2 Lloyd’s Rep 394 and Cantrade Privatbank AG Zurich v Bangkok Bank Public Company Limited 681 N.Y.S. 2d 21 (1998). 120 [1999] 2 Lloyd’s Rep 187. 121

[1999] 2 Lloyd’s Rep 187 at 199.

122

[1996] 2 Lloyd’s Rep 611, affirmed [1998] 1 Lloyd’s Rep 251.


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6–63 If the bank does pay the seller and subsequently discovers the fraud it can recover the money from the beneficiary if it can show that such money was had and received by the beneficiary. In Bank Russo-Iran v Gordon Woodroffe & Co Ltd128 Browne J said: If the documents are presented by the beneficiary himself and are forged or fraudulent the bank is entitled to refuse payment if it finds out before payment and is entitled to recover the money as paid under a mistake of fact if it finds out after payment.129 A difficulty arises in such a claim, however, where the payment is made through a reimbursing bank rather than direct to the beneficiary because in such circumstances it is not possible to show that the beneficiary has had and received the bank s money.130 6–64 The bank will also have a claim for damages in deceit against the beneficiary and any party who has issued a document knowing that it contains a false statement and that it is to be presented to the bank under a letter of credit.131 123

[1996] 2 Lloyd’s Rep 611 at 617, approved [1998] 1 Lloyd’s Rep 251 at 253. Waller J’s use of the phrase “irrefutable evidence” was intended to epitomise and not depart from the test that the fraud must be clear to the bank—see [1998] 1 Lloyd’s Rep 251 at 253. 125 See, for example, Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 513. 125A Or unless the bank can show a reasonable prospect of successfully defending the claim on a ground that impugns the validity of the credit, for example because its issue was induced by a conspiracy or misrepresentation—see Solo Industries (UK) Ltd v Canara Bank [2001] EWCA Civ 1041. 126 See paragraphs 6–63 to 6–64 below. 127 Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600 at 606 and 608, following Balfour Beatty Civil Engineering Ltd v Technical & General Guarantee [2000] CLC 252, a case 124

concerned with a performance bond. The bank must be able to adduce evidence of an actual fraud, not simply facts that would lead a reasonable bank to believe that there was fraud—see Society of Lloyd’s v Canadian Imperial Bank of Commerce [1993] 2 Lloyd’s Rep 579 (a case concerning a standby credit issued subject to the UCP). 128 (1972) 116 SJ 921. Such a claim can be brought against any person dishonestly responsible for issuing a document to be presented under the credit who has received the proceeds—see SWIL International Pte Ltd v Ladykirk Shipping Ltd (unreported—1997). 129 See also Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyd’s Rep 445 at 447–8. 130 Bank Tejarat v Hong Kong and Shanghai Banking Corporation (CI) Ltd [1995] 1 Lloyd’s Rep 239, applying Agip (Africa) Ltd v Jackson [1990] 1 Ch 265. 131 Standard Chartered Bank v Pakistan National Shipping Corporation [1995] 1 Lloyd’s Rep 365. See also Bank Leumi Le Israel BM v Cablefoot Ltd (unreported: 12/2/90), Shinhan Bank Ltd v Sea Containers Ltd [2000] 2 Lloyd’s Rep 406 and KBC Bank v Industrial Steels (UK) Ltd [2001] I All ER (Comm) 409. Such claim may also extend to a director of the beneficiary—see Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [1998] 1 Lloyd’s Rep 684, reversed on a pleading point [2000] 1 Lloyd’s Rep 218. Cf SX Holdings Ltd v Synchromet Ltd (unreported—10/10/00). As to the measure of damages, see Standard Chartered Bank v Pakistan National Shipping Corporation (No 3) [1999] 1 Lloyd’s Rep 747. If the bank has been induced to make a payment by the deceitful statement, contributory negligence cannot be raised against the bank, even where it has then attempted to deceive another bank—see Standard Chartered Bank v Pakistan National Shipping Corporation (No 4) [2001] 1 QB 167. Where a beneficiary agrees to


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indemnify a shipowner against the consequences of issuing a deceitful bill of lading, such agreement is unenforceable—see Brown, Jenkinson & Co Ltd v Percy Dalton (London) Ltd [1957] 2 QB 621, where the defendants (sellers and shippers) required a clean bill of lading, which the plaintiffs (loading brokers and chartering agents) were willing to issue only against indemnity. The indemnity given admitted that the containers of the goods (orange juice) were old and frail and leaking and covered the plaintiffs in respect of all loss or damage of whatsoever nature “which might arise from the issuance of clean bills of lading”. The defendants pleaded that the indemnity was unenforceable because it was founded on an illegal consideration. By a majority (Lord Evershed MR dissenting) the Court of Appeal found in favour of the defendants, refusing to assist the plaintiffs. Pearce

A tracing claim based on knowing receipt or knowing assistance (in the case of a person who has been involved in the transaction but has not received the trust money) might also be established on the basis that money obtained through fraudulent misrepresentation is held subject to a constructive trust.132 6–65 The position becomes more complicated where the credit calls for a “time” draft and the issuing bank discovers the seller’s forgery or knowledge of it before acceptance or payment. If it has given its acceptance it cannot refuse to pay a holder in due course and is entitled to claim reimbursement from the buyer,133 but if it has not accepted the draft it would seem that it can refuse to accept unless the credit is a negotiation credit and the claim is made by a holder for value.134 A bank cannot be compelled to honour a credit unless all the conditions precedent have been performed, and it ought not to be under an obligation to accept or pay against documents which it knows to be waste paper for which the beneficiary is responsible, except where it has authorised negotiaton against its promise to pay. To hold otherwise would be to deprive the bank of that security for its advances which is a cardinal feature of the process of financing carried out by means of the credit. Moreover, the buyer, unless LJ said (at 638–9): “In the last 20 years it has become customary, in the short sea trade in particular, for shipowners to give a clean bill of lading against an indemnity from the shippers in certain cases where there is a bona fide dispute as to the condition or packing of the goods. This avoids the necessity of rearranging any letter of credit, a matter which can create difficulty where time is short. If the goods turn out to be faulty, the purchaser will have his recourse against the shipowners, who will in turn recover under his indemnity from the shippers. Thus no one will ultimately be wronged. This practice is convenient where it is used with conscience and circumspection, but it has perils if it is used with laxity and recklessness. It is not enough that the banks or the purchasers who have been misled by clean bills of lading may have recourse at law against the shipowner. They are intending to buy goods, not lawsuits. Moreover, instances have been given where their legal rights may be defeated or may not recoup their loss. Trust is the foundation of trade; and bills of lading are important documents. If purchasers and banks felt that they could no longer trust bills of lading, the disadvantage to the commercial community would far outweigh any conveniences provided by the giving of clean bills of lading against indemnities.” The New York Supreme Court (Appellate Division) held in Hellenic Lines Ltd v Chemoleum Corporation that a letter of indemnity given for the issue of a clean bill of lading in circumstances which did not justify a clean bill contravened public policy as expressed in article 3 rule 8 of the Hague Rules and should not be enforced; also that the plaintiff could sue in negligence, using the indemnity as an admission. 132 Bank Tejarat v Hong Kong and Shanghai Banking Corporation (CI) Ltd [1995] 1 Lloyd’s Rep 239, where the claim for knowing assistance failed on the ground that the requisite knowledge


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could not be proved against the defendant. Since that case it has been established that the assistance must be dishonest—see Royal Brunei Airlines v Tan [1995] 2 AC 378. See also Ferrotex Industrial Ltd v Banque Francais de l’Orient (unreported, 4/7/00). As to a claim based on receipt of trust money, which requires knowledge of facts making it unconscionable for the recipient to receive the money, but not dishonesty, see Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000] Lloyd’s Rep Bank 292. 133 Robinson v Reynolds (1841) 2 QB 196; Thiedemann v Goldschmidt (1859) 1 De G.F. &J. 4. 134 See European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 621 (a case which did not involve fraud).

otherwise agreed, cannot be deemed to have authorized the bank to pay against documents it knows to be forged. 6–66 In Banco Santander SA v Bayfern Ltd135 the Court of Appeal held that where fraud is discovered between acceptance of documents and the date for payment under a deferred payment letter of credit, the issuing bank and the confirming bank (if any) are under no obligation to pay either the beneficiary or an assignee from the beneficiary who has no notice of the fraud. The position is different where the issuing bank has unequivocally represented to the intermediary bank that it is entitled to act as negotiating bank under the credit and will be paid as negotiating bank on the maturity date.136 6–67 The bank will also have a defence to the seller’s claim where the buyer and the seller agree that the seller will present documents which are false or where the buyer has procured the issue of the letter of credit by a fraudulent misstatement to the issuing bank of the nature of the transaction of which the seller is aware at the time when he presents the documents.137 Forged or Altered Documents 6–68 The draft accompanying the documents may bear a forged signature or may have been altered in some material respect. Where the drawee bank knows of this, it is entitled to refuse payment, even if the holder of the draft is a bona fide purchaser for value.138 If the bank is deceived into paying it cannot claim to be reimbursed by its customer. 135

[2000] Lloyd’s Rep Bank 165. European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 Lloyd’s Rep 611 at 619 and 621 and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1999] 2 Lloyd’s Rep 187 at 205. 137 Rafsanjan Pistachio Producers Co-operative v Bank Leumi (UK) Plc [1992] 1 Lloyd’s Rep 138 Sections 24 and 64 of the Bills of Exchange Act 1882. In either case the bank would be entitled to refuse payment to a holder in due course unless, in the case of an altered bill, the alteration is not apparent. See Orr v Union Bank of Scotland (1854) 1 Macq HL Gas 513; 24 LT (o.s.) 1; British Linen Co v Caledonian Insurance Co (1861) 4 Macq HL Gas 107; 4 LT 162. 139 See paragraphs 4–21 to 4–22 above and 7–01 below. 140 Gian Singh & Co Ltd v Banque de Indochine [1974] 2 Lloyd’s Rep 1 (discussed in paragraph 4– 21 above). See also Ulster Bank v Synnott (1871) 5 Ir Rep Eq 595; Woods v Thiedemann (1862) 1 H & C 478; Basse and Selve v Bank of Australasia (1904) 20 TLR 431, in which case the certificate of analysis called for bore no connection with the ore actually shipped. 136

6–69 A situation peculiar to commercial credits will arise where the holder of a genuine draft also tenders forged documents or documents bearing a material alteration.


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The bank is, of course, under a duty to examine the documents with care, but not normally bound to inquire into their genuineness.139 It follows, therefore, that if it has paid against forged documents that are in conformity with the terms of the credit, it can claim to be reimbursed by the buyer.140 This is again in accordance with the principle set out article 15 of the UCP, which provides that banks assume no liability or responsibility for the “genuineness, falsification or legal effect” of documents or for the “good faith or acts and/or omissions” of the consignees or forwarders.141 6–70 Moreover the holder of a draft with documents attached who presents the draft for payment makes no representation that the documents are genuine. He is entitled to payment and the buyer or his bank is not entitled to repayment once the forgery is discovered. In Guaranty Trust Company of New York v Hannay142 the plaintiff bank purchased a draft with shipping documents attached, and presented it to the defendants’ bank in Liverpool by whom the draft was accepted and paid at maturity. The bill of lading proved to be a forgery, and when the fraud was discovered the defendants took action in an American court to recover the amount paid by their bank. The American court held that the matter was governed by English law,143 and the plaintiff bank brought an action in England, claiming a declaration that by presenting the draft for acceptance with the documents attached they did not by the law of England warrant the genuineness of the bill of lading. The defendants counterclaimed to recover back the money paid to the plaintiffs. It was held that the plaintiffs were entitled to the declaration and that the counterclaim failed. Pickford LJ said:144 I doubt if the presentation of the draft for acceptance was a request by the plaintiffs to the bank at all; it may well be only an inquiry as to whether they were going to perform the contract of [the bank’s] principals with the [seller] by accepting the draft. The position of the holder of a bill of exchange who presents it for payment is, I think, well expressed in a lecture by Dean Ames of Harvard in the Harvard Law Review, Vol. IV, pp. 297, 302, republished in Ames’s Lectures on Legal History, p. 270, where he says: “The attitude of the holder of a bill who presents it for payment is altogether different from that of a vendor. The holder is not a bargainer. By presentment for payment he does not assert, expressly or by implication, that the bill is his, or that it is genuine. He in effect says: ‘Here is a bill which has come to me, calling by its tenor for payment by you. I accordingly present it to you for payment, that I may either get the money or protest it for non-payment’. Mr Justice Chambre’s statement145 that the holder warrants the genuineness of the bill by presenting it was expressly repudiated by Littledale and 141

Article 15 is set out in full in paragraph 4–09 above and its effect is discussed at paragraphs 4–21 to 4–22 above and paragraph 7–01 below. 142 [1918] 2 KB 623. See also Robinson v Reynolds (1841) 2 QB 196, Thiedemann v Goldschmidt (1859) 1 De G.F.&J. 4, Leather v Simpson (1871) R 11 Eq 398 (followed in Baxter v Chapman (1873) 29 LT 642). 143 210 Fed Rep 810 (1913). 144 [1918] 2 KB 623 at 631–2. 145 In Smith v Mercer (1815) 6 Taunt. 83 at 84.


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Bayley JJ in East India Co v Tritton.”146 He is no doubt in that passage speaking of the question whether there is a representation as to the genuineness of the bill of exchange, but I think the statement as to the position of the holder in such a case applies equally to the question whether there is a representation as to the bill of lading. But if it were a request, it was only a request to them to perform that contract, and such request did not impose any liability on the plaintiffs. It was not in any way such a request as those in the cases of Sheffield Corporation v Barclay147 and Bank of England v Cutler.148 see Moel Tryvan Ship Co v Kruger & Co149 I can see nothing in these circumstances to afford evidence of warranty or representation or undertaking to indemnify. 6–71 Although article 15 of the UCP is pretty comprehensive, it is submitted that the disclaimer does not cover an altered document if the alteration is apparent on the face of it and the effect of the alteration is that the document does not comply with the terms and conditions of the credit.150 In those circumstances a bank would not normally know whether an alteration was made by authority and it could not be expected to inquire. As Greer J said in Skandinaviska Aktiebolaget v Barclays Bank Ltd:151 …documents of this sort tendered to a bank under a credit ought to be documents on which questions cannot be raised so far as the documents are concerned…the documents ought to be completely in order. 146

(1824)3B.&C.280. [1905] A.C. 392. 148 [1908]2K.B.208. 149 [1907] 1K.B.809. 150 As to the effect of the alteration of a document, see Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2000] 1 WLR 1135. A case of bona fide alteration in relation to a c.i.f. contract was Re Salomon and Naudzus (1899) 81 LT 325, in which a relatively minor mistake in a bill of lading and certificate of inspection was altered before the documents were executed. Darling J held that they were a good tender, for reasons that may be doubted. The other member of the Court, Phillimore J thought otherwise. Speaking of someone having to make up his mind “without the possibility of inquiry of the maker of the documents …” he “did not think that a choice should be imposed on a business man either to take documents which might be quite good or, quite conceivably, worthless; or incur the liability to an action if it turns out that he has rejected documents which are in fact good. If the documents in cases such as this were tendered with unquestionable written proof by the makers that the alterations were valid and authorized the position might be different.” But see Banco Nacional de Cuba v Bank of Nova Scotia (1988) 4 OR (3rd) 100, where the confirming bank inserted a heading on a quality certificate and was held entitled to reimbursement from the issuing bank. See also Brown v Rosenstein 120 Misc. (N.Y.) 787, 200 N.Y. Supp. 491 (1923), aff’d. wt. op. 208 App. Div. (N.Y.) 799, 203 N.Y. Supp. 922 (1924). 151 (1925) 22 L1.L.R. 523 at 525. 147


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Documents that are a nullity 6–72 In United City Merchants (Investments) Ltd v Royal Bank of Canada,152 the House of Lords left open the question of the rights of the beneficiary against the confirming bank when a document presented by him is a nullity because unknown to him it was forged by some third party or is executed without the authority of the person by whom it purports to be issued.153 The point was resolved at first instance in Montrod Ltd v Grundkotter Fleischvertriebs GmbH.154 The credit provided for payment by drafts 45 days after presentation of documents. It required presentation of inspection certificates signed by the applicant for the credit, who had provided finance to the buyer of the goods. The buyer informed the seller, the beneficiary under the credit, that one of its employees should sign the inspection certificates on behalf of the applicant. The seller, honestly believing that it had the applicant’s authority to sign the certificates, presented certificates so signed. Between the date of presentation and the date of payment, it became clear that the applicant had not given its authority for the seller to sign the certificates. HHJ Jack QC held that the beneficiary was entitled to payment under the credit and that the issuing bank was entitled to reimbursement from the applicant. He held that the seller had not acted fraudulently. It was argued that the inspection certificates were a nullity and that since the bank knew of the nullity before payment, it was not entitled or bound to pay the beneficiary. The Judge rejected the argument, holding that it was inconsistent with the provisions of the UCP and the principle that banks consider documents alone and should not take account of other matters. He concluded his reasoning as follows:155 In my judgment the “nullity exception” should and does form no part of English law. It is unsupported by authority. It provides a further complication where simplicity and clarity are needed. There are problems in defining when a document is a nullity. The exception could have unfortunate consequences in relation to the rights of third parties. 152

[1983] 1 AC 168. A bill of lading with a wrong date on it is not a nullity, however—see United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 182; neither is a bill of lading which is fraudulently altered to show that goods have been shipped as opposed to received for shipment— see Kwei Tek Chao v British Traders and Shippers Ltd [1954] 1 Lloyd’s Rep 16. 154 [2001]CLC 466. 155 [2001]CLC 466 at 477. 153

Chapter 7 DOCUMENTARY COMPLIANCE Introduction 7–01 The central element of letter of credit transactions is the presentation, or tender, of documents. As article 14(b) of the UCP1 states: Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents. The corollary of this is that banks assume no liability or responsibility for (i) the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document or (ii) the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document or (iii) the good faith, acts or omissions, solvency or performance of any other party associated with the transaction.2 As Lord Goff said in Westpac Banking Corporation v South Carolina National Bank.3 …it is well settled that a bank which issues a letter of credit is concerned with the form of the documents presented to it, and not with the underlying facts. It forms no part of the bank’s function, when considering whether to pay against the documents presented to it, to speculate about the underlying facts. 7–02 Presentation has a twofold aspect. First, the bank owes a duty to its customer to refuse documents that do not conform to the terms included in the credit.4 On the other hand, the beneficiary under the credit must also carry out the terms of his contract with the issuing bank and a party who is entitled to draw against a letter of credit must strictly 1

See also article 4, set out at paragraph 1–27 above. Article 15. 3 [1986] 1 Lloyd’s Rep 311 at 315. See also Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 334–5. In Guaranty Trust Company of New York v Van den Berghs Ltd (1925) 22 L1.L.R. 446 Scrutton LJ said (at 454–5): “I do not accept the conclusions sought to be drawn from two passages in the case of The Bank of Montreal v. Recknagel 109 New York 482 at 488 and 494, both of which I think were obiter dicta, to the effect that the issuing bank, to recover from the purchaser requesting the credit, may either show that the documents on 2

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observe the terms and conditions under which the credit is to become available. If he does not and the bank refuses to honour the payment obligation in the credit, he has no cause of action against the bank.5 7–03 This Chapter deals with the principles relating to documentary compliance under the following headings: (a) strict compliance (b) issues that may relate to more than one type of document (c) transport documents (d) insurance documents (e) commercial invoices (f) other documents (g) compliance under ISP98. Strict compliance The general principles 7–04 Under articles 9(a) and 9(b) of the UCP the liability of the issuing bank and the confirming bank to the beneficiary is dependent upon presentation of the stipulated documents and compliance with the terms and conditions of the credit. This is often referred to as “strict compliance”. The idea of strict compliance has developed from the general principle of the law of agency that an agent is only entitled to reimbursement from his principal if he acts in accordance with his instructions. 7–05 Article 13(a) of the UCP provides: Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be which it has paid conform to the letter of credit, or that if they do not the goods when they arrive do so conform. The object of payment against documents before the goods arrive, as stated by Kennedy, LJ in his admirable judgment in Biddell Bros v E Clemens Horst Co [1911] 1 KB 934 at 958, subsequently adopted by the House of Lords, is to enable the purchaser to deal with documents representing the goods before the goods themselves arrive. To hold that the issuing bank might make the purchaser liable on documents which did not represent the goods, because at some time the goods themselves arrived, seems to me entirely to defeat the commercial objects of the transaction.” 4 English, Scottish and Australian Bank Ltd v The Bank of South Africa (1922) 13 Ll.L.R. 21 at 24 (Bailhache J). The consequence of this principle is that a bank paying against discrepant documents is not entitled to reimbursement—see articles 10(d) and 14(a) of the UCP and paragraph 4–66 above. 5 Articles 9(a) and 9(b) of the UCP.


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inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit. 7–06 The question for the bank examining the documents is therefore whether they comply with the terms and conditions of the credit or not. Although article 13(a) refers to the bank examining the documents with reasonable care to ascertain this, the test for establishing whether the bank must accept or reject the documents is whether or not they comply and, save where the bank has applied a reasonable construction to an ambiguous requirement in the credit,6 if a discrepancy is missed the bank cannot be heard to say that it is entitled to reimbursement because it exercised reasonable care. As Lord Sumner said in Equitable Trust Co of New York vDawson Partners Ltd:7 There is really no question here of waiver or of estoppel or of negligence or of breach of a contract of employment to use reasonable care and skill… 6

As to which, see paragraph 4–19 to 4–20 above. (1927) 27 Ll.L.R. 49 at 52 (discussed in paragraph 7–129 below). The issue was whether a stipulation for a “certificate of quality issued by experts” required the certificate to be issued by one expert or two. The House held that it required to be issued by two experts and that the bank could not rely on the principle of ambiguity. It is worthy of note that in that case Scrutton LJ thought differently in the circumstances and Lord Carson in the House of Lords agreed with him. The difficulty is shown by the reluctance of the dissenting judges: “…businessmen will not be able to use the system of credits through banks if they take objections, which are at best technical, to honest attempts to carry out ambiguous instructions.” However it would cause very serious embarrassment to banks issuing commercial credits if any relaxation was permitted of the rule that documents tendered must be strictly those specified in the letter of credit. In Skandinaviska Aktiebolaget v Barclays Bank Ltd (1925) 22 L1.L.R.523 at 524–5, Greer J said: “It seems to me that documents of this sort tendered to a bank under a credit ought to be documents on which questions cannot be raised so far as the documents are concerned…the documents ought to be completely in order…” See also English, Scottish and Australian Bank Ltd v Bank of South Africa (1922) 13 Ll.L.R. 21 at 24 (Bailhache J), South African Reserve Bank v Samuel & Co Ltd (1931) 39 L1.L.R. 87 at 93 (Rowlatt I), J.H. Rayner & Co Ltd v Hambros Bank Ltd [1943] 1 KB 37 at 42–3 (Goddard LJ), Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 151 (Devlin J), Banque de l’Indochine et de Suez SA v J.H. Rayner (Mincing Lane) Ltd [1983] QB 711 at 729–30 (Sir John Donaldson MR), Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236 at 239–40 (Lloyd LJ), Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 at 150 (Sir Thomas Bingham MR), Kredietbank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Rep 219 at 222–3 and Credit Agricole Indosuez v Generate Bank [2000] 1 Lloyd’s Rep 123 at 127. Credits sometimes draw attention to the need for strict compliance—see that of Marine Midland Trust in Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep. 367 at 381. 7


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the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well... The documents tendered were not exactly the documents which the defendants had promised to take up, and prima facie they were right in refusing to take them. Moreover whether the requirements of the credit serve any useful purpose is of no concern to the bank. As Lord Diplock said in Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd:8 The banker is not concerned as to whether the documents for which the buyer has stipulated serve any useful commercial purpose or as to why the customer called for tender of a document of a particular description. 7–07 So long as the documents are as described or, in the absence of description, are usual in the trade, it is not any part of the bank’s duty to exercise its judgment as to their legal effect or to consider whether the customer’s intentions are being carried out or whether the documents tendered will do just as well as those stipulated for by the buyer.9 Thus, in National Bank of Egypt v Hannevigs Bank Ltd 10 Scrutton LJ is reported to have said:11 In some cases the obligation of a banker, under such a credit, may need very careful examination. I only say at present that to assume that for onesixteenth per cent of the amount he advances, a bank is bound carefully to read through all bills of lading presented to it in ridiculously minute type and full of exceptions, to read through the policies and exercise a judgment as to whether the legal effect of the bill of lading and the policy is, on the whole, favourable to their clients, is an obligation which I should require to investigate considerably before I accept it in that unhesitating form. 8

[1973] AC 279 at 286. See Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 at 151. See also Banque de l’Afrique Occidentale v Banca Commerciale Italiana—Tribunal de Commerce de la Seine (10e Ch.), 6.2.1950 (Gazette du Palais, 1–4 avril, 1950), the headnote to which reads: ‘… il est essentiel pour la sauvegarde des intérêts de l’acheteur que le donneur d’ordre n’interprète pas ses instructions, mais les exécute littéralement’. The headnote to a decision (Ferrari v La Société Française de Banque et de Dépôts) of the Tribunal de Commerce de Bruxelles of 2.11.1953 reads: ‘Pour vérifier si les documents sont conformes à la lettre de crédit, le banquier doit s’en rapporter uniquement à leur teneur sans devoir procéder a des vérifications de fait quelconques.’ The buyer had called for railway receipts for potatoes ‘en port payé jusqu'à la frontière italienne’, whereas the bank had opened the credit for the potatoes ‘à expédier franco frontière italienne’. The court stated that the bank’s duty was to check the condition by reference only to the documents and that it was not required to verify in fact. The plaintiff lost his case on other grounds. 10 (1919) 1 Ll.L.Rep. 69, but this point is only reported in 3 Legal Decisions Affecting Bankers 213. 9


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In British Imex Industries Ltd v Midland Bank Ltd,12 Salmon J shared the doubt expressed by Scrutton LJ. He put it in these words:13 According to the Bank’s case, it was their duty, for the remuneration of £18, to read through the multifarious clauses in minute print on the back of these bills of lading, and, having observed Additional Clause B, to consider its legal effect, and then to call for an acknowledgment that it had been complied with. I respectfully share the doubt that Lord Justice Scrutton expressed in National Bank of Egypt v Hannevig’s Bank Ltd, as to whether any such duty is cast upon the Bank. I doubt whether they are under any greater duty to their correspondents than to satisfy themselves that the correct documents are presented to them, and that the bills of lading bear no indorsement or clausing by the shipowners or shippers which could reasonably mean that there was or might be some defect in the goods, or in their packing. A contrary approach could reduce documentary credit practice to an absurdity because of the unreasonable responsibility it would place on an issuing bank and of the delays that would inevitably ensue. This is now reflected in the provisions of the UCP, which expressly state that banks will not examine the contents of the terms and conditions in transport documents.14 7–08 The issuing bank owes a duty to its customer as laid down in article 13(a)15 to scrutinize the documents tendered by the beneficiary under the credit or by the intermediary bank, and to check them carefully with the instructions which it has received from its customer, and which, presumably, it has faithfully embodied in its credit and in its credit instructions to its correspondent bank. Any default in this respect will debar it from claiming reimbursement by the customer of any amount paid against the documents and will also cause it to forfeit its right to remuneration.16 7–09 Under article 13(a), compliance is to be “determined by international standard banking practice as reflected in these Articles”. In Glencore International AG v Bank of China17 it was said that the italicised words make it clear that international banking practice determined apart from the UCP cannot override the express effect of the UCP as construed by the courts. This may give too narrow a construction to article 13(a) and does not appear to be the view taken by the ICC Commission on Banking Technique and Practice, which in its Policy Statement on 12 July 1999 purported to set out international standard banking practice in relation to determination of whether 11

3 Legal Decisions Affecting Bankers 213 at 214. [1957] 2 Lloyd’s Rep 591. 13 [1957] 2 Lloyd’s Rep 591 at 597. 14 Articles 23(a)(v), 24(a)(v), 26(a)(v) and 27(a)(vi). If the credit requires presentation of the charterparty where it calls for presentation of a charterparty bill of lading, the bank is under no obligation to examine the charterparty—see article 25(b). 15 As to whether this duty is also owed to the beneficiary, see paragraph 4–07 footnote 13 above. 16 See paragraphs 4–12 to 4–33 above. 17 [1996] 1 Lloyd’s Rep 135 at 153. 12


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documents are “original”.18 This detailed statement sets out practice not expressly dealt with in the articles of the UCP, but is applied by banks in determining whether or not documents are “original” and was intended by the Commission to resolve the difficulties created by legal decisions relating to that issue. The Policy Statement, while not adding to the provisions of the UCP, is clear evidence of standard banking practice and ought to be accepted by the courts in determining whether international standard banking practice has been complied with. If this is correct, there is no reason why evidence should not be led in relation to different areas of international standard banking practice relating to documentary compliance. 7–10 The bank is clearly entitled to reject documents when they are not documents of the kind described in the credit. A commercial credit is usually established as ancillary to a contract for the sale of goods on c.i.f. terms and the documents will, therefore, as a rule include those which are obligatory in the case of such a contract, namely an invoice, bill of lading and a policy of insurance, although in some cases the buyer may deal with insurance. The credit may further call for weight notes, analysts’ reports, consular certificates and the like.19 Obviously, all the documents called for must be presented. Forms of application for credits and credits themselves, although differing in detail and format, nevertheless today conform in skeleton to a fairly well-defined pattern. It is the exception rather than the rule for them to lack precision in so far as the documents required are concerned. It is rather in the descriptions of the documents that there is a lack of precision, which leads from time to time to misunderstanding.20 7–11 In most cases the bank’s mandate will be explicit and detailed in its terms, and in this event the bank is chiefly concerned to observe that the documents when presented correspond to the description given in its mandate. But not infrequently the circumstances are such as to call for an exercise by the bank of its judgment whether the documents are such as it can safely accept, having regard to the terms in which its mandate is framed.21 If the mandate is ambiguous, it may be sufficient if the bank acting in good faith puts a reasonable interpretation on its phraseology.22 7–12 The documents must conform to the requirements of the credit “on their face”. This entails compliance with the description of the documents as laid down in the credit. It is a matter of description, not quality, correctness or validity.23 Documents may be false or forged, yet if they appear on their face to be consistent with the credit description both individually and as a whole they constitute a good tender.24 There is, however, often 18

See paragraph 7–33 below. There has been a tendency in recent years for the documents stipulated to increase in number. Documents relating to quality and origin of the goods are often required by the authorities of the country into which the goods are to be imported in order to ensure that foreign exchange is not spent on worthless goods. 20 For a case where the stipulation as to both the documents required and descriptions lacked precision, see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 277–8. 21 See Kredietbank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Rep 219 at 223. 22 For discussion of this principle, see paragraphs 4–19 to 4–20 above. In Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279 at 286, Lord Diplock said that the reason for this principle was that the bank has to make decisions quickly in circumstances where delay in making the decision may give rise to a breach of the bank’s contractual obligations. 19


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room for dispute between banks as to whether documents appear on their face to comply with the credit or not and ultimately such disputes can only be resolved in the courts. 7–13 Strict compliance does not extend to the dotting of i’s and the crossing of t’s or to obvious typographical errors either in the credit or the documents. Rigid meticulous fulfilment of precise wording is not required in all cases. Some margin must and can be allowed, but it is slight, and banks are at risk in most cases where there is less than strict compliance.25 7–14 In Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran26 Lloyd LJ said it would not help to attempt to define the sort of discrepancy which can properly be described as trivial, although he pointed to a difference in one digit in a telex number as being a possible example. He held, however, that a failure to insert the letter of credit number and the buyer’s name on a document was not trivial and constituted a discrepancy. Obvious typographical errors in names may not constitute a discrepancy, but the misspelling of a name that is not obviously misspelt is a discrepancy as may be the insertion of the word “Pty” in the name of a company.27 7–15 In J.H.Rayner & Co Ltd v Hambros Bank Ltd28 the Court of Appeal held that the tender of a bill of lading which contained a description of goods having an identical meaning to, but which was different from, the description on the credit was discrepant even though the invoice described the goods in accordance with the credit. In Bank Melli Iran v Barclays Bank (Dominion, Colonial and Overseas)29 McNair J held that documents evidencing a shipment of “100 new-good, Chevrolet trucks” were not a good presentation under a credit calling for “new” trucks. In Moralice (London) Ltd v E.D. & F. Man,30 McNair, J held that documents showing shipment of 300 kilos less than 23

In Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1982] 2 Lloyd’s Rep 476 at 482, Parker I said: “I have no doubt that so long as the documents can be plainly seen to be linked with each other, are not inconsistent with each other or with the terms of the credit, do not call for inquiry and between them state all that is required in the credit, the beneficiary is entitled to be paid.” 24 For a discussion of the position in relation to false or forged documents, see paragraphs 6–57 to 6–72 above. 25 Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1982] 2 Lloyd’s Rep 476 at 482 (Parker J: affirmed [1983] QB 711), Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236 at 239–40 (Lloyd LJ) and Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 at 150 (Sir Thomas Bingham MR). Cf Opinions of the ICC Banking Commission, R345. 26 [1993] 1 Lloyd’s Rep 236 at 240. See also Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 461 and Oei v Citibank (Kools) 96 Civ 3737 (MBM) (S.D.N.Y. 1997). As to an incorrectly stated number, see E&H Partners v Broadway National Bank 96 Civ 7098 (RLC) (S.D.N.Y. 1998). 27 See Kredietbank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Rep 219 at 222–3, where Evans LJ said: “…the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents.” See also Tufts v Whitney National Bank 132 F 3d 1453 (1998). 28 [1943] 1KB 37.


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the quantity of 500,000 kilos required by the credit were discrepant. On the other hand in Soproma SpA v Marine & Animal By-Products Corporation,31 McNair J said:32 Finally, it was objected that, whereas the letters of credit provided that the bills of lading should state that at the moment of loading the temperature does not exceed 371/2°C, the bill of lading stated that the temperature at the moment of shipment did not exceed 100°F, there being a discrepancy of 0.5°F. Seeing that the de minimis rule does not apply to the tender of documents under a letter of credit (see Moralice (London) Ltd v E.D. & F. Man), I suppose in strict law I should give effect to this objection, but I confess that I should be reluctant to do so if it stood alone. 7–16 In the light of these opinions it is impossible exhaustively to define the nature and extent of the bank’s duty with regard to the exactness of compliance of documents presented to it under a credit and each case must be decided on its merits in the light of the language of the credit and the circumstances in which it has been established.33 Consistency of documents 7–17 Article 13(a) of the UCP provides that documents which appear on their face to be inconsistent with one another will be considered as not compliant.34 The meaning of “consistency” has been discussed by the ICC Commission on Banking Technique and Practice, which concluded that: the notion of “consistency” referred to in Article 735 should be understood as meaning that the whole of the documents must obviously relate to the same transaction, that is to say, that each should bear a relation (link) with the others on its face, and the documents should not be inconsistent with one another. 29

[1951] 2 Lloyd’s Rep 367. [1954] 2 Lloyd’s Rep.526 at 532. McNair J refused to apply the rule of insignificance (de minimis non curat lex) as between the intermediary banker and the beneficiary, as to which see paragraph 7–37 below. But see Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 461, where a survey report stated that the tonnage of a ship was 51,412.58, which was 0.40 tonnes more than the tonnage given by the invoices and bill of sale, and Leggatt J said: “If the question had been whether the survey report is in accordance with a figure of 51,412.18 gross tonnes appearing in the credit, I would have said that it is ... As a venial imperfection in rendition I would ignore it.” 31 [1966] 1 Lloyd’s Rep 367. 32 [1966] 1 Lloyd’s Rep 367 at 390. 33 The English courts have been reluctant to deal with abstract points and have largely confined themselves to the relevant facts of each case. 34 Article 13(a) is set out in paragraph 7–05 above. For consistency in relation to the specification of monetary amounts in credits payable in euro or one of the national currencies it replaces, see paragraph 4–113 above. 30


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7–18 In Midland Bank Ltd v Seymour,36 Devlin J referred to the documents being consistent with one another “in the sense that they make up a set which is apparently referring to the same parcel of goods”37 and said:38 …it is sufficient that the description should be contained in the set of documents as a whole and that the documents should each one be valid in itself and each be consistent with the other; and, accordingly, it would not matter for this purpose whether the description in the bill of lading is or is not negatived by the clause in the bill of lading,39 since the description is sufficiently contained in the invoice, which is one of the documents. In Banque de l’Indochine et de Suez SA v J.H. Rayner (Mincing Lane) Ltd40 Parker J indicated that the documents must be “plainly seen to be linked with each other” and “not inconsistent with each other”. In the Court of Appeal Sir John Donaldson MR held that the effect of the provisions of the UCP was that, although article 37(c)41 provided that the goods may be described in documents other than the commercial invoice “in general terms not inconsistent with the description of the goods in the Credit”, such documents had to identify the goods unequivocally. Thus linkage between the documents is not, as such, necessary, provided that each directly or indirectly refers unequivocally to “the goods”.42 Documents that could relate to the goods, but do not necessarily relate 35

Of the 1974 Revision (now article 13(a)). Consistency between documents is a troublesome concept and the ICC Commission on Banking Technique and Practice is attempting to give it less importance in the determination of whether a presentation is compliant. Thus rule 4.03 of ISP98 states that documents need only be examined for inconsistency with each other if expressly required by the credit (see paragraph 7–133 below) and in the first draft of the electronic supplement to the UCP (see paragraph 7–35 below) it is tentatively proposed that where the credit calls only for the presentation of electronically produced documents, such documents are to be deemed consistent if they can be linked to the same transaction. 36 [1955] 2 Lloyd’s Rep 147. 37 [1955] 2 Lloyd’s Rep 147 at 151. 38 [1955] 2 Lloyd’s Rep 147 at 155. 39 “Weight, measure, marks, numbers, quality, contents and value if mentioned in the bill of lading are to be considered unknown unless the contrary has been expressly acknowledged and agreed to. The signing of this bill of lading is not to be considered as such agreement.” 40 [1983] QB 711. 41 The relevant article in the case was 32(c) of the 1974 Revision. 42 This does not mean that a deficiency in a document which does not comply with an express requirement of the credit can be cured by reference to another document—see Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236 at 240, where the credit provided that each document should contain the letter of credit number. That is a common requirement, which establishes linkage between documents.


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to the goods, are not compliant.43 A minuscule difference in an amount as between one document and others does not, however, render the documents inconsistent with one another.44 Immaterial documents 7–19 In Soproma SpA v Marine & Animal By-Products Corporation, 45 the shippers’ invoice was included with the shipping documents in error (not being called for under the credit) and described the goods in a way that was inconsistent with the terms of the credit. McNair J held that the shippers’ invoice was “probably irrelevant in law”.46 Article 13(a) now states that the bank to which documents are presented must not examine documents not stipulated in the credit. Such documents must be either returned to the beneficiary or passed on. If the bank passes such documents on it does so without responsibility.47 7–20 In Credit Agricole Indosuez v Muslim Commercial Bank Ltd,48 Staughton LJ drew attention to a third class of documents. He said: I refer to [the documents against which payment, acceptance or negotiation is to be made] as stipulated documents. By contrast there may be others, not mentioned in the credit, which are provided by the seller on negotiation. 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. Here the question is whether the weight and measurement list, and the certificate of origin, were stipulated 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? It does not say in terms that they were. One has to look at the document as a whole to see whether it nevertheless “precisely” achieved that result. 43

[1983] QB 711 at 731–2. See also E & H Partners v Broadway National Bank 96 Civ 7098 (RLC) (S.D.N.Y. 1998). In International Banking Corporation v Irving National Bank 283 F. 103 the credit called for drafts accompanied by a bill of lading for “Manila” hemp, but the documents which were presented to the bank were drafts to which were attached bills of lading for “general merchandise contents unknown”. The drafts were paid by the bank, but on delivery only a portion of the consignment was found to consist of “Manila” hemp. It was held that the bank was entitled to an indemnity against its customer to the extent only to which the consignment consisted of “Manila” hemp. See also Hickox v Adams (1876) 34 LT 404. 44 Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 461. 45 [1966] 1 Lloyd’s Rep 367. 46 [1966] 1 Lloyd’s Rep 367 at 390. 47 Article 13(a). See also article 21 (set out at paragraph 7–125 below) 48 [2000] 1 Lloyd’s Rep 275.


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7–21 The material condition of the credit in that case provided “Original documents along with 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.” No weight and measurement list and no certificate of origin was sent by the confirming bank to the issuing bank and the confirming bank probably did not receive such documents. The Court of Appeal held that these were not “stipulated” documents against which the payment obligation in the credit arose.49 They fell into the third class of documents identified by Staughton LJ. Accordingly the confirming bank was entitled to reimbursement from the issuing bank. “Usual” documents and “merchantability” 7–22 As commercial letters of credit were principally developed in connection with c.i.f. sales, the acceptability of documents was at first determined, in the absence of instructions in the bank’s mandate as to the documents to be presented, by whether the documents were such as were usual in the trade in question, and which the bank’s customer could in his turn require a sub-purchaser to accept in satisfaction of a contract of resale.50 Thus, in Borthwick v Bank of New Zealand,51 the bank was instructed to pay against bill of lading, invoice and insurance policy. Mathew J held that, on the evidence, an all risks policy was what was ordinarily tendered in business of the kind in question and that the tender of a policy providing for insurance against total loss of the vessel only was not compliant.52 Nowadays credits normally so fully stipulate the documents that are to be presented that banks must not consider whether documents usual in the trade have been presented.53 Moreover banks are not expected to know detailed trade customs or customary terms so as to be able to judge whether particular references in documents are usual or have the same meaning as terms used in the credit.54 49

Staughton, with whom Sedley LJ agreed, held that because the provision of the credit concerned did not precisely state the documents to be presented as required by article 5(b) of the UCP, such provision could not be providing for “stipulated” documents. Peter Gibson LJ was left in uncertainty about the meaning of the clause. The whole court held that the confirming bank succeeded on the basis of the principle stated by Lord Diplock in Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279 at 283 (see paragraphs 4–19 to 4–20 above). 50 See the statement of Lord Sumner Hansson v Hamel & Horley Ltd [1922] AC 36 at 46 set out in paragraph 7–23 below. 51 (1900) 6 Com Cas 1. 52 At one time the bank had to consider whether it was usual in the trade for all three of a set of bills of lading to be tendered, in which case this had to be done—Cederberg v Borries, Craig & Co (1885) 2 TLR 201 and Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1 at 11–2. Now the position is governed by the UCP—see paragraph 7–99 below. 53 See, in relation to insurance documents, paragraph 7–114 below. 54 See English, Scottish and Australian Bank Ltd v Bank of South Africa (1922) 13 Ll.L.R. 21 at 24 and J.H.Rayner & Co Ltd v Hambros Bank Ltd [1943] 1 KB 37 at 41. 55 (1911) 16 Com Cas 95 at 101.


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7–23 It has also been said that the documents must be “merchantable” or such as substantially to confer protective rights throughout. Neither the buyer nor the bank is buying a litigation, as A.T.Lawrence J said in Re an Arbitration between General Trading Co Ltd and Van Stolk’s Commissiehandel.55 In Skandinaviska Aktiebolaget v Barclays Bank Ltd,56 Greer J said:57 …this is a credit which is opened against delivery of documents, and the documents are the security of the bank for the money covered by the credit. It is of vital importance that they should be in what I may call good merchantable order so that if anything happened to the parties mainly concerned and the money was not forthcoming to the bank, the bank would have realisable documents from which they could reimburse themselves from the risk that they had undertaken. However, in Golodetz & Co Inc v Czarnikow-Rionda Co Inc58 it was said that, absent a stipulation in the credit that the bill of lading must be in usual form, a notation on a bill of lading that does not prevent the bill from being a clean one as a matter of law does not make the documents unmerchantable.59 In that case Donaldson J accepted unreservedly the statement of Lord Sumner in Hansson v Hamel & Horley Ltd60 that: These documents have to be handled by banks; they have to be taken up or rejected promptly and without any opportunity for prolonged inquiry; they have to be such as can be re-tendered to sub-purchasers, and it is essential that they should so conform to the accustomed shipping documents as to be reasonably and readily fit to pass current in commerce. Donaldson J went on to say, however:61 A tender of documents which, properly read and understood, calls for further inquiry or are such as to invite litigation is clearly a bad tender. But the operative words are “properly read and understood”. I fully accept that the clause on this bill of lading makes it unusual, but properly read and understood it calls for no inquiry and it casts no doubt at all upon the fact that the goods were shipped in apparent good order and condition or upon the protection which anyone is entitled to expect when taking up such a document whether as a purchaser or as a lender on the security of the bill. In the light of these statements, a bank is entitled to reject a presentation of documents, which properly read and understood, calls for further enquiry or is such as to invite litigation.62 56

(1925) 22 L1.L.R. 523. The bank was entitled to reject a bill of lading to order which did not contain the name of the shipper and was endorsed in an illegible manner. 57 (1925) 22 L1.L.R. 523 at 524.


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The effect of non-documentary conditions 7–24 Conditions that do not relate to the documents should not be included in the credit. Article 13(c), which was introduced in the 1993 Revision of the UCP,63 provides: If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them. This provision was inserted for the purpose of eradicating the practice of incorporating non-documentary conditions into documentary credits,64 a practice which can cause severe problems and is against the underlying rationale of documentary credits.65 7–25 The rather curious wording of article 13(c) is designed to deal with the difficulty that a condition may or may not relate to the documents to be presented depending on the documents stipulated. Thus a condition that the goods be of a particular origin will be a condition relating to a document if the credit requires a certificate of origin or other document requiring a statement of origin to be presented (in which case the certificate or other document must show the origin stipulated in the condition), but will not be a condition relating to a document if the credit does not require a certificate of origin or other document requiring a statement of origin to be presented.66 It follows that if the issuing bank requires written evidence as a condition of the fulfilment of an obligation it should be unambiguously stated in the credit that a document evidencing the fulfilment of such condition be presented for payment.67 58

[1979] 2 Lloyd’s Rep 450, affirmed [1980] 1 Lloyd’s Rep 453. The notation explained the fact that certain goods had been lost by fire after loading, a separate bill of lading being issued. 60 [1922] AC 36 at 46. 61 [1979] 2 Lloyd’s Rep 450 at 456. 62 Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1981] QB 711 at 729–30. 63 In the previous edition of this book, commenting upon the decision in Banque de l’Indochine et de Suez SA v.J.H.Rayner (Mincing Lane) Ltd [1983] QB 711, the editor stated: “It would be simpler from the standpoint of both bank and beneficiary if they were concerned only with the actual documents called for as a condition of payment. The doubt could be removed if the Uniform Customs prescribed that any provision or statement in a credit which was capable of compliance by the beneficiary or a third party but not included among the documents against which payment would be made was to be ignored (non-écrit).” 64 A practice described in Position Paper No 3 produced by the ICC Commission on Banking Technique and Practice as “totally wrong”. The Commission expressed its “strong disapproval” that notwithstanding article 13(c) issuing banks continue to issue credits which contain nondocumentary conditions. 65 Cf Articles 2, 4, 5(b) and 13(a), which all stress that the credit transaction relates to documents and not to goods or the underlying contract between buyer and seller. As to the difficulty in which a negotiating bank can be placed, see Chartered Bank of India, Australia and China v Macfadyen & Co (1895) 1 Com Cas 1, in which it was held that the holder of a draft could not recover from the issuing bank as the draft had been drawn in breach of the condition specified in the credit that the credit should only be opened in respect of produce for exportation already purchased and paid for. The Court indicated that the negotiating bank took the risk of the condition not having been fulfilled. 59


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7–26 Article 13(c) has brought about a significant change. Absent this provision, it is difficult to see how any term of the credit that calls for some act by the seller is not a condition precedent to payment. It would seem that all provisions of a credit must have some meaning even if they appear to call for positive action on the part of the seller which the issuing bank cannot readily verify without documentary evidence. So, for example, the credit may provide that drafts shall not be drawn under it unless an act or series of acts have been performed by the seller, although today this would be rare. Thus in Chartered Bank of India, Australia and China v Macfadyen & Co68 the credit stipulated that it was to be availed of by drafts on the defendants against produce bought and paid for. The sellers drew bills on the defendants without having bought and paid for any goods, and negotiated them with the plaintiffs who were aware of the terms of the credit. It was held that the defendants were entitled to refuse payment of the drafts.69 This decision followed an earlier case of Union Bank of Canada v Cole70 where a credit was issued by the defendants to a firm of corn merchants authorizing them to draw bills against shipments of grain on certain conditions. It was held that noncompliance with these conditions was a ground justifying a refusal to pay drafts under the credit. In Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd71 where the credit stated that shipment was to be by a Conference Line vessel but did not call for a document to that effect, Parker J (endorsed by the Court of Appeal) held that the bank was entitled, although no specific proof was called for, to insist upon reasonable documentary proof “since parties to documentary credits deal only in documents”. In the Court of Appeal, Sir John Donaldson MR drew attention to the fact that “this was an unfortunate condition to include in a documentary credit, because it breaks the first rule of such a transaction, namely, that the parties are dealing in documents, not facts”.72 This point would be decided differently under the current revision of the UCP. 66

See Position Paper No 3 produced by the ICC Commission on Banking Technique and Practice. A submission that the latest shipment date was a condition which did not state the document to be presented in compliance with it and had to be disregarded was rejected in Credit Agricole Indosuez v Generate Bank [2000] 1 Lloyd’s Rep 123 at 127. 67 Cf article 5(b). 68 (1895) 1 Com Cas 1; and see Státni banka ceskoslovenská v Arab Bank Ltd, Revue de la Banque, no. 7 of 1967,675, no. 3 of 1972,248. 69 Cf Maitland v Chartered Mercantile Bank (1869) 38 L.J. Ch. 363; 2 H. & M. 440, where the discounting bank had no notice of the respective conditions and was held to be entitled to recover against the issuing bank. 70 (1877)47LJ.CP. 100. 71 [1983] QB 711. Parker J’s approach was followed by Evans J in Floating Dock Ltd v The Hongkong and Shanghai Banking Corporation [1986] 1 Lloyd’s Rep 65 at 79–80. 72 [1983] QB 711 at 728, See also Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 463 and Co-operative Centrale Raiffeisen-Boerenleenbank BA v The Sumitomo Bank Ltd [1988] 2 Lloyd’s Rep 250 at 256. 73 Article 22. 74 Cf paragraphs 7–61 to 7–63 below in relation to “stale” transport documents.


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Issues that may relate to more than one type of document Dating, signature and issue of documents 7–27 Certain principles are established in relation to the dating, issue and signature or authentication of documents. It is not necessary for documents to be issued or dated after the date of issue of the credit and documents dated prior to the date of issue of the credit are compliant subject to any provision of the credit to the contrary.73 They must be accepted, subject to presentation taking place within the time specified in the credit and in accordance with the UCP.74 7–28 Where the credit provides for a document to be authenticated, validated, legalised or certified, this requirement is satisfied by any signature, mark, stamp or label on the document that on its face appears to satisfy the requirement.75 The bank does not have to investigate the validity of the act concerned.76 Where a credit describes in vague terms a qualification that the person issuing a document is required to have, the bank must accept the document stipulated provided that the document appears on its face to comply with the other terms and conditions of the credit and not to have been issued by the beneficiary.77 7–29 Documents may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.78 Unless the credit stipulates that a copy document must be tendered, the documents tendered must be original documents. An original document may be a document which is written, typed, perforated or stamped by the document issuer’s hand or a document which states that it is original, unless the statement appears not to apply to 75

Article 20(d) of the UCP. In Vest v Pilot Point National Bank (1999) Tex. App. Lexis 4998, the Texas Court of Appeal held that a certificate that had to be signed by the “Judge of Denton County, Texas” was compliant when it was signed by a named person as “Acting Denton County Court Judge”. 76 See Gian Singh & Co Ltd v Banque de l’Indochine [1974] 2 Lloyd’s Rep 1. See also article 15 of the UCP and the Policy Statement adopted by the ICC Commission on Banking Technique and Practice on 12 July 1999 in relation to original documents (discussed in paragraph 7–33 below). 77 Article 20(a), discussed in paragraph 4–18 above. 78 Article 20(b). 79 See the Policy Statement adopted by the ICC Commission on Banking Technique and Practice on 12 July 1999. See also Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 at 152. A statement that a document is a “duplicate” original or “third of three” or that the document becomes void if another document of the same tenor and date is used indicates that the document is original. Documents which appear to be produced on a fax machine or by photocopy or which state that they are a true copy of another document or that another document is the sole original are not originals. 80 [1996] 1 Lloyd’s Rep 135.


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the document presented.79 Controversy has arisen, however, in relation to documents produced upon the document issuer’s original stationery by word processor and printer. Article 20 (b) of the UCP provides:

Unless otherwise stipulated in the Credit, banks will also accept as an original document(s), a document(s) produced or appearing to have been produced: (i) by reprographic, automated or computerised systems; (ii) as carbon copies; provided that it is marked as original and, where necessary, appears to be signed. 7–30 In Glencore International AG v Bank of China80 the credit required the presentation of a beneficiary’s certificate certifying that a full set of non-negotiable documents had been sent to the buyer. A certificate was produced on an ordinary word processor and printer. That document was then photocopied onto the same paper as that used by the printer. The case proceeded on the basis that one of the photocopies was signed and presented. Neither the first document produced nor the other photocopies were signed. The Court of Appeal held that signature of a copy document does not make it an original and that article 20(b) did not have the effect of treating the signature as a substitute for marking as an original. The Court expressed the view that a document produced in the manner referred to in article 20(b) must be marked as an original. The beneficiary’s certificate was not so marked and was therefore discrepant. 7–31 In Kredietbank Antwerp v Midland Bank Plc81 the credit required presentation of an original insurance policy. Under this stipulation two documents were presented, an original policy and a duplicate. The documents were produced by typing the details using the keyboard of a word processor. The original policy was printed onto high quality watermarked headed paper bearing the underwriters’ agent’s name and logo. The paper was fed manually into a laser printer. The document produced was photocopied and the photocopy marked “Duplicate”. Both documents were then signed. The question arose whether the original was discrepant because it was not “marked as original”. The judge at first instance held he was bound by Glencore International AG v Bank of China82 to hold that article 20(b) required the original to be marked as original. He then held that the document was marked as original within the meaning of article 20(b) because of the obviously original coloured logo on the first document, the signatures, the terms of the document itself and the fact that the document was accompanied by a duplicate, so marked and signed. The Court of Appeal held that the document did not need to be marked as original, holding that banks are not entitled to reject documents which clearly are originals and where apart from the terms of article 20(b) they would clearly be obliged to accepted them. The Court said that Glencore was not concerned with an original document which contained a relevant contract and which was not itself a copy of some other document and the judgment did not qualify the bank’s duty to accept a


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document of that kind as valid tender under a credit.83 This made it unnecessary to determine whether the original insurance policy was “marked as original” within the meaning of article 20(b). Evans LJ agreed with the judge at first instance about this, but preferred to say that the reasons relied on for this conclusion were those that led to the conclusion that the document was the original required by the credit.84 7–32 The approaches of the Court of Appeal in Glencore and Kredietbank are difficult to reconcile. The effect of Glencore appeared to be that any document not produced in handwriting or by typewriter had to be marked as original, which would normally be effected by stamping the word “original” on it. The Court considered that this would be a simple thing to do with no cost and that it was interpreting article 20(b) in a manner which produced a clear rule to apply in the case of documents produced by reprographic, automated or computerised systems.85 Clearly the beneficiary in Kredietbank was not aware of the decision in Glencore, however, and produced what it thought was a perfectly acceptable document. Moreover, as Evans LJ pointed out in Kredietbank banks may have difficulty in determining whether a document is produced by an electric typewriter or by a word processor, creating an unsatisfactory position.86 7–33 After the decision in Kredietbank, the ICC Commission on Banking Technique and Practice produced a Policy Statement indicating the correct interpretation of article 20(b).87 The Policy Statement supports the approach taken in Kredietbank. It states that unless a document indicates otherwise, it is treated as original if it appears to be on the document issuer’s original stationery and that a document printed on plain paper from electronically stored text is acceptable, without regard to article 20(b), if it appears to be an original. Further article 20(b) does not apply to documents only partly produced by reprographic, automated or computerised systems and that a photocopy ceases to be reprographically produced within the meaning of article 20(b) when manually stamped, dated, completed or signed by the issuer of the document. Further the “marked as original” provision in article 20(b) is satisfied by any marking on a document or recital in the text that indicates that the issuer of the document intends it to be treated as original. 81

[1999] Lloyd’s Banking Rep 219. [1996] 1 Lloyd’s Rep 135. 83 [1999] Lloyd’s Banking Rep 219 at 228. 82

84

[1999] Lloyd’s Banking Rep 219 at 229. 85 [1996] 1 Lloyd’s Rep 135 at 153. [1999] Lloyd’s Banking Rep 219 at 228. 87 Adopted on 12 July 1999. The Decision does not amend article 20(b) but is intended to indicate the correct interpretation of it. 88 Article 20(c)(i). Documents that purport to be copies but fail to correspond with the original (for example, because of correction of the original) are discrepant—see Oei v Citibank (Kools) 96 Civ 3737 (S.D.N.Y. 1997). 89 Article 20(c)(ii). 90 ISP98 addresses this issue and the relevant provisions are discussed in paragraph 7–137 below. 86


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7–35 The UCP is framed on the assumption that actual rather than electronic documents will be produced and presented under the terms of credit.90 Presentation by, For this purpose production on a letterhead or handmarking in any way marks the document as original. Credits often stipulate that copy documents be presented. Unless otherwise stipulated, banks must accept as a copy a document which is labelled as a copy or not marked as an original and a copy need not be signed.88 7–34 Where a credit requires multiple documents, this is satisfied by presentation of one original and the remaining number in copies except where the document itself indicates otherwise.89 for example, attaching authenticated electronic documents to an email sent to a nominated bank is not envisaged under the UCP. This does not mean that the creation of a credit permitting this is not possible. It is, however, necessary to stipulate in detail in the credit itself how presentation is to be effected and the precise matters with which each electronically transmitted document has to comply in order to meet the terms of the credit.91 The ICC Commission on Banking Technique and Practice is currently addressing such matters and is expected to approve in November 2001 an “electronic supplement” to UCP 500, which is likely to come into force in June 2002.92 The supplement will be known as the UCP Supplement for Electronic Presentation (eUCP, for short) and is now in draft. It will contain rules relating to the production and presentation of documents electronically.92 It is envisaged that the provisions of the supplement will apply only where expressly incorporated into the credit in addition to the UCP.93 The approach of the supplement will be to extend the meaning of terms used in the UCP so as to be capable of embracing electronically transmitted documents94 and to define for the purpose of the supplement other terms appropriate for use in connection with electronically transmitted documents.95 The supplement will provide for mixed presentations of paper documents and electronic records. It will also deal with such matters as the format in which electronically produced documents must be 91

A global electronic trading system, “Bolero.net”, was launched in September 1999. Bolero.net is a secure electronic system for transmitting trade documents through which it is possible to make and perform contracts and obtain trade finance. To use the system it is necessary to become a member and members’ obligations to one another in relation to the use of the system are founded on multilateral contracts to which all members become party. “Bolero.net” is the trading name of Bolero International Ltd. Further information can be found at http://www.bolero.net/. 92 Source “www.iccwbo.org/home/news_archives/2001/credit_rules.asp”. 93 Incorporation of the e-supplement will automatically incorporate the UCP, but not vice versa. 94 For example, “document”, “appear on their face”, “authenticate”, “sign”, “substitute”, “superimposed”, “notation” and “stamped”. 95 For example, “electronic record”, “electronic signature”, “paper document” and “receipt”. A number of these definitions will follow those used in ISP98, as to which see paragraph 7–137 below. 96 For the effect of the introduction of the euro—see paragraph 4–113 above. 97 If the credit requires a document to stipulate a unit price, such unit price must be stated and it is not sufficient to state the total quantity and the total price—see Opinions of the ICC Banking Commission, R308.


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presented, how presentation of such documents is to take place, notification that a presentation is complete, the bank’s time for examination, what the bank must do if it rejects documents, what constitutes an original document or a set of a single document and the date when electronically produced documents (and in particular transport documents) are issued. The amount claimed and the quantity of goods shipped 7–36 The sum to which the beneficiary is entitled upon presenting compliant documents will be stipulated in the credit.96 Generally this causes no difficulty.97 It is not open to the beneficiary to claim more than the amount stipulated and where the credit specifies that it is subject to some limitation in amount, the bank may refuse to pay if this condition is disregarded.98 98

Article 37(b), dealing with the amount invoiced. The bank may, however, pay an amount up to the limit of the credit and if it does so its decision binds all other parties—see paragraph 7–119 below. See also, as regards the amount of a draft, Scrutton LJ in Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1, 28 Com Cas 253, who is reported in the Commercial Case report (but not the King’s Bench report) as saying (at 263): “The only remaining point is a suggestion that a bill was tendered for more than the amount of the letter of credit. As to that, in my view for the excess amount over the letter of credit no bill was drawn against the credit, but there was only a request to collect; and the fact that such a request to collect was made did not afford any reason for rejecting the document drawn against the credit itself.” This comment must be regarded as obiter since it was not necessary to the decision. See also Kydon Compania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 at 77. An intermediate type of case may create some difficulty, for example, where a bill is drawn for the stipulated amount with exchange. It was held in Muenzer v Los Angeles Trust and Savings Bank 3 F. (2d) 222, that this was a case of de minimis. 99 Where quantities are specified in a credit, the form in which they are specified should be adhered to. Difficulties sometimes arise by reason of differing national systems of measurement. In this connection, instructions calling for 1,000 tons should require clarification. Documents covering 1,000,000 kilos (1,000 metric tons) would not be acceptable. 100 [1954] 2 Lloyd’s Rep 526. The possibility of proving this rule is mitigated by custom in a particular trade was referred to by Scrutton LJ in Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1 at 16. Article 39 of the UCP now deals with this. In Lomas 6-Cov Barff Ltd., Frangopulo & Co v Lomas & Co (1901) 17 T.L.R. 437, Kennedy J held that a tender of documents for 4,202 cases of currants was bad in respect of a contract for “about 4,000 cases”, with a margin of 5 per cent more or less. See also Margaronis Navigation Agency Ltd v Henry W. Peabody & Co of London Ltd [1965] 2 QB 430, in which Sellers LJ held that the rule was of general application and could be invoked in relation to a claim or a defence and whatever the nature of the transaction, and Soproma SpA v Marine & Animal By-Product Corporation [1966] 1 Lloyd’s Rep 367 at 390. 101 That is to say, those where the quantity is not stated in terms of a stated number of packing units or individual items. 102 Article 39(b). 103 As to partial shipments, see paragraphs 7–41 to 7–45 below.


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7–37 The documents presented must show the quantity of goods shipped.99 The quantity of goods shipped must be in accordance with the terms of the credit. In Moralice (London) Ltd v E.D. & F.Man,100 McNair J held that the de minimis rule could not be prayed in aid where payment was to be made against documents pursuant to a letter of credit. This rule is now mitigated to a certain extent by the UCP. In relation to bulk shipments,101 a tolerance on the quantity shipped of 5% more or 5% less is allowed unless the credit stipulates that the quantity of goods must not be exceeded or reduced, provided that the sum to be drawn under the credit on such quantity does not exceed the amount of the credit.102 Where partial shipments are prohibited103 and the credit stipulates the quantity in terms of a stated number of packing units or individual items, a tolerance of 5% less in the amount of the drawing is permissible provided that the quantity of goods (if stipulated in the credit) is shipped in full or the unit price of the goods (if stipulated in the credit) is not reduced.104 7–38 Often contracts of sale and credits issued pursuant to them give the seller a leeway as to the amount that he can ship, by using words such as “about”, “approximately” or “circa”. That, in turn, will have an effect on the sum of money that the seller is entitled to receive under the credit.105 Sometimes the unit price stipulated will also be described as “about”, “approximate” or “circa”. Where such or similar expressions are used in connection with the quantity to be shipped, the amount to paid under the credit or the unit price of the goods, the credit is construed as allowing a difference not to exceed 10% more or 10% less than the quantity, amount or unit price to which they refer.106 104

Article 39(c). Credit descriptions of quantities are not always clear and even where they are it is not always possible to determine the responsibility of the paying bank in this respect. Where a credit is opened for a total amount of “about” £5,000 in respect of “about” 500 tons of a particular commodity and nothing is said as to price, part shipments being allowed, the obligation on the bank accepting these instructions is by no means certain. It could be argued that so long as the bank paid no more than £5,500 against documents showing shipment of 500 tons it had complied with the credit. But could the buyer insist that it was the duty of the bank to see that the price was uniform throughout? In a case which did not reach the courts, later shipments were at a higher price, though this did not affect the credit as a whole. Instructions such as these should, of course, be declined, for they leave too much to the imagination; but the credit was a negotiation credit and the negotiating bank did not see the credit until the documents were presented to it for negotiation. The bank would surely not be called upon to consider the price unless price was mentioned in the instructions and, anyhow, if there were any wide variation either the amount of the credit or the quantity of the goods would fall outside the margin. On the other hand, if a credit states that part shipments are allowed against proportional payments, the bank would be wrong in paying unless the invoice showed a value in proportion to the size of the shipment. 106 Article 39(a). 107 (1921)9L1.L.R. 116. 105


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7–39 Subject to the above, where quantities are stated in the bill of lading they must correspond to those mentioned in the customer’s mandate as embodied in the credit. Thus, where a credit calls for bills of lading covering, say, 500 tons of a particular commodity, and when the bills of lading are presented they show additional goods or, say, 100 tons more of the commodity said to have been ordered by the buyers, these bills should not be accepted even if the other documents are in order and no payment is asked for the excess. In London and Foreign Trading Corporation v British and North European Bank107 the plaintiffs purchased 500 tons of meal from a Singapore firm on c.i.f. terms, payment to be made by the opening of a credit with the defendant bank in London, which was instructed to pay against “bill of lading to be endorsed in blank, dated not later than October 2, 1920; insurance policy covering war and marine risks; invoice for 500 tons South African Maize Meal c.i.f. Liverpool shipped per steamer from Singapore to Liverpool”. The bank paid against a bill of lading for 5,895 bags of meal, the number of bags not being converted in the bill of lading into tons weight. The invoice accompanying the drafts stated that if the bags were taken to represent 190 lb. each the total weight of the consignment would equal 500 tons. The consignment was landed short of that quantity, and the plaintiffs sued the bank alleging a breach of duty in paying for less than the amount specified in the plaintiffs’ instructions. The bank relied on the statement in the invoice, which they claimed to be the document that governed the transaction. 7–40 Rowlatt J held that (i) the authority given to the bank was limited to payment against a bill of lading showing the shipment of 500 tons, and that the invoice could not be prayed in aid to interpret the bill of lading and (ii) that the bank was in default in accepting a bill of lading which did not specify tons weight. Rowlatt J also declined to give effect to a clause in the contract between the bank and the plaintiffs that provided that the bank did not accept responsibility for discrepancies or shortages which it had no means of verifying. Such reservation was irrelevant in the circumstances. If the bill of lading is patently identifiable with the goods called for by the credit, which means also that it is not in conflict with the invoice, then it should be a good presentation. In the case in question the bank tried to use the invoice to show 5,895 bags were the same as 500 tons. 108

Under English law, in the absence of agreement, course of dealing or usage, a buyer is not bound to accept partial shipments—see sections 30 and 31 of the Sale of Goods Act 1979. Where partial shipments are agreed, the parties may agree that a minimum and/or maximum quantity should be shipped in each part For a case where the tender of documents was discrepant because the quantity shipped was less than that stipulated for the partial shipment concerned, see Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) 1 Lloyd’s Rep 684, affirmed [2000] 1 Lloyd’s Rep 218, [2001] 1QB 167. 109 Sometime the terms “divisible” or “fractionable” are used in the credit If they are, they should be disregarded—see article 48 (b). 110 Article 40(a). In relation to standby credits issued subject to ISP98, partial and multiple drawings are permitted unless expressly prohibited—see rule 3.08.


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Partial shipments and drawings 7–41 If the contract of sale provides for delivery of a specific quantity of goods the question may arise whether the seller can satisfy his contractual obligations only by shipping the whole quantity in one lot or whether he can ship it in several different parcels (by “partial shipments”). The parties should agree whether such partial shipments can be made or not.108 In some cases, the contract may not simply permit partial shipments, but may require them to be made so that parts of the total shipment are deliverable over a period of time (“shipment by instalments”). 7–42 The credit issued pursuant to the contract of sale should reflect what has been agreed between the parties in relation to these matters. The presumption in the UCP is, however, that partial shipments109 are allowed unless the credit stipulates otherwise.110 7–43 The effect of partial shipments being allowed is that the bank must pay the invoice value of the goods part shipped against documents which show 111

Cf Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyd’s Rep 445 at 448, where Lord Denning said: “…[this] seems to have been one transaction. The whole letter of credit covered all the 240,000 tonnes. The documents ought to be correct and valid in respect of each parcel. If that condition is broken by forged or fraudulent documents being presented—in respect of any one parcel—the defendants have a defence in point of law against being liable in respect of that parcel”. In that case, however, there was evidence that the documents presented in respect of each parcel were forged and accordingly the bank had a claim to recover amounts paid under previous presentations as money paid under a mistake of fact. 112 Similar provision is made for shipments by post and courier—see article 40(c). 113 For discussion of this issue in relation to a c.i.f. contract, see Rosenthal & Sons Ltd v Esmail [1965] 1 WLR 1117, where, because of a quota system applying to Hong Kong, the sellers shipped goods in two equal lots by the same ship under two bills of lading and two sets of shipping documents, but forwarded all the documents as one set. The question which arose was whether there were two shipments or one. The House of Lords held by a majority that there was only one shipment and thus one entire contract. Lord Upjohn said (at 1123): “Each case must depend on its own particular facts and no one general rule can be laid down. No doubt if a seller loads onto one ship but under more than one bill of lading and he evinces any intention to deal with the documents separately he can hardly thereafter challenge the view that he has elected to make two shipments. But in this case the facts were rather special—(1) Two bills of lading and ancillary documents were necessary because the goods came from two sources of supply and the quota regulations demanded separate documentation; (2) the goods were all loaded into one ship on one day and the bales were numbered consecutively from 0–140; (3) the seller sent forward all the documents as one set of documents for acceptance by the buyer. It was solely due to the wrongful act of the buyer in rejecting one set of documents that any separation occurred; (4) the correspondence referred to in the speech of my noble and learned friend, Lord Pearson, shows that both parties were intending to deal with the goods as one shipment. On the particular facts of this case I am of opinion that there was only one shipment, and therefore only one entire contract.”


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shipment of that part provided that the terms of the credit are otherwise fulfilled (and in particular that the invoice is made out for a sum consistent with the terms of the credit).111 However, it is sometimes difficult to know whether shipments are in accord with a credit under which partial shipments are allowed and what the expression “partial shipments allowed” means in relation to other shipping requirements of the credit. Some clarity is introduced by article 40(b), which states: Transport documents which appear on their face to indicate that shipment has been made on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering partial shipments, even if the transport documents indicate different dates of shipment and/or different ports of loading, place of taking in charge, or despatch.112d In circumstances falling within article 40(b), the fact that there are separate invoices and policies for two bills of lading does not necessarily mean that there are partial shipments.113 Shipments on the same ship but with delivery at different destinations are partial shipments. On the other hand, shipment in one ship of goods gathered at different ports is not a contravention of a credit in which part shipments are prohibited. 7–44 Where instalment shipments are called for under the credit at given periods of time, the seller must ship the quantity of goods stipulated for each instalment within the period stated. If he does not do so, the credit ceases to be available both for the shipment which is not made within the period and for all subsequent shipments, unless the credit stipulates otherwise.114 Thus, if an instalment fails, it cannot be added to subsequent shipments and no further payment can be recovered in respect of later shipments unless the credit so provides. 114

Article 41. As regards a sales contract governed by English law, the question depends on the terms of the contract and the circumstances of the case—see section 31(2) of the Sale of Goods Act 1979. 115 For transferability of credits, see paragraphs 5–02 to 5–20 above. 116 Discussed at paragraphs 5–09 to 5–10 above. 117 See paragraphs 7–119 to 7–121 below. 118 Unless expressly required by the credit, it is not necessary for such documents to contain a description of the goods provided that they are not inconsistent with the other documents presented and can be linked to the transaction—see Opinions of the ICC Banking Commission, R364.


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7–45 Where partial shipments are allowed under a credit and the credit is transferable,115 the benefit of the credit can be transferred in favour of more than one supplier. Article 48(g),116 after providing that a transferable credit can be transferred once only, goes on to say that: Fractions of a transferable Credit (not exceeding the aggregate amount of the Credit) can be transferred separately, provided partial shipments/drawings are not prohibited, and the aggregate of such transfers will be considered as constituting only one transfer of the Credit. The description of the goods 7–46 Article 37(c) of the UCP provides: The description of goods in the commercial invoice must correspond with the description in the Credit. In all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the Credit. It should be noted that the commercial invoice description must “correspond” to the description in the letter of credit—it need not be precisely the same, although usually the beneficiary will draft the invoice so as to describe the goods in the same way as they are described in the credit.117 There is no requirement for a corresponding description in the other documents.118 Such documents must not be “inconsistent” with the credit or the invoice so far as the description is concerned. Accordingly the description may be in general terms, although it must identify the goods unequivocally. 7–47 Cases on the description of the goods have tended to arise in connection with the description in the bill of lading, although the same principles apply in relation to any document other than the commercial invoice. In J.H.Rayner & Co Ltd v Hambros Bank Ltd,120 where no provision equivalent to article 37(c) was included in the credit, the credit called for documents covering a shipment of Coromandel groundnuts. The invoice tendered was for Coromandel groundnuts, but the bill of lading evidenced a shipment of machine-shelled groundnut kernels. Hambros Bank’s refusal to pay was upheld by the Court of Appeal. It was argued that anyone in the trade would have known that the two descriptions meant the same thing, but the Court declined to accept this, asserting that a bank cannot be expected to have knowledge of the customs and customary terms of every one of the thousands of traders for whose dealings it may issue credits. This case seems to have been variously understood. In some quarters it has been thought to mean that a bank must decline to pay against documents embodying descriptions which are not precisely the same as those given in the credit. This is clearly not so. It has also been suggested to mean that a general description in a bill of lading which does not conflict with that contained in the credit and which bears the necessary shipping marks is not enough. That is inconsistent with article 37(c). 7–48 In Soproma SpA v Marine & Animal By-Products Corporation121 the sales contract described the goods as “Chilean Fish Full Meal”, as did the letter of credit. The seller’s invoice described the goods as “Chilean Fish Full Meal, 70% protein”. The bill of


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lading described the goods as “Chilean Fishmeal”. McNair J held that anyone in the trade seeing a bill of lading would not expect to see more specific a description than “Fishmeal” and could not reasonably object to such a description. He distinguished J.H. Rayner & Co Ltd v Hambros Bank Ltd on the ground that there the credit did not contain a term equivalent to article 37(c). 7–49 In the light of this an acceptable practical rule is that a bill of lading will be a good presentation (in this particular connection) if its description of the goods in no way conflicts with that given in a credit (which means also that it contains no description which is not in the credit) and carries such shipping marks as enable the goods unequivocally to be identified with those specified in the credit. Of course, as Devlin J said in Midland Bank Ltd v Seymour.123 “If the terms of the credit require that the bill of lading should contain a certain description, then the bill must contain that description and it is not for the bank to ask itself what legal value such a description might have.” Transport documents Introduction 7–50 Virtually all commercial letters of credit provide that a transport document must be presented. Such a document evidences that the goods have been shipped by the beneficiary, or at least have been taken into the custody of the carrier for the purpose of shipment. The nature and terms of the document specified will depend on the type of transport being used, sea, air, rail, road or inland waterway, or whether two or more types of transport are being used, known as “multimodal transport”. Bills of lading 7–51 The most frequently used transport documents for the purpose of letters of credit are bills of lading. By mercantile law, “bills of lading are the symbols of the goods”.124 They are documents of title and the indorsement and delivery of them from one person to another transfers the right to possession of the goods and such title as the transferor intends to pass to the transferee.125 The holder of the bill of lading has constructive possession of the goods and the goods should only be delivered by the carrier against 119

See paragraph 7–18 above. See also Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135, where the Court of Appeal held that a packing list that did not contain a description of the goods did not entitle the bank to reject the presentation, it being clear when the document was read with other documents that it related to the goods. 120 [1943] 1 KB 37. See also Opinions of the ICC Banking Commission, R363. 121 [1966] 1 Lloyd’s Rep 367. 122 See also London and Foreign Trading Corporation v British and North European Bank (1921) 9 L1.L.R. 116 at 117–8 and Netherlands Trading Society v Wayne & Haylitt Co (1952) 6 Legal Decisions Affecting Bankers 320. In Laudisi v American Exchange National Bank 239 N.Y.234 (1924), it was held that the presentation of a bill of lading evidencing a


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presentation of the bill of lading.126 Bills of lading are frequently issued in sets of three. When delivery has taken place against one of the set, the others in the set cease to have effect. Bills of lading that acknowledge that the goods have been delivered into the possession of the carrier, although not yet shipped (“received for shipment” bills of lading), have also been held to be documents of title.127 Bills of lading issued for the transport of goods from a place inland to a destination overseas are known as “combined transport” or “through” bills of lading and are referred to in the UCP as “multimodal transport documents”. If such a bill of lading evidences shipment of the goods at the port of loading for the sea transport it can be presented under a credit which calls for an ocean bill of lading for port to port shipment.128 If it does not evidence shipment at the port of loading it can only be presented under a credit calling for a document covering multimodal transport.129 7–52 A document evidencing shipment of goods which includes words which show that it is not transferable is known as a straight (or non-negotiable) bill of lading and such documents are referred to in the UCP as “non-negotiable sea waybills”. Transfer of them cannot transfer title to the goods. Moreover neither the shipper nor the consignee can require the carrier to deliver the goods to a third person and the carrier is bound to deliver the goods to the named consignee without production of the waybill. A non-negotiable sea waybill cannot be presented under a credit calling for an ocean bill of lading. 7–53 Other documents that cannot be presented under a credit calling for an ocean bill of lading are mate’s receipts and delivery orders. A mate’s receipt is a document that evidences the loading of the goods on board the vessel and shows the apparent order and condition of the goods. It is usually signed by the first officer of the ship and does not contain the terms and conditions of carriage. The bill of lading is usually filled out with the information contained in the mate’s receipt and supersedes it. A mate’s receipt is not an acceptable substitute for a bill of lading.132 Similarly, neither a delivery order nor a ship’s release will do where a bill of lading is stipulated for.133

shipment of “grapes” was good under a credit in respect of shipment of “Alicante Bouchez Grapes”; but see Bank of Italy v Merchants National Bank 236 N.Y. 106 (1923). 123 [1955] 2 Lloyd’s Rep 147 at 154. 124 Ross T.Smyth & Co Ltd v T.D.Bailey & Son & Co [1940] 3 All ER 60 at 69 (Lord Wright). 125 This was established in 1794 in Lickbarrow v Mason (1794) 5 Term 683. See also Sanders v Maclean (1883), 11 QBD 327 at 341. As to the transfer of the rights under the bill of lading contract, see now the Carriage of Goods by Sea Act 1992. 126 The significance of the bill of lading as evidence of a right to possession is shown in the decision of the Court of Appeal in Trucks & Spares Ltd v Maritime Agencies (Southampton) Ltd [1951] 2 All ER 982, in which the Court of Appeal reversed an order of Devlin J that the carriers deliver to the consignees notwithstanding that the bills of lading had been retained by the carriers in respect of the shippers’ indebtedness to them. Denning LJ said: “I think we cannot allow strangers to the contract of carriage to claim the goods at this stage without production of the bills of lading.” For a recent case, see Motis Exports Ltd v Dampskibsselskabet AF [2000] 1 Lloyd’s Rep 211 (delivery against forged bill of lading).

7–54 A case illustrating the underlying rationale for these principles is The National Bank of South Africa v Banca Italiana di Sconto.134 A contract for the sale of goods “ex


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warehouse” was financed by a bank’s commercial credit which provided that drafts would be accepted against “delivery orders”. The beneficiaries presented bills of lading instead of delivery orders, and it was held that the issuing bank was justified in refusing to honour the drafts. The Court of Appeal decided that the contract of sale could only be satisfied by the presentation of a delivery order ex warehouse, or a document that was equivalent to it in the business sense. The bill of lading presented was subject to Italian law and only entitled the holder to delivery (from the ship) subject to charges. Further, although in the body of the document the goods were deliverable to the order of the shipper, it contained in the margin a statement that delivery was to be to the order of a named consignee or his assigns, leaving it uncertain whether delivery would be made to the order of the vendor of the goods, or whether it was necessary that the bill of lading should also be endorsed by the consignee named in the margin. The right of the issuing bank to reject the bill of lading was put on the ground that the customer had not obtained a document that would give him an unqualified right to delivery. 7–55 In Enrico Furst & Co v W.E.Fischer Ltd135 Diplock J said that he was satisfied on the evidence of banking witnesses, that banking practice is that, where the credit is for payment against bills of lading, banks, whether in London or Switzerland or in Italy, do not treat as good tender either bills of lading signed by forwarding agents or bills of lading claused to incorporate the terms of a charter party. The UCP now deals expressly with bills of lading signed by forwarding agents and bills of lading incorporating the terms of a charterparty (“charterparty bills of lading”). 127

The Marlborough Hill [1921] 1 AC444 (PC), Ishag v Allied Bank International [1981] 1 Lloyd’s Rep 92 (Lloyd J) and The Lycaon [1983] 2 Lloyd’s Rep 548 (Lloyd J). Cf Diamond Alkali Export Corporation v Bourgeois [1921] 3 KB 443 (McCardie J). 128 Article 23(a)(ii). The bill must also satisfy the other requirements of article 23 and the terms of the credit. 129 The bill must also satisfy the requirements of article 26 and the terms of the credit. See also Emilio Clot v Compagnie Commerciale du Nord SA (1921) 8 Ll.L.R. 380, where it was held that the term “shipping documents” did not include a so-called “reception order” issued by a firm of forwarding agents under which the forwarding agents undertook no liability in respect of the goods after they had left their control. 130 Benjamin’s Sale of Goods, 5 ed, para 18–014. 131 Compare articles 23(a)(iv) and 24(a)(v). 132 In Wah Tat Bank Ltd v Chan Cheng Kum [1967] 2 Lloyd’s Rep 437 the Malaysia Federal Court (Appellate Jurisdiction) held that a trade custom could create a mate’s receipt a document of title to goods so that the transfer of the document operates to pass the property in the goods in the same way as the transfer of a bill of lading. This has, however, no bearing on a bank’s duty under an irrevocable credit which requires presentation of a bill of lading. 133 This is also the position under c.i.f contracts, as to which see Orient Co Ltd v Brekke and Howlid [1913] 1 KB 531, Forbes v Pelling (1921) 9 Ll.L.R. 202, Denbigh, Cowan & Co v Atcherley and Co (1921) 90 LJ KB 836 and Heilbert, Symons & Co Ltd v Harvey, Christie-Miller & Co (1922) 12 L1.L.R. 455.


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7–56 Article 30 provides that banks will only accept a transport document136 issued by a freight forwarder in two circumstances. The first is that the bill appears on its face (a) to indicate the name of the freight forwarder as carrier or multimodal transport operator and (b) to have been signed or otherwise authenticated137 by the freight forwarder as carrier or multimodal transport operator. The second is that the bill appears on its face (a) to indicate the name of the carrier or multimodal transport operator and (b) to have been signed or otherwise authenticated by the freight forwarder as a named agent for or on behalf of the carrier or multimodal transport operator.138 In addition to satisfying these requirements the document must also satisfy the relevant requirements of articles 23 to 28.139 7–57 Under the UCP charterparty bills of lading or charterparty sea waybills may not be presented unless the credit expressly calls for or permits them to be presented.140 If the credit calls for a charterparty bill of lading, the bill must contain an indication that it is subject to a charterparty. Such a credit may also require presentation of the charterparty itself. In such a case, a proper presentation must include the charterparty, but banks do not examine the charterparty and pass it on without responsibility on their part.141 If the credit permits a charterparty bill of lading, the bill may contain an indication that it is subject to a charterparty. Where charterparty bills of lading are called for or permitted, there is no need for the name of the carrier to be indicated on the bill of lading.142 Time of shipment/“stale” documents 7–58 As well as stipulating presentation of a transport document, credits commonly require that shipment143 take place within a certain period or by a certain date.144 A transport document showing shipment after the last date for shipment must be rejected.145 If the expression “on or about” a certain date is used, banks must interpret this to mean that shipment is to be made during the period from 5 days before to 5 days after the specified date, with both end dates included.146 Expressions such as “prompt”, “immediately” and “as soon as possible” should not be used and banks must disregard them.147 7–59 The UCP provides for when goods are deemed to have been shipped and accordingly for the date when the bank must take the goods as having been shipped for the purpose of determining an event (shipment, dispatch or taking in charge of the goods) that may be relevant for the purpose of the credit. It does not follow that the goods are actually shipped on the date so deemed and it is commonplace that shipped bills of lading 134

(1922) 10L1.L.R531. [1960] 2 Lloyd’s Rep 340 at 345–6. The credit specified “S.S. Co’s” bills of lading, meaning steamship company’s bills of lading, included to show that a freight forwarder’s bill of lading would not be compliant. The judge held that the words were unnecessary and that accordingly, in this respect, the credit was issued in the terms agreed between the buyer and the seller. The seller was concerned because he believed that the credit meant that liner bills of lading (that is to say, bills issued for shipment on a scheduled line) had to be presented. 136 This includes a bill oflading. 137 For signature and authentication, see paragraph 7–85 below. 135


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are issued on a date after the date of issue stated on the bill of lading. It is not therefore possible to argue that the bank should reject a presentation of documents because circumstances show that the goods cannot have been shipped on the date that the bank is required to take as the date of shipment.148 7–60 In relation to bills of lading containing pre-printed wording showing that the goods have been loaded on board, the date of shipment is deemed to be the date of issuance of the bill of lading. In other cases, the date of shipment is the date shown on the notation on the bill of lading149 showing that the goods have been loaded on board.150 Where a document evidencing multimodal transport is called for, the date of issuance of the document is deemed to be the date of loading on board and the date of shipment, unless the document expressly indicates a date of loading on board, in which case such date is deemed to be the date of shipment.151 Where a credit calls for an actual date of dispatch of goods by air and the air transport document indicates a specific notation of such date, the date of shipment is deemed to be that date. In all other cases the date of issuance of the air transport document is deemed to be the date of shipment.152 In relation to rail, road and inland waterway documents the date of shipment is deemed to be the date of issuance of the transport document unless the document bears a reception stamp, in which case the date of shipment is deemed to be the date of the reception stamp.153 The date of shipment of goods sent by courier is deemed to be the date shown on the stamp or other authentication showing the date and place where the goods have been picked up.154 The date of 138

For signature as an agent, see paragraph 7–86 below. See paragraphs 7–82 to 7–105 below. 140 Article 23(a)(vi), 24(a)(vi) and 25. 141 Article 25(b). 142 Article 25(a)(iii). 143 Shipment has an extended meaning, which will depend on the type of transport document to be issued and the conditions of the credit—see article 46(a). 144 If no date is specified the last legally possible date for shipment will be the date on which the credit expires (as to which, see paragraphs 6–02 to 6–03 above), although it may not be practically possible for the transport document to be issued and presented to the bank on the same day. Credits may also state an earliest date for shipment. 145 See Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123 at 127. 146 Article 46(c). 147 Article 46(b). 139

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Westpac Banking Corporation v South Carolina National Bank [1986] 1 Lloyd’s Rep 311 at 315–6 (dealing with articles 15 and 20(b) of the 1974 Revision). See also United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 (discussed at paragraph 6–58 above), where the bill of lading was deliberately wrongly dated, to bring it within the permitted shipment period, by an employee of the loading brokers. In Stein v Hambros Bank of Northern Commerce (1922) 10 Ll.L.R 529 the credit provided that the goods were to be shipped “per steamer Caboto leaving Calcutta about the middle of January”. Owing to strikes and other causes the vessel did not sail until the middle of February, and it was held by the Court of Appeal that the terms of the credit had not been complied with. In the view of the Court the words “leaving Calcutta about the middle of


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January” were not merely indicative or descriptive of the vessel, but formed part of the contract shipment of goods sent by post is deemed to be the date shown on the post receipt as the date of pick up or receipt of the goods.155 7–61 An issue associated with the date of shipment of goods is whether the transport document is “stale”, that is to say whether the document has been issued too long a time before it is presented to the bank for payment. Credits must state an expiry date by which the documents must be presented156 and, as stated above, they usually specify an earlier date by which the goods must be shipped. Once the goods have been shipped and the transport document issued, the beneficiary can present it under the credit (assuming that all the other documents are in order) even though this may be a long time before expiry of the credit. The issue of staleness arises when the goods have been shipped a long time before the expiry date of the credit, but the documents are not presented to the bank for some time after they have been issued, albeit before the expiry of the credit. Banks long regarded as unsatisfactory a presentation of bills of lading which they considered to be stale (though during the currency of the credit) because it was not possible for an intermediary bank or the issuing bank to whom they were presented to ensure that they reached the consignee before the arrival of the goods to which they related. The reason for this practice was said to be the belief that the issuing bank was under a duty to the consignee to see, as far as is possible, that he was not put to any expense as a result of the arrival of the goods before the documents. Since 1974 the point has been expressly dealt with in the UCP. Article 43(a) states: In addition to stipulating an expiry date for presentation of documents, every Credit which calls for a transport document(s) should also stipulate a between the bank and the beneficiary. Nowadays this might be treated as a non-documentary condition and disregarded pursuant to article 13(c)—see paragraphs 7–24 to 7–26 above. 149 As to which, see paragraph 7–88 below. 150 Articles 23(a)(ii) and 25(a)(iv). The same principle applies in relation to sea waybills—article 24(a)(ii). 151 Article 26(a)(ii). 152 Article 27(a)(iii). Information as to the flight number and date contained in a box on the transport document marked “For carrier use only” is not a specific notation of the date of dispatch. 153 Article 28(a)(ii). A date entered in a box for date of delivery in a rail consignment note does not indicate the date of shipment and a term that the transport documents be “accepted as presented” does not permit the bank to disregard the consequences of the failure to state the shipment date— see Credit Agricole Indosuez v Credit Suisse First Boston [2001] Lloyd’s Rep Bank 218. 154 Article 29(a)(i). 155

Article 29(b)(ii). Article 42(a). 157 Under a c.i.f. contract it has long been held that, although there is no implied condition that the bill of lading should be delivered so that it may arrive before or at the time of the arrival of the ship, the seller must “make every reasonable exertion to send forward the bill of lading as soon as possible after he has destined the cargo to the particular vendee or consignee”—see Sanders v Maclean (18830 11 QBD 327 at 337, Landauer &Cov Craven [1912] 2 KB 94 at 105 and Johnson 156


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v Taylor Bros & Co Ltd [1920] AC 144 at 149 and 156. Early editions of this book criticized the practice of banks in rejecting stale documents, asserting that it ran counter to the bank’s responsibility to the beneficiary. If, for whatever reason, it was thought proper that a tender of stale bills of lading should have been refused, this should have been made a condition of the contract between buyer and seller and translated into the credit, unless it could have been said that there was a custom—which was thought not to be the case—so that the stipulation became an implied term of the credit contract. Absent an express or implied stipulation in the credit, if the goods are those for which the buyer has contracted and the seller has fulfilled all the terms of the contract of sale, there is no reason why the seller should be deprived of payment on the ground that the bills of lading are tendered long after the date of issue. Once the credit is established and communicated, the bank’s duty to the beneficiary, though conditional, overrides any duty to the buyer with which it conflicts. It is hardly arguable that there can be such a duty as has the effect of qualifying the bank’s contractual responsibility to the beneficiary to the extent of placing on him a burden which the buyer has not imposed and which by the seller may be impossible of fulfilment.

specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the Credit. If no such period of time is stipulated, Banks will not accept documents presented to them later than 21 days after the date of shipment. In any event, documents must be presented not later than the expiry date of the Credit. 158

Artcile 40(b). Article 43(b). 160 For an example of which in a claim between c.i.f. buyer and seller, see Golodetz & Co Inc v Czarnikow-Rionda Co Inc [1979] 2 Lloyd’s Rep 450 at 457 (affirmed [1980] 1 Lloyd’s Rep 453). 161 [1979] 2 Lloyd’s Rep 450 (affirmed [1980] 1 Lloyd’s Rep 453). 162 Although the principle is now clear, doubt about it was caused by opinions expressed in the Court of Appeal in National Bank of Egypt v Hannevig’s Bank Ltd (1919) 1 L1.L.R. 69. In that case the credit, covering a shipment of Egyptian onions, was payable against “delivery of Bills of Lading, Marine and War Risk Insurance Certificate and Invoice”. The bill of lading tendered contained an indorsement that several bags were torn and re-sewn. Bailhache J held that the credit, as originally opened, called for clean bills of lading. Scrutton LJ said (according to (1919) 3 Legal Decisions affecting Bankers 213 at 214): “There were two views put before the learned Judge on the pleadings, one that this credit calls for ‘clean’ bills of lading, the other that it calls for ‘usual’ bills of lading…My present impression is, I do not know that it is necessary to decide it finally in view of the grounds on which we are deciding this case, that a mere credit against delivery of bills of lading is not necessarily a credit against ‘clean’ bills of lading. It depends on the facts of the case. A c.i.f. contract involves your providing a contract of insurance and a contract of carriage, and what the particular contract of insurance and contract of carriage specify as the obligation is, in my view, a question of evidence of the usual conditions of trade at the time…The question is whether ‘clean’ bill of lading is ‘usual’ bill of lading in the trade at 159


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7–62 Questions have arisen as to the date from which the 21 days are to run in certain cases. For this purpose, “the date of shipment” means the date as determined by the provisions of the UCP discussed in paragraphs 7–59 to 7–60 above. Where more than one transport document is presented indicating that goods are being transported on the same means of conveyance on the same journey to the same destination, the shipment is to be treated as a single shipment158 and for the purpose of article 43(a) the date of shipment is the latest date on any of transport of documents presented.159 7–63 The bank is not concerned to know whether a bill of lading is “stale” in the sense that it was issued a long time after shipment160 because it is concerned only with the documents and not with the facts underlying the transaction. In Golodetz & Co Inc v Czarnikow-Rionda Co Inc161 the bill was issued a fortnight after loading was finished. Donaldson J held that in the circumstances the bill was issued as soon as reasonably practicable after the completion of the loading of the whole parcel and at or about the time when the ship sailed. Transport documents showing defective condition of goods or packing 7–64 Transport documents must be “clean”.162 Under article 32(a) a clean transport document is “one which bears no clause or notation which expressly declares a defective condition of the goods and/or the packaging”. Banks will not accept transport documents bearing any such clause or notation unless the the time.” However, the shipment was made during wartime and Bankes LJ said (at 70): “The learned Judge on that point has accepted the defendants’ contention that the meaning of this letter of instructions was that payment was only to be made against clean bills of lading, in that sense. If it was material to decide that point, I should have very considerable hesitation in accepting the learned Judge’s view. I express no opinion about it; but I certainly think it is worthy of careful consideration whether, although that may be the generally accepted construction to be put upon such a letter of instructions as this in normal times, and with reference to a business which is being conducted in the ordinary normal way, a different construction may not have to be put upon the same expression in a letter of instructions to a bank in reference to a business which, to the knowledge of both parties, is completely disorganised and has to be carried on in war time under very different conditions from those under which it is carried on in peace time.” The question was considered by Roche J in Westminster Bank Ltd v Banca Nazionale di Credito (1928) 31 Ll.L.R. 306, where evidence was given by many London bankers to the effect that clean bills were normally expected and that they would not, without authority, pay against any others, but he declined to give any ruling on the ground that it was not necessary for him to decide the question. Bailhache J’s view was, however, accepted by Salmon J in British Imex Industries Ltd v Midland Bank Ltd [1958] 1 QB 542 at 551, where he distinguished circumstances in which business is disorganised by war and said: “… when a credit calls for bills of lading, in normal circumstances, it means clean bills of lading. I think that, in normal circumstances, the ordinary business man who undertakes to pay against the presentation of bills of lading means clean bills of lading; and he would probably consider that that was so obvious to any other business man that it was hardly necessary to state it. That seems to have been the view taken by Bailhache J in the case of National Bank of Egypt v Hannevig’s Bank Ltd. I entirely agree with it.” Romariz & Pistacchini v Zeyen & Co (1919) 35 TLR 299 is no authority to the contrary. It concerned a tender of dock warrants


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marked “cases frail, not accountable for quantity of contents”, the shipment being of Portuguese sardines under a contract providing for 10 per cent examination. Bailhache J held that, while he could understand the defendant bank refusing to pay, the contract did not call for clean warrants, for which the purchaser should have stipulated. This was, however, an action on a sales contract, not on the contract by which the bank undertook to pay against dock warrants. It is the universal practice today to decline bills of lading which are not clean except where the bank has authority to accept unclean (claused) bills or where it feels justified in taking the risk. A bank cannot be expected to know what bills of lading are used in particular trades (cf J.H.Rayner & Co Ltd v Hambros Bank Ltd [1943] 1 KB 37) and where a bill is usual in the trade a paying bank would be entitled to reject an unclean bill, unless it had express authority to accept it, because a bill cannot normally be in the contemplation of the buyer who would prefer to have documents declined by his bank’s correspondent, the intermediary bank, than have the trouble of suing his supplier for breach of contract, at any rate where the bill of lading disclosed something which might put the buyer at risk. Moreover the intermediary bank, at any rate, may not be in a position to judge the seriousness of the “clausing”. 163 See also British Imex Industries Ltd v Midland Bank Ltd [1958] 1 QB 542 at 551 where Salmon J said: “I incline to the view…that a clean bill of lading is one that does not contain any reservation as to the apparent good order and condition of the goods or packing.” Salmon J thought the bills tendered were patently clean because they contained no such reservation “by way of indorsement clausing or otherwise”. The bank had declined to pay on the ground that a printed clause in the bill of lading disclaimed responsibility for correct delivery and expenses consequent upon insufficient securing or marking of bundles of steel bars and there was no proof that the conditions of the clause had been met. See also Golodetz & Co Inc v Czarnikow-Rionda Co Inc [1979] 2 Lloyd’s Rep 164

Article 32(b). These words are not contractual, but are a representation of fact which may give rise to an estoppel—see Compania Naviera Vasconzada v Churchill & Sim [1906] 1 KB 237 at 247; confirmed in Brandt v Liverpool, Brazil and River Plate Steam Navigation Co Ltd [1924] 1 KB 575 (CA), United Baltic Corporation v Dundee, Perth and London Shipping Co Ltd (1928) 31 L1.L.R. 272 and Silver v Ocean Steamship Co Ltd [1930] 1 KB 416. 166 Each reservation must be considered on its own terms, the effect of which may be difficult to construe. For example, the phrase ‘Not accountable for rust’ may indicate that the goods were rusty on loading or may simply be a marginal clause limiting liability (which might be of no effect pursuant to article III rule 8 of the Hague Rules). If it indicates that the goods were rusty on loading it would fall within article 32(a), although if the goods to which it refers are normally shipped in a rusty condition it does not in fact constitute a declaration of defective condition of the goods. If the goods are normally shipped in a rusty condition, however, they can properly be described as in apparent good order and condition and there would be no need to qualify the bill of lading. 167 See Compania Naviera Vascongada v Churchill & Sim [1906] 1 KB 237 at 245 and Re Owners of Motor Tanker Athelviscount and The National Petroleum Co (1934) 39 Com Cas 227 at 235. The master of a ship has no authority to make representations as to the quality of the cargo—see Cox v Bruce (1886) 18 QBD 147. 168 (1928) 31 L1.L.R.306. 169 [1979] 2 Lloyd’s Rep 450, affirmed [1980] 1 Lloyd’s Rep.. 453. In dealing with an argument based on the provisions of the 1974 Revision equivalent of article 32(a), 165


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credit expressly stipulates the clauses or notations which may be accepted.164 Whether or not a bill of lading is clean is a matter of law. 7–65 By Article III, rule 3(c) of the Hague Rules the shipper must issue a bill of lading showing, among other things, the “apparent order and condition of the goods”. Almost invariably bills of lading contain pre-printed clauses stating that the goods have been shipped (or received for shipment) in “apparent good order and condition”.165 Thus a reservation166 as to the condition of the goods can only be made by super-imposition. It is such a reservation that renders a bill “unclean” or at least unacceptable from a documentary credit standpoint. “Condition” in this connection means external and apparent condition and not “quality”, which is not usually apparent to an unskilled person.167 An early example of clauses rendering a bill unclean is to be found in Westminster Bank Ltd v Banca Nazionale di Credito, in which the bills bore the statement that the wrappers (of meat) were wet and blood-stained and that the meat was “misshapen”. Roche J held that the bills of lading containing such clauses were not a proper and sufficient presentation under the credit. 7–66 A question may arise as to whether a notation on the transport document indicating that the goods have been damaged after shipment without affecting the statement in the transport document that the goods were in good order and condition on shipment makes the document “unclean”. This problem arose in the context of a c&f contract in Golodetz & Co Inc v Czarnikow-Rionda Co Inc, 450 at 455 (affirmed [1980] 1 Lloyd’s Rep 453) where Donaldson J said: “I have been referred to a number of text books and authorities which support the proposition that a “clean” bill of lading is one in which there is nothing to qualify the admission that the goods were in apparent good order and condition and that the seller has no claim against the goods except in relation to freight.”which concerned a shipment of sugar from India to Iran to be paid for cash against documents, the contract calling for a complete set of signed, clean “on board” bills of lading. A fire broke out after loading and part of the cargo was damaged and discharged. Two bills of lading stated that the goods were shipped in apparent good order and condition but the bill covering the cargo damaged by fire bore a typewritten note explaining what had happened by stating “Cargo covered by this bill of lading has been discharged Kandla view damaged by fire and/or water used to extinguish fire for which general average declared.” The buyers rejected the bill on the ground that it was not a clean bill. Donaldson J and the Court of Appeal held that the bill was clean, a clean bill of lading being one in which there is nothing to qualify the acknowledgment that the goods were in apparent good order and condition at the time of shipment. Although neither Donaldson J nor the Court of Appeal purported to construe article 32 of the UCP, the result of the case strongly suggests that article 32 should be construed as defining a clean bill of lading as one where there is no clause or notation which expressly declares a defective condition of the goods or the packing at the time when they are shipped. 7–67 Another point raised in Golodetz & Co Inc v Czarnikow-Rionda Co Inc was whether a bill of lading containing as part of the printed conditions “weight, measure, quantity, condition, contents and value unknown” and acknowledging receipt of goods “said to weigh” was a clean bill. Donaldson J had no hesitation in rejecting an argument


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that the bill was not clean for this reason. That is in line with article 31 of the UCP, which provides that banks will accept a transport document which: (i) bears a clause on the face thereof such as “shipper’s load and count” or “said by shipper to contain” or words of similar effect 7–68 It is an interesting question whether a bill of lading acknowledging the receipt of goods that have no packing at all and testifying to that fact is unclean. Judged by reference to a strict construction of article 32(a) such a bill would be regarded as clean because there is no “express” declaration of a defective condition of the goods and/or the packing. Where, however, it is clear that the goods should be packed, but are not, a bill of lading that stated that the goods were in apparent good order and condition would be a misrepresentation and the master would therefore have to clause the bill of the lading to show that they were not packed. Such a bill would not be clean within the meaning of article 32(a) and a bank would be entitled, if not bound, to refuse to accept such a bill if presented pursuant to a credit which did not expressly provide for it. 7–69 Bills of lading, though clean in the sense of article 32(a), may not be acceptable to the buyer. For instance, some bills contain at their foot a note “subject to mate’s receipt”. This is a qualification that detracts from the bill’s Donaldson J noted that the definition failed to specify the time with respect to which the notation must speak. 170 [1979] 2 Lloyd’s Rep 450, affirmed [1980] 1 Lloyd’s Rep. 453.

acceptability. In Canadian and Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd,171 the bill of lading contained the qualifying words “signed under guarantee to produce ship’s receipt”. The Privy Council said:172 If the statement at the head of the bill, “Received in apparent good order and condition”, had stood by itself, the bill would have been a “clean” bill of lading, an expression which means, at least in a context like this, that there is no clause or notation modifying or qualifying the statement as to the condition of the goods. But the bill did in fact on its face contain the qualifying words, “Signed under guarantee to produce ship’s clean receipt”: that was a stamped clause clear and obvious on the face of the document, and reasonably conveying to any business man that if the ship’s receipt was not clean the statement in the bill of lading as to apparent order and condition could not be taken to be unqualified. If the ship’s receipt was not clean, the bill of lading would not be a clean bill… The question posed by this case is whether article 32(a) must be construed literally or whether a bank is entitled to take a broader view of the effect of a clause on a transport document so as to enable it to reject any document where there may be a doubt as to its value to the buyer.173 Each case must, of course, be considered on its own facts, however, the better view is that article 32(a) should be construed according to its terms, but where the transport document is claused in some way that does not prevent it from being clean


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within the meaning of article 32(a) the bank must be careful to ensure that the transport document presented complies with the terms of the credit in other respects. 7–70 Thus, where the clausing does not prevent the transport document from being clean, it may nevertheless mean that the terms and conditions of the credit are not complied with so that the bank is under no obligation to pay. An example of this is Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd,175 where the bill of lading was stamped “…not portmarked, vessel not responsible for incorrect delivery. Any extra expense incurred in consequence to be borne by consignee”. The credit provided that “All charges outside Djibouti if any are to be paid by applicant—payment of costs additional to the freight charges…is strictly excluded and is not covered by this letter of credit. Their reference on shipping documents should be considered as null and void when negotiated or paid under the terms and conditions of this letter of credit.” At first instance Parker J held that the bill of lading was clean, which was not disputed, and that it complied with the terms of the credit. In relation to the provision in the credit concerning charges outside Djibouti, he said:176 It expressly recognizes that there may be…charges [outside Djibouti] and that the documents may refer to them. It also recognizes that despite such reference the documents may be negotiated or paid. Its purpose is merely to ensure that no such charges are paid under the credit even if documentary evidence is provided. Furthermore, the clause itself is not inconsistent with the terms of the credit. There was no requirement that the goods should be portmarked and the clause was not in any way unusual. The Court of Appeal accepted this and pointed out that the judge would have been entitled to come to the same result in reliance on article 33(d) of the UCP.177 However, the Court held that Parker J had overlooked the fact that the credit called for documents 171

[1947] AC 46. [1947] AC 46 at 54. 173 The previous edition of this work stated: “It is impossible to generalize in this matter, each case depending on its own facts, but it is submitted that the range of acceptability may be more restricted than ‘clean’ as understood by Article 18(a) [now article 32(a)] and that a bank would be wrong to accept without authority a bill which was or might be prejudicial beyond the normal to the buyer— a notation which left the bank in no doubt of its precise effect and, therefore, in doubt whether the buyer was getting the bill of lading for which he had stipulated.” The bill of lading in Canadian and Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd may be an example of a transport document that does not appear to contain all the terms and conditions of carriage— see paragraph 7–103 below. 174 See paragraph 7–105 below. Some shipping companies clause their bills of lading so as to relieve themselves of responsibility for incorrect delivery and for expense incurred by reason of the fact that consignments are not clearly marked with the name of the consignee. This is a reasonable reservation. A bank to which such a bill of lading is presented cannot rightly refuse to pay on the ground that the bill of lading is unclean within the UCP, but it may do so if the condition is inconsistent with a term of the credit If the clause is contained in the pre-printed terms of the bill of lading (as in British Imex 172


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covering shipment at a specified price “cost and freight liner out Djibouti”. It was common ground that this meant that the freight covered all costs up to and including discharge at Djibouti. The Court held that the clause stamped on the bill of lading was inconsistent with this. 7–71 Often credits require the transport document to include the clause “clean on board”. This requirement is complied with if the transport document (a) does not contain a clause or notation expressly declaring defective condition of the goods or the packing and (b) otherwise complies with the requirements of the UCP in relation to a document of the type concerned.178 It follows that the document need not actually contain the words “clean on board”, although transport documents frequently do.179 Stowage on deck 7–72 It has always been the practice of British banks to refuse bills of lading showing that the goods has been shipped on deck unless such shipment is authorized by the credit. This was the position even if the bill in the body of it and not by means of a superimposed clause reserved the right to ship on deck.180 In other words, they regarded it as an implied term in credits (in the absence of an express authority) that goods should be shipped under deck. The reason is that deck shipment is more liable to result in damage to goods, unless the goods are such that no increased risk of damage is likely, something that a bank cannot know for certain. 7–73 Article 31 now provides:181 Unless otherwise stipulated in the Credit, banks will accept a transport document which: (i) does not indicate, in the case of carriage by sea or by more than one means of conveyance including carriage by sea, that the goods are or will be loaded on deck. Nevertheless, banks will accept a transport document which contains a provision that the goods may be carried on deck, provided that it does not specifically state that they are or will be loaded on deck,… 7–74 The effect of this is that, absent a term in the credit to the contrary, bills of lading that indicate that goods are or will be loaded on deck must be rejected. However, a bill of Industries Ltd v Midland Bank Ltd [1957] 2 Lloyd’s Rep. 591) the bank is under no obligation to consider it—see paragraph 7–07 above. 175 [1983] QB 711. 176 [1983]QB711at719. 177 Article 16(d) of the 1974 Revision. For article 33(d), see paragraph 7–80 below. 178 Article 32(c). As to the various requirements, see Article 23, 24, 25, 26, 27, 28 and 30 (discussed in paragraphs 7–82 to 7–105 below). 179 See Opinions of the ICC Banking Commission, R335. In 1951 the Court of Appeal of Aix-enProvence held a bank to be wrong in paying against documents which did not bear the clause “goods on board”, signed and dated, the credit having called for this; and that a buyer was justified in refusing documents covering a shipment of rubber c.i.f. Marseille, the bill of lading being claused “le Havre-Transit” and the other documents


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lading that gives liberty to load on deck does not of itself indicate that goods are or will be loaded on deck and banks must accept such a document unless there is an express statement that the goods are or will be so showing shipment c.i.f. Marseille—see Revue Trimestrielle de Droit Commercial, Paris, 1951, 331. 180 In the US case, Re The Peter Helms AMC 1220 (1938), it was held that when, in the body of it, a bill of lading reserved to the shipping company the right to carry merchandise on deck or under deck at its option, the bill was not clean. In Givaudan Delawanna Inc v NederlandschAmerikaansch Stoomvart AMC 1235 (1950) the judge stated that the narrower meaning given to the term “clean” was that in the absence of marginal qualifying words in the bill of lading and no provision in the bill as to the manner of stowage, the import was that the goods were to be secured under deck and that a clean bill of lading could not import under-deck stowage except in the absence of a specific provision as to stowage. 181 Article 21 of the 1955 Revision authorized the acceptance of bills of lading showing stowage on deck if they were accompanied by an insurance policy or certificate mentioning that the goods were stowed on deck, but British banks would not necessarily assume that the defect in the bill of lading would be cured by a policy of insurance providing cover for goods expressly stated to be stowed on deck. In France a bank was under no obligation to accept as clean a bill of lading bearing mention that the goods were shipped on deck, even if accompanied by a policy covering this risk: Béguin et fils v The Wine Products Cooperative Marketing Union (Sodap), Birolleaud, Genestal, Banque Ottomane et autres. Cour d’appel de Bordeaux (3 Chambre), November 9, 1959; confirmed May 13,1964 by the Cour de Cassation.

loaded. The terms of article 31 are such that they apply even if the credit calls specifically for shipment under deck and in such a case it is not necessary for the bill of lading expressly to state this. Freight Paid 7–75 Credits often provide that the transport document must indicate that the freight has been paid or prepaid. This gives the buyer under a c.i.f. contract the security of knowing that the seller has shipped the goods at his own expense and that the carrier will not seek to exercise a lien over the goods for unpaid freight. Unless the credit stipulates that the transport document should so indicate, however, a bank must accept a transport document stating that freight or transportation charges have still to be paid, provided that this is not inconsistent with any of the other documents presented.182 7–76 Inconsistency with other documents in this respect will principally arise in relation to c.i.f. (or c.&f.) sales. Under such sales it is the obligation of the seller to procure a contract of affreightment, but it is not essential for the seller to pay the freight in advance. The seller may pay the freight in advance, but equally (in the absence of agreement to the contrary) he may leave the freight to be paid on delivery of the goods (“freight collect”) and deduct the amount of the freight from his invoice to the buyer.183 7–77 This latter situation was considered in the context of letters of credit in Dixon, Irmaos & Cia Ltda v Chase National Bank of the City of New York 184 in which a Brazilian exporter sold cotton c.i.f. to a Belgian buyer, payment to be by irrevocable credit. The plaintiff presented documents to Chase through the Guaranty Trust Co of New York. Chase declined them on the grounds that (a) they did not include a full set of bills of lading, and (b) freight was not prepaid. To cover the first point the Guaranty Trust Co


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offered its indemnity, which was refused. It was held customary to accept such indemnities, a custom which, according to the court, had to be read into the contract between the paying bank and the seller. Chase lost the second point also. The plaintiff had shipped the goods “freight collect” and had deducted the freight from the invoice. The Appeals Court said: In the case of a sight draft, it is wholly immaterial to the buyer whether freight is prepaid or credit given on the invoice price. In the case of a time draft, it is true that the buyer may be deprived of the credit period as to part of the purchase price, that is, so much of it as the freight amounts to. In the case at bar the freight was $1,359.14. The measure of any possible loss to the buyer is the interest upon this sum for the period between arrival of the goods and the date the drafts would fall due and the possible inconvenience of being called upon for early payment in cash of this 182

Article 33(a). See Ross T.Smyth & Co Ltd v T.D.Bailey, Son & Co [1940] 3 All E.R. 60 at 68. 184 C.C.A. 2d (1944) 144 F. 2d 759, cert denied 324 U.S. 850. 183

portion of the price. The bills of lading were endorsed “on board” on May 5th and, if we assume the voyage would take 30 days, the buyer would not be called upon for the freight until June 5th. The draft if accepted on May 15th would have been due 90 days later, that is, the buyer would have had to pay freight about 70 days earlier than he would otherwise have paid such sum. Interest at 6 per cent would amount to about $17. On a transaction involving $9,700 such a sum is insignificant. The law has not cut so fine. The point of possible inconvenience is taken care of by ancient usage. The seller has so long had the option of shipping either freight collect or freight prepaid that the cases recognise the option as part of the standard meaning of the term c.i.f., making no distinction between prepayment or shipping freight collect and crediting it on the invoice irrespective of whether the draft be time or sight. See Ireland v Livingston, L.R. 5 H.L. 395, 406; Thames & Mersey Ins Co v United States, 237 U.S. 19, 26, 35, S. Ct. 496, 59 L. Ed. 821, Ann. Gas. 1915 D, 1087; Warner Bros. & Co v Israel, 2 Cir., 101 F.2d 59, 60. As the court pointed out in finding 16, the American Foreign Trade definitions provide that under a c.i.f. contract the seller must pay the freight, but make no mention of prepayment. Furthermore, if the buyer sells the documents before arrival of the goods, as frequently happens in c.i.f. transactions, whether freight was prepaid will be wholly immaterial to him.185 This analysis shows that a “freight payable” bill of lading is inconsistent with a c.i.f. invoice that does not show that freight has been deducted from the c.i.f. price of the goods. Banks should not therefore pay against documents covering a shipment on c.i.f. terms that do not show that freight has been prepaid unless the accompanying invoice shows that freight has been deducted.


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7–78 Where the credit requires the transport document to show that freight has been paid it is essential that it so indicates. This point arose in Soproma SpA v Marine & Animal By-Products Corporation,186 in which the credits called for bills of lading marked “freight prepaid”, whereas the bills were in fact marked “freight collect”. The board of appeal in the arbitration found that it was common practice in the trade for bills of lading to be marked “freight collect” under a c.&f. contract and that they were regarded as a good tender if the sellers either deducted from the invoice or tendered a freight receipt. McNair J put the matter in its proper perspective and said that, if this meant anything more than that buyers commonly do not take the objection, the finding was one which could not be sustainable in law “since on the hypothesis stated the documents would be mutually inconsistent”.187 It is accordingly clear that an issuing bank is entitled to decline bills of lading in such circumstances—in fact, obliged to do so unless it can obtain the consent of its principal. 7–79 Article 33(b) provides: If the Credit stipulates that the transport document has to indicate that freight has been paid or prepaid, banks will accept a transport document on which words clearly indicating payment or prepayment of freight appear by stamp or otherwise, or on which payment or prepayment of freight is indicated by other means. If the Credit requires courier charges to be paid or prepaid banks will also accept a transport document issued by a courier or expedited delivery service evidencing that courier charges are for the account of a party other than the consignee. 185

The New York Court of Appeals would seem to have been at pains to show that the possible loss of interest to the buyer in respect of that part of the price which represented freight was negligible—or at any rate insignificant in relation to the value of the shipment; but what if the shipment had been a much more valuable one—one on which the freight might be calculated at a much higher rate? It is not easy to understand this argument. 186 [1966] 1 Lloyd’s Rep 367. 187 [1966] 1 Lloyd’s Rep 367 at 387. 188

Article 33(c). Artcile 33(d). For an example of a case where the bill of lading referred to costs of this type, see Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1983] QB 711 (discussed at paragraph 7–70 above). 190 Article 31(iii). See also Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 334. 191 In Automation Source Corporation v Korea Exchange Bank 670 N.Y.S. 2d 847, the Supreme Court of New York held that the addition of the name of a second notify party did not make the transport document discrepant. 189


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The words “freight payable” or “freight to be prepaid” or similar words are not to be accepted as constituting evidence of payment of freight.188 There is nothing here which conflicts with the view that strict compliance with the terms of a credit is essential to a good tender pursuant to it, or with the view of McNair J that a credit calling for a “freight paid” bill of lading is not met by the tender of a bill with a freight receipt or with an invoice from which freight has been deducted. 7–80 Costs additional to freight, for example in relation to loading or discharging the cargo, may also be incurred in respect of a voyage. It is not necessary for the transport document to show that such costs have been paid and banks must accept documents referring to such costs unless the terms of the credit specifically prohibit such reference.189 The consignor/notify party 7–81 Except where the credit expressly requires it, the beneficiary of the credit need not be named as the consignor of the goods on the transport document and, unless otherwise stipulated in the credit, banks will accept a transport document that indicates as the consignor of the goods a party other than the beneficiary of the credit.190 The transport document must state the name of the notify party required by the credit.191 Specific requirements of the UCP in relation to transport documents 7–82 Articles 23 to 29 provide what the contents of documents evidencing each type of transport (sea, air, rail, road or inland waterway or multimodal transport) should or may contain. They envisage that credits will call for the following types of document: bills of lading covering port to port shipment (article 23), non-negotiable sea waybills covering port to port shipment (article 24), charterparty bills of lading (article 25), multimodal transport documents192 (article 26), air transport documents193 (article 27), road, rail and inland waterway transport documents194 (article 28) and post receipts or certificates of posting (article 29). 7–83 In relation to credits calling for each of these types of document, the relevant provision of the the UCP is framed in terms that “banks will, unless otherwise stipulated in the Credit, accept a document, however named, which:” and then the provisions are set out. The type of matters dealt with are generally common to each type of transport, although the substance varies depending on the type of document. It is important to recognise that the UCP expressly recognises that the terms of the credit may provide for different requirements and it is therefore important for banks in each case to examine the transport document against the terms of the credit as well as against the requirements of the UCP and consequently for beneficiaries to do the same. It should also be emphasised that it is the substance of the document that is important and not the name that is given to it.


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(i) The name of the carrier and signature or other authentication of the document 7–84 A transport document must appear on its face to indicate the name of the person whose responsibility it is to perform the carriage. In relation to non-charterparty bills of lading, non-negotiable sea waybills, air, road, rail or inland waterway transport documents, the UCP refers to the name of the “carrier”.195 A multimodal transport document must indicate the name of the “carrier or multimodal transport operator”.196 A charterparty bill of lading must contain an indication that it is subject to a charterparty, but need not indicate the name of the carrier.197 A document issued by a courier or expedited delivery service must indicate the name of the courier or service.198 In the case of non-charterparty bills of lading, non-negotiable sea waybills and multimodal transport documents, the name of the carrier must appear as such on the front of the documents, that is to say the side showing the details of the goods, vessel and voyage. Documents that fail to show the name of the carrier on the front must be rejected, even though the identity of the carrier maybe indicated on the back of the document.199 7–85 All such documents must be signed or otherwise authenticated.200 In the case of non-charterparty bills of lading and non-negotiable sea waybills the person signing or otherwise authenticating must be either (i) the carrier or a named agent on his behalf or (ii) the master or a named agent on his behalf.201 In the case of charterparty bills of lading the person signing must be either (i) the master or a named agent on his behalf or (ii) the owner or a named agent on his behalf.202 Thus although the charterer may sign the bill of lading, his signature will only be acceptable if it is made expressly on behalf of the master or the owner of the ship, thereby giving the buyer a right of action against the shipowner in the event of the goods being lost or damaged. Multimodal transport documents must be signed or otherwise authenticated by either (i) the carrier or a named agent on his behalf or (ii) the multimodal transport operator or a named agent on his behalf or (iii) the master or a named agent on his behalf.203 Air transport documents must be signed or otherwise authenticated by the carrier or a named agent on his behalf.204 Road, rail and inland waterway transport documents must either (i) be signed by the carrier or a named agent on his behalf or (ii) bear a reception stamp or other indication of receipt by the carrier of a named agent on his behalf.205 7–86 In all cases, where the principal signs or authenticates (including a master) any signature or authentication must be identified as that of the principal,206 although it is not necessary for the word “carrier” to appear again in the signature box when it has already been used on the front of the documents to 192

That is to say, transport documents covering at least two modes of transport. If the transport document shows shipment from one port to another by one mode of transport only, it is not a multimodal transport document—see Opinions of the ICC Banking Commission, R342. 193 These are commonly referred to as “air waybills”. Such documents are not documents of title in the same way as bills of lading. 194 Road and rail transport documents are commonly referred to as “consignment notes”. Such documents are not documents of title in the same way as bills of lading. 195 Paragraphs (a)(i) of each of articles 23, 24, 27 and 28 196 Article 26(a)(i).


197

216

Article 25(a)(i)(iii).

198

Article 29(b). Unless the credit specifically calls for a document issued by a named courier or service, banks will accept a document issued by any courier or service. 199 See paragraph 1 of the comments in relation to articles 23, 24 and 26 in Position Paper No 4 produced by the ICC Commission on Banking Technique and Practice. 200 There is no provision for presentation of documents electronically, but see paragraph 7–35 above. 201 Articles 23(a)(i) and 24(a)(i). An alteration to a transport document need not be authenticated by the agent who signed the document originally—see Opinions of the ICC Banking Commission, R344. 202 Article 25(a)(ii). 203 Article 26(a)(i). 204 Article 27(a)(i). 205 Article 28(a)(i). 206 Paragraph (a)(i) of each of articles 23, 24 and 26 to 28 and paragraph (a)(ii) of article 25. It is not necessary for the name of the master to be quoted when the document is signed by the master— see paragraph 4 of the comments in relation to articles 23, 24, 25 and 26 in Position Paper No 4 produced by the ICC Commission on Banking Technique and Practice. 207

See paragraph 2 of the comments in relation to articles 23, 24 and 26 in Position Paper No 4 produced by the ICC Commission on Banking Technique and Practice. 208 Paragraphs 3 and 4 of the comments in relation to articles 23, 24, 25 and 26 in Position Paper No 4 produced by the ICC Commission on Banking Technique and Practice sets out the acceptable ways in which parties may sign as agents for the carrier to the master. 209 Article 28(a)(i). 210 Article 29(a)(i). 211 Article 29(b)(i). 212 Articles 23(a)(ii), 24(a)(ii) and 25(a)(iv). The bill must relate solely to the goods which form the subject-matter of the credit. In International Banking Corporation v Irving National Bank 283 F. 103, the credit called for drafts accompanied by a bill of lading for “Manila” hemp, but the documents which were tendered to the bank were drafts to which were attached bills of lading for “general merchandise contents unknown”. The drafts were paid by the bank, but on delivery only a portion of the consignment was found to consist of “Manila” hemp. It was held that the bank was entitled to an indemnity against its customer to the extent only to which the consignment consisted of “Manila” hemp. 213 Articles 23(a)(ii), 24(a)(ii) and 25(a)(iv). This must be a separate date from the date of issue of the document—see Robalen v Generale de Bank SA, Brussels US Dist. Lexis 13775 (S.D.N.Y. 1999) and Opinions of the ICC Banking Commission, R346 and R347. A stamp that the goods are loaded on board does not supersede or cast doubt over a pre-printed statement that the goods have been shipped on board—see Westpac Banking Corporation v South Carolina National Bank [1986] 1 Lloyd’s Rep 311, where a bill stating that the goods were received for shipment also contained a pre-printed clause that the goods were shipped on board, to which a stamp stating “loaded on board” was subsequently added. The material provisions also came before the Tribunal de Commerce de Paris (2ème Chambre) and the Cour d’Appel de Paris (5ème Chambre) on March 28, 1970, and April 3,1971, respectively. The facts were that an American bank issued two irrevocable credits through a French bank in favour of French beneficiaries. Payment under the second credit was refused on the ground that article 18 (of the 1962 Revision of the UCP) had not been complied with, the credit having called for “on board” bills of lading, whereas the bills tendered evidenced shipment on board by means of a notation “clean on board”. The


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identify the party acting as carrier.207 Where an agent signs or authenticates that must be indicated, as must the name and the capacity of the principal on whose behalf the agent is acting.208 In the case of reception stamps or other indications of receipt on road, rail and inland waterway documents, the stamp or indication of receipt must be identified on its face as that of the carrier.209 7–87 In the case of a post receipt the document must have been stamped or otherwise authenticated and dated in the place from which the credit stipulates the goods are to be shipped or dispatched.210 In the case of a courier or expedited delivery service receipt the document must be stamped, signed or otherwise authenticated by the courier or service named in the receipt.211 (ii) Indication that the goods have been shipped or taken in charge by the carrier 7–88 Bills of lading and non-negotiable sea waybills must indicate that the goods have been loaded on board or shipped in a named vessel.212 This may be indicated by preprinted wording on the document. If it is not, the loading on board must be evidenced by a notation on the bill of lading which gives the date on which the goods have been loaded on board.213 It follows from this that a “received for shipment” bill of lading which contains no such notation is not acceptable unless the credit expressly calls for or permits it.214 Even if such a document is by the custom of the trade a usual document the bank must refuse it unless the credit authorises its acceptance.215 bills, though not the notation, were signed in the name of the master. The issuing bank argued that this was not enough. Both courts in Paris held that it was, criticizing the issuing bank for its attitude. The article was perhaps not as clear as it might be; it could be doubted whether the notation itself required the master’s signature. But the issuing bank’s attitude may have been the result of its having referred to its customer before deciding whether or not to pay and it was on its customer’s instructions that payment was refused (as to which, see paragraph 6–07 above). The Cour d’Appel seemed to think that the fact that the first credit was honoured against identical documents meant that the issuing bank was not in doubt as to the character of the bills tendered under the second credit, but this would appear to have little to do with the bank’s position regarding the second. For a comment on this, see Westpac Banking Corporation v Commonwealth Steel Co Ltd [1983] 1 NSWLR 735 at 738 (an interim decision in the claim that eventually went to the Privy Council as Westpac Banking Corporation v South Carolina National Bank (above)). 214 The reasoning would seem to be that a “received for shipment” bill of lading, in the absence of agreement or custom to the contrary, is not a good tender under a c.i.f. contract for the sale of goods: Diamond Alkali Export Corporation v Bourgeois [1921] 3 KB 443. See also Donald H. Scott &Cov Barclays Bank Ltd [1923] 2 KB 1. Cf The Marlborough Hill [1921] 1 AC 444. The decisions in Weis & Co v Produce Brokers’ Co (1921) 7 Ll.L.R. 211 and United Baltic Corporation v Burgett and Newsam (1921) 8 Ll.L.R. 190 must be taken to turn on the special circumstances involved. 215 Diamond Alkali Export Corporation v Bourgeois [1921] 3 KB 443. 216 Articles 23(a)(ii) and 24(a)(ii) 217 Articles 23(a)(ii) and 24(a)(ii). This applies even if the goods have been loaded on the vessel shown on the bill of lading as the “intended vessel”. A clause reserving to the carrier a right to substitute another vessel may be acceptable, although much depends on the terms of the clause— see Opinions of the ICC Banking Commission, R349. 218 Articles 26(a)(ii), 27(a)(ii) and 28(a)(ii).


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7–89 Where the goods are taken in charge by the sea carrier at a place different from the port of loading, a notation must be included on the document showing the port of loading stipulated in the credit and the name of the ship on which the goods have been loaded.216 A “through bill of lading” is therefore acceptable, provided that it makes clear that the goods are loaded on board the ship at the port of loading specified in the credit. 7–90 Where the bill of lading does not definitely indicate the vessel on which the goods are shipped, for example by use of the words “intended vessel”, a notation must be included on the bill of lading showing that the goods have been loaded on board a named vessel.217 7–91 Multimodal transport documents, air transport document and road, rail and inland waterway documents must indicate that the goods have been “dispatched, taken in charge or loaded on board”, “accepted for carriage” and “received for shipment, dispatch or carriage” respectively.218 Evidence of actual shipment on one of the means of transport is not therefore necessary. (iii) Indication of the places of beginning and end of the transport and transhipment 219

7–92 The transport document must cover the whole of the transit. In Landauer & Co v Craven 220 bills issued at Hong Kong on transhipment were tendered in satisfaction of a contract c.i.f. London for the sale of hemp originally shipped at Manila. Scrutton J held that the buyer was entitled to reject them. The tender was not good because it did not include a contract of affreightment to London dated prior to the latest date for shipment or a contract of affreightment from Manila to Hong Kong. This case was followed by the House of Lords in Hansson v Hamel & Horley Ltd,221 where goods were originally shipped from Norway and transhipped at Hamburg and it was held that an ocean bill of lading issued at Hamburg was not a good tender. 7–93 This principle is embodied in the UCP. Bills of lading and sea waybills must accordingly indicate the port of loading and the port of discharge stipulated in the credit.222 It does not matter that the bill shows the port of loading as different from the place of taking in charge or the port of discharge as different from the place of final destination or that the word “intended” is inserted before the port of loading or port of discharge so long as the ports stated are those stipulated. 7–94 Most bills of lading contain among their printed conditions a licence to tranship.223 Such a bill must to that extent, therefore, be a bill which is usual in the particular trade— at any rate, the bill cannot be unusual by reason solely of the inclusion of the licence. Normally credits state specifically whether or not transhipment is allowed. Unless transhipment is prohibited by the terms of the credit, banks must accept bills of lading and sea waybills which indicate that the goods will be transhipped, provided that the entire ocean carriage is covered by one and the same document.224 7–95 Where the credit prohibits transhipment, a bill of lading or sea waybill evidencing that transhipment has taken place is not a good tender under such a credit. Accordingly a bank that includes a stipulation in a credit prohibiting transhipment is calling for a bill of lading that, though it may contain the usual licence, bears no


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indication that transhipment has taken place.225 It does not matter that this may well be something that the bank cannot verify at the moment of presentation of the documents by the seller or the intermediary bank. Banks must thus accept a bill of lading or sea waybill that reserves to the carrier the right to tranship.226 7–96 Where bills of lading and sea waybills evidence that the goods are shipped in containers, trailers or “LASH” barges227 and indicate that transhipment will take place, banks must accept them even though transhipment is prohibited if they cover the entire stipulated ocean carriage in one document.228 219

In relation to bills of lading and sea waybills, transhipment means unloading and reloading from one vessel to another during the course of ocean carriage from the port of loading to the port of discharge stipulated in the credit—see articles 23(b) and 24(b). This means that where goods are shipped on a lighter or barge which is intended to be loaded on to an ocean-going ship, the transfer of the lighter or barge to the ship must not be regarded as a transhipment. The loading in the lighter or barge and the transfer of the latter to the ship are to be treated as a single act of loading and the bill of lading, whether issued by the ship on receipt of the lighter or barge or at the time of loading in the lighter or barge, is acceptable under a credit calling for a bill of lading evidencing loading on board. For adapted definitions of transhipment to the same effect in relation to air, road, rail and inland waterway transport, see articles 27(b) and 28(c). 220 [1912]2KB94. 221 [1922] 2 AC 36. See also Brazilian & Portuguese Bank v British & American Exchange Banking Corporation (1868) 18 LT 823. 222 Articles 23(a)(iii), 24(a)(iii) and 25(a)(v). When the credit permits presentation of charterparty bills of lading and the credit specifies a range of ports, the bill of lading may show in the port of discharge box the range specified and need not name a specific port—see Opinions of the ICC Banking Commission, R368. 223 See generally Scrutton on Charterparties, 20th ed, page 270. 224

Articles 23(c) and 24(c). Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367, in which it was argued that a bill permitting transhipment was not a good tender under a c.i.f. or c.&f. contract, as it would not provide the buyer with continuous documentary cover. McNair J dismissed this argument and said (at 388) that he was “not disposed to hold that a bill of lading otherwise unobjectionable in form, which did in fact cover the whole transit actually performed, would be a bad tender merely because it contained a liberty not in fact exercised but which, if exercised, would not have given the buyers continuous cover for the portion of the voyage not performed by the vessel named in the bill of lading.” Cf Holland Colombo Trading Society Ltd v Alawdeen [1954] 2 Lloyd’s Rep 45 at 53 (PC). 226 Articles 23(d)(ii) and 24(d)(ii). 227 “LASH” stands for “lighter aboard ship” and a “LASH” barge is one which carries cargo to an ocean going ship and is then loaded with the cargo onto the ship for the voyage without the cargo being discharged from the barge. 228 Articles 23(d)(i) and 24(d)(i). 229 Article 26(a)(iii). 230 Article 26(b). 225


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7–97 A multimodal transport document must indicate either (i) the place of taking in charge and the place of final destination stipulated in the credit or (ii) one or more of the intended vessel or the intended port of loading or the intended port of discharge or (iii) both (i) and (ii).229 The places of taking in charge and final destination may be different from the port, airport or place of loading on the one hand and the port, airport or place of discharge on the other. Where a credit calls for a multimodal transport document it should not prohibit transhipment, as this would be a contradiction in terms. If it does prohibit transhipment, banks will accept a transport document that indicates that transhipment will or may take place, provided that the entire carriage is covered by one and the same document.230 7–98 Air, road, rail and inland waterway transport documents must indicate the airport of departure or place of shipment (as the case may be) and the airport or place of destination (as the case may be) stipulated in the credit.231 Where credits call for such documents, banks will not give effect to a provision in the credit prohibiting transhipment, provided that the entire carriage is covered by one and the same transport document and within the same mode of transport.232 (iv) Sets of transport documents 7–99 As a general rule the presentation of one duly endorsed bill of lading out of a whole set is sufficient compliance with seller’s obligations under a c.i.f. contract.233 For many years banks have commonly stipulated for presentation of the whole set.234 The UCP now provides, in relation to bills of lading, sea waybills and multimodal transport documents, for delivery of a sole original transport document or if issued in more than one original the full set so issued.235 Where a full set of documents is called for presentation of 2 bills of lading plus either an indemnity or an undertaking to produce the third is not sufficient to satisfy the requirements of the credit.236 231

Articles 27(a)(iv) and 28(a)(iii). If no place of destination is stipulated, none need be specified— see Opinions of the ICC Banking Commission, R357. 232 Articles 27(c) and 28(d). 233 See Sanders v Maclean (1883) 11 QBD 327 and Barber v Meyerstein (1870) LR 4 HL 318. 234 See, for example, Donald H.Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1. 235 Articles 23(a)(iv), 24(a)(iv), 25(a)(vi) and 26(a)(iv). Each original must be examined independently and the presentation rejected if any of the set is not compliant—see Oei v Citibank (Kools) 96 Civ 3737 (MBM) (S.D.N.Y. 1997). 236 See Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1 at 11 (Bankes LJ). 237 Article 27(a)(v). 238 Article 28(b).


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7–100 The bank is entitled to accept a single air transport document that appears to be the original for the consignor (or shipper) even if the credit stipulates that a full set of original documents be presented.237 7–101 So far as road, rail and inland waterway transport documents are concerned, article 28(b) states: In the absence of any indication on the transport document as to the numbers issued, banks will accept the transport document(s) presented as constituting a full set. It follows from this that if the credit calls for a set of transport documents, the bank is entitled to accept a single document provided that such document does not indicate that it is one of a number of originals. Road, rail and inland waterway transport documents need not state that they are originals.238 7–102 Courier and post receipts are unlikely to be issued in sets and the UCP makes no express provision in relation to this.

(v) Terms of carriage 7–103 Bills of lading other than charterparty bills of lading, sea waybills, multimodal transport documents and air transport documents must appear to contain all the terms and conditions of carriage or to incorporate such terms and conditions by reference to another source or document.239 (vi) Type of vessel 7–104 Bills of lading, sea waybills and multimodal transport documents must not contain an indication that the carrying vessel is propelled by sail only.240 (vii) Compliance with the stipulations of the credit in other respects 7–105 Transport documents must meet the stipulations of the credit in all other respects. It is essential that the transport document reflects the terms of the credit and is not inconsistent with it. Stipulations imposed in each case may differ widely and so each case must be dealt with on an individual basis.241 There are, however, certain matters that recur and in respect of which general practice has been stated in the UCP. These relate to expressions as to quantity, partial shipments, instalment shipments, stowage of cargo on deck, condition of the cargo, payment of freight and the time within which a transport document must be presented. These matters have been dealt with above. Insurance Documents


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7–106 As with all other documents, the beneficiary under a credit should present the precise insurance document that the credit calls for. The requirements for such documents can be dealt with under the following headings: (a) the goods covered (b) issuance of the document (c) type of document (d) type of cover (e) currency and amount of the cover (f) voidable policies and forgeries The goods covered 7–107 Obviously, insurance documents must relate to the goods that have been shipped. The UCP does not make express provision in relation to this, but the requirement in article 13(a) that the documents must not be inconsistent with one another brings about this result. Thus the description of the goods and the journey or voyage covered by an insurance document must be consistent with the transport document, the commercial invoice and the other documents.4 The insurance documents must therefore directly or indirectly refer unequivocally to the goods.243 It follows from this that the policy should be one that relates solely to the goods referred to in the bill of lading and the invoice.244 Issuance of the document 7–108 Insurance documents must appear on their face to be issued and signed by insurance companies or underwriters or their agents.245 Unless a copy document is stipulated in the credit, the original must be presented.246 If the document presented indicates that it has been issued in more than one original, all originals must be presented unless the credit provides otherwise.247 7–109 Insurance cover should exist for the whole of the journey or voyage that the goods undergo. If it appears from the insurance document that the cover is effective at the latest from the date of shipment or taking in charge of the goods the document may bear a date later than the date of shipment or taking in charge.248 However, if it does not appear from the document that it is effective at the latest date for shipment, the insurance document must not bear a date later than the date of shipment or taking in charge of the goods as indicated in the transport document unless otherwise stipulated in the credit.249 7–110 Unless the credit provides that the name of the assured be stated in the policy, the policy can be made out “To Order” without naming the assured. If the buyer and the bank wish to avoid the possible risk that a person who has endorsed the policy was not entitled to do so, the credit should be issued with a requirement that the name of the assured to whom the policy is issued be stated on the policy. 239 240

Articles 23(a)(v), 24(a)(v), 26(a)(v) and 27(a)(vi). Articles 23(a)(vi), 24(a)(vi), 25(a)(vii) and 26(a)(vi).


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241

See, for example, Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1983] QB 711 (discussed at paragraph 7–70 above).

242

As to the position concerning the contractual journey or voyage under a c.i.f. contract, see Landauer & Co v Craven [1912] 2 KB 94 at 105. 243 See paragraph 7–18 above. 244 In Hickox v Adams (1876) 34 LT 404 the policy covered 2,000 quarters of wheat instead of the 1,000 quarters purchased under a c.i.f. contract and it was held that the buyers were entitled to reject the documents when tendered on the ground that they would otherwise be embarrassed. See also Manbre Saccharine Co v Corn Products Co [1919] 1 KB 198. 245 Article 34(a). 246 As to whether a document is an original, see Kreditebank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Law Reports 219 (discussed at paragraphs 7–31 to 7–33 above). 247 Article 34(b). 248 See Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 335 (declarations issued 2 days after sailing). 249 Article 34(e). 250 Kredietbank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Rep 219. A policy issued to bearer is not discrepant where the letter of credit stipulates a policy endorsed in blank since the effect of transfer of the policy in each case is the same—see Opinions of the ICC Banking Commission, R322.


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Type of document 7–111 If a credit stipulates for a policy of insurance, strictly, nothing but a policy will do; to present one type of document for another is not a good presentation. Where, however, a merchant makes continuous shipments it is often convenient to effect insurance by means of a floating or open policy to avoid the delay involved in the issue of a separate policy in each case. In such case a certificate of insurance or declaration of shipment is issued in respect of each cargo to which the policy attaches and it has become common for such certificates to be presented under c.i.f. contracts.251 The transfer of a certificate does not, however, give the buyer (or the bank) a direct right of action against the insurer.252 With cargo insurance, however, policies are rarely issued. In the London market the Slip Policy Scheme provides for certificates of Lloyds or of the Institute of London Underwriters, a formal policy being issued only at the request of any party to the insurance contract. In consequence, provided that a credit does not prohibit the tender of a certificate, UK banks have long accepted a certificate of insurance of Lloyd’s or the Institute of London Underwriters in respect of marine insurance even though a policy is called for. Such certificates are subject to the Institute Cargo Clauses, state the exact risks covered and the specific exclusions, and it is a general practice of UK banks to accept certificates if they describe the subject matter as contained in the other documents presented, are for the appropriate value, show the essential terms and conditions of the policies to which they are ancillary and evidence that a valid policy is in existence or in course of execution and available for production. Insurance certificates are often issued with the signature of the insurer or his agent already printed on them. An “open cover” under which there has been no declaration of shipment is not, however, a good presentation.253 7–112 The tender of American certificates of insurance254 was considered in Donald H Scott & Co Ltd v Barclays Bank Ltd.255 The letter of advice stated that 251

See Wilson, Holgate & Co Ltd v Belgian Grain and Produce Co Ltd [1920] 2 KB 1 at 7–8. Wilson, Holgate & Co Ltd v Belgian Grain and Produce Co Ltd [1920] 2 KB 1 at 9. In AC Harper & Co v Mackechnie & Co.[1925] 2 K.B. 423, Roche J held that “…the defendants in handing over the certificate warranted by implication that the assertions contained in it were true, that the plaintiffs were not merely to rely on the brokers, but that the defendants undertook to produce or procure the production of the policy referred to in the certificate. In the case of a c.i.f. contract where there is a chain of sellers, there is a contract between the broker and the original seller, and each successive seller, if he chooses to accept the certificate and to pass it on to a buyer, undertakes to make good what the certificate asserts. The ultimate remedy, if there is any irregularity, shifts back until it reaches the original seller and the brokers themselves.” 253 South African Reserve Bank v Samuel & Co Ltd (1931) 40 Ll.LR. 291 at 298–9. 254 As to which, see De Monchy v Phoenix Insurance Co of Hartford (1928) 33 Com Cas 197 (CA) and (1929) 35 Com Cas 67 (HL). See also Koskas v Standard Marine Insurance Co Ltd (1927) 32 Com Case 160. In each case, it was held that a clause in the policy of insurance that claims had to be brought within a specific time, of which no notice was given in the certificate tendered, could not be relied upon. As to this point, see also Macleod Ross & Co Ltd v Compagnie d’Assurance l’Helvetia of St Gall [1952] 1 Lloyd’s Rep 12. 255 [1923] 2 KB 1. 252


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drafts would be honoured against documents including “an approved256 insurance policy”. The document when presented included a certificate of an American insurance company which merely stated that a policy had been issued, and was silent as to the nature of the insurance and its terms and conditions. The Court of Appeal held that the bank was justified in rejecting the certificate. Scrutton LJ said:257 In my opinion they had a right to see a document or documents containing the terms, and if they are tendered a document that does not show what the terms are, they are acting reasonably in refusing to accept. A certificate in this form which does not state the terms of insurance so that they can be seen by the person to whom it is tendered is not an approved policy; it is one to which a reasonable objection can be made. The Court expressly left open the question, however, whether an American certificate of insurance that set out the terms of the insurance would have been acceptable, Scrutton LJ saying that he would not be prepared to hold that all such certificates would be a bad presentation.258 7–113 The position in relation to all insurance certificates and declarations under open policies is now covered by the UCP. Article 34 provides: (d) Unless otherwise stipulated in the Credit, banks will accept an insurance certificate or declaration under an open cover pre-signed by insurance companies or underwriters or their agents. If a Credit specifically calls for an insurance certificate or a declaration under an open cover, banks will accept, in lieu thereof, an insurance policy. This effectively makes policies (on the one hand) and certificates and declarations (on the other hand) interchangeable, save that a certificate or declaration cannot be accepted if the credit expressly prohibits this. It should be noted that the certificate or declaration must be presigned by the insurer or the insurer’s agent. Cover notes issued by brokers are not acceptable unless specifically authorised by the credit.260 256

The Court held that “approved” meant that the policy had to be one to which no reasonable objection could be taken by commercial men (see [1923] 2 KB 1 at 15–6 and 17). 257 [1923] 2 KB 1 at 15. 258 [1923] 2 KB 1 at 15–16. See also Wilson, Holgate & Co Ltd v Belgian Grain and Produce Co Ltd [1920] 2 KB 1 at 7, where Bailhache J said that American certificates were equivalent to policies, and Diamond Alkali Export Corporation v Bourgeois [1921] 3 KB 443 at 455–8, where McCardie took the contrary view. Cf Kunglig Jarnvagsstyrelsen v Dexter & Co (1924) 299 F. 991, where it was held that a certificate of insurance was good tender unless a policy was expressly specified in the credit. 259 In the absence of any stipulation in the credit to the contrary, the declaration need not be issued by any particular person—see Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 335, where it was held that declarations issued by the seller were compliant with the terms of the credit. 260 Article 34(c). Under such notes neither the buyer (nor the bank) has a right to sue the insurer, or even the broker—see Wilson, Holgate & Co Ltd v Belgian Grain and Produce Co Ltd [1920] 2 KB 1 at 9.


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Type of cover 7–114 The credit should stipulate the type of insurance required and the insurance document presented must be for the type of insurance stipulated. Article 35 provides: (a) Credits should stipulate the type of insurance required and, if any, the additional risks which are to be covered. Imprecise terms such as “usual risks” or “customary risks” should not be used; if they are used, banks will accept insurance documents as presented without responsibility for any risks not being covered. (b) Failing specific stipulations in the Credit, banks will accept insurance documents as presented, without responsibility for any risks not being covered. It follows that if the credit provides for presentation of an insurance document without setting out the risks that must be covered, the bank must accept any insurance document without regard to the risks covered, provided that it otherwise complies with the terms of the credit. The bank must adopt the same stance if vague terms are used to describe the risks that should be covered.261 In either of these circumstances the bank is not liable if the goods suffer a loss that is not insured. It is not for the bank to examine the document to see if it provides adequate protection for the buyer (or itself). 7–115 Where the risks that must be covered are specified the bank must only accept the insurance document if it covers those risks.262 If insurance against “all risks”263 is specified, the bank must accept any insurance document that contains 261

Cases such as Borthwick v Bank of New Zealand (1900) 6 Com Cas 1 (referred to at paragraph 7–22 above) would be decided differently under the UCP. In that case the credit specified presentation of an insurance policy without stipulating the cover and the documents presented to the bank included a policy “to pay total loss of vessel only”. There was a partial loss of the consignment not covered by the policy. It was held that the loss fell on the bank on the ground that a policy in this form was unusual in the frozen meat trade, in which it was customary to tender an “all risks” policy. 262 So a policy that stated “excluding rust, oxidation and discolouration unless directly caused by stranding, sinking, collision and/or heavy weather only” does not comply with the requirements of a credit for an insurance document covering Institute Cargo Clause (A)—see Opinions of the ICC Banking Commission, R360. 263 It has been understood for many years that an “all risks” policy need not be such as to cover all possible causes of loss or damage—see Upjohn v Hitchens [1918] 2 KB 48 at 60–1 (Scrutton LJ) and Vincentelli v Rowlett (1911) 16 Com Cas 310, where Hamilton I said that the policy must be sufficient to protect the assured so far as questions of quantum of loss were concerned. In Gaunt v British & Foreign Marine Insurance Co [1921] 2 AC 41 “all risks” was held to mean something more than “all marine risks”. In that case Lord Sumner said (at 57): “There are of course limits to “all risks”…the expression does not cover inherent vice or mere wear and tear or British capture. It covers a risk, not a certainty; it is something which happens to the subject matter from without, not the natural behaviour of that subject matter, being what it is the circumstances under which it is carried. Nor is


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any “all risks” notation or clause.264 Such document need not bear the heading “all risks”, provided that it contains the required notation or clause. Moreover, provided that the document contains such a notation or clause, it must be accepted even though certain risks are excluded and the bank is not liable if the goods suffer a loss which is not insured.265 Once again, it is not for the bank to examine the document to see if it provides adequate protection for the buyer or itself. Currency and amount of the cover 7–116 The insurance document must be expressed in the same currency as the credit unless the credit stipulates otherwise.266 Article 34(f)(ii) of the UCP specifies the minimum amount for which the insurance document must indicate the cover to have been effected. If the c.i.f. or c.i.p.267 value of the goods can be determined from the documents on their face, the minimum amount of the cover must be that value plus 10%. If the c.i.f. or c.i.p. value of the goods cannot be determined from the documents on their face, the minimum amount must be the greater of (i) 110% of the amount for which payment, acceptance or negotiation is requested under the credit and (ii) 110% of the gross amount of the invoice. 7–117 Finally, article 35 provides: it a loss which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury, he has injured them himself.” See also Soya GmbH Mainz Kommanditgesellschaft v White [1982] 1 Lloyd’s Rep 136. Certain risks are not included in “all risks” cover because insurers will not cover them, on the obvious ground that they are incalculable. Loss of market, for example, or a fall in price, are not normally covered; the same applies to changes in currency regulations resulting in loss or the action of foreign governments rendering a loss unavoidable, and the bankruptcy of a buyer, or, again, the risk of unlimited transhipment, or delay. As it is impossible to visualize all the possibilities of loss that would be excluded from an “all risks” insurance, there seems to be no short cut to a solution of the problem through the offer of full insurance excluding named risks. This is not done. It is probably similarly impossible to specify the exact risks covered and so the expression “all risks” cannot become a term of art, recognizable as bearing a universally understood meaning to trade interests throughout the world. 264 Article 36. 265 Article 36. This is essential because, for the reasons set out in footnote 263, the expression “all risks” rarely means what it appears to say. Without a universally accepted meaning to “all risks” the expression means what its user intends it to mean, which can be anything between every risk of whatever nature on the one hand and every risk normally insured against in respect of the particular trade on the other. 266 Article 34(f)(i). In Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 1 KB 1, the Court of Appeal left open the question whether under a sterling credit the policy must be one payable in sterling. See also Malmbeerg v Evans (1924) 30 Com Cas 107. 267 Carriage and insurance paid to (named place of destination).


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Unless otherwise stipulated in the Credit, banks will accept an insurance document which indicates that the cover is subject to a franchise or an excess (deductible). The bank is not concerned with the amount of any such franchise or excess. Voidable policies and forgeries 7–118 Although an insurance document tendered under a c.i.f. contract should be enforceable in law at the time it is tendered,268 because the bank is not concerned with the legal effect of any document presented under the credit,269 the bank is not justified in rejecting a document that may be void or voidable. The bank would, however, be bound to reject a policy of insurance that it knew to be forged, although if the bank accepted it in good faith without knowledge of the forgery it would be entitled to reimbursement and would not be liable to its customer for any consequent loss.270 The commercial invoice 7–119 Article 37 of the UCP provides: (a) Unless otherwise specified in the Credit, commercial invoices: (i) must appear on their face to be issued by the Beneficiary named in the Credit (except as provided in Article 48), and (ii) must be made out in the name of the Applicant (except as provided in sub-Article 48(h)), and (iii) need not be signed. (b) Unless otherwise specified in the Credit, banks may refuse invoices issued for amounts in excess of the amount permitted by the Credit. Nevertheless, if a bank authorised to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate under a Credit accepts such invoices, its decision will be binding upon all parties, provided that such bank has not paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated for an amount in excess of that permitted by the Credit. (c) The description of the goods in the commercial invoice must correspond with the description in the Credit. In all other documents the goods may be described in general terms not inconsistent with the description of the goods in the Credit. 7–120 The commercial invoice must thus be made out to show an amount due from the applicant for the credit to the beneficiary under the credit for the goods 268

See Arnhold Karberg & Co v Blythe [1915] 2 KB 379. Article 15. 270 See Basse and Selve v Bank of Australasia (1904) 90 LT 618, (1904) 20 TLR 431. 269


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described in the credit, although it need not be signed.271 If the credit provides for any different requirement, however, such requirement must be complied with. Moreover, where the benefit of the credit is transferable, the bank may pay against an invoice showing a sum due from the original beneficiary to the beneficiary for whose benefit the credit has been transferred.272 7–121 Article 37(c) provides that the invoice description of the goods must “correspond” with the description of the goods in the credit.273 This is a less rigid requirement than that it should be precisely the same,274 but it is essential that the words of the invoice follow those of the credit and all of the elements of the description be present. In Kydon Campania Naviera SA v National Westminster Bank Ltd 275 the bank argued that a credit relating to the sale of a ship “as per Memorandum of agreement dated 2nd July 1974” required that invoices should specify the year of building, the light replacement tonnage of the ship and inclusion of equipment, outfit and gear, as also stated in the credit. The beneficiary argued that it was sufficient for the invoice to certify that the ship was “as per Memorandum of agreement dated 2nd July 1974”, which were the words included in the invoice. Parker J, however, held that that the bank’s argument was correct. The dates on the invoices also did not tally with those on other documents, but Parker J held that this did not matter. A similar point arose in Astro Exito Navegacion SA v Chase Manhattan Bank NA,276 where Leggatt J held that words in a credit relating to the sale of a ship that the ship was “to arrive under own power at Kaohsiung, Taiwan, on or before 30th September 1980, as is but always safely afloat and substantially intact as per memorandum of agreement dated 2nd July 1980” were not words of description that needed to be included in the invoice. Such words related only to the condition of the ship when notice of readiness was issued. In Glencore International AG v Bank of China277 the issue was whether the inclusion of additional words showing the specific origin of the goods in an invoice under a credit relating to goods required to be of origin “Any Western brand” meant that the invoice did not correspond to the credit. The Court of Appeal held that the additional information in the invoice was not detrimental to or in any way inconsistent with the requirement of the credit and the invoice was therefore acceptable. 7–122 Article 37 does not stipulate that the commercial invoice should be made out only in respect of the goods financed by the credit and, provided that the 271

The fact that the invoice deducts an advance payment which is not referred to in the credit does not of itself make the invoice discrepant, although much depends on the precise terms of the credit—see Opinions of the ICC Banking Commission, R361. 272 See article 48, discussed in paragraphs 5–17 to 5–19 above. 273 This includes the trade term subject to which the goods are being sold if that is referred to in the description of the goods in the credit, see Opinions of the ICC Banking Commission, R362. 274 So, for example, the expressions “ex Berger Pilot” and “previous name Berger Pilot” correspond as in the context “ex” meant “previous name”—see Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 458. 275 [1981]1 Lloyd’s Rep 68. 276 [1986] 1 Lloyd’s Rep 455. 277 [1996] 1 Lloyd’s Rep 135.


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invoice properly identifies and invoices the goods the subject matter of the credit, this would appear to be sufficient. In Talbot v Bank of Hendersonville,278 the plaintiff sued the First American National Bank, which had issued its credit at the instance of the Bank of Hendersonville. The credit called for a commercial invoice covering “101 No. 418 Alarm Units consisting of Part 301, 12 Siren and Remote Switch…”. The invoice tendered referred to “Dialer ME-310”, but it also contained in different type “It covers 101 No. 418 Alarm Units consisting of Part 301…”. The Tennessee Court of Appeals held that the First American National Bank was justified in paying on the ground that there was no evidence that the dialers described in the letter of credit were not included in the shipment in addition to the ME 310 dialers. A court in the United Kingdom might well take a different view of the matter. 7–123 Article 37(b) makes it clear that a bank may reject documents that include a commercial invoice issued for an amount in excess of the maximum sum payable under the credit in respect of the shipment concerned. The bank to which the documents are presented may, however, choose to accept the presentation. If that bank does so, all other parties (including the issuing bank and the buyer) are bound by that decision. Accordingly in those circumstances the buyer must reimburse the issuing bank and the issuing bank must reimburse any paying bank or meet any draft or deferred payment obligation arising as a result of the acceptance of the documents. Thus, where a credit calls for shipment to the value of £100,000 and documents are presented for goods to the value of £110,000, with a request that £100,000 be paid and the excess collected, the bank may accept or reject the presentation. If it accepts the presentation, the payment obligation must be fulfilled in accordance with the terms of the credit and the buyer cannot refuse the documents or refuse to reimburse the issuing bank. None of the banks would, however, be under an obligation to collect the balance from the buyer unless there was some arrangement with the seller separate from the credit pursuant to which it had undertaken such an obligation.279 Other documents 7–124 Credits may (and usually do) call for documents other than those normally required under a contract for the sale of goods on c.i.f. terms. It is usual now to see a very wide variety of documents called for under credits in relation to many types of commodity sales, especially where the quality and origin of goods 278

496 SW 2d 548 (1973). See also Key Appliance Inc v First National City Bank 359 N.Y.S. 2d 886 (1974), affirmed 37 N.Y. 2d 826 (1975), in which documentary terms “were stated with such particularity that apparently trivial discrepancies justified non-payment”; also Courtaulds v North Carolina National Bank 528 F 2d 802 (4th Cir 1975). 279 For the position where the draft is made out for an amount in excess of the amount authorised in the credit, see Donald H.Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1, but on this point reported only in (1922) 28 Com Cas 253.

may vary considerably.280 The credit should state precisely the documents against which payment, acceptance or negotiation is to be made.281


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7–125 Such documents must correspond to the description (if any) given in the credit.282 If they are described in imprecise terms banks are allowed by the UCP to accept such as are presented, providing that they are of the type called for.283 Article 21284 states as follows: When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented provided that their data content is not inconsistent with any other stipulated document presented. In the light of this the issues will usually be (i) whether a document capable of constituting the document called for under the credit has been presented and (ii) whether such a document if it has been presented is consistent with other documents presented.285 280

For an example of a bewildering list of conditions relating to the documents to be presented under a credit for the sale of Iranian cotton, see Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 Lloyd’s Rep 275 at 276–7. 281 Article 5(b) (discussed at paragraph 4–18 above). 282 As to the description of the goods to be contained in the documents, see paragraphs 7–46 to 7– 49 above. 283 In Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367 the shippers’ invoice was included with the shipping documents in error and described the meal as “Chilean Fishmeal minimum 67% protein”. It was accompanied by a certificate of quality, issued by the shippers, which stated that “the analysis or composition of the goods is in accordance with the following analysis Protein 67 per cent minimum”. The analysis certificate said that the protein content was 69.7 per cent. McNair J held that, although the shippers’ invoice was probably irrelevant in law, the shippers’ certificates of quality and analysis did not constitute valid shipping documents and were, therefore, not a good tender. The credit further called for a health certificate to the effect that the meal was free from Salmonella, whereas the one tendered certified merely that the goods were free from “infection and parasites”. McNair, J said that “inasmuch as the Marine Midland Trust described the certificate as a Salmonella certificate I should not be disposed to give effect to this objection”. 284 This article in its form in the 1974 Revision was referred to in Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd [1983] QB 711 and Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 462. In thé former case, Parker J said (at 722): “Article [21] cannot be understood to mean that banks must accept any document tendered, even if inconsistent. It will, however, enable the bank to accept, for example, a certificate of quality even if not by an independent person. To go further is to create absurdity. A certificate of origin which on its face did not apparently cover the quantity of goods would clearly not be sufficient, and would not be saved by the article.” See also Opinions of the ICC Banking Commission, R339 and R340. 285 In Automation Source Corporation v Korea Exchange Bank 670 N.Y.S. 2d 847 the credit made no reference to the weight of the shipment. Two documents referring to different weights were presented. The Supreme Court of New York held that the documents were compliant. In the light of the fact that the letter of credit did not refer to the weight of the


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7–126 It is obvious that a document such as a certificate of analysis, which is labelled “certificate of analysis” but which does not provide the information that such a document is intended to give, cannot be a good presentation. However, where the credit simply calls for a “certificate of inspection”, a document recording that the goods have been inspected is sufficient. It is not necessary that it certifies that the condition and quality of the goods conform to the contract of sale unless the credit so requires.286 It would seem that if a credit called, for some reason or other, for a bank guarantee without further definition, the document presented, if answering the basic requirement, would be acceptable. 7–127 Where the credit calls for documents certifying different matters, a single document certifying all the matters is acceptable. In Netherlands Trading Society v Wayne & Haylitt Co,287 the credit called for “original weight certificate” and “original jute mills certificate”. The bank accepted a combined jute mill and weight certificate and was upheld. Similarly, where a certification of weight is called for in respect of goods to be transported otherwise than by sea, in the absence of provision to the contrary in the credit, a separate document need not be presented if the weight appears to have been stamped or declared on the transport document by superimposition by or on behalf of the carrier. In this respect article 38 provides: If a credit calls for an attestation or certification of weight in the case of transport other than by sea, banks will accept a weight stamp or declaration of weight which appears to have been superimposed on the transport document by the carrier or his agent unless the Credit specifically stipulates that the attestation or certification of weight must be by means of a separate document. 7–128 Where the document called for must confirm that facts and matters are in a certain state at a particular date, a document purporting to give such confirmation but made much earlier than the date concerned does not conform to the requirements of the credit. In Kydon Compania Naviera SA v National Westminster Bank Ltd,288 Parker J said:289 shipment, the weight stated in the documents was irrelevant to the bank’s obligation to pay. 286 Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279. If the document called for is a “health certificate”, a certificate of inspection certifying that the goods are of “the quality designated” without making any reference to health may not comply—see Michael Doyle & Associates Ltd v Bank of Montreal (1982) 39 BCLR 186, affirmed (1984) 55 BCLR 196. 287 (1952) 6 Legal Decisions Affecting Bankers 320. 288 [1981] 1 Lloyd’s Rep 68. The documents required were a certificate that the ship complied with a memorandum of agreement, a bill of sale containing a covenant that the ship was free from encumbrances and a certificate of the registrar at the place of the ship’s registration that ship was free from encumbrances. See also Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 at 464 (also concerning a bill of sale containing a covenant that the ship was free from encumbrances). But cf Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329 at 335 (declaration of ownership made out a month before sailing held to be compliant).


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Where…certificates of the nature of those in the present case are called for it appears to me that the clear intention was that they should relate to the condition of the vessel at time of delivery and thus that, if antedating that time at all, they could only, to constitute a good tender, do so by a very small amount. 7–129 The leading case on strict compliance, Equitable Trust Co of New York v Dawson Partners Ltd,290 concerned a certificate of quality.291 A credit opened in Batavia required the presentation, in addition to the usual documents, of a “Dutch Government certificate of quality” relating to the goods. The Government of the Dutch East Indies did not issue such certificates and the credit was accordingly varied so that a certificate of quality given by “experts” would be acceptable, which certificate was to be signed by the Chamber of Commerce at Batavia. Two complications arose in complying with the telegraphic code used by the bank. The advice forwarded to the correspondent bank in Batavia read “expert” in the singular instead of in the plural. Further, there was no Chamber of Commerce in Batavia, though there was a body known as the Commercial Association of Batavia which discharged functions commonly performed by chambers of commerce. In the result the documents presented and taken up by the issuing bank included a certificate signed by one expert only and countersigned by the Commercial Association of Batavia. The buyer adopted the attitude that the bank had failed to comply with its mandate and was consequently not entitled to an indemnity in respect of the moneys it had paid in order to take up the drafts. The House of Lords held that on the evidence the Commercial Association of Batavia could be regarded as equivalent to the Chamber of Commerce, but that the presentation was bad on the ground that a certificate furnished by a single expert was not enough. 7–130 The courts have since considered compliance in relation to a number of different types of documents, including the following: certificates of inspection in relation to quality, quantity and weight,292 packing lists,293 beneficiary’s certificates,294 notices of a ship that it is ready for loading295 notices of a 289

[1981] 1 Lloyd’s Rep 68 at 76. (1927)27L1.L.R.49. 291 As to the intent of such certificates, see Minster Trust Ltd v Traps Tractors Ltd [1954] 1 WLR 963, where Devlin J said (at 975): “It has now become quite common to include among documents which have to be tendered against payment a certificate of inspection or of quality. Certificates of this sort are addressed to all the world or to all who may be concerned. If the phrase is not used as more than a label, they might be called certificates in rem, as compared with certificates in personam which deal only with particular contracts and are addressed only to particular parties. The former carry the same meaning to all who read them. The latter may have to be interpreted in the light of particular contractual requirements or of information known only to the addressees. A certificate in rem certifies a standard of quality extraneous to the contract. It may be the certifier’s own standard or it may be taken from some public or independent source. A certificate in personam may be based on the certifier’s own standards or on standards prescribed by the contract. It may be a certificate of quality or a certificate that a contract has been carried out.” 290


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7–131 So far as consistency is concerned, the issue is often one of linkage. Thus in Banque de l’Indochine et de Suez SA v J.H.Rayner (Mincing Lane) Ltd299 the credit called for a certificate of origin, “E.U.R.1” certificates and certificates of weight, quality and packing. The Court of Appeal held that the bank was entitled to reject the documents on 292

Bank Melli Iran v Barclays Bank NA (Dominion, Colonial and Overseas) (1951) 2 TLR 1057, 6 Legal Decisions Affecting Bankers 215; Soproma SpA v Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep 367 (see footnote 283 above); Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279; Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 (where Leggatt J held that the bank was entitled to call for a document to confirm that a certificate that had to be approved by the Taiwan authorities had in fact been so approved); Bayerische Vereinsbank Akteingesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 (where Mance J said (obiter) that a certificate based on the gross loaded weight of the vessel ascertained by reading the ship’s draft before and after loading and deducting the ship’s tare was a satisfactory certification, but the fact that the certificate drew attention to the fact that the ship’s calibration tables were inaccurate would entitle the bank to reject the presentation); and Kredietbank Antwerp v Midland Bank Plc [1999] Lloyd’s Banking Rep 219 (where the Court of Appeal held that (i) a report issued by Daniel Griffith (Holland) BV that contained words indicating that the company was a member of the Worldwide Inspectorate Group satisfied the requirement for a report issued by “Griffith Inspectorate” and (ii) a “Draft Survey Report” referred to a survey of the ship’s draft that could be satisfied by a report certifying the quantity loaded based on calculation of the ship’s drafts at various stages of loading and need not state the draft measurements of the ship). See also Chairmasters Inc v Public National Bank of New York 131 N.Y.L.J., No. 34 (1954) (where it was held that where a credit denied responsibility for the validity sufficiency or genuineness of the documents, the bank was not obliged to reject a certificate of inspection which indicated that only spot checks of the goods were made) and Banco Espanol de Credito v State Street Bank and Trust Co 385 F. 2d 230 (1st Cir. 1967), affd 409 F. 2d 711 (1st Cir. 1969), where a bank was held not justified in refusing a certificate to the effect that “the goods were found conforming to the conditions stipulated on the order stock sheets”, presented pursuant to a credit which required a certificate testifying that “the goods are in conformity with the order”, the Court holding that the language used was not a meaningful variance from the terms of the credit. In Germany it has been held (Bundesgerichtshof, Wertpapier-Mitteilungen 1958, 587) that a certificate of inspection for which the credit had called presented in relation to powdered milk, which closed with the words “The “Powdered edible dried skim milk (spray process)” is in good condition, of good commercial quality, prime, sound and fresh and edible” indicated by use of the inverted commas that the words between them did not emanate from the person giving the certificate and thus that the expert assumed no responsibility regarding the method of analysis employed. 293 Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (where the Court of Appeal held that failure of the packing list to describe the goods did not entitle the bank to reject the documents in circumstances where the document stated the quantity, net weight and gross weight of the goods in terms which were identical to other documents which described the goods). 294 Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (where the requirement was the common one that the beneficiary certify that one full set of non-negotiable documents have been sent to the buyer within 10 working days after shipment and the Court of Appeal held that the document presented was not an original, as to which see paragraphs 7–30 to 7–33 above). 295 Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455 (where Leggatt J held that the notice was commercially acceptable even though it was signed by a Master of the Supreme Court pursuant to orders of the Court and contained numerous amendments).


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beneficiary that the goods are ready for loading296, sight drafts297 and an acceptance of sale and bill of sale relating to the sale and delivery of a ship.298 the ground that there was nothing to link the documents with one another or with the credit. Here the question is whether the documents unequivocally identify the goods, although the goods may be described in the document in general terms, such description not being inconsistent with the description of the goods in the credit.300 Compliance under ISP98 7–132 The principles for examination of documents and compliance under ISP98 are similar to those under the UCP, but there are differences. Rule 4.01 (a) provides that demands for honour of standby credits must comply with the terms and conditions of the credit.301 Rule 4.01(b) provides that compliance is determined by examining the presentation on its face against the terms and conditions stated in the credit as interpreted and supplemented by ISP98. For this purpose the provisions of ISP98 are to be read in the context of “standard 296

Credit Agricole Indosuez v Generale Bank [2000] 1 Lloyd’s Rep 123 (where David Steel J held that a notice of readiness for shipment had to be dated prior to the last date for shipment under the credit). 297 Kydon Campania Naviera SA v National Westminster Bank Ltd [1981] 1 Lloyd’s Rep 68 and Astro Exito Navegacion SA v Chase Manhattan Bank NA [1986] 1 Lloyd’s Rep 455. The need to comply with a requirement to present a sight draft is discussed at paragraph 4–93 above. 298 Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 (where the Court of Appeal held that under the terms of a credit to finance the sale of a ship the acceptance of sale and bill of sale did not have to show delivery within the range of delivery dates specified in the contract of sale). 299 [1983] QB 711. 300 Article 37(c) (discussed at paragraphs 4–18 and 4–121 above). In Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348, the Court agreed with a finding that words in relation to the sale of a ship “for delivery in Taipei during 17–20 August 1998” were not part of the description of the goods in the credit, but went on to hold that documents showing delivery one day outside such period were not inconsistent with that description. In Re Reinhold & Co and Hansloh (1896) 12 TLR 422, the buyer under a c.i.f. contract which provided that the documents should include a “legalized Chamber of Commerce Certificate as to shipment”, rejected the documents on the ground that the certificate that was tendered did not correspond to the bills of lading, which described the goods as shipped in bags marked “F”. It was held that the buyer was justified in rejecting the documents because there was no evidence that the bags shipped were those the subject matter of the certificate. 301 If a standby does not specify any required documents, it is deemed to require a documentary demand for payment—see rule 4.08.


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standby practice”, making it clear the practice to be considered in relation to standby credits is not limited to what is stated in ISP98.302 7–133 Documents presented which are not required by the credit need not be examined and must be disregarded for the purpose of determining compliance.303 Nondocumentary conditions must also be disregarded.304 These principles are the same as those adopted in the UCP.305 The position in relation to consistency is different, however. Rule 4–03 provides that an issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the credit. The effect of this is that if a document complies with the terms of the credit, it does not matter that it is inconsistent with other documents unless the credit stipulates that documents must be compliant with one another.306 7–134 The documents presented must be in the same language as that used in the credit.307 They must be issued by the beneficiary308 unless the credit indicates that the document is to be issued by a third person or the document is of a type that standard standby practice requires to be issued by a third person.309 Documents must not be dated later than the date of presentation.310 If the credit does not specify the precise wording to be used in a document, the document presented must appear to convey the same meaning as that required by the credit.311 Often, however, credits specify the wording to be used by reference to quotation marks, blocked wording or an attached exhibit or form. If the credit provides that the specified wording must be “exact” or “identical”, the wording must be exactly reproduced in the documents presented, including as to typographical errors in spelling, punctuation, spacing and such matters, as well as blank lines and spaces for data.312 If the credit does not provide that wording 302

Cf paragraph 7–09 above. Rule 4.02. 304 Rule 4–1 1(a). ISP98 goes into more detail as to what consitutes a non-documentary condition than the UCP. Rule 4–11(b) provides that terms or conditions are non-documentary if the credit “does not require presentation of a document in which they are to be evidenced and if their fulfillment cannot be determined by the issuer from the issuer’s own records or within the issuer’s normal operations.” Rule 4.11(c) provides for the sort of matters that enable the issuer to determine whether the condition has been complied with from its own records and include matters such as when, where and how documents are sent and received, amounts transferred into or out of accounts held with the issuer and amounts determinable from a published record (for example, in relation to amounts of interest determined according to published interest rates). 305 See paragraphs 7–19 above and 7–24 to 7–26 above. 306 Cf paragraphs 7–17 to 7–18 and 7–131 above. 307 Rule 4.04. 308 For the position where the credit is transferred or assigned, see paragraphs 5–38 to 5–47. 309 Rule 4.05. An obvious example of a document required to be issued by a third person is a court judgment or arbitration award. 310 Rule 4.06. They may be dated earlier than the date of presentation. 311 Rule 4.09(a). 312 Rule 4.09(c). 303


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must be “exact” or “identical”, typographical errors in spelling, punctuation, spacing and such matters that are apparent when read in context are not required to be duplicated and blank lines or spaces for data may be completed in any manner not inconsistent with the credit.313 If the issuer or confirmer is reorganised, merged or changes its name, any required reference by name to the issuer or confirmer in the documents may be to it or its successor.314 7–135 Original documents must be presented, except where copies are called for.315 A document is deemed to be an original (i) unless it appears on its face to have been reproduced from an original or (ii) if it appears on its face to have been reproduced from an original but contains a signature or authentication that appears to be original.316 Where the credit provides for presentation of a copy, an original or a copy can be presented unless the credit states that only a copy be presented or otherwise addresses the disposition of all originals.317 If multiples of the same document must be presented, only one must be an original unless (i) “duplicate originals” or “multiple originals” are called for, in which case all must be originals, or (ii) “two copies” or “two-fold” or a similar expression is used, in which case either originals or copies may be presented.318 7–136 Documents need not be signed unless the credit so stipulates or unless standard standby practice requires them to be signed.319 If signature is required, it may be made in any manner that corresponds to the medium in which the signed document is presented.320 Any signature is treated as a complying signature unless the credit specifies the name of the person who must sign a document.321 A required statement need not be accompanied by any formality unless the credit so requires.322 313

Rule 4.09(b). Rule 4.14. 315 Rule 4.15(a). Where an electronic presentation is permitted or required (as to which, see paragraph 7–137 below), presentation of an electronic record is deemed to be an original—see rule 4.15(b). If the credit requires presentation of the original standby credit and the original is lost, stolen, mutilated or destroyed, the issuer need not replace it or waive any requirement that the original be presented under the standby—see rule 3.12(a). The issuer may, however, replace an original credit or waive a requirement for its presentation or provide a replacement copy to the beneficiary without affecting its right to reimbursement from the applicant—see rule 3.12(b). The issuer may in its sole discretion require indemnities satisfactory to it from the beneficiary and assurances from nominated persons that no payment has been made. Cf Gan General Insurance Co v National Bank of Canada (1997) 36 BLR (2d) 307, affirmed (1999) 44 BLR (2d) 67, where it was held that under UCP400 the presentation of an authentic copy of a standby credit coupled with an indemnity was sufficient compliance with the terms of the credit. 316 Rule 4.15(c). 317 Rule 4.15(d). 318 Rule4.15(e). 319 Rule 4.07(a). Cf rules 4.16(b)(iv), in relation to demands for payment, and 4.17(c), in relation to statements of default (referred to in paragraph 7–139 below). Another example of a document that practice requires to be signed is a draft. 320 Rule 4.07(b). 321 Rule 4.07(c). No indication of the status of the person signing is necessary unless the credit so specifies. Where signature by a named person or body or by a person of a particular status is required, the issuer or nominated person can act on the appearance of 314


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7–137 ISP98 envisages the possibility of presentation taking place electronically.323 Presentation must, however, take place in accordance with the medium indicated in the credit.324 Where no medium is indicated, a document must be presented as a paper document,325 unless only a demand is required. If only a demand is required and the beneficiary is a SWIFT participant or a bank, it can be presented by SWIFT, tested telex or similar authenticated means. If the beneficiary is not a SWIFT participant or a bank and only a demand is required, the demand can only be presented by paper unless the issuer permits, in its sole discretion, the use of another means of presentation.326 Where presentation in an electronic medium is indicated in the credit, to comply a document must be presented as an electronic record327 capable of being authenticated328 by the person to whom it is presented.329 7–138 Rule 4.13 of ISP 98 provides that save in relation to presentation of an electronic record, a person honouring a presentation has no obligation to the applicant to ascertain the identity of any person making a presentation or any assignee of proceeds.330 Any payment to an account or account number stated in the credit or in a cover instruction from the beneficiary or nominated person fulfils the obligation under the credit to effect payment.331 the document and need not verify that the person named actually signed or had the status required—see rule 4.07(d). 322 Rule 4.12(a). Rules 4.12(b), (c) and (d) make provision for what is called for where the credit provides that the addition of formality is required or a statement is required to be witnessed or counter-signed, legalised visaed or the like. As to certification or authentication of legal or judicial documents, see rule 4.19. 323 An electronic document is received for the purpose of presentation when either (i) an electronic record enters, in a form capable of being processed, the information system designated in the credit, or (ii) the issuer retrieves an electronic record sent to an information system other than that designated by the issuer. 324 Rule 3.06(a). 325 A document communicated electronically is not turned into a paper document for this purpose if the person receiving it generates a paper document from it—see rule 3.06(c). 326 Rule 3.06(b). 327 Rule 1.09(c) provides that an “electronic record” is a record communicated by electronic means to a system for receiving, storing, re-transmitting, or otherwise processing information, which is capable of being authenticated and then examined for compliance with the terms and conditions of the credit. 328 Rule 1.09(c) provides that “authenticate” means to verify by generally accepted procedure or methodology in commercial practice the identity of a sender or source and the integrity of or errors in the transmission of the information contained in a record. Assessment of integrity of information involves checking that the information has remained complete and unaltered apart from any change arising in the normal course of communication, storage and display. 329 Rule 3.06(d). 330 Rule 4.13(a). 331 Rule 4.13(b). If payment is made to an account specified in a cover instruction received electronically, the issuer, confirmer or nominated person must authenticate the document containing the instruction.


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7–139 Like the UCP, ISP98 makes specific provision for presentation of certain documents that are commonly required to be presented under standby credits. The specific provisions are for the following types of document: (1) Demands for payment. These are dealt with in rule 4.16. A demand for payment need not be a separate document unless the credit specifically requires it to be. If a separate document is required, it must contain (i) a demand for payment from the beneficiary directed to the issuer or nominated person, (ii) a date indicating when the demand was issued, (iii) the amount demanded, and (iv) the beneficiary’s signature. A demand may be in the form of a draft or other instruction, order or request to pay. If the credit specifies presentation of “draft” or “bill of exchange”, the draft or bill of exchange need not be in negotiable form unless the credit so requires. (2) Statements of default or other drawing event. These are dealt with in rule 4.17. If the content of such a document is not specified in the credit, the document complies if it contains (i) a representation to the effect that payment is due because a drawing event described in the credit has occurred, (ii) a date indicating when it was issued, and (iii) the beneficiary’s signature. (3) Negotiable documents. These are dealt with in rule 4.18. The provision relates to stipulated documents that are transferable by endorsement and delivery. If the credit does not stated whether, how or to whom endorsement must be made, the document may be presented without endorsement or, if endorsed, the endorsement may be in blank. In any event the document may be issued or negotiated with or without recourse.332 (4) Legal or judicial documents. These are dealt with in rule 4.19. The provision relates to government issued documents, court orders, arbitration awards or similar documents. Such a document is deemed to comply with a credit if it appears to be (i) issued by a government agency, court, tribunal or similar body (as the case may be), (ii) suitably titled, (iii) signed, (iv) dated, and (v) originally certified or authenticated by an official of the government agency, court, tribunal or similar body (as the case may be). (5) Other documents.333 These are dealt with in rule 4.20. If a document other than one described in paragraphs (1) to (4) above is called for by the credit and the credit does not specify the issuer, data content, or wording of the document, the document complies if it appears to be 332

Cf paragraphs 4–109 to 4–110 for the position under a negotiation commercial credit issued subject to UCP500. 333 If a document is of a type for which the UCP contains detailed rules (for example, a commercial invoice, transport document or insurance document), it must be examined in the context of practice in relation to standby credits under ISP98 and not in accordance with the provisions of the UCP— see rule 4.20(b).


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appropriately titled or to serve the function of that type of document under standard standby practice. 7–140 Sometimes standby credits request the beneficiary to issue his own separate undertaking to another person. Under ISP98, such an undertaking, if issued, does not affect the requirements as to presentation of documents under the credit. Thus the beneficiary’s compliance with the request does not confer any rights other than the right to draw under the credit even if the issuer pays a fee to the beneficiary for issuing its separate undertaking.334 Neither the separate undertaking nor any document presented under it need be presented to the issuer unless the credit so provides.335 If the separate undertaking or documents presented under it (or copies of them) are received by the issuer although not required to be presented under the credit (i) the issuer need not examine them and must disregard their compliance or consistency with the credit, the beneficiary’s demand under the credit or the beneficiary’s separate undertaking and (ii) the issuer may without responsibility return them to the presenter or forward them to the applicant with the stipulated documents presented.336 7–141 Like the UCP, ISP98 does not define or otherwise provide for defences to a claim under a standby credit based on fraud, which must be dealt with under the law applicable to the credit.337 334

Rule 4.21 (a). Rule4.21(b). 336 Rule 4.21(c). 337 The point is made expressly in rule 1.05(c). In England, defences based on fraud in relation to standby credits are dealt with in the same way as such defences in relation to commercial credits— see Kvaerner John Brown Ltd v Midland Bank Plc [1998] CLC 446. As to the principles applied, see paragraphs 6–57 to 6–72 and 4–23 to 4–33 above. For recent US decisions in relation to standby credits, see 3Com Corporation v Banco Do Brazil SA 171 F.3d 739 (2nd Cir. 1999). As to the law applicable to the credit, see paragraphs 10–39 to 10–48 below. 335

Chapter 8 THE BANK’S SECURITY Introduction 8–01 Documents of title to goods are often the security behind the documentary credit transaction, although few banks would rely solely on them. Where a bank accepts documentary credit instructions from an issuing bank to act as a confirming bank or otherwise to pay against documents it is normally content to rely on the substance and integrity of the issuing bank, its principal. Similarly where a bank issues a credit at the instance of a customer, it is principally to the customer that it looks for reimbursement of any sum that it must pay, and the security provided by its possession of the documents of title to the goods the subject of the credit is normally regarded as subsidiary. Nevertheless, it may be necessary to resort to the documents of title for reimbursement of the moneys paid against them. The bank therefore needs to have the right to deal with the documents as it sees fit. Security arising from possession of documents 8–02 The credit specifies the documents that must be presented and the paying bank must obtain those documents from the seller. These documents are the title to the goods the subject matter of the transaction to which the credit relates. They will usually include a transport document, a policy of insurance, a commercial invoice and a number of other documents. Such documents are the security upon which the issuing bank may rely for reimbursement by the buyer of any moneys paid under the credit.1 1

Banner v Johnston (1871) LR 5 HL 157 at 174. See also Ex parte Brett(1871) LR 6 Ch App 838 at 841, The Odessa [1916] 1 AC 145 and The Orteric [1920] AC 724. 2 In The Star Gemini [1999] 2 Lloyd’s Rep 255 (Federal Court of Australia, NSW Registry in Admiralty), Tamberlin J stated (at 263) that these 2 sentences “usefully summarised” the position. 3 (1923)14L1L.R.344. 4 (1923) 14 L1L.R. 344 at 347. 5 See paragraph 8–36 to 8–37 below. 6 A recent example of a confirming bank having to sell goods in circumstances where it had paid against documents that were not compliant is Standard Chartered Bank v Pakistan

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Pledge—general principles 8–03 The security operates as a pledge. As regards the issuing bank, such right is usually given expressly by the agreement between it and its customer contained in the application for the credit. The intermediary bank has an implied pledge when it pays or negotiates documents presented to it by the seller.2 A power of sale is inherent in the pledge and if a bank does not receive reimbursement or indemnity in accordance with the terms agreed, it may sell pursuant to the right that the pledge gives. In Rosenberg v International Banking Corporation3, Scrutton LJ said:4 Bankers’ liens or bankers’ pledges effected in such a way give, according to the views of merchants, the bankers a right of sale. Whether you talk about it as an express pledge, or whether…you talk about it as an implied pledge, in my view such a transaction gives an independent right, or right of property, to the bank to secure the amount which they have advanced… Thus, as pledgee the issuing bank can retain the documents until it is paid and, if not paid in accordance with the terms agreed, it may take possession of and sell the goods themselves and reimburse itself from the proceeds.5 This is so even where the bank pays inadvertently against irregular documents that are declined by the buyer and there is no recourse to the seller; the bank has a pledge for what it may be worth.6 8–04 The bill of lading and the accompanying documents become pledged to the bank because, although in certain rare cases a bank may take a bill of lading for some other purpose, the documents are invariably given to the bank by way of pledge when they are delivered in pursuance of the terms of a commercial credit.7 The bank’s security by way of pledge does not, however, depend on the contract between the buyer and his bank. It depends on the ability of the seller to pledge the documents of title on behalf of the buyer or with his consent.8 It is therefore essential that the seller retain the general property in the goods at the date when the documents are presented to the bank and only if he does can there be a pledge.9 National Shipping Corporation (No 3) [1999] 1 Lloyd’s Rep 747. The bank took possession of the goods and sold them, but did not recoup the sum it had paid to the beneficiary. It therefore sought to recover its loss from shipowners who had issued an antedated bill of lading against which payment had been made. Cf Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59, where the confirming bank sold goods in circumstances where it had paid against documents that were compliant 7 Where a bill of lading is indorsed to a bank it is always a question of fact (that is to say, as to the intention of the parties) whether the whole property passes to the bank as purchaser or mortgagee or whether the bank only acquires a special property as pledgee. In the absence of evidence of a contrary intention, the bank only acquires a special property as pledgee: Sewell v Burdick (1884) 10 App Cas 79, Bristol Bank v Midland Ry Co [1891] 2 QB 653 and North Western Bank Ltd v John Poynter Son & MacDonalds [1895] AC 56. See also The Glamorganshire (1888) 13 AC 454. 8 See Ross T.Smyth & Co Ltd v T.D.Bailey, Son & Co (1940) 67 L1.L.R. 147 at 156 and The Future Express [1993] 2 Lloyd’s Rep 542 at 547. In the former case, Lord Wright said: ‘The property which the seller retains while he or his agent, or the banker to whom he has pledged the documents,


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retains the bills of lading is the general property and not a special property by way of security. In general, however, the importance of the retention of the property is not only to secure payment from the buyer but for purposes of finance. The general course of international commerce involves the practice of raising money on the documents so as to bridge the period between shipment and the time of obtaining payment against documents. These credit facilities, which are of the first importance, would be completely unsettled if the incidence of the property were made a matter of doubt. By mercantile law, the bills of lading are the symbols of the goods. The general property in the goods must be in the seller if he is to be able to pledge them. The whole system of commercial credits depends on the seller’s ability to give a charge on the goods and the policies of insurance.” In Kwei Tek Chao v British Traders and Shippers Ltd [1954] 1 QB 459, in considering the buyer’s right of rejection, Devlin J dealt with the question whether the pledging of documents of title to a bank by the buyer (in contrast with the usual situation under a letter of credit where the pledge derives from the seller) put an end to the buyer’s right to reject. It was suggested that the buyer had thereby done an act inconsistent “with the ownership of the seller” within the meaning of section 35 of the Sale of Goods Act 1893 (see now the Sale of Goods Act 1979, as amended by section 2(1) of the Sale and Supply of Goods Act 1994). Devlin J expressed (at 487) the view (obiter) that “what the buyer obtains, when the title under the documents is given to him, is the property in the goods subject to the condition that they revert if upon examination he finds them to be not in accordance with the contract. That means that he gets only a conditional property in the goods, the condition being a condition subsequent All his dealings with the documents are dealings only with that conditional property in the goods. It follows, therefore, that there can be no dealing which is inconsistent with the seller’s ownership unless he deals with something more than the conditional property.” This view was regarded as a correct statement of the position in Berger & Co Inc v Gill & Duffus SA [1984] AC 382 at 395. 9 The Future Express [1993] 2 Lloyd’s Rep 542. 10

[1935] AC 53 at 59. Lord Wright drew attention to the fact that by virtue of the Factors Act 1889 a mercantile agent can effect a valid pledge by delivering documents of title in circumstances where the owner of the goods cannot do so. The issue in the case was whether the effect of section 178 of the Indian Contract Act 1872 was to enable the owner of goods to pledge the goods by delivering the documents of title. The Privy Council held that it was. 11 The bill of lading will usually show that the goods have been shipped on board. It is probable that a “received for shipment” bill of lading issued in circumstances where the goods have been received into the custody of the carrier pursuant to a contract of carriage may also be an exception to the rule that a pledge of documents is not a pledge of the goods—see Ishag v Allied Bank International [1981] 1 Lloyd’s Rep 92, applying The Marlborough Hill [1921] AC 444. For a persuasive critique of this case, see Benjamin’s Sale of Goods, 5th ed, para 18–045. See also MB Pyramid Sound NV v Briese Schiffahrts GmbH [1993] 2 Lloyd’s Rep 492, where the issue of whether a received for shipment bill of lading is a document of title was treated as an open question. 12 Re Hamilton Young & Co, ex parte Carter [1905] 2 KB 772, Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 at 64–66, Kum v Wah Tat Bank Ltd [1971] 1 Lloyd’s Rep 439 at 442 and Ishag v Allied Bank International [1981] 1 Lloyd’s Rep 92 at 98.


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8–05 The validity of a pledge at common law is dependent on the delivery of the goods, or of a document of title to the goods, either to the pledgee or to some person authorised to hold the security on his behalf. This delivery of possession may take the form of the actual handing over of the goods to the pledgee or of a symbolical or constructive delivery. Symbolical or constructive delivery may be effected by an agreement on the part of the owner of the goods, or some person holding the goods on his behalf, to hold them as bailee on behalf of the pledgee, a device which is deemed to change the nature of the original possession of the goods, so as to amount to a constructive delivery. Where goods are represented by documents the transfer of the documents does not change the possession of the goods, save in the case of a bill of lading, unless the carrier or warehouseman is notified of the transfer and agrees to hold in future as bailee for the pledgee. As Lord Wright said in Official Assignee of Madras v Mercantile Bank of India Ltd:10 …a pledge of documents is not in general to be deemed a pledge of the goods: a pledge of the documents (always excepting a bill of lading) is merely a pledge of the ipsa corpora of them; the common law continued to regard them as merely tokens of an authority to receive possession… Bills of lading, however, operate as a transfer of the possession of the goods.11 Thus it is always possible to pledge the goods to which the credit relates by indorsing the bill of lading to the bank. 8–06 Where documents that do not include a bill of lading are deposited with the intention that they constitute security, there is an equitable pledge or charge of the goods. Such a pledge is binding on the person to whom the bank has extended credit on the security of the documents and the bank can restrain the debtor from disposing of the goods inconsistently with the bank’s security. The equitable pledge will, however, be defeated by a transfer of the property in the goods to a purchaser for value who takes them without notice of the bank’s rights. Moreover the bank cannot maintain a claim for misdelivery against the carrier unless it is named as consignee in the transport document and has given notice to the carrier of its rights as pledgee prior to delivery.13 8–07 The type of transport document required and the person to whose order it must be made out are often stipulated in the credit and this will determine the precise nature of the banks’ rights of security.14 The issuing bank may therefore seek to insist that the credit stipulate presentation of a transport document in a form that gives it maximum security. Moreover it may not be possible to have the credit confirmed if the confirming bank does not also obtain security satisfactory to it. The analysis below shows that the form of transport document most satisfactory to both the issuing bank and confirming bank arises where there is a shipped bill of lading made out to the order of the shipper and endorsed in blank or in favour of the intermediary bank. Thus banks should require that letters of credit stipulate that bills of lading be so drawn and, where the transport document called for is not negotiable, that it name the issuing bank as consignee.15 Regardless of the security rights a bank acquires by its possession of the documents, having the documents drawn in the way suggested puts an issuing bank or an intermediary bank in a position, if it is necessary to exercise its rights of security, (i) to perform a contract of sale of the goods by delivery (or indorsement and delivery) of the


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bill of lading or (ii) to obtain physical delivery of the goods with a view to selling them or (iii) to maintain a claim for misdelivery of the goods.16 Pledge—particular situations 8–08 In the light of the principles stated above, the position of the issuing bank and the intermediary bank involved in the credit must be considered. There are four situations that need to be considered separately: (a) the transport document is a negotiable bill of lading made out to the order of the shipper or the intermediary bank; 13

Kum v Wah Tat Bank Ltd [1971] 1 Lloyd’s Rep 439 at 442, in which the Privy Council held that where the bank had advanced money before the goods were shipped and on shipment the shipowners issued a receipt showing the bank as consignee, the goods were delivered to the ship as bailee for the bank with the consequence that the pledge was completed. 14 In the absence of stipulation in the credit, the bank is not entitled or bound to consider the name of the consignee or the order party on the transport document—see articles 23 to 29 of the UCP. 15 Whether the bank can insist on this will depend on the terms of the contract between the buyer and the seller, but in ordinary circumstances the seller will not object to this course if the buyer can only obtain the issue of the credit on such terms. If bills of lading or sea waybills are dealt with in this way, the bank will have transferred to and vested in it all rights of suit under the contract of carriage as if it has been a party to that contract—see section 2 of the Carriage of Goods by Sea Act 1992. On the other hand, by section 3 of that Act, if the bank takes or demands delivery of the goods or makes a claim under the contract of carriage, it will also become subject to the same liabilities under the contract as if it had been a party to that contract. For an explanation of these provisions, see Borealis AB v Stargas Ltd [2001] 1 Lloyd’s Rep 663. The 1992 Act also applies to ship’s delivery orders. 16 See The Star Gemini [1999] 2 Lloyd’s Rep 255.

(b) the transport document is a negotiable bill of lading made out to the order of the issuing bank; (c) the transport document is a negotiable bill of lading made out to the order of the buyer; (d) the transport document is not a negotiable bill of lading. Transport document a negotiable bill of lading made out to the order of the shipper or the intermediary bank 8–09 This situation is the most straightforward. Transfer of the bill of lading operates as a transfer of possession of the goods. If the bill of lading is made out to the order of the shipper, prior to presentation of the documents he endorses it in favour of the intermediary bank or in blank and upon presentation to the intermediary bank there is a transfer of possession of both the documents and the goods to the intermediary bank. The intermediary bank becomes pledgee of the documents and the goods and, while the documents remain in its possession, it has security for the obligations that it undertakes.17 The same position arises if the bill of lading is made out to the order of the intermediary bank.


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8–10 Upon the issuing bank accepting the documents from the intermediary bank, the issuing bank becomes pledgee of the documents and the goods as security for the payment that it is called upon to make.18 If the issuing bank rejects the documents, it must return them to or hold them to the order of the intermediary bank.19 In this event, the intermediary bank is treated as having had possession of the documents at all times.20 It may require indorsement of the documents in its favour (if they are not already endorsed in blank) and will resume its position as pledgee of the documents and the goods. 8–11 It follows that in this situation both the issuing bank and the intermediary bank have an implied pledge of the documents and the goods when they receive the documents presented to them by the seller.21 The intermediary bank’s position is not, however, protected if, after releasing the documents to the issuing bank, it negotiates the seller’s time draft22 or as confirming bank it is called upon to pay a draft accepted by the issuing bank or to make payment under a deferred payment undertaking and if then it cannot obtain reimbursement from the issuing bank.23 Transport document a negotiable bill of lading made out to the order of the issuing bank 8–12 In this situation, upon receipt of the documents from the intermediary bank, the issuing bank has security by way of pledge over the documents and the goods. 8–13 The position of the intermediary bank is different. Since the bill of lading is not made out to the intermediary bank’s order or indorsed in its favour, upon presentation of the documents to the intermediary bank, it does not obtain security by way of pledge of the goods. The fact that the documents come into its possession may give rise to a pledge of the documents and thus an equitable pledge of the goods.24 It is arguable, however, that because it is agreed under the terms of the contract of sale and the credit that the bill of lading be made out to the order of the issuing bank, an intention on the part of the buyer to authorise the seller to confer a special property by way of pledge on the 17

See Guaranty Trust Company of New York v Hannay [1918] 1 KB 43 at 51, affirmed in part [1918] 2 KB 623 and The Star Gemini [1999] 2 Lloyd’s Rep 255 at 263. In these circumstances the bank relies upon the genuineness of the bill of lading. See also Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59, where upon the (wrongful) return of the documents to the confirming bank by the issuing bank, the confirming bank sold the goods to the beneficiary and obtained judgment for the difference between the amount that it paid to the beneficiary under the credit and the amount that it realised on the sale of the goods back to the beneficiary. It is not, however, clear from the report to whose order the bill of lading was made out. 18 If the bill of lading is made out to the order of the intermediary bank or endorsed in its favour, the intermediary bank must endorse the bill of lading in blank or in favour of the issuing bank in order to effect a pledge of the goods to the issuing bank. If the bill of lading is already indorsed in blank, further indorsement is unnecessary. 19 See paragraph 6–20 above. 20 The Star Gemini [1999] 2 Lloyd’s Rep 255 at 264–5. the position is that until the issuing bank accepts or is deemed to have accepted the documents it holds them for the limited purpose of determining whether it is going to take them up and on trust for the intermediary bank. Cf paragraphs 8–19 to 8–30 below.


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intermediary bank as opposed to the issuing bank is negatived. On the face of the bill of lading the intermediary bank can receive no title to the goods. On the other hand, the intermediary bank receives the documents as a bailee and, if it has undertaken a liability to the beneficiary, only releases the documents against the issuing bank’s obligation to reimburse it.25 8–14 Usually the intermediary bank will have released the documents to the issuing bank before reimbursement is made and so any right by way of pledge will be released at that time. If, however, the obligation to reimburse is repudiated before the documents are released or the documents are refused and returned to the intermediary bank, it seems clear that the intermediary bank has the right to retain the documents and dispose of the documents as best it can.26 Without endorsement of the bill of lading in its favour,27 however, it has no means of performing a contract to sell the documents or the goods or of obtaining delivery of the goods. If, on the other hand, the bill of lading is subsequently indorsed in the bank’s favour, the bank acquires the means of selling the documents and obtaining delivery of them,28 and it can maintain a claim against the shipowner for mis-delivery of the goods.29 Transport document a negotiable bill of lading made out to the order of the buyer 8–15 In this situation, both the issuing bank and the intermediary bank are in the position of the intermediary bank described in the previous situation.30 However, it is likely that as between the issuing bank and the buyer, the buyer will have expressly agreed to provide the issuing bank with security for its obligation to indemnify the issuing bank. That agreement may have the effect of an express pledge over both the documents and the goods.31 If so, it is likely to contain a term providing the issuing bank with the right to call on the buyer to do all things necessary to perfect the security, which would include endorsement of the bill of lading in favour of the bank. Moreover the issuing bank will usually not release the documents to the buyer (except for the purpose of enabling the value of the goods to be realised) unless it is paid or alternative security is provided. 21

Guaranty Trust Company of New York v Hannay [1918] 2 KB 623 at 659–60, quoted at paragraph 1–07 above. 22 If the documents or goods are still pledged to the issuing bank and both the issuing bank and the drawer of the bill of exchange become insolvent, the intermediary bank may be able to require the proceeds of sale to be applied in discharge of the issuing bank’s liability to reimburse it under the rule in Ex parte Waring (discussed in paragraphs 8–35 below). Otherwise the intermediary bank takes the risk of the issuing bank’s insolvency. 23 See Banco Santander SA v Bayfern Ltd [1999] Lloyd’s Rep Bank 239, affirmed [2000] Lloyd’s Rep Bank 165. 24 In these circumstances the intermediary bank relies on the genuineness of the documents—see Bank Leumi Le Israel BM v Cablefoot Ltd (unreported—12/2/90) and Standard Chartered Bank v Pakistan National Shipping Corporation [1995] 2 Lloyd’s Rep 365 (see further Standard Chartered Bank v Pakistan National Shipping Corporation (No2) [1998] 1 Lloyd’s Rep 684, affirmed [2000] 1 Lloyd’s Rep 218, [2001] 1 QB 167). 25 See article 14(a) of the UCP.


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Transport document not a negotiable bill of lading 8–16 If the transport document is not a negotiable bill of lading, the delivery of the document to the bank will not constitute a pledge of the goods—it will at most constitute a pledge of the documents.33 It follows that the bank’s security may be affected by whether the transport document called for under the credit is a bill of lading or a “non-negotiable” or “straight” sea waybill.34 The latter is not a document of title35 and therefore its delivery to the bank does not confer a pledge in respect of the goods. Similarly, a mate’s receipt is not a document of title and transfer of it passes no property or right to possession in the goods to which it relates.36 A ship’s delivery order is not a document of title.37 Transport 26

See Rosenberg v International Banking Corporation (1923) 14 L1L.R. 344 at 347 (quoted at paragraph 8–03 above). Cf Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59 (footnote 17 above). 27 To which it is entitled by virtue of the combined effect of articles 14(d)(ii) and 14(e) of the UCP. 28 In Standard Chartered Bank v Pakistan National Shipping Corporation (No 3) [1999] 1 Lloyd’s Rep 747, the bill of lading was made out to the order of the issuing bank. Following the refusal of the issuing bank to take up the documents, the bank’s right to take possession of the goods and sell was not in issue in the proceedings, the beneficiary having no further interest in the goods after receiving payment and the issuing bank having failed to reimburse. Upon rejection of the documents, the issuing bank held them to the order of the confirming bank and agreed to indorse them in favour of the confirming bank when called upon to do so. As a result the confirming bank obtained control over the documents and the goods and was able to sell them. 29 London Joint Stock Bank Ltd v British Amsterdam Maritime Agency Ltd (1910) 16 Com Cas 102. 30 As between himself and the carrier the seller may have the right to indorse the bill of lading and deliver it by way of pledge to a bank, even where it names the buyer as consignee—see Elder Dempster Lines Ltd v Ishag [1983] 2 Lloyd’s Rep 548 at 555, 31 Property in the goods is likely to have passed to the buyer (at latest) on payment being made or on acceptance of a draft—see Benjamin’s Sale of Goods, 5th ed, para 18–165. 32 See paragraphs 8–19 to 8–30 below. 33 See paragraph 8–05 to 8–06 above. 34 A multimodal transport document maybe a negotiable bill of lading or a non-negotiable waybill. If negotiable it will be made out to order or to bearer and be transferable either by delivery or by indorsement and delivery. If in non negotiable form it will indicate a named consignee. It may also indicate only that the goods have been “taken in charge” and not shipped. It follows that the terms of the document must be examined carefully to see what rights are obtained. 35 See Henderson &Cov The Comptoir d’Escompte de Paris (1873) LR 5 PC 253 and The Chitral [2000] 1 Lloyd’s Rep 529. 36 See Nippon Yusen Kaisha v Ramjiban Serowgee [1938] AC 429 at 445, where Lord Wright said: “The mate’s receipt is not a document of title to the goods shipped. Its transfer does not pass property in the goods, nor is its possession equivalent to possession of the goods. It is not conclusive, and its statements do not bind the shipowner as do the statements in a bill of lading signed with the master’s authority. It is, however, prima facie evidence of the quality and condition of the goods received, and prima facie it is the recipient or possessor who is entitled to have the bill of lading issued to him. But if the mate’s receipt acknowledges receipt from a shipper other than the person who actually receives the mate’s receipt, and, in particular, if the property is in that


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documents in relations to air, road, rail and inland waterway transport are also not documents of title. 8–17 Where transport documents that are not documents of title are called for under the credit neither the issuing bank nor the intermediary bank will obtain a pledge of the goods. The most they will obtain is a pledge of the documents and an equitable pledge of the goods. A pledge of the documents will certainly arise in favour of a bank named as consignee on the transport document. In such circumstances the documents are not only pledged to the bank, but the carrier must deliver the goods to the bank as the named consignee.38 Where a bank is not named as consignee in the transport document, it may be pledgee of the documents so long as they are in its possession, but it cannot prevent the carrier from delivering to the named consignee. If the named consignee is its customer, however, the bank has the right to require the buyer not to deal with the goods in a manner inconsistent with the pledge of the documents.39 8–18 It follows that where transport documents other than shipped bills of lading are called for by a credit, the bank which finances shipment of goods by letter of credit does not obtain as complete a security. The wider use of transport documents other than shipped bills of lading has not, however, given rise to difficulties in relation to security that have come before the courts. It may be that as banks look primarily to their customers, the buyers, rather than to the goods as security, the need for a negotiable document of title is perhaps of less importance than it used to be. shipper, and the shipper has contracted for the freight, the shipowner will prima facie be entitled, and indeed bound, to deliver the bill of lading to that person. So it was held by Bacon V-C., in Hathesing v Laing (1873) LR 17 Eq 92, a case in principle not different on its facts from the present. It was held that the indorsement of the mate’s receipt did not transfer a property which overrode that given by the indorsement of the bill of lading, which had been issued without production of the mate’s receipt, though the latter was held as security by the person to whom it has been issued. In that case, as in this, the person who delivered the goods to the ship took the mate’s receipt describing the debtors as the shippers. No doubt, if the shipowner, before he issued the bill of lading, is given express notice that he is not to issue the bill of lading without the mate’s receipt or to anyone but the person who delivered the goods, he cannot disregard that notice. Even without express notice, he may be affected by notice to the same effect by knowledge of the actual circumstances of the case.” Cf Wah Tat Bank Ltd v Chan Cheng Kum [1967] 2 Lloyd’s Rep 437 (Malaysian Federal Court), affirmed [1971] 1 Lloyd’s Rep 439 (PC). 37 Certain dock warrants issued by dock companies that have obtained private Acts of Parliament putting their warrants on a footing that is equivalent to bills of lading. However, as a rule the transfer of delivery orders and dock warrants is not enough to effect constructive delivery of the goods, as attornment by the warehouseman or dock company is necessary to constitute a change of possession. Delivery orders and dock warrants have never been much utilised as security in connection with commercial credits. The difficulties which arise when taking a delivery order as security for a debt are well illustrated by the case of Dublin City Distillery v Doherty [1914] AC 823. See, however, the “green” clause (referred to at paragraph 2–14 footnote 25 above). See also section 2 of the Carriage of Goods by Sea Act 1992, pursuant to which the person to whom delivery of goods to which a ship’s delivery order relates is to be made in accordance with the undertaking contained in the order has transferred to and vested in him all rights of suit under the contract of carriage as if he had been a party to that contract.


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Release of the documents pledged 8–19 As a pledge connotes possession by the pledgee of the documents or the goods that form his security, loss of possession of the documents or the goods brings the pledge to an end and the security is lost. If the bank desires to give possession either of the goods or of the bill of lading to its customer in order to facilitate realisation it must do so without putting an end to the pledge. The instrument used for this purpose is the “trust receipt” or “letter of trust”, sometimes loosely and erroneously called a “letter of hypothecation” or a “letter of lien”.40 8–20 A trust receipt or letter of trust is used where a bank-pledgee having possession of documents of title or actual or constructive possession of the goods, received from or on behalf of the owner, delivers them to the owner or to a third party,41 who undertakes to hold them and, if sold, the proceeds, in trust for the bank.42 The use of the term “hypothecation” for this is somewhat of an anomaly, as the law of England does not admit, as a general rule, of anything corresponding to the hypothec of Roman Law.43 The term has crept into English 38

In the case of a sea waybill, it also has rights against the carrier by virtue of section 2 of the Carriage of Goods by Sea Act 1992. 39 See paragraph 8–06 above. 40 For a case where the letter of credit provided for release of the goods against a trust receipt by the issuing bank to the buyer prior to the issuing bank becoming liable to make payment to the seller, see Habib Bank Ltd v Bank of South Australia (1997) 70 SASR 14. In that case the credit rather unusually provided that payment would not become due if the buyer’s customer gave notice of rejection of the goods within 90 days. When the buyer’s customer did not return the goods having rejected them, it was held that the seller had no claim against the issuing bank. 41

For a case where the documents were delivered to a third party, see Sale Continuation Ltd v Austin Taylor & Co Ltd [1968] 2 QB 849 (discussed at paragraph 3–36 to 3–38 above). 42 The receipt, to be effective, must be so framed as to retain or create some right of the bank to the goods or to be paid out of the proceeds. A mere undertaking to pay the bank the sum due may not be sufficient to constitute an equitable assignment: Palmer v Carey [1926] AC 703. See also Re Kent and Sussex Sawmills Ltd [1947] Ch 177, Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567, Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 613, Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 and Hurst-Bannister v New Cap Reinsurance Corp Ltd (unreported—10/12/99). 43 Stroud, Judicial Dictionary, 5th ed, (1986) does not define the term “hypothecation”; “pledge”, however, is said to be distinguished from the contract of hypothecation by the transfer of the possession, or the actual delivery, of the thing intended to be charged to the creditor. The term hypothecation denotes the creation of a preferential charge on goods unsecured by possession either actual or constructive. Hart, Law of Banking, 4 ed, Vol II, p 906, gives the following definition: “Where property is charged with the amount of a debt, but neither ownership nor possession is passed to the creditor, it is said to be hypothecated.” In Ladenburg &Cov Goodwin, Ferreira & Co Ltd (in liquidation) [1912] 3 KB 275, the seller of goods entered into a transaction with his bank (in relation to goods shipped f.o.b. to the order of the buyer on 6 months’ credit) “hypothecating the


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shipments or the proceeds thereof to [the bank]”. Since there was no intention that the bank should obtain possession of the goods or the documents of title, it was held that the seller had effectively charged its book debt in respect of the proceeds of sale to the bank. See also Ayers v South Australian Banking Co (1871) LR 3 PC 548. In R v Townshend (1884) 15 Cox CC 466, it was held for the purposes of section 80 of the Larceny Act 1861, that a letter of hypothecation is a declaration of an express trust and, therefore, within the scope of the Bills of Sale Acts 1878 and 1882. The goods covered by the letter were, however, still at sea, and this brought the letter under the exemption contained in the Acts. See also Re Slee (1872) LR 15 Eq 69, Re Steele, ex parte Conning (1873) 16 Eq 414, Re Hamilton Young & Co, ex parte Carter [1905] 2 KB 772 and Mercantile Bank of India Ltd v Chartered Bank of India, Australia and China (No 2) (1937) 43 Com Cas 80. In the latter case, the trust receipts were in the following form: “In consideration of your allowing us to overdraw we hereby agree that all cheques drawn on our current account shall be applied solely to the purchase of produce…then until the overdraft shall be repaid all such produce as shall be purchased by means of such cheques or overdrafts shall be kept apart…and shall be held by us in trust for you…you to be entitled to such produce as security for our overdraft for the time being…we holding such produce as agent and trustee for you.” The question for decision was whether these instruments should have been registered pursuant to section 5 of the Indian Trusts Act 1882. Porter J held that the general effect of the documents was to give the bank an equitable charge and not to create a trust and thus they were not void for want of registration. It would seem likely that in the United Kingdom such instruments would be similarly regarded. The question which then arises is whether as equitable assignments, if not as declarations of trust without transfer, they would fall foul of the Bills of Sale Acts 1978–82 unless registered. Unless there is a pledge they are not documents used in the ordinary course of lending against goods, and it can hardly be said that they are documents “used in the

legal terminology possibly by way of maritime law, in which it is used to denote a transaction by which maritime property44 is made available as security for a debt without transfer to the creditor either of property or possession. It is not a term of art and, therefore, it is difficult to define its legal characteristics with precision when applied to property other than maritime property. Strictly, in the present context the term “letter of hypothecation” is to be applied to the case where the bank is given a charge over goods without possession of them or of the documents of title.45 8–21 When employed in connection with documents received by an issuing bank pursuant to a letter of credit, the purpose of the transaction pursuant to which the bank releases the goods (whatever the name given to the document used to evidence it) may, so far as the goods are concerned, be regarded as a conversion of the possession of the owner of goods into that of a bailee from the pledgee, or as an equitable agreement by the owner to create a pledge at a future date.46 Viewed as a whole the legal consequences of such a transaction may be defined as a bailment of the documents to the debtor by the pledgee coupled with an equitable assignment or charge by the debtor of the proceeds of sale of the documents or the goods.47 8–22 It follows that the object of the trust receipt or letter of trust is to enable the bank as pledgee to redeliver to the buyer, without forfeiting its rights as pledgee by parting with possession. At common law, although a parting with possession of the goods is destructive of the pledge, a redelivery of the goods for a limited purpose has always been permitted. This appears from the leading case of North Western Bank Ltd v John Poynter Son & Macdonalds48 in which the facts were that bills of lading for a cargo of phosphate rock were pledged to the bank as security but were subsequently redelivered to the pledgers for the purpose of enabling them to fulfil a contract under which they had sold


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the goods. The bills of lading were handed back on the terms of a letter of trust by which the pledgers were constituted the agents of the bank for the purpose of disposing of the goods, and undertook to pay over the proceeds of the sale to the bank as soon as they were received. The goods were then resold and delivered to the ultimate purchasers, but before the whole of the price had been paid over the pledgers ordinary course of business as proof of the possession or control of goods” within the meaning of section 4 of the Bills of Sale Act 1878.

became insolvent. The short point, therefore, was whether the portion of the price still in the hands of the purchasers of the cargo belonged to the bank as pledgees or to the creditors of the pledgors. It was admitted, on behalf of the latter, that a redelivery to an agent who was a stranger to the contract of pledge did not operate to put an end to the pledge, because the possession of the agent was in such a case the possession of the pledgee. It was, however, contended that the position was otherwise where the redelivery was to the pledgor himself, and that in this event the latter resumed possession of his property freed from the burden of the security. This argument found no favour with the House of Lords, which reaffirmed the principle that a pledgee may redeliver the goods for a limited purpose without impairing its security. 8–23 There is nevertheless some risk to the bank’s interests. The rights enjoyed by a bank under a letter of trust, whatever their nature may be, are clearly of an equitable character. The bank has the right to call upon the pledgor to redeliver the documents or the goods if no sale has taken place. If the pledgor deals with the documents or goods outside the authority given by the letter of trust, the bank can maintain an action for wrongful interference with them. The bank can follow the goods into the hands of a purchaser who has notice of the letter of trust and the assignment or charge that is created can be perfected by giving notice50 to any prospective purchaser. Where the purchaser has no notice, however, his rights will prevail over those of the bank if he has purchased for value in good faith, and he cannot be compelled to deliver up the goods.51 If the purchaser has not paid over the price before receiving notice from the bank, he must pay it over to the bank, but it is obvious that, if the pledgor is acting dishonestly, the bank will in all probability find that it has lost its security.52 8–24 A trust receipt or letter of trust is usually taken upon redelivery of goods which are already the subject of a pledge but it has been known for banks to take a letter of trust without having previously had either a charge or a pledge, and 44

Maritime property consists of the ship, its cargo and the freight. Perhaps even before they are in existence 46 Paget, Law of Banking, 9th ed (1982) p 484 (the most recent edition of the Paget (the 11th) deals with the matter in a different way). An undertaking to provide an acceptor with the bills of lading as security for his acceptance has been held to give the acceptor of the drafts an equitable claim to the bills of lading which will prevail over that of the customer’s trustee in bankruptcy: Lutscher v Comptoir d’Escompte (1876) 1 QBD 709. 47 See Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 at 65–66. 48 [18951 AC 56. This was a Scottish appeal, but the law of England and Scotland are the same on this point See also Re David Allester Ltd [1922] 2 Ch 211 (discussed in paragraphs 8–26 to 8–29 below) and Official Assignee of Madras v Mercantile Bank of India Ltd[1935]AC53. 45


49

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Midland Bank Ltd v Eastcheap Dried Fruit Co [1962] 1 Lloyd’s Rep 359. It was held in R v Townshend (1884) 14 Cox C.C. 466, that a letter of hypothecation is a declaration of an express trust within the meaning of section 80 of the Larceny Act, 1861. If this decision is to be regarded as of general application, it would seem that the notice must be in writing under section 137(3) of the Law of Property Act 1925; but quaere whether the transaction is not a bailment rather than the constitution of an express trust. Cf The Zigurds (No 2) (1932) 48 TLR 559. 51 See Official Assignee of Madras v Mercantile Bank of India Ltd [1935] AC 53 at 66. See also Joseph v Lyons (1884) 15 QBD 280. 52 See Lloyds Bank Ltd v Bank of America Trust and Savings Association [1938] 2 KB 147, in which it was held that pledgors to whom documents of title had been re-delivered under a trust receipt were mercantile agents within the meaning of the Factors Act 1889 and that they with the original pledgees were owners authorising themselves as mercantile agents to pledge the goods with the defendant bank. The defendant bank therefore acquired title to the goods. Cf Mercantile Bank of India Ltd v Central Bank of India [1938] AC 287, where the Privy Council held in relation to a transaction under Indian law that the title of second pledgees to whom documents had been pledged was subject to the title of the first pledgees in respect of whom the pledgor had acted fraudulently. 50


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neither property nor possession. The effect of this would appear intended to be that the goods or the proceeds of sale would be held by the customer in trust for the bank in respect of any advances the bank may have made—not necessarily in relation to the particular goods. 8–25 The validity in law of true letters of trust or hypothecation has from time to time been challenged on various grounds by creditors of pledgers. It has, in the first place, been claimed that these documents are void, either as unregistered bills of sale or as unregistered charges on book debts under the Companies Acts; or that under section 38(c) of the Bankruptcy Act 1914, the goods pass to the trustee in bankruptcy of the pledger as being in the possession, order or disposition of the latter, in his trade or business, by the consent and permission of the bank, so as to make the pledger the reputed owner of the goods.54 These attempts to deprive the bank of the benefit of its security have been uniformly unsuccessful. 8–26 The bank’s position is illustrated by the case of Re David Allester Ltd,55 in which Barclays Bank were pledgees of a bill of lading which they had redelivered to a company, the pledgers, in exchange for a letter of trust in the following terms: To Barclays Bank Ltd: Gentlemen, We have to acknowledge receipt of invoice, bill of lading and copy of insurance policy representing… We receive the above in trust on your account, and we undertake to hold the goods when received and their proceeds when sold as your trustees. We further undertake to keep this transaction separate from any others and to remit you direct net proceeds when realized, but not less than £…within 28 days from this date. The company went into liquidation, and, at the time of doing so, certain of the goods had been realised. The proceeds were claimed both by the liquidator and by the bank. The liquidator opposed the claim of the bank on the ground that the letter of trust was either a bill of sale within the meaning of the Bills of Sale Acts 1878–82, or, alternatively, a mortgage of book debts within the meaning of the Companies Act, and consequently void for non-registration. It was admitted that there had been no registration and there were therefore three issues before the court: (a) Did the claim of the bank to the proceeds depend on the letter of trust? (b) If so, was the letter of trust a bill of sale requiring registration under the Bills of Sale Acts? (c) 53

The current legislation is contained in Part XII of the Companies Act 1985 and, in particular, sections 395–6 of that Act. 54 The doctrine of reputed ownership was abolished when the Bankruptcy Act 1914 was repealed and replaced by the Insolvency Act 1985, which was subsequently consolidated into the Insolvency Act 1986. 55 [1922] 2 Ch 211. For a “landmark” decision in the field of trust receipts in the United States, see Barrett v Bank of Manhattan Co 218 F. 2d 763 (1954).


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Alternatively, was it a mortgage of book debts that should have been registered pursuant to the Companies Act? 8–27 The liquidator’s contentions were rejected by Astbury J, who ruled in favour of the bank. He based his decision primarily on the ground that the letter of trust could, in this instance, be disregarded, as the bank had, by reason of the pledge, a title to the proceeds of sale which was independent of the letter of trust. The policy of the Bills of Sale Acts is to strike at documents and not at transactions. Consequently, if a title can be shown without having recourse to the document, the Acts do not apply.56 In the case under discussion, the rights of the bank as pledgee of the goods and the proceeds of sale did not depend on the letter of trust, but arose independently and were complete at an earlier date when the bank received the bill of lading by way of pledge. Such rights were not destroyed by redelivery of the bill of lading to the company for the purpose of enabling it to sell the goods.57 8–28 Astbury J also held that the letter of trust was not a bill of sale requiring registration in any event, because it fell within the exceptions in section 4 of the Bills of Sale Act 1878, as being a document used in the ordinary course of business as proof of the possession or control of goods.58 He said:59 The object of these letters of trust was not to give the bank a charge at all, but to enable the bank to realise the goods over which it had a charge in the way in which goods in similar cases have for years and years been realised in the City and elsewhere. 8–29 As regards the third point taken by the liquidator, Astbury J also held that the letter of trust was not a mortgage or charge on book debts within the meaning of section 93 of the Companies (Consolidation) Act 1908.60 Counsel for the liquidator had relied on the decision of Pickford J in Ladenburg & Co v 56

Ex parte Hubbard, Re Hardwick (1886) 17 QBD 690, where Lord Esher MR said (at 697): “When a transaction is one of pledge, and nothing more, the document which describes it is not a “bill of sale” in the ordinary sense of the word or within section 4 of the Act of 1878 and therefore not within the Act of 1882.” 57 Applying North Western Bank Ltd v John Poynter Son & Macdonalds [1895] AC (discussed in paragraph 8–22 above). 58 If the letter of trust is used by itself and not pursuant to a “pledge”—which would be very unusual—it may well fall outside the exceptions set out in section 4 of the Bills of Sale Act 1878, and within the category of documents which are within the term “bill of sale”. If the document is intended per se by the parties to give a charge it must fall within the exceptions or be registered. It should be observed that the decision in R v Townshend (1884) 15 Cox CC 466 was apparently not brought to the notice of Astbury J. 59 [1922] 2 Ch 211 at 218. See also Re Hamilton, Young & Co, ex parte Carter [1905] 2 KB 381 (affirmed [1905] 2 KB 772), which was originally tried in Manchester and where Bigham J said (at 389): “This document evidences a transaction of a most ordinary kind as between bankers and merchants. Such transactions happen by the score every day of the week in places of business like Manchester.” See also Lloyds Bank Ltd v Bank of America Trust and Savings Association [1938] 2 KB 147 at 166. 60 Now sections 395 and 396 of the Companies Act 1985.


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Goodwin, Ferreira & Co Ltd (in liquidation).61 The facts in that case were unusual. The bank agreed to make advances against shipments by the defendants, a firm of merchants, to customers in South America. The merchants forwarded drafts to the bank for acceptance, which were drawn in respect of specified shipments. To these drafts they attached copies (not originals) of the shipping documents, together with a letter purporting to hypothecate the goods to the bank as security. The goods were sold on what were, to all intents and purposes, f.o.b. terms, though all charges on the goods after they left the warehouse were to fall on the buyers, and the bill of lading was made out to the order of the buyers, who thus had full right and power over the goods and the property in them. It was pointed out by Pickford J that in these circumstances the only thing that could be hypothecated was the proceeds of the goods, because the interest in the goods themselves had passed away from the merchants to their customers. All that was given by way of security was an equitable charge over the price of the goods, which, until payment, was a book debt. He therefore held that the letter of hypothecation gave a charge over book debts, and that the case accordingly fell within the provisions of the Act, thus rendering the document void for want of registration. Astbury J declined to treat the ratio decidendi in Ladenburg & Co v Goodwin, Ferreira & Co Ltd as applicable. He said:62 Now in [Ladenburg & Co v Goodwin, Ferreira & Co Ltd] the bank had no pledge or other right in the goods at all before the transaction in question; the transaction was one which notwithstanding its form could not and did not give the bank any right except a charge over the company’s book debts, and as Pickford J pointed out, it was simply and solely a mortgage or charge on the company’s book debts, and as such was avoided by the Act. There was, as I have stated, no previous right in the bank at all under which they could claim as against the liquidator. The charge was explicit, and there was nothing at the date of the charge that the company could charge except its book debts, which is expressly and plainly charged to the bank as security. That case does not appear to me to have any bearing upon the present case at all. Here, if I may repeat myself again, the bank as pledgee created a trust agency in the company for the purpose of the realization of the bank’s security. That trust agency was acknowledged and recorded in the letters of trust. That is the whole of the transaction. The letters of trust are neither bills of sale within s. 93, sub-s. 1 (c), nor are they in any sense mortgages or charges on book debts within clause (e) or any other clause of the section. 8–30 In the light of these cases, trust receipts and letters of trust evidencing the transfer of possession of the documents of title to goods from the bank as pledgee to the buyer at whose instance a letter of credit has been opened are recognized instruments of commerce and their validity in law is well established. 61 62

[1912] 3 KB 275. [1922] 2 Ch 211 at 218–9.


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Claims to the documents or goods by persons other than the bank 8–31 No party to the transaction financed by a credit other than the issuing or intermediary bank (for example, a purchaser of a draft drawn under the credit) has a right to the goods or to the proceeds of the goods by way of lien or charge. In Robey & Go’s Perseverance Ironworks v Ollier63 the defendents had entered into a joint adventure with one Brown for the shipment of a cargo of maize on board the ship Acacia, and agreed to accept bills which were to be drawn on them by Brown for the price of the goods. Brown drew bills on the defendants payable to his order, which stated that the amounts of the bills were to be placed “to account cargo per Acacia”, and indorsed them to the plaintiffs. Brown stopped payment, and the defendants refused to accept the bills but sold the cargo. The plaintiffs then commenced the action in which they claimed a lien on the proceeds of the sale in respect of the amounts of the bills of which they were the holders. In affirming the decision of the Master of the Rolls, who dismissed the action, James LJ said:64 I am not prepared to say that merely because a bill of exchange purports to be drawn against a particular cargo, it carries a lien on that cargo into the hands of every holder of the bill. Mellish LJ took the same view, saying that:65 The indorsement of a bill gives only a right to the bill, and I do not think that any mercantile man would suppose because he saw in the bill the words “which place to account cargo per A” that he was to have a lien on that cargo. A mercantile man who is intended to have a lien on a cargo expects to have the bill of lading annexed; if there is no bill of lading annexed, he only expects to get the security of the bill itself. 8–32 In Ex parte Dever, Re Suse66 the bank had issued a letter of credit authorising a merchant at Shanghai to draw on it to the extent of $20,000, the drafts to be accompanied by shipping documents relating to tea purchased by their customer. The credit contained the following words: And we hereby agree with you and also as a separate engagement with the bona fide holders respectively of the bills in compliance with the terms of this credit, that the same be duly accepted on presentation and paid at maturity. The bills drawn under this credit always stated the particular consignment of tea against which each of them was drawn, and the bill of lading and other 63

(1872) LR 7 Ch App 695; approved in Phelps, Stokes & Co v Comber (1885) 29 Ch D 813. (1872) LR 7 Ch App 695 at 698. 65 (1872) LR 7 Ch App 695 at 699. 66 (1884) 13 QBD 766. This case was followed in Greenough v Munroe, 46 F. 2d 537, affd. 53F.2d 362 (2d Cir. 1931). 64


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documents relating to each particular consignment were attached to the corresponding bill of exchange. These bills of exchange were discounted with a bank in China which presented them for acceptance in London through their agents and delivered the shipping documents in exchange for the acceptance of the issuing bank. The proceeds of the sale of the tea when realised were paid to the credit of the general account of the issuing bank with their own bank. The issuing bank suspended payment, and in their bankruptcy the holders of the bills of exchange claimed to be entitled to a lien or charge on the tea and the proceeds of sale. This claim was allowed by the registrar, but his order was discharged on appeal. Lindley LJ considered the case to be indistinguishable in principle from Robey & Co’s Perseverance Ironworks v Ollier.67 He said: It is true that the bills of lading were attached to the bills of exchange and that is no doubt a very important circumstance, but the bargain was that the bills of lading should be given up to the acceptors of the bills of exchange on their acceptance. 8–33 In Brown, Shipley &Cov Kough68 an American seller consigned goods for sale to a factor in England and drew a bill on the latter in favour of X or order containing the words “charge to account of cheese per Britannic”. The seller became insolvent and the factor declined to accept the bill. It was held that the holder of the bill was not entitled to claim the goods as against the trustee in bankruptcy of the seller. 8–34 In Banner v Johnston69 the buyer of goods obtained a credit from a bank by which he authorized a firm at Pernambuco which had sold cotton to him to draw on the bank for the price of the cotton. The drafts were to be covered by shipping documents on receipt of which the bank undertook to honour the drafts. After receipt of certain bills of lading for the cotton and acceptance of the drafts by the bank but before any of the bills fell due, the bank stopped payment and drafts arriving thereafter were not accepted. The bills were all drawn against “Credit No. 20” (in accordance with the instructions contained in the credit) but it was decided that the holders of the bills had no charge on the cotton for the amount of the bills. It was pointed out that the bank was not in the position of a trustee for the bill-holders. Lord Hatherley said:70 If that be the doctrine of the Court of Equity, which I venture to say it has never been affirmed to be, notwithstanding the many attempts made at different times by parties, interested in bills of this description, to obtain injunctions to prevent the disposal of goods against which the bills were supposed to be drawn—or, in other words, to acquire a distinct lien over the goods by that means—the result would be that in the case of every one 67

(1872) LR 7 Ch App 695. (1885) 29 Ch D 848. This case appears to have destroyed the authority of Frith v Forbes (1862) 4 De G.F. & J. 409. 69 (1871) LR5 HL 157. Cf. Ex parte Brett (1871) LRCh 838 at 841. 70 (1871) LR 5 HL 157 at 168. 68


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letter of credit of this kind, the bankers giving it would be held to constitute themselves trustees for every bill-holder, whatever number of bills there might be, whether ten or twenty or fifty or more, and they would be held bound as trustees for the various bill-holders to keep a separate account of the proceeds of the goods consigned to them by way of security. No one can doubt that in that case all bankers of good credit, dealing largely in these transactions, as most banks in London and Liverpool do, would, as a consequence, have a responsibility cast on them of a kind which would be enough to stop the business of any bank. 8–35 It was also pointed out in the same case that the only instance in which a bill-holder could have a claim to goods pledged as security for the bill would be when it was possible to apply the rule in Ex parte Waring,71 that is to say if the estates of two parties who are liable on a bill are brought under a forced administration and one of the parties holds by way of cover for the bill goods which are still unrealized.72 In relation to letters of credit this situation would arise where a bill is negotiated under a credit and both the drawer of the bill and the bank became insolvent. In such a case the holder of the bill would seem entitled to a charge on the documents in the bank’s hands so long as there has been no realization.73 In Banner v Johnston,74 Lord Hatherley explained that the object of the rule is to ensure that the one firm whose estate is being administered in bankruptcy may not be injured by another bankrupt firm getting the benefit of the securities, whilst at the same time it cannot discharge the obligation it has incurred to pay the bills. It is only in these circumstances that the holders of bills have ever been held to be entitled to such an equity. Realisation of the security 8–36 As stated above, the issuing bank as pledgee of the documents and of the goods to which they relate has a right of sale in the event of the buyer’s default in 71

(1815) 19 Ves 345. The rule in Ex parte Waring does not, however, apply to a case in which either the drawer or the acceptor is a joint stock company which has been ordered to be wound up, unless it is proved that the company is actually insolvent—see Re New Zealand Banking Corporation (1867) LR 4 Eq 226, a case which also appears to be an authority for the proposition that the rule will not apply if the bank is otherwise a creditor of the drawer and has a general lien on securities deposited with him. See also Re Barned’s Banking Co (1875) LR 10 Ch 198. 72 Ex parte Dever, Re Suse (No 2) (1885) 14 QBD 611. 73 See, for example, Ex parte Dever, Re Suse (No 2) (1885) 14 QBD 611, in which a London firm of bankers issued a credit to merchants in Ceylon. Remittances were sent forward for the purpose of covering certain bills drawn under the credit. The bankers and the Ceylon merchants became insolvent and both estates were placed under forced administration. It was held that the rule in Ex parte Waring applied, and that the remittances, so far as they existed in specie, must be applied in paying the bills in respect of which they had been sent forward. See also Ex parte Dewhurst (1873) LR 8 Ch 965. 74 (1871) LR 5 HL 157 at 168.


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reimbursing the bank the sum that has been advanced by it.75 Where it has been agreed that reimbursement shall be made at a fixed date, the bank is entitled to sell forthwith if it has paid the seller’s draft and is not reimbursed on the due date.76 Where it is a term of the agreement for the issue of the credit that the buyer is to put the bank in funds before payment is made, the bank has a right of sale before payment is due if the buyer fails to provide the funds when called on to do so.77 If the agreement merely provides that the bank be reimbursed without fixing any time at which reimbursement is to be made, the bank can sell after it has paid, but before exercising this right it must give reasonable notice to the buyer of its intention to sell the goods.78 Where the issuing bank has wrongly refused to take up documents and reimburse the confirming the bank, once the confirming bank has realised its security by disposing of its interest in the goods it can recover from the issuing bank the difference between the amount that it paid to the beneficiary and the amount that it realised in disposing of its interest in the goods.79 8–37 As a bailee, the bank is under a fiduciary obligation to the debtor in relation to the goods. It follows that where a sale produces a sum greater than the sum necessary to pay off the debt and any charges, the bank must account to the debtor for the balance. If it fails to do so as soon as practicable, it is liable to the debtor for interest at rates which take into account the return that the bank has been able to obtain on the money.80 75

Rosenberg v International Banking Corporation (1923) 14 Ll.L.R. 344 at 347 (see paragraph 8– 03 above). The remedy of foreclosure does not extend to a pledge of personal chattels: Carter v Wake (1877) 4 Ch D 605. 76 Re Morritt (1886) 18 QBD 222. 77 Banner vjohnston (1871) LR 5 HL 157. 78 See De Verges v Sanderman [1902] 1 Ch 579, a case of mortgage. 79 Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59. 80 Mathew v T.M.Sutton Ltd [1994] 1 WLR 1455.

Chapter 9 DAMAGES Introduction 9–01 The matters to be considered in this chapter are (i) the extent of the liability of the buyer to the seller if the buyer fails to open a credit in accordance with the provisions of a contract of sale and (ii) the extent of the liability incurred by the issuing bank and/or the confirming bank to the beneficiary of a credit in the event of a wrongful refusal by the bank to honour drafts drawn, or to pay against documents presented, in accordance with the terms of the credit. 9–02 In both these circumstances the claim is for damages and not for debt. It follows that the claimant is not limited to recovery of the sum that should have been paid if he can prove a loss greater than this. In determining the loss recoverable it is necessary to take into account general principles relating to recovery of damages for breach of contract and the claimant is entitled to any damages which can reasonably be said to flow from the breach, within the confines of the rule laid down in Hadley v Baxendale.1 Thus the buyer or the bank, as the case may be, is liable for such damages as ordinarily flow from a breach of contract of the kind in question. A person who breaches a contract is not, however, liable for damage deriving from the existence of special circumstances unless these circumstances were known or ought to have been known2 to him at the time when the contract is made, so that it is a fair inference from the facts that he contracted on the basis that damage of an unusual kind would result from the breach of the contract.

1

(1854) 9 Ex 341. See also Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] KB 528 and Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350. See generally Chitty on Contracts, 28th ed, paras 27–039 to 27–051. 2 Reasonable businessmen are taken to understand the ordinary practices and exigencies of the other’s trade or business—see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196 at 224. See further Chitty on Contracts, 28th ed, para 27–048. 3 The measure of damages for non-acceptance is provided for in section 50 of the Sale of Goods Act 1979. See generally Benjamin’s Sale of Goods, 5th ed, paras 16–054 to 16–082. 4 [1952] 2 QB 297. See also Réalisations Industrielles et Commerciales SA v Loescher [1957] 2 Lloyd’s Rep 270. 5 Denning LJ suggested ([1952] 2 QB 297 at 306–7) one way “…in which the buyers might be able to rely on the rise in price. It might be a ground for mitigation of damages. I can well understand that the buyers might in some cases be able to say that the sellers ought to have

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Damages recoverable by the seller if the buyer fails to open a credit

9–03 Where the buyer fails to open a letter of credit in accordance with the contract of sale by the date required by the contract, this constitutes a repudiation of the contract and the seller is entitled to treat the contract as terminated and claim damages for non-acceptance of the goods.3 In Trans Trust S.P.R.L v Danubian Trading Co Ltd4 the Court of Appeal held that the seller can recover damages for loss of his profit on the goods where it is within the reasonable contemplation of the parties that if the assurance of payment constituted by the credit is not put in place, the seller will not be able to purchase or manufacture the goods that he would have delivered under the contract. The facts in that case were that the defendants contracted to buy steel from the claimants which the latter were to buy from a Belgian company to which the manufacturers had given an option to buy. Neither the claimants nor the Belgian company were able to find the money to purchase the goods. The contract provided for payment by confirmed credit of a Brussels bank to be opened in the Belgian company’s favour by an American corporation to which the defendants had contracted to sell. The defendants failed to procure the credit and repudiated the contract of sale. The price of the goods had risen since the date of the contract and the defendants argued that the claimants could have resold for more than the contract price and that, therefore, the claimants were entitled to nominal damages only. The Court of Appeal would not accept this.5 Denning LJ said:6

A banker’s confirmed credit is a different thing from payment. It is an assurance in advance that the seller will get paid. It is even more than that. It is a chose in action which is of immediate benefit to the seller. It is irrevocable by the banker; and it is often expressly made transferable by the seller. The seller may be relying on it to get the goods himself. If it is not provided, the seller may be prevented from getting the goods at all. The damages he will then suffer will not in fact be nominal. Even if the market price of the goods has risen, he will not be able to take advantage of the rise because he will not have any goods to resell. His loss will be the profit which he would have made if the credit had been provided. Is he entitled to recover that loss? I think he is, if he can show that such a loss was at the time of the contract foreseeable by the buyer as the probable consequence of a breach… That was clearly the case here. The buyers knew that the sellers could not obtain the goods at all unless the credit was provided. The foreseeable loss was the loss of profit, no matter whether the market price of the goods went up or down. It is, therefore, the proper measure of damages. It was said that the breach here was a failure to pay money, and that the law has never allowed any damages on that account. I do not think that the law has ever taken up such a rigid standpoint. It did undoubtedly refuse to award interest until the [Law Reform (Miscellaneous Provisions) Act, 1934, s. 3 (I)7], see London, Chatham and Dover Railway Co v South Eastern Railway Co8 but the ground was that interest was “generally presumed not to be within the contemplation of the parties”: see Bullen & Leake, 3rd ed., p. 51. That is, I think, the only real ground on which


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damages can be refused for non-payment of money. It is because the consequences are as a rule too remote. But when the circumstances are such that there is a special loss foreseeable at the time of the contract as the consequence of non-payment, then I think such loss may well be recoverable.9 offered the goods elsewhere and found someone else to provide a letter of credit But no such case can be made here. The sellers acted reasonably throughout. They kept the matter open for the buyers in the hope and expectation that the credit would be provided and eventually lost their own option because the credit was not provided. The sellers have, therefore, lost their profit without any fault on their part and they are entitled to recover it from the buyers as damages.” See also J.D’Almeida Araujo Lda v Sir Frederick Becker & Co Ltd [1953] 2 Lloyd’s Rep 30, where the seller failed to take reasonable steps to mitigate the loss and consequently was only entitled to nominal damages.

Somervell and Romer LJJ were of the same view. The latter said:10 The Judge regarded the principle [that only interest is recoverable for a failure to pay money, as had been argued] as inapplicable to a failure to procure the provision of a letter of credit. There is, I think, a further difficulty. If, on a sale of goods, the buyer fails to open a credit or to provide the purchase price, and this can be and is accepted as a repudiation of the contract, the principle clearly has no application. The seller is not entitled merely to interest but to damages to be assessed according to the prima facie measure or having regard to the special circumstances, if any. This seems to show that the principle relied on…is inapplicable in the present case even if one treats the failure to open the credit as a failure to pay money. Nevertheless, the court refused to order the indemnification of the sellers in respect of a possible liability they might be under to their sellers because such a special loss was not within the contemplation of the parties.11 9–04 The reasoning in Trans Trust S.P.R.L v Danubian Trading Co Ltd12 was applied in Ian Stach Ltd v Baker Bosly Ltd13 where Diplock J said:14 In accordance with the judgment in Trans Trust S.P.R.L. v Danubian Trading Co Ltd, in a case of this kind where there is a string of contracts which it is known (as it was known in this case) can only be financed by a 6 [1952] 2 QB 297 at 305–6. 7 See now section 35A of the Supreme Court Act 1981. See also the Late Payment of Commercial Debts (Interest) Act 1998. 8 [1893] AC 429. See also President of India v La Pintada Compania Navigation SA [1985] AC 104 and Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. 9 This latter passage and words to similar effect of Romer LJ ([1952] 2 QB 297 at 307) were applied by the Court of Appeal in Wadsworth v Lydall [1981] 1 WLR 598, which was approved in President of India v La Pintada Compania Navigation SA [1985] AC 104 at 124–7. See also Compania Financiera “Solieda” SA v Hamoor Tanker Corporation Inc

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[1952] 2 QB 297 at 302. Even if such head of damage was recoverable, it is doubtful whether it would have been correct to make a declaration of indemnity (cf Brown v KMR Services Ltd [1994] 4 All ER 385), although where the claimant has a potential liability the amount of which may be recoverable from the defendant as damages, the Court has power to defer dealing with that head of damage while giving judgment in relation to other heads—see Trans Trust S.P.R.L v Danubian Trading Co Ltd [1952] 2 QB 297 at 307 and Deeny v Gooda Walker Ltd (in liquidation) [1995] 4 All ER 289. 12 [1952] 2 QB 297. 13 [1958] 2 QB 130. 14 [1958] 2 QB 130 at 145. 15 [1953] 2 Lloyd’s Rep 30. See now article 10 of the Rome Convention on the law applicable to contractual obligations and paragraph 10–55 below. 11


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letter of credit from the ultimate buyer, prima facie the measure of damages is the loss of profit on the transaction, since the defendants must have known that their failure to provide the letter of credit would make it impossible for the plaintiffs to carry out the transaction, just as failure on their part to provide a letter of credit made it impossible for the defendants themselves to carry out the transaction. I think, therefore, that probably the right basis is loss of profit. 9–05 In J.D’Almeida Araujo Lda v Sir Frederick Becker & Co Ltd15 Pilcher J held that the question whether the claimants’ claim for £3,500 which they had to pay away by way of indemnity as the result of the defendants failing in their obligation to open [1981] 1 Lloyd’s Rep 483, International Minerals and Chemical Corporation v Karl O. Helm AG [1986] 1 Lloyd’s Rep 81 and President of India v Lips Maritime Corporation [1988] AC 395 at 408–12,424 and 429.

an irrevocable credit in their favour, was one of remoteness, to be determined according to the proper law of the contract, and was not determinable as a procedural or remedial question according to the law of the forum. Accordingly, whether the claimants could recover the sum paid fell to be determined under Portuguese law. Damages recoverable by the beneficiary of a credit in the event of a wrongful refusal by the bank to honour drafts drawn or to pay against documents 9–06 The obligation of the bank may be to accept and pay drafts or to pay against documents or pursuant to a deferred payment undertaking. 9–07 Generally, if the bank dishonours a draft that it has accepted, the position is covered by the Bills of Exchange Act 1882, which expressly provides that damages shall include interest.16 In other words, the general rule is that nothing is recoverable beyond the amount of the debt with the exception of nominal damages and, in certain cases, of interest in addition. This rule does not, however, meet the case where a bank refuses to honour drafts on it under a commercial credit which it has issued, because this cannot be regarded as being simply in the nature of a failure to pay a money debt. As stated above, the law treats a failure to pay a sum due under a credit, as a breach of the credit contract between the beneficiary and the bank, which may involve consequences over and above the non-receipt of a sum of money on the due date. 9–08 The position was well illustrated in 1870 by Prehn v Royal Bank of Liverpool17 The facts in that case were that the bank issued a credit to the claimants, who carried on business at Liverpool and Alexandria as grain merchants, by which the bank agreed to accept the drafts of the claimants’ Alexandria house on the claimants’ undertaking to provide funds to meet the drafts at maturity and to remit the shipping documents to the bank as security for the advance. The bank was to receive a commission of 1/2% in respect of the accommodation. Drafts were accepted by the bank under the credit and

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funds to meet them at maturity were duly provided by the claimants. Before the drafts fell due the bank stopped payment and advised the claimants that it could not apply the moneys lodged by the claimants to meet the bank’s acceptances. The claimants accordingly arranged for another bank to accept the drafts for the honour of the drawees at a commission of 2% and were also put to expense in protesting the drafts and in cabling to Alexandria. It was not disputed that the bank was liable for the amount of the drafts, but it was argued that the damages in respect of the extra commission and cable charges were not recoverable on the ground that the claim was in the nature of a money demand, and that damages were, therefore, limited to the amount of the debt. The Court rejected this contention, pointing out that the cause of action was not in respect of the non-payment of a sum of money, but was founded on the breach of contract to honour the drafts drawn by the Alexandria house as they fell due. This being so, the cost of procuring fresh accommodation and of the cables could be recovered by the claimants because the necessity for procuring a new credit and of communicating with Alexandria were reasonable and probable consequences of the breach. 16

Bills of Exchange Act 1882, section 57(1). Expenses of noting and protest can also be recovered under this section. Where a breach of contract consists in a wrongful refusal to accept a bill drawn under a credit, it would seem that interest may also be recovered from the time at which the bill would have matured if it had been accepted—see Davis v Smyth (1841) 8 M & W 399 and Marshall v Poole (1810) 13 East 98. 17 (1870) LR 5 Ex 92. See also Larios v Bonany y Gurety (1873) LR 5 PC 346. Cf Banque Populaire de Bienne v Cave (1895) 1 Com Cas 67. 18

Prehn v Royal Bank of Liverpool (1870) LR 5 Ex 92, Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 and Trans Trust S.P.R.L v Danubian Trading Co Ltd [1952] 2 QB 297. See also paragraph 9–02 above. 19 See Trans Trust S.P.R.L v Danubian Trading Co Ltd [1952] 2 QB 297 and the cases cited at footnotes 8 and 9 above.


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9–09 This case, though important as establishing the principle that damages are recoverable beyond the amount of the bills and interest where the bank fails to carry out its undertaking given in a credit, did not dispose of the question as a whole. The drawers of the bills under the credit and the parties at whose instance the credit was issued were the same—the merchants’ Liverpool and Alexandria houses—so that the reasonable and probable consequences of the failure by the bank to honour its undertaking were limited to the actual out-of-pocket expenses incurred by the claimants in making other arrangements. There was no contract of sale between the claimants and some other person, and no breach of such a contract by non-acceptance of the documents of title when tendered by the beneficiary under the credit. For these reasons the decision in Prehn v Royal Bank of Liverpool only covered part of the ground, and did not meet the position which arises in the event of a breach by the bank of its obligations towards the beneficiary under a letter of credit where the beneficiary under the credit (the seller) and the customer requesting the issue of the credit (the buyer) are distinct persons as is usually the case. In such case the beneficiary has a grievance over and above the necessity of finding fresh accommodation, because if there is a breach of contract by the bank there is also, in effect, a breach of the contract of sale out of which the credit has originated. 9–10 It is now settled that damages are computed with reference to the loss which the beneficiary sustains by the non-acceptance of the shipping documents by the bank and not solely on the basis that the bank has failed to pay a sum of money due from it under the terms of the credit. The cases now establish the propositions set out in the following paragraphs. Proposition (a) 9–11 The claimant is entitled to such damages as the parties ought reasonably to have contemplated as ordinarily flowing from the bank’s failure to comply with its obligations under the credit.18 There is no principle limiting the damages because the breach is the failure to perform an obligation to pay money.19

Proposition (b) 9–12 Where the refusal of the bank to honour the credit amounts to a repudiation of its liability to honour further bills drawn under the same credit, the beneficiary is entitled to treat such refusal as an anticipatory breach of the credit contract and to sue for damages on that basis.20 In such an event the beneficiary is in the same position as a seller of goods in a case where the buyer has repudiated the contract of sale, and can at his option sue at once without presenting any further documents to the bank, claiming the loss consequent on the fact that he has not been permitted to fulfil his part of the contract. 9–13 In Urquhart Lindsay & Co Ltd v Eastern Bank Ltd,21 the credit provided for the payment of the price of instalments of goods to be shipped to India from time to time. The contract of sale provided that in the event of any increase taking place respectively in wages or cost of materials or transit rates, or in the event of any reduction in working hours, the price should be correspondingly increased. Two instalments of the goods were

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shipped and paid for, but when the documents relating to the third instalment were presented to the bank, the beneficiaries were informed that drafts including an amount for extra cost of labour would not be paid in future without the approval of the buyers of the goods at whose instance the credit had been opened. The beneficiaries elected to treat this letter as a repudiation of the contract established by the credit between them and the bank, and they sued for damages on the footing that there had been an anticipatory breach. It was argued on behalf of the bank that the terms of the contract of sale must be taken to be incorporated in the credit, and that reading the two contracts together the true meaning of the proviso as to increased costs was that any increase of that nature was to be the subject of subsequent independent adjustment. On this showing there was no breach of contract by the bank, but Rowlatt J did not accept this and held that there had been a breach by the bank of the contract contained in the credit. He then discussed the question of the measure of damages and said:22 The point is a new one and not free from difficulty. It is, of course, elementary that as a general rule the amount of damages for non-payment of money is only the amount of the money itself… These damages are not for non-payment of money. It is true that non-payment of money was what the buyer was guilty of; but such non-payment is evidence of a repudiation of the contract to accept and pay for the remainder of the goods, and the damages are in respect of such repudiation. I confess I cannot see why the refusal of the bank to take and pay for the bills with the documents representing the goods is not in the same way a repudiation of their contract to take the bills to be presented in future under the letter of credit; nor, if that is so, why the damages are not the same. Rowlatt J held, therefore, that the proper measure of damages in the case before him was the difference between (a) the value of the material left on the sellers’ hands and the cost of such as they would have further provided and (b) what they would have been entitled to receive for the whole of the goods from the buyers. 20

Cf Jaks (UK) Ltd v Cera Investment Bank SA [1998] 2 Lloyd’s Rep 89, where MooreBick J held that a telex sent by the issuing bank, which the beneficiary read as a cancellation of the credit, was not sufficiently clear to amount to an unequivocal refusal to perform. 21 [1922] 1 KB 318. Rowlatt J’s judgment in this case was delivered on December 5, 1921 and his judgment in Stein v Hambros Bank of Northern Commerce (1921) 9 L1.L.R. 433, 507, (1922) 10 L1.L.R. 529 (discussed in paragraph 9–16 below) was delivered on December 12, 1921. Thus although the report in the latter case does not say so, Rowlatt J was in effect distinguishing the two cases. 22 [1922] 1KB 318 at 323. 23

The position is the same as between a negotiating bank and the issuing bank—see Hamilton Bank NA v Kookmin Bank 98 Civ. 2162 (S.D.N.Y. 1999). As to the position in relation to consequential losses, see paragraph 9–20 below. 24 (1870) LR 5 Ex 92 (discussed in paragraph 9–08 above). 25 (1919) 1 L1.L.R. 256 at 257. The point as to the proper measure of damages was apparently not taken before Rowlatt J in the court below. The law is the same in the United States and well


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illustrated by the judgment of the Supreme Court of Connecticut in New York Life Insurance Co v Hartford National Bank and Trust Co 22 U.C.C. Reporting Service 761 (1977), a case of a standby credit issued by the bank in favour of the insurance company in connection with a mortgage loan commitment which required a cash deposit of $180,000 with the insurance company. This requirement was subsequently replaced by a letter of credit. The mortgage loan fell through, hence the action. The judgment referred to the Uniform Commercial Code s.5–115, by which a beneficiary “may recover from the issuer the full amount of the draft or demand together with incidental damages and interest”, but with a proviso reference to mitigation. For recent statements of the position in the United States, see San Diego Gas & Electric Co v Bank Leumi 50 Cal. Rptr. 2d 20 (4th App. Dist. 1996) and Hamilton Bank NA v Kookmin Bank 98 Civ. 2162 (S.D.N.Y. 1999). See also Mannesman Handel AG v Kaunlaran Shipping Corporation [1993] 1 Lloyd’s Rep 89 at 94, where the position under Swiss law was considered.

Proposition (c) 9–14 Where the refusal to honour the credit takes the form of a failure by the bank to make a payment due under the credit, to accept a draft presented under the credit or to pay a draft which has already been accepted by the bank, unaccompanied by circumstances evidencing a refusal to honour drafts drawn thereafter under the same credit, the measure of damages will be the amount payable under the credit or the draft together with interest and any expenses to which the claimant may have been put by reason of the failure of the bank to honour the credit.23 9–15 So far as the refusal to honour drafts is concerned, the position was established in Prehn v Royal Bank of Liverpool.24 In relation to a case where a confirming bank refused to make payment against documents, the position was established in Belgian Grain and Produce Co Ltd v Cox & Co (France) Ltd,25 in which it was argued that the measure of damages was limited to the amount that would be recoverable as damages by the claimant as seller against the buyer.26 Bankes LJ refused to accept this, saying: …it would seem to me that the contention, if sound, would defeat the object of letters of credit in this form, which…is to secure payment of the amount of the purchase price of the goods or of the actual amount named in a letter of credit, in exchange for the particular documents mentioned therein, and one of the objects is to avoid any controversy in reference to the amount of damage and to secure that, as against the documents, if they are in order, the amount of money named in the letter of credit should be paid over. 9–16 The same issue arose 2 years later in Stein v Hambros Bank of Northern Commerce.27 The claimant had sold hides to an Italian buyer on c.i.f. terms, payment to be by “confirmed” credit. The credit stated that it would be available by drafts against invoice, weight note and “bill of lading per steamer Caboto leaving Calcutta about the middle of January”. The goods were shipped on the Caboto on January 24, but the vessel did not sail until February 19. The defendant bank, acting on the instructions of the buyer, declined to honour the drafts on the ground that the claimant had in effect warranted that

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the vessel would sail not later than January 15. Rowlatt J held that the bank were not entitled to reject the documents28 and the question of the proper measure of damages was then argued. It was contended on behalf of the defendant bank that, even if it was wrong in refusing to accept the documents, the damages could not be greater than the damages would be in the case of a buyer who refused to take up and pay for the documents under a sale on c.i.f. terms; in other words, it is the duty of the beneficiary in such a case to mitigate his damages by realising the documents and goods to best advantage. The argument on behalf of the claimant was that he was entitled to the amount of the draft representing the purchase price, and, in addition, to interest. Rowlatt J held that the latter was the correct view. He said:29 The question is whether the plaintiff is suing upon a contract to pay money upon the fulfilment of certain conditions which have not been fulfilled,30 or whether he is suing for the breach of an obligation to carry through a transaction under which something has to be done by the plaintiff, on the analogy of the position which arises where a buyer refuses to accept goods the property in which has not yet passed. It seems to me that this is clearly a case of a simple contract to pay money upon the fulfilment of conditions which have been fulfilled. The bank had simply to accept the bill when the proper documents were brought to them. They were brought to them. The plaintiff in effect put them down on the counter of the bank, asked for acceptance, and the bank would not give acceptance. The plaintiff rather than leave the documents there took them away again. There is no question arising as between buyer and seller as to the buyer having some opportunity of inspecting the goods or anything of that sort. The obligation of the bank is absolute, and is meant to be absolute, that when the documents are presented thay have to accept the bill. That is the commercial meaning of it. Therefore, it seems to me, the plaintiffs contention is right. No difficulty arises as to the discounting of the bill, because the action was not brought until after the date when the bill would have matured. Therefore, it seems to me, the plaintiff is entitled to judgment for the amount of the bill, which should have been accepted, plus interest from the date it would have become due until today… 26

The argument appears to have been that the beneficiary was limited to a claim for nonacceptance of the goods, cf Stein v Hambros Bank of Northern Commerce (1921) 9 L1.L.R. 433,507 27 (1921)9L1.L.R.433, 507. 28 His ruling on this point was reversed by the Court of Appeal (1922) 10 Ll.L.R. 529 and the question of the measure of damage was not dealt with. 29 (1921)9L1.L.R.507. 30 This follows the report, but it makes better sense as “conditions which have been fulfilled”.


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9–17 The first United Kingdom case in which a bank issuing an irrevocable credit refused to pay was British Imex Industries Ltd v Midland Bank Ltd,31 in which the bill of lading presented pursuant to the credit stipulated that the ship would not be responsible, in the case of a cargo of iron and steel, for correct delivery or for expenses at the port of discharge unless each piece was distinctly marked with oil paint and each bundle securely fastened. The bank refused the bill on the ground that the bill of lading did not show on its face that the above requirement had been complied with. The claimants succeeded and were awarded the amount payable under the credit.32 The normal order is now for judgment to be given for the sum due under the credit, although if the documents have been returned to the beneficiary the order will be that the bank make payment in exchange for the documents.33 Where the bank (issuing or confirming) has no reasonable ground for defending the claim, the beneficiary is entitled to summary judgment.34 9–18 It follows from this that the beneficiary is under no obligation to mitigate his loss by seeking to arrange the sale of the goods elsewhere.35 It might at first seem that there is no reason why the ordinary rules relating to the mitigation of damages should not apply.36 The beneficiary, or an intermediary bank, in the case of a wrongful refusal by the issuing bank to accept or to pay a draft, may be left with documents on his hands and the argument is that he ought, as in other cases of breach of contract, to adopt all reasonable means of mitigating the damages by disposing of the goods elsewhere to the best possible advantage.37 However, the very object of an irrevocable credit is to free the beneficiary from any doubt or anxiety as to the payment which he is to receive for the goods to which the credit relates. From the business point of view the whole aim of the establishment of the credit is to enable the seller of the goods to obtain payment without delay and with certainty. The introduction of rules as to mitigation of damages would largely neutralize this advantage.38 In Urquhart Lindsay & Co Ltd v Eastern Bank Ltd,39 Rowlatt J pointed out that if the beneficiaries under irrevocable credits were to be deprived of the right of insisting that they should be placed in the same position as if the credits had been honoured, they would lose the essential benefit which they sought to obtain by stipulating for payment by means of an irrevocable credit. He said:40 31

[1958] 1QB542. Judgment was given 11 days after the date on which the claim was issued, which was the day after the bank’s refusal to pay. As a result, upon payment the bank was able to remit the documents to the buyer and obtain reimbursement. 33 See Floating Dock Ltd v The Hongkong and Shanghai Banking Corporation [1986] 1 Lloyd’s Rep 65 at 80. 34 For a review of the principles upon which such judgment is given, see Safa Ltd v Banque du Caire [2000] 2 Lloyd’s Rep 600 at 605–6; but see also Solo Industries (UK) Ltd v Canara Bank [2001] EWCA Civ 1041. For a case where summary judgment was given for damages and interest to be assessed, see Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 Lloyd’s Rep 329. Cf Société Métallurgique d’Aubrives & Villerupt v British Bank for Foreign Trade (1922) 11 Ll.L.R. 168 at 170, where Bailhache J said that if goods were so misdescribed (albeit not fraudulently) in the documents tendered to the issuing bank that the goods might be rejected by the buyers and were so rejected by the buyers, the seller would be entitled only to nominal damages on the grounds of 32

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circuity of action. This is not easy to follow, but the report is not a strong one (it speaks of “security of action”, not “circuity of action”).


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The whole purpose of the arrangement is that the seller shall have a responsible paymaster in this country to protect him against the very contingency which has occurred and the very damages which he claims. 9–19 If the beneficiary chooses to realise the value of the documents and/or the goods upon the bank’s refusal to take up and pay for the documents, he is bound to bring into account the sum that he receives on the re-sale.41 In these circumstances the beneficiary has accepted the bank’s refusal to make payment as a repudiation of the credit.42 9–20 Consequential loss arising from late payment of the sum due under the credit was considered in Ozalid Group (Export) Ltd v African Continental Bank Ltd43 in which the defendant bank failed to pay against a valid presentation of documents pursuant to an irrevocable credit until after some nine weeks’ delay, for which there was no adequate explanation. The credit was a US dollar credit but the claimants’ money of account44 was sterling. Between the date when the payment should have been made and the date when payment was actually made the dollar depreciated against sterling. Donaldson J said:45 Once it is proved that the plaintiffs’ true loss is to be measured in sterling, any payment on account made in a different currency falls to be credited against the sterling loss at the rate of exchange ruling at the date of payment.

35

In Philadelphia Gear Corporation v Federal Deposit Insurance Corporation (9/2/84) the United States District Court for the Western District of Oklahoma decided that to impose a duty to mitigate would violate the independence principle and diminish the commercial utility of letters of credit and that there is nothing in the UCP or the United States Uniform Commercial Code that imposes such a duty on a beneficiary. 36 It has been argued in the past that to compel the bank to pay for the documents and to take them up is, in effect (though not in terms), to establish the remedy by way of specific performance of the contract contained in the credit as the usual remedy, rather than as a discretionary remedy which ought to be granted only where the rights of the party injured by a breach of contract cannot be secured in any other way. Irrevocable credits often relate to payment for goods which are ordinary articles of commerce and which can be disposed of elsewhere without any great difficulty. Thus, the argument ran, to force the documents on to the bank in such circumstances would seem to violate the principles of equity embodied in the discretionary power given to the courts to award specific performance of a contract. 37 For a case where a confirming bank, which had been refused reimbursement by the issuing bank, did this and recovered the difference between the amount that it paid to the beneficiary and the amount that it received on the re-sale of the goods, see Bayerische Vereinsbank Aktiengesellschaft v National Bank of Pakistan [1997] 1 Lloyd’s Rep 59. 38 Banks readily discount bills drawn under credits, but they might hesitate to do so if, when unable to obtain payment of the bills, they were compelled to fall back on the troublesome alternative of realising the goods represented by the documents of title and of suing the bank which has issued the credit for any resulting loss.

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41

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[1922] 1KB 318. [1922] 1KB 318 at 324.

He cannot recover more than the difference between the amount of the sum due under the credit (or the dishonoured draft) and the proceeds of sale, together with any consequential damages: Re Barned’s Banking Co, Coupland’s Claim (1869) LR 5 Ch 167 and Re Barned’s Banking Co, Leech s Claim (1871) LR 6 Ch 388. 42 As to which, see proposition (b) discussed in paragraphs 9–12 and 9–13 above. In these circumstances he must take reasonable steps to mitigate his loss. 43 [1979] 2 Lloyd’s Rep 231. As to consequential damages in the United States, see Meb Export Co v National City Bank 131 N.Y.L.J. 4 (1954), Investitions-und Handels Bank v United California Bank 277 F. Supp. 1005 (S.D.N.Y. 1968), Linden v National City Bank 12 A.D. 2d 69,208 N.Y.S. 2d 182 (1st Dept. 1960) and New York Life Insurance Co v Hartford National Bank and Trust Co 22 U.C.C. Reporting Service 761 (1977). 44 See Services Europe Atlantique Sud (SEAS) v Stockholms Rederiaktiebolag SVEA [1979] AC 685, Societe Francaise Bunge SA v Belcan NV [1985] 2 Lloyd’s Rep 189 and Attorney General of the Republic of Ghana v Texaco Overseas Tankships Ltd [1994] 1 Lloyd’s Rep 473 45 [1979] 2 Lloyd’s Rep 231 at 234, applying Miliangos v George Frank (Textiles) Ltd [1976] AC 443 and Services Europe Atlantique Sud (SEAS) v Stockholms Rederiaktiebolag SVEA [1979] AC 685. In International Minerals and Chemical Corporation v Karl O. Helm AG [1986] 1 Lloyd’s Rep 81 at 105, Hobhouse J cast doubt on Donaldson J’s reasoning on the mistaken basis that the beneficiary’s claim was a claim for debt and not damages. In any event the claim for currency loss was sustainable on the basis of the reasoning in Wadsworth v Lydall [1981] 1 WLR 598, which was approved in President of India v La Pintada Compania Navigacion SA [1985] AC 104 at 124–7 and which was applied by Hobhouse J in International Minerals and Chemical Corporation v Karl O. Helm AG. See also Aruna Mills Ltd v Dhanrajmal Gobindram [1968] 1 QB 655.


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He gave judgment for the difference between the value of the dollar payment in sterling at the time when it should have been received and the value of the dollar payment in sterling at the time when the defendant ultimately paid, plus interest, costs46 and expenses incurred by the claimants because of the defendant’s default. Proposition (d) 9–21 Where the seller has discounted his draft, and it has been accepted by the bank, the rights of the holder of the draft will be determined by the law of negotiable instruments, and no question peculiar to commercial credits will arise. Where, however, the drawee bank has refused to accept the draft, the holder must frame his claim on the basis of the promise of acceptance by the bank contained in the credit, and he will be entitled to such damages as are the reasonable consequences of the breach of that promise.47 Such damages must be measured without regard to any consequences arising from a breach of the contract of sale, because the holder of the draft has not bought the goods or taken an assignment of any rights under the contract of sale.48 46

The award of interest was inconsistent with the rule established in London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429 subsequently reaffirmed in President of India v La Pintada Compania Navigacion SA [1985] AC 104. 47 Prehn v Royal Bank of Liverpool (1870) LR 5 Ex 92 (discussed at paragraph 9–08 above). 48 See Guaranty Trust Company of New York v Hannay [1918] 1 KB 43 at 51, affirmed in part [1918] 2 KB 43.

Chapter 10 JURISDICTION AND CONFLICT OF LAWS Introduction 10–01 The UCP is a code that applies when incorporated into the contract embodying the credit. It is not a body of law. When disputes concerning its application and interpretation arise they must be determined in accordance with the system of law that governs the contract in respect of which the dispute arises. The UCP does not make any provision as to how the system of law governing such contract is to be determined. Nor does it provide for determination of the place where disputes can or may be adjudicated upon. In the light of the fact that the UCP now comprehensively sets out the rights of the parties to the credit, the scope for contracts to have different effects depending upon the law that governs them is reduced.1 Often therefore the significance of the law governing the contract is in ascertaining the jurisdiction in which a dispute may be determined.2 In the light of this it is appropriate to deal with jurisdictional issues first and then issues relating to conflict of law. Jurisdiction Introduction 10–02 There are now 2 separate systems for determining jurisdiction in the United Kingdom. The first is that provided for in the Civil Jurisdiction and Judgments Act 1982, as amended by the Civil Jurisdiction and Judgments Act 1991 (referred to as the “CJJA”). The CJJA makes provision for the application of the Brussels and Lugano Conventions (the “Conventions”) in the United Kingdom. Those Conventions provide for the allocation of jurisdiction in civil 1

It is possible that interpretations may vary from one country to another, but the frequent revisions of the UCP and the opinions of the ICC Commission on Banking Technique and Practice reduce the incidence of differing interpretations. 2 See, for example, European Asian Bank AG v Punjab and Sind Bank [1981] 2 Lloyd’s Rep 651 (affirmed [1982] 2 Lloyd’s Rep 356), Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 and Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227.

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and commercial matters where a claim is brought and the defendant3 is domiciled in member states of the European Union and the European Free Trade Association (referred to as “contracting states” in the CJJA and the Conventions).4 They also provide for the reciprocal enforcement of judgments given in contracting states. The second system for determining jurisdiction, which applies to persons who are not domiciled in contracting states5, is that based on the common law, as supplemented by the “exorbitant” jurisdiction over persons who cannot be served within the jurisdiction provided for (in England and Wales) in Part 6.20 of the Civil Procedure Rules 1998. Only a brief summary of these systems is provided here with particular emphasis on those provisions likely to affect claims in relation to letters of credit.6 Jurisdiction under the CJJA Introduction 10–03 The underlying principle of the Conventions7 is that a defendant domiciled in a contracting state should be sued in his place of domicile.8 There are, however, exceptions to this principle. Such exceptions fall into 3 categories: (i) cases where a claimant may sue the defendant in either the contracting state in which the defendant is domiciled or in a contracting state other than that of the defendant’s domicile, (ii) cases where the parties have chosen a jurisdiction in which suits should be brought and (iii) cases where one contracting state has exclusive jurisdiction. The Conventions also provide for the situation where claims concerning the same matter are brought in more than one contracting state. The CJJA further makes provision for allocation of jurisdiction between different parts of the United Kingdom. Permission to serve a defendant out of 3

The domicile of the claimant is irrelevant except in the limited circumstances expressly provided for in the Conventions—see Universal General Insurance Co v Group Josi Reinsurance Co SA [2000] 3 WLR 1625. 4 The provisions of article 16 of the Conventions relating to exclusive jurisdiction may provide jurisdiction where the defendant is not domiciled in a contracting state. 5 See article 4 of the Conventions. 6 For a detailed exposition, see Dicey & Morris, The Conflict of Laws, 13th ed, chapter 11. 7 In construing the provisions of the Conventions it is necessary first to interpret the concepts used in them independently by reference to the language, structure, system and objectives of the Conventions and secondly to apply such concepts to the procedural regime of a particular national legal system recognising that the concepts may have different content in each system—see Shearson Lehman Hutton v TVB Treuhandgesellschaft für Vermögensverwaltung und Beteiligungen mbH [1993] ECR 1–139 at para 13 and Canada Trust Co v Stolzenberg [2000] 3 WLR 1376 at 1382 and 1389. 8 Article 2 of the Conventions. The effect of this is that it is no longer possible to found jurisdiction in the United Kingdom on the basis of the defendant’s temporary presence within the jurisdiction or the presence or seizure of property belonging to the defendant or situated in the United Kingdom— see article 3 of the Conventions. The court does, however, have power under section 49 of the CJJA to stay proceedings brought against a defendant domiciled in the United Kingdom where the courts of a non-contracting state are the more appropriate forum—see Re Harrods (Buenos Aires) Ltd [1992] Ch 72.


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the jurisdiction is not required where the defendant is domiciled in a contracting state and jurisdiction is founded on the Conventions.9 Domicile 10–04 A court must apply its national law in determining whether a party is domiciled in its own state and in determining whether a party is domiciled in another contracting state a court must apply the law of that state.10 The “seat” of a company or other legal person is treated as its domicile. In determining the “seat” of a company a court must apply its own rules of private international law.11 10–05 Part of V of the CJJA12 sets out the rules to be applied in the United Kingdom for implementing these provisions. In the case of an individual, domicile is determined by reference to (i) whether the individual’s place of residence is in a particular state and (ii) whether the nature and circumstances of such residence indicate that the person has a substantial connection with that state.13 An individual is only so domiciled if both residence and substantial connection are satisfied. Similar principles apply in determining whether a person is domiciled in a part of the United Kingdom.14 Where the country concerned is other than the United Kingdom or a part of it, the national law of that country must be applied if it gives rise to a principle different from that set out in the CJJA.15 A company has its “seat” in a state if either (i) it is incorporated or formed under the law of that state or has its official address16 in that state or (ii) its central management and control is exercised in that state.17 However a company is not regarded as having its seat in a contracting state other than the United Kingdom if it is shown that the courts of that state would not regard it as having its seat there.18 Similar principles apply in determining whether a company has its seat in a part of the United Kingdom.19 9

Part 6.19 of the Civil Procedure Rules 1998. For the purpose of establishing that the United Kingdom courts have jurisdiction under the Conventions, the claimant must show a good arguable case—see Canada Trust Co v Stolzenberg [1998] 1 WLR 547 at 553–9, [2000] 3 WLR 1376 at 1387. 10 Article 52 of the Conventions. 11 Article 53 of the Conventions. 12 Sections 41 to 46. 13 Sections 41 (2) and (7). 14 Sections 41(3)–(6). 15 Section 41(1). 16 This means an address which the company is required by law to register, notify or maintain for the purpose of receiving notices or other communications—see section 42(8). For the United Kingdom, the registered office is expressly referred to—see section 42(3). 17 Sections 42(3) and 42(6). Different provisions apply for determining the seat of companies for the purpose of determining whether the court has exclusive jurisdiction over proceedings under article 16(2) of the Conventions relating to the formation or dissolution of companies or to decisions of their organs—see section 43. 18 Section 42(7). 19 Sections 41(4)–(5). See also section 43.


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Cases where a claimant may sue the defendant in either the contracting state in which the defendant is domiciled or in a contracting state other than that of the defendant’s domicile 10–06 A number of articles of the Conventions enable the courts of a contracting state to assume jurisdiction in circumstances where there is a connection between the claim and a particular contracting state. The articles that are most likely to affect claims in respect of letters of credit are articles 5 and 6.20 10–07 Article 5 provides that a person domiciled in a contracting state may be sued in another contracting state in a number of different circumstances. The particular provisions likely to be relevant to claims in respect of letters of credit are those relating to contracts, torts and the activities of branches of banks domiciled in other contracting states. 10–08 Paragraph (1) of article 5 provides that in matters relating to a contract, the defendant may be sued “in the courts for the place of performance of the obligation in question” as well as the courts of his domicile. The “obligation in question” is the obligation which forms the basis of the legal proceedings.21 10–09 Disputes involving letters of credit usually centre on the obligation of one or other of the parties to pay money, for example, the obligations of the issuing bank and the confirming bank to pay the beneficiary and the obligations of the issuing bank and the buyer to reimburse22 the confirming (or other paying bank) and the issuing bank respectively. In these circumstances the defendant may be sued in the courts of the place where the obligation to pay the money must be performed.23 If the claim is based on the obligation of an issuing bank or a confirming bank under an acceptance credit to accept the drafts, such bank may be sued in the courts of the place where the obligation to accept must be performed. In the case of a negotiation credit or of unpaid drafts accepted by 20

Other articles provide for jurisdiction in claims relating to liability arising from the use or operation of a ship (article 6A), jurisdiction in matters relating to insurance (articles 7 to 12A) and jurisdiction over consumer contracts (articles 13 to 15). 21 See De Bloos Sprl v Bouyer SA [1976] ECR 1497, Shenavai v Kreischer [1987] ECR 239, Union Transport plc v Continental Lines SA [1992] 1 WLR 15 and Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153 at 164 and 181. It is irrelevant that this leads to jurisdiction in the courts of a country that does not have the closest connection with the dispute—see Custom Made Commercial Ltd v Stawa Melalbau GmbH [1994] ECR 1–2913 and Boss Group Ltd v Boss France SA [1997] 1 WLR 351. See also Royal Bank of Scotland Plc v Cassa di Risparmio delle Provincie Lombarde [1992] 1 Banking Law Reports 251 and Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348. The obligation in question may be an implied term— see Raiffeisen Zentralbank Österreich AG National Bank of Greece SA [1999] 1 Lloyd’s Rep 408. 22 For paragraph (1) of article 5 to apply it is necessary for the obligation to reimburse to be founded on contract, which will usually be the case. A claim based on a restitutionary obligation to reimburse may not fall within paragraph (1), see Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153. 23 Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 at 351–4. The “obligation in question” is not the obligation of the bank to accept conforming documents.


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another bank, the obligation is to make payment.24 In each case the place where such obligation must be performed is determined by the law which governs the contract.25 10–10 The place of performance of the obligation of an issuing or confirming bank to make payment or accept drafts under a letter of credit must be determined from the terms of the credit itself. Where the credit states the place at which it is “available”, this is the place at which the documents must be presented and, in the past would have been the place where payment would have been made or the draft would have been accepted.26 It is, however, necessary to construe the credit as a whole in order to see where it has been agreed that payment will be made. Credits nowadays frequently state that payment will be made in accordance with the instructions of the beneficiary. This situation arose in Chailease Finance Corporation v Credit Agricole lndosuez27 where the credit was expressed to be “valid until November 30,1998 at our counters in Geneva… available by payment at sight…against presentation of the following documents …”. It further provided: Upon receipt at our counters in Geneva of documents in strict conformity with this stand-by letter of credit terms and conditions, we shall pay you as per your instructions, value two Geneva/New York Bank working days. Documents were presented to the bank with payment instructions to the effect that the funds should be paid by transmission to the beneficiary’s account at the Midland Bank in London.28 The documents were rejected. The beneficiary issued proceedings in England on the basis that the place of performance of the bank’s obligation to make payment was London in accordance with the beneficiary’s instructions. The Court of Appeal rejected the bank’s challenge to the 24

Where the obligation is to meet an unpaid draft drawn on another bank, it might be argued that the bank’s obligation is in the nature of a guarantee and that as such the obligation was to “see to it” that the draft is paid—see Domicrest Ltd v Swiss Bank Corporation [1999] QB 548 at 557. If that is so, the obligation could be said to be performable where the bank or the person whose primary obligation it was to pay had its place of business. However, under the terms of articles 9(a)(iii)(b) and 9(b)(iii)(b) the obligations of the issuing and confirming bank are framed as primary obligations and not guarantee obligations. Cf Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 92. 25 Industrie Tessili Italiana Como v Dunlop AG [1976] ECR 1473 at para 13, Custom Made Commercial Ltd v Stawa Metalbau GmbH [1994] ECR 1–2913 at para 26 and Leathertex Divisions Sinetici v Bodetex BVBA [1999] CLC 1976 at para 33. See also Domicrest Ltd v Swiss Bank Corporation [1999] 1 Lloyd’s Rep 80 at 86 and Chailease Finance Corporation v Credit Agricole Indosuez [2000] 1 Lloyd’s Rep 348 at 356. 26 See Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 (discussed at paragraph 4–14 above) and Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep 36 at 37. See also paragraph 6–04 above. 27 [2000]1 Lloyd’s Rep 348. 28 This was the third presentation. The previous presentations had been accompanied by requests to make payment to the beneficiary’s account in Taipei. It was common ground that the beneficiary was entitled to change its payment instructions.


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jurisdiction. It held that the undertaking in the credit to pay as per the beneficiary’s instructions gave the beneficiary the right to nominate the place at which the obligation to make payment had to be performed. The words “available for payment at sight” represented no more than compliance with article 10(a) of the UCP.29 The words “upon receipt at our counters in Geneva we shall pay you” were directed to the time at which the obligation of payment arose. They were not intended to specify the place of payment, as to which the words “as per your instructions value two Geneva/New York Bank working days” were apt and were intended to apply.30 This conclusion gave rise to a further question as to whether article 5(1) of the Conventions contemplates jurisdiction founded on a “floating” place of performance. The Court held that it did and rejected an argument that article 5(1) requires that the place of performance must be ascertainable from the contract itself.31 The Court was mindful of the possibility that the choice might be made in order to found jurisdiction.32 The Judge at first instance had, however, found that the instructions given by the beneficiary were designed to determine the place where the bank was liable to perform. Accordingly there was no evidence that the beneficiary had used the right given to it in the credit in order to establish jurisdiction in an illegitimate way.33 10–11 Where a paying bank is claiming reimbursement from the issuing bank the obligation in question is the obligation to effect reimbursement. Once again it is important to consider the terms of the credit in order to see what has been agreed. Usually there will be a clause in the credit pursuant to which the issuing 29

Article 10(a) provides that all credits must clearly indicate whether they are available by sight payment, deferred payment, acceptance or negotiation—see paragraph 2–06 above. 30 [2000] 1 Lloyd’s Rep 348 at 354–5. Cf Britten Norman Ltd (in liquidation) v State Ownership Fund of Romania [2000] Lloyd’s Rep Bank 315, where the question arose as to the place of payment under a letter of guarantee issued by Barclays Bank. Peter Leaver QC said (at 319): “When the demand was made, in conformity with the terms of the Letter of Guarantee, Barclays’ potential liability crystallised into an actual liability. That liability, absent any contractual term as to the place of payment, was to make payment at the place where the demand was made and where the liability crystallised. The fact that SOF, in its demand, requested that payment should be made into a stipulated account at a Romanian bank was simply an administrative, or mechanical, request, and not a contractual requirement. It would have been perfectly possible for SOF to have stipulated for payment in Romania, but it did not do so. While it is true that, in English law, a debtor is under an obligation to seek out his creditor in order to make payment of his debt, so that Barclays was under an obligation to seek out SOF, that obligation has little to do with the place of payment under a document such as the Letter of Guarantee.” 31 [2000] 1 Lloyd’s Rep 348 at 355–7. 32 Cf MSG v Gravieres Rhenanes [1997] ECR 1–911, where it was held that it was not permissible to agree a place of performance which is designed not to determine the place where the person liable is actually to perform the obligations incumbent upon him, but to establish the jurisdiction of the courts of a particular place in a manner not provided for in the Conventions. 33 [2000] 1 Lloyd’s Rep 348 at 357.


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bank indicates how reimbursement will be made.34 This is a contractual provision and, if inconsistent with the provisions of article 19 of the UCP, it excludes the operation of that provision.35 In Royal Bank of Scotland Plc v Cassa di Risparmio delle Provincie Lombarde36 the Italian defendant issued a credit to be confirmed by the claimant, which provided: Upon receipt of regular documents at your counters please accept beneficiary draft drawn on yourselves and at maturity you are authorised to reimburse yourselves with Manufacturers Hanover Trust Co—New York. The claimant confirmed the credit and accepted the beneficiary’s draft. At maturity it sought reimbursement through the Manufacturers Hanover Trust. In the meantime, acting on the instructions of the applicant, the defendant revoked its reimbursement instructions to Manufacturers Hanover Trust. The claimant sued in England, but the proceedings were stayed on the ground that the obligation on which the claim was based was to be performed in New York. The Court of Appeal held that there was an express agreement as to the manner of reimbursement through an American bank in the United States. There was no obligation on the defendant to pay in any other manner. 10–12 It is clear from Chailease Finance Corporation v Credit Agricole Indosuez37 and Royal Bank of Scotland Plc v Cassa di Risparmio delle Provincie Lombarde38 that it is essential in each case to analyse the terms of the credit in order to determine what the parties have agreed in relation to the place of performance of the obligations of the parties.39 Where it is clear that the beneficiary or paying bank has the right to nominate the place at which payment is to be made, such nomination will enable it to found jurisdiction at that place if payment is not made. 10–13 Paragraph (3) of article 5 provides that in matters relating to tort or delict, the defendant may be sued “in the courts for the place where the harmful event occurred” as well as the courts of his domicile. The place where the harmful event occurs may be either the place where the damage occurs or the 34

For example “we shall cover you in accordance with your instructions at maturity” or “please reimburse yourself from [named reimbursing bank] [x] working days after your SWIFT message notifying us of receipt of compliant documents” or “after receipt of documents strictly in accordance with the credit terms you are authorised to reimburse yourselves with [named bank]”. Reimbursement may be subject to the Uniform Rules for Bank-to-Bank Reimbursements (see paragraphs 4–76 to 4–80 above) 35 Royal Bank of Scotland Plc v Cassa di Risparmio delle Provincie Lombarde [1992] 1 Banking Law Reports 251. 36 [1992] 1 Banking Law Reports 251. See also European Asian Bank AG v Punjab and Sind Bank [1981] 2 Lloyd’s Rep 651 at 656–7 (affirmed [1982] 2 Lloyd’s Rep 356) and Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 91. 37 [2000] 1 Lloyd’s Rep 348. 38 [1992] 1 Banking Law Reports 251. 39 See also Raiffeisen Zentralbank Österreich AG v National Bank of Greece SA [1999] 1 Lloyd’s Rep 408.


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place of the event giving rise to the damage.40 A claim for failure to use reasonable care, which may be brought under English law in either contract or tort, does not fall within article 5(3).41 A restitutionary claim for unjust enrichment is not a claim in tort for the purpose of article 5(3).42 10–14 Usually disputes arising out of the operation of a letter of credit will not give rise to claims in tort. Circumstances where such a claim might arise in connection with a letter of credit are likely to be where the issue or confirmation of the credit is procured by fraudulent misrepresentation or negligent misstatement or where documents are presented which are known by the beneficiary to be false, also giving rise to a fraudulent misrepresentation. In a case of misrepresentation, the place where the harmful event occurs is the place from which the misrepresentation originates and not the place where it is received.43 The place where the damage is suffered may be the place at which the misrepresentation is received, but this need not necessarily be so, for example where the consequence of the receipt of the statement is for action to be taken in a jurisdiction different from that in which the statement is received.44 10–15 Where a credit contract is induced by a misrepresentation, loss is suffered only when a binding agreement is made.45 If a bank is induced to issue a letter of credit in one country and then communcates it to a beneficiary in another country, the question therefore arises as to whether the damage is suffered at the branch of the bank which issues the credit or at the place where it is communicated to the beneficiary. If the contract embodied in the credit becomes binding on communication to the beneficiary,46 it is strongly arguable that this is the place at which the damage is suffered and the fact the bank might ultimately suffer a financial loss at the branch at which the credit is issued is irrelevant.47 10–16 Where documents are presented deceitfully and payment is obtained, the place of the event giving rise to the damage is the place at which the documents 40

Handelskwekerij G.J.Bier BV v Mines de Potasse d’Alsace SA [1978] QB 708, Dumez France v Hessische Landesbank [1990] ECR1–49 and Marinari v Lloyds Bank Plc [1996] QB 217. 41 Source Ltd v T.U.V. Rheinland Holding AG [1998] QB 54. It was held that both claims could be pursued as relating to a contract under article 5(1), but it is doubtful whether this is good law in the light of Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153—see Raiffeisen Zentralbank Osterreich AG v National Bank of Greece SA [1999] 1 Lloyd’s Rep 408 at 411. 42 Kleinwort Benson Ltd v Glasgow City Council [1999] 1 AC 153. It is possible that a restitutionary claim for recovery of money paid as a result of the presentation of documents known by the beneficiary to be fraudulent would fall within article 5(3), as such a claim is arguably for a remedy provided by English law for deceit. 43 Domicrest Ltd v Swiss Bank Corporation [1999] QB 548, not following Minster Investments Ltd v Hyundai Precision & Industry Co Ltd [1988] 2 Lloyd’s Rep 621. See also Alfred Dunhill Ltd v Diffusion Internationale de Maroquinerie de Prestige SARL (unreported—1/2/01). 44 Domicrest Ltd v Swiss Bank Corporation [1999] QB 548. 45 Raiffeisen Zentralbank Osterreich AG v Tranos [2001] ILPr 85. 46 As to which, see paragraphs 4–47 to 4–48 above. 47 Cf Dumez France v Hessische Landesbank [1990] ECR 1–49 and Marinari v Lloyds Bank Plc [1996] QB 217.


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are presented under the credit. The place at which damage is suffered is the place where the bank makes payment under the credit or accepts a draft (as the case may be). The place at which the economic consequence of such payment is felt is probably too remote to be the place where the harmful event occurs.48 10–17 Paragraph (5) of article 5 provides that as regards a dispute arising out of the operations of a branch, agency or other establishment, the defendant may be sued “in the courts for the place in which the branch, agency or other establishment is situated” as well as the courts of his domicile. In the context of letters of credit, jurisdiction is likely to be established under this provision when a branch of a bank, which has a permanent place of business under the direction and control49 of a parent body in another jurisdiction, acts as an issuing or intermediary bank. Disputes arise out of the operations of such a branch (i) in relation to contracts, when they are entered into at that place of business in the name of the parent and (ii) in relation to torts, when the claim is based on the activities in which the branch is engaged.50 10–18 Article 6 of the Conventions provides for the situation where there are connected claims. This special jurisdiction is designed to enable the entire dispute concerning a particular situation to be heard by a single court.51 Paragraph (1) concerns the situation where a claim is made against a number of different defendants. In these circumstances all defendants can be sued in the courts for the place where any one of them is domiciled.52 Paragraph (2) provides that third party proceedings53 can be brought by the defendant against a third party domiciled in another contracting state in the court seised of the original proceedings.54 There must be sufficient “nexus” between the claimant’s claim against the defendant and the defendant’s against the third party to justify overriding the basic right of the third party to be sued separately in his country of domicile.55 Paragraph (3) provides that a defendant may bring a counterclaim arising out of the same contracts or facts on which the original claim is based in 48

Cf Dumez France v Hessische Landesbank [1990] ECR 1–49 and Marinari v Lloyds Bank Plc [1996] QB 217. 49 See De Bloos Sprl v Bouyer SA [1976] ECR 1497 and Somafer SA v Saar-Ferngas AG [1981] ECR819. 50 Somafer SA v Saar-Ferngas AG [1981] ECR 819 and Lloyd’s Register of Shipping v Société Campenon Bernard [1995] ECR 1–961. 51 Kongress Agentur Hagen GmbH v Zeehaghe BV [1990] ECR 1–1845 at 1864. 52 Jurisdiction over defendants not domiciled in the United Kingdom can be assumed as soon as the claim form is issued against the defendant domiciled in the United Kingdom and if the defendants are all named as original parties in the claim form it is not necessary for the defendant domiciled in the United Kingdom to be served first: Canada Trust Co v Stolzenberg [2000] 3 WLR 1376. 53 In England and Wales, now a Part 20 claim under the Civil Procedure Rules. 54 This is subject to the proviso that the original proceedings were not instituted solely with the object of removing the third party from the jurisdiction of the court that would be competent in his case. As to this, see Hough v P & O Containers Ltd [1999] QB 834 at 840–1. 55 This principle will usually be satisfied where the defendant can bring proceedings under Part 20 of the Civil Procedure Rules—see Kinnear v Falconfilms NV [1996] 1 WLR 920.


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the courts in which the original claim is pending even though the claimant is not domiciled in the jurisdiction in which he commenced that claim. The effect of these provisions is that it will usually be possible for all claims arising in connection with a letter of credit to be tried in a single jurisdiction provided that one of the defendants is domiciled in that jurisdiction. Cases where parties have chosen a jurisdiction in which suits should be brought 10–19 Article 17 of the Conventions provides that the courts of a contracting state shall have exclusive jurisdiction where the parties have agreed to settle any disputes in the courts of that state.56 Such an agreement must be in writing, or be evidenced in writing, or be in a form which accords with the practices of the parties, or be in a form which accords with the usages of the particular area of international trade or commerce concerned.57 Letters of credit rarely contain clauses agreeing jurisdiction for the settlement of disputes. 10–20 Article 18 of the Conventions provides that the courts of a contracting state have jurisdiction where the defendant submits to the jurisdiction, save where such submission is made solely to contest the jurisdiction or where another court has exclusive jurisdiction by virtue of article 16. Cases where one contracting state has exclusive jurisdiction 10–21 Article 16 of the Conventions provides for courts of contracting states to have exclusive jurisdiction in certain circumstances, regardless of the domicile of the parties. None of these circumstances is likely to arise in connection with claims relating to letters of credit, although it should be noted that in proceedings concerned with the enforcement of judgments, the courts of the contracting state in which the judgment has been or is to be enforced have exclusive jurisdiction, regardless of the domicile of the parties. 56

If the parties have agreed to submit disputes exclusively to the courts of a particular state, such agreement will be enforced so as to prevent proceedings being enforced in any other state. If the parties’ agreement is non-exclusive, the courts of the chosen state have jurisdiction in addition to any other state in which jurisdiction can be founded under the Conventions—see Kurz v Stella Musical GmbH [1992] Ch 196. 57 Where one party relies on a clause which complies with the requirements of article 17, jurisdiction cannot be established in a different contracting state under article 6: Hough v P&O Containers Ltd [1999] QB 834. Nor will the Court stay proceeding brought pursuant to the clause under articles 21 or 22—see Continental Bank NA v Aeakos Campania Naviera SA [1994] 1 WLR 588. 58 Gubisch Maschinefabrik KG v Palumbo [1987] ECR 4861.


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Claims brought in more than one contracting state 10–22 By articles 21 and 22 of the Conventions provision is made to prevent proceedings in different contracting states concerning the same matters. The object of these provisions is to avoid the duplication of proceedings and the risk of judgments being given that are irreconcilable with one another.58 10–23 Article 21 provides for the situation where proceedings involving the same cause of action59 and between the same parties60 are brought in the courts of different contracting states. In those circumstances any court other than the court “first seised” must stay its proceedings until the jurisdiction of the court “first seised” has been established, after which any other court must decline jurisdiction. 10–24 Article 22 of the Conventions provides for the situation where related actions are brought in the courts of different contracting states. In those circumstances any court other than the court “first seised” may, while the actions are pending at first instance, stay its proceedings. Actions are deemed to be related where they are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.61 If the law of the court “first seised” permits consolidation of related actions and that court has jurisdiction over both actions, any court other than the court “first seised” may decline jurisdiction. 10–25 English courts become “seised” of a claim for the purpose of articles 21 and 22 when the claim form is served.62 59

“Cause of action” comprises the facts and the rule of law relied on as the basis of the action. It is necessary to consider the object of the proceedings. Proceedings for damages for breach of contract on the one hand and for a declaration of non-liability on the other have the same object, namely to determine the question of liability of one party to another and thus involve the same cause of action—see The Tatry [1999] QB 515. 60 In litigation involving multiple parties it is necessary to consider the claims between each claimant and defendant individually and to determine which court was seized first in relation to the claim between those parties—see The Tatry [1999] QB 515. 61 Separate trials and judgments must involve the risk of conflicting decisions in a broad sense. For a court to have the power to stay proceedings under article 22 it is not necessary that the second action involves the risk of mutually exclusive legal consequences—see The Tatry [1999] QB 515. The question must be approached in a broad commonsense manner. Actions may be related in a wide range of circumstances and in deciding whether there is a risk of irreconcilable judgments no distinction is properly to be drawn between the primary or essential issues necessary to establish a cause of action and other matters not essential to the court’s conclusion—see Sarrio SA v Kuwait Investment Authority [1999] 1 AC 32. 62 Dresser UK Ltd v Falcongate Freight Management Ltd [1992] QB 502. Cf Canada Trust Co v Stolzenberg [2000] 3 WLR 1376 at 1384–5 and 1393–4.

Allocation of jurisdiction between different parts of the United Kingdom 10–26 Section 16 of the CJJA makes provision for the allocation of jurisdiction within the United Kingdom. This is done by reference to Schedule 4 to the CJJA. Schedule 4 relects to a substantial degree the provisions of the Conventions applied as though the


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different jurisdictions of the United Kingdom are different states. The provisions of the Conventions discussed above are reproduced in Schedule 4, save that article 17 is modified as to the requirements necessary to establish the enforceability of the agreement concerning jurisdiction and there is no equivalent of articles 21 and 22.

Jurisdiction where the CJJA does not apply Introduction 10–27 The provisions of the CJJA as to jurisdiction do not apply where the defendant to a claim is not domiciled in a state party to the Conventions or the claim does not fall within the scope of the Conventions. In these circumstances the English courts have jurisdiction in 2 circumstances:63 (1) where the defendant is within the jurisdiction at the time when served with proceedings and (2) where the court permits service of proceedings outside the jurisdiction under Part 6.20 of the Civil Procedure Rules 1998. Where service is effected on a defendant in these circumstances the defendant can apply to have the proceedings stayed on the basis that there is a more appropriate court in which the claim can be tried.64 Presence within the jurisdiction 10–28 In the case of an individual, service can take place where the person concerned is within the jurisdiction even though he does not have the degree of residence or connection necessary to render him domiciled in the jurisdiction within the meaning of section 41 of the CJJA. In the case of a company, it is present in the jurisdiction if it has established a place of business in the jurisdiction.65 This means that a beneficiary or intermediary bank claiming against an overseas issuing bank can establish jurisdiction if the issuing bank maintains an office in the jurisdiction.66 A defendant can also be present in the jurisdiction through an agent where the claim is in respect of a contract made within the jurisdiction with or through the defendants agent and at the time when application is made for service the agent’s authority has not been terminated or he is still in a business relationship with the principal.67 63

Leaving aside jurisdiction founded for the purpose of a claim in rem. For the principles upon which the court exercises its discretion to stay proceedings, see Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460 and Lubbe v Cape Plc [2000] 2 Lloyd’s Rep 383. Examples of unsuccessful applications for a stay in a letter of credit case, see Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227 Arab Banking Corporation v First Union National Bank (unreported—8/3/01). 65 As to service, see section 695 of the Companies Act 1985. 66 See, for example, Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227. 67 See Part 6.16 of the Civil Procedure Rules 1998. An application to permit service on the agent must be made. 68 Provision is also made for service out of the jurisdiction of Part 20 claims—see rule 6.20(3)(3A). 64


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Permission to serve proceedings outside the jurisdiction 10–29 The court only grants permission to serve proceedings on a defendant outside the jurisdiction if the claim is one that can be brought within the provisions of rule 6.20 of the Civil Procedure Rules 1998. This provides a number of grounds on which permission can be granted, the most significant of which for the purpose of letters of credit are those based on claims relating to contracts and claims in tort68 10–30 So far as contracts are concerned, permission to serve out of the jurisdiction may be given if a claim is made in respect of a contract where the contract (a) was made within the jurisdiction, (b) was made by or through an agent69 trading or residing within the jurisdiction, (c) is governed by English law, or (d) contains a term to the effect that the court shall have jurisdiction to determine any claim in respect of the contract.70 Permission may also be given where a claim is made in respect of a breach of contact committed within the jurisdiction.71 The issue of whether a contract is governed by English law is discussed in detail in the section below on conflict of law.72 As stated above73, contracts arising from the issue of credits do not usually contain jurisdiction clauses. 10–31 Service out of the jurisdiction in a claim between a beneficiary and an issuing bank was considered in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran74, where Bank Markazi, an Iranian bank, issued a credit in favour of the claimant. The credit was advised to the claimant through the London office of Bank Melli, another Iranian Bank.75 It was payable at sight on presentation of documents to Bank Melli in London. Payment was not made against the documents on presentation. The claimant obtained permission to issue and serve proceedings out of the jurisdiction on the basis that (i) the contract between Bank Markazi and the claimant was made within the jurisdiction and/or (ii) the contract was made by or through Bank Melli as agent within 69

This is a reference to the defendant’s agent, not the claimant’s—see Bank ofBaroda v The Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 95–6 70 Rule 6.20(5). Permission will also be granted where the claim is made for a declaration that no contract exists where, if the contract was found to exist, it would comply with the conditions mentioned—see rule 6.20(7). 71 Rule 6.20(6). 72 See paragraphs 10–42 to 10–55 below. 73 Paragraph 10–19. 74 [1994] 1 AC 438. 75 The credit was not confirmed. The position would not have been different if there had been confirmation, save that the beneficiary would have had a remedy against the resident confirming bank and would have been less likely to want to sue the overseas issuing bank. 76 It disputed the jurisdiction on the basis that the claim against it was not strong enough to justify the grant of permission to serve out of the jurisdiction, as to which see paragraph 10–35 below. 77 See paragraphs 10–42 to 10–48 below. The first and second contentions are supported by Westpac Banking Corporation v Commonwealth Steel Co Ltd [1983] 1 NSWLR 735, but see the discussion at paragraphs 4–47 to 4–48 above.


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the jurisdiction for Bank Markazi, which was out of the jurisdiction and/or (iii) the claim was in respect of a breach of contract committed within the jurisdiction. Bank Markazi accepted that jurisdiction could be founded in one or more of these ways and so no ruling was obtained on which applied.76 The claimant’s third contention appears to be correct77, however, and in the common situation that Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran epitomised a beneficiary will be able to establish jurisdiction in England. 10–32 As between the issuing and intermediary banks, claims most likely to arise concern the reimbursement of the intermediary by the issuing bank. Usually reimbursement takes place through a third party bank, usually in the United States if the credit is a dollar credit. It is unlikely therefore that it will be possible to ground jurisdiction on a breach of contract committed within the jurisdiction. Unless English law governs the credit, to establish jurisdiction it will be necessary to show that the contract was made within the jurisdiction or was made by or through an agent trading or residing within the jurisdiction. In Bank of Baroda v Vysya Bank Ltd78 the defendant issued a credit in favour of an Irish company with a London office. The credit was to be advised and confirmed by Citibank, London. Citibank refused to do so. The credit was then advised by National Westminster Bank, which also refused to confirm it. The defendant approached the claimant, which agreed to confirm. Documents were presented. The claimant accepted the documents and sought reimbursement from the defendant The defendant refused to reimburse. The question arose whether jurisdiction could be maintained on the basis that the contract was made within the jurisdiction.79 Both the claimant and the defendant were Indian banks. The claimant was first approached to confirm the credit through an office in India. The defendant alleged that the claimant agreed to confirm the credit in a conversation that took place between employees of the banks in India. The claimant alleged that the contract was made when it acted upon a request sent to its London office to confirm the credit by advising the beneficiary of its confirmation of the credit a day later. Mance J held that the claimant had a “good arguable case”80 that the contract was made in London. In so doing he regarded an alternative contention by the defendant that the contract was only made when 8 days after advising the beneficiary that it had confirmed the credit the claimant communicated to the defendant that it had negotiated the documents presented by the beneficiary as unlikely. It can be seen from this that determination of whether contracts between issuing 78

[1994] 2 Lloyd’s Rep 87. In addition to the points discussed in this paragraph, there was an issue as to the proper law of the contract, which is discussed in paragraphs 10–47 to 10–48 below. 79 The case also raised an issue as to whether the contract was made by or through an agent within the jurisdiction. On the facts the judge was able to deal with this summarily 11994] 2 Lloyd’s Rep 87 at 95–6. 80 See paragraph 10–34 below. 81 The issue was described by Mance J in Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 94 as one of “considerable complexity”. 82 [1994] 2 Lloyd’s Rep 87.


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and intermediary banks are made within the jurisdiction involves a close analysis of the circumstances in which the contract was made.81 Absent other evidence as to where the contract is made, however, Bank of Baroda v Vysya Bank Ltd82 shows that, where an intermediary bank receives and acts on an instruction from the issuing bank in England, this can be sufficient to ground jurisdiction in England. 10–33 So far as torts are concerned, permission to serve out of the jurisdiction may be given where damage is sustained within the jurisdiction or the damage sustained results from an act committed within the jurisdiction.83 This provision now reflects article 5(3) of the Conventions84 and similar principles apply. 10–34 The claimant must show that it has a “good arguable case” that the claim is one that falls within the provisions of rule 6.20.85 This means that the court does not have to be satisfied on the civil standard of proof about whether each aspect of the provision relied upon is proved. It can be equated to terms such as “a strong argument” or “a strong case for argument”.86 Bank of Baroda v Vysya Bank Ltd87 is an illustration of this. In that case Mance J was unable to determine on the written evidence before him whether or not an oral contract had been made in India. However, he was sufficiently doubtful about whether such a contract had been made to hold that there was a good arguable case that the contract had been made upon the claimant acting upon the request received in London. 10–35 The claimant must also show that there is a serious issue to be tried between the parties in relation to the claim in respect of which he seeks permission to serve out of the jurisdiction. This test is not as high as establishing a “good arguable case”. If there is no serious issue to be tried it cannot be a proper exercise of discretion to grant permission to serve out of the jurisdiction.88

83

Rule 6.20(8). See paragraphs 10–13 to 10–16 above. 85 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 (a case concerning a dispute about a letter of credit—for the subsequent proceedings, see [1999] 1 Lloyd’s Rep 36). 86 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 at 453. 87 [1994] 2 Lloyd’s Rep 87. See paragraph 10–32 below. 88 Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 at 453 at 456–7. 89 For the principles upon which the court exercises its discretion to stay proceedings, see Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460. For examples of unsuccessful applications to set aside service in letter of credit cases, see European Asian Bank AG v Punjab and Sind Bank [1981] 2 Lloyd’s Rep 651 (affirmed [1982] 2 Lloyd’s Rep 356) and Bank ofBaroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87. 90 Questions may also arise in relation to drafts presented for acceptance pursuant to a credit, but these are matters covered by rules of the conflict of laws relating to negotiable instruments, which it is out of place to discuss here. These matters are provided for in 84


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10–36 Even if the claimant can show that there is a good arguable case that the claim falls within one of the provisions of rule 6.20 and that there is a serious issue to be tried on the merits, the court may set aside service of the proceedings if there is another more appropriate court in which the claim can be tried.89 Conflict of Laws Introduction 10–37 This section deals with questions of conflict of laws in relation to the contracts arising upon the issue of the credit. In this connection it is important to remember when considering what law applies in connection with a letter of credit that the issue of a credit gives rise to a number of different autonomous contracts and that the position in relation to each contract must be considered separately, albeit that a conclusion as to the law governing one contract may point to a similar conclusion in relation to another. Thus it is misleading to speak of the proper law of the contract in regard to a letter of credit. The whole transaction may require the application of different proper laws. section 72 of the Bills of Exchange Act 1882—see generally Byles on Bills of Exchange, 25th ed, chapter 24; Chalmers & Guest on Bills of Exchange, 15th ed, paras 1751 and following; Dicey & Morris, The Conflict of Laws, 13th ed, pp 1434 and following. A case concerning the problems that can arise in relation to drafts issued under letters of credit was Guaranty Trust Company of New York v Hannay [1918] 1 KB 43 (reversed [1918] 2 KB 623; as to the US proceedings, see 210 Fed Rep 810). There the seller in the United States discounted with the plaintiffs his draft on the defendant’s bank. The bill of lading was a forgery, no goods having been shipped under it The question which arose was how far the case was affected by American law, whether the validity in form of the draft or the rights of the parties was governed by the law of the place in which the seller carried on business, the law of the place in which the holder of the draft carried on business, or the law of the place in which the bank on which it was drawn carried on business (similar problems might present themselves as to the validity of any subsequent negotiation of the draft). The defendant first sued the plaintiffs in New York for recovery of the money paid under mistake of fact and succeeded, it being held that the draft was conditional on the genuineness of the bill of lading, but the decision was overruled on appeal on the ground that the case was governed by English law. Thereupon the plaintiffs claimed (among other things) a declaration in England that the draft was an unconditional bill of exchange within the meaning of the Bills of Exchange Act 1882, that it was unconditionally accepted and that in presenting the acceptance with the bill of lading attached they did not warrant the genuineness of the bill according to the law of England. Bailhache J found that the enforceability of the bill fell to be determined according to “American law” and proceeded to determine the effect of “America law”. In the Court of Appeal Bailhache J’s decision as to the law to be applied was not appealed, but the Court of Appeal reversed his decision as to the effect of “American law”. See also Bank of Nova Scotia v San Miguel 214 F 2d 102 (1st Cir. 1954). 91 For the purpose of identifying the law applicable under the Convention, England and Wales, Scotland and Northern Ireland are considered separate states—see article 19 of the Convention. 92 Although the contracting states which are parties to the Rome Convention are the member states of the European Union, the law specified by the Convention as governing a contractual obligation must be applied whether or not it is the law of a contracting state—see article 2 of the Convention. The Convention rules therefore form the law of the United Kingdom in relation to the


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determination of conflict issues for all contracts and replace the common law rules. Questions as to the meaning of the Convention can be

The Rome Convention 10–38 The Contracts (Applicable Law) Act 1990 now provides for the manner in which the courts of the United Kingdom91 must determine the law governing obligations arising out of contracts. The 1990 Act provides that the Rome Convention on the law applicable to contractual obligations has the force of law in the United Kingdom.92 The Rome Convention sets out rules governing the choice of the law that applies to contractual obligations.93 Determination of the applicable law Introduction 10–39 Article 3(1) of the Convention provides that a contract shall be governed by the law chosen by the parties. It is rare for the contracts arising out of the issue of a letter of credit to contain a choice of law clause, although such a clause is more likely to be included in the contract between the issuing bank and the buyer pursuant to which the credit is issued.94 In the light of this the rules of the Convention applicable where there has been no choice of law must be applied. The rules are set out in article 4. 10–40 Where parties have not chosen the law that governs their contract, article 4(1) provides that the overriding principle is that the contract is governed by the law of the country with which it is most closely connected.95 In the case of a letter of credit, where all parties act in the course of a trade or profession, a presumption must be made under article 4(2) that the contract is most closely connected with the country where the place of business of the party who is to effect the performance which is characteristic of the contract is, at the time of conclusion of the contract, situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.96 Article 4(5) provides, however, that such presumption must be disregarded if either (i) the characteristic performance of the contract cannot be determined or (ii) it appears from the circumstances as a whole that the contract is more closely connected with another country. The law governing the contract between the applicant for the credit (the buyer) and the issuing bank 10–41 It is convenient to deal first with the contract between the buyer and the issuing bank pursuant to which the credit is opened. The performance that is characteristic of this contract is the issue of the letter of credit, an act to be effected by the issuing bank. By virtue of article 4(2) the presumption is that the law governing the contract will be that of the principal place of business of the bank, or if it is agreed that the credit will be issued through a branch in a country


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referred to the European Court of Justice and regard must be had to the principles laid down by the European Court of Justice in interpreting the Convention—see section 3 of the 1990 Act. For discussion of the application of the Convention, see Dicy & Morris, The Conflict of Laws, 13th ed, chapters 32 and 33 and in particular paras 33–301 to 33–305 for discussion of its application to letters of credit.

different from the principal place of business, the place of business of the branch concerned. This presumption reflects the commercial reality of the transaction and it would be a very unusual case that gave rise to a good reason for the presumption being disregarded under article 4(5). The law governing the contracts arising on the issue and confirmation of the credit 10–42 In the typical situation there will be a contract between the issuing bank and the seller embodied in the credit, a contract between the confirming bank and the seller embodied in the confirmation and a contract between the issuing bank and the confirming bank arising from the confirming bank acting on the issuing bank’s instruction to confirm. The law applicable to each ought therefore to be determined separately. The courts have, however, approached the question of the law governing each contract according to 2 guiding principles: (a) the commercial purpose of the transaction is to provide the beneficiary with the right to receive payment in a particular country (usually that in which he carries on business) and accordingly his rights under the credit should be determined in accordance with the law of that country and (b) there are strong commercial reasons for each of the 3 contracts associated with the credit referred to above to be governed by the same law.97 10–43 The principles can first be seen from the judgment of Ackner J in Offshore International SA v Banco Central SA,98 in which a letter of credit was issued by a Spanish bank through a bank in New York. The credit was available by draft drawn on the New York bank at sight. The credit was not confirmed by the New York bank, which was thus acting as agent for the Spanish bank to negotiate, accept and pay the claimant’s drafts upon delivery of the stipulated documents. Applying the principle that in the absence of any express provision the proper law was that with which the transaction had its closest connection,99 Ackner J held that since the credit was issued through a New York bank and payment was to be made in US dollars against documents presented in New York, the proper law was that of New York, not Spain from where the credit emanated. He said:100 93

The application of the law of any country specified by the Convention means the application of the rules of law in force in that country other than its rules of private international law—see article 15 of the Convention. Renvoi is therefore excluded. 94 As to which, see paragraph 10–41 below. 95 A severable part of the contract that has a closer connection with another country may by way of exception be governed by the law of another country. 96 There are other presumptions set out in articles 4(3) and 4(4), but these do not apply to contracts arising under letters of credit. 97

For a summary of the cases, see Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227.


98

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[1976] 2 Lloyd’s Rep 402. The common law principle applicable prior to the coming into force of the Contracts (Applicable Law) Act 1990. For the application of this principle in Singapore, see Agritrade International Pte Ltd v Industrial and Commercial Bank of China [1998] 3 SLR 211 and Sinotani Pacific Pte Ltd v Agricultural Bank of China [1999] 4 SLR 34. In the latter case, the Singapore Court of Appeal held that the credit was governed by the law of the place of business of the issuing bank (China) on the ground that the credit had to be performed there by acceptance of a draft. Presentation was, however, to take place in Singapore and it is strongly arguable that the court should have treated this as the most material aspect of performance and held that Singapore law governed the contract as a result. 100 [1976] 2 Lloyd’s Rep 402 at 404. 99


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…on the side of New York are all matters of performance, whereas, in relation to Spanish law, Spain and a Spanish bank was the source of the obligation. In my judgment it is with New York that the transaction has its closest and most real connection. Moreover… I am satisfied that [counsel for the claimant] was correct in his contention that very great inconvenience would arise, if the law of the issuing bank were to be considered the proper law. The advising bank would have constantly to be seeking to apply a whole variety of foreign laws. Indeed it is very difficult to follow exactly what would flow from [counsel for the defendant’s] submission, if the advising bank was (as was not this case) to confirm the letter of credit…. The view which I have expressed is, however, supported by the Fourth Edition of the Law of Bankers’ Commercial Credits by the late Mr Gutteridge and by Mr Maurice Megrah at page 196 where the following statement is made— Men of business do not, perhaps, often express their choice of law either openly or by inference and very frequently it becomes the duty of the Court to ascertain, not what the parties intended to be the proper law of the contract, but what law would be selected by reasonable men of business in all the circumstances of any particular transaction. In this event it is submitted that the presumption must be that matters connected with the performance by the banker of his contract under a commercial credit are to be regulated by the law prevailing at the place of performance, ie the law of the territory in which the seller’s draft is presented to the Bank for acceptance or payment. The significant features of this case were that the documents were to be presented in New York and drafts were to be drawn on the New York bank and payable at sight in New York. To speak, however, of the place of performance may be misleading unless the phrase is defined. Much may depend upon what has to be performed. For instance, where a credit is issued from, say, Buenos Aires through a London bank in favour of an English exporter, the place of performance is probably Buenos Aires if all that the London bank has to do is advise the credit to the beneficiary and to receive the documents for transmission to the issuing bank.101 If the London bank is called upon to pay against or negotiate the beneficiary’s draft, the place of performance may well be said to be London, because payment or negotiation in London is final if the draft and documents are in order, the Buenos Aires bank being bound and reimbursement being a matter of form. 101

If the documents have to be presented in Buenos Aires in the circumstances postulated the London branch will be acting as agent for the beneficiary in sending them to Buenos Aires. If the credit provides for documents to be presented at the London bank, however, that bank will usually have authority to determine whether they comply with the credit. In accordance with the principles discussed below, that will usually cause the credit to be governed by the law of the place at which the documents are to be presented, that is to say, English law.

10–44 Ackner J’s approach in Offshore International SA v Banco Central SA102 was approved by the Court of Appeal in Power Curber International Ltd v National Bank of


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Kuwait,103 in which the irrevocable credit of the Kuwaiti bank was addressed to the Bank of America in Miami in terms that included the following: …please advise our irrevocable credit through North Carolina National Bank in Charlotte, North Carolina in favour of [the claimants]…available by drafts without recourse as shown below on the opener… Payment terms: 25% of the ex-works value to be paid against presentation of documents… Remaining 75% of the ex-works value after one year of the date of shipments…. In reimbursement of your negotiations under this credit, please draw on our account with Bank of America (International), New York, in respect of sight payment… The role of the North Carolina National Bank is not clear. It may only have been required to advise the credit to the claimants, which is consistent with the fact that the letter of credit appears to authorise the Bank of America to negotiate (the credit provided for reimbursement of Bank of America). However, it is not clear from the recitation of the facts in the judgments to whom (Bank of America or North Carolina National Bank) the documents were presented or who made the first 25% payment at sight, although the judgments proceed on the basis that presentation was made to the North Carolina Bank, which made the first 25% payment. This seems to be confirmed by the fact that in relation to the drafts for the second 75% payment National Bank of Kuwait wrote to the North Carolina National Bank that: relative usance draft…has been accepted by our principals. We shall not fail to remit to you the above mentioned amount through Morgan Guaranty Trust Co New York… Lord Denning MR said:104 In my opinion [the proper law] was the law of North Carolina where payment is to be made (on behalf of the issuing bank) against presentation of documents. 102

[1976] 2 Lloyd’s Rep 402. [1981] 2 Lloyd’s Rep 394. See also Minories Finance Ltd v Afribank Nigeria Ltd [1995] 1 Lloyd’s Rep 134. Cf Westpac Banking Corporation v Commonwealth Steel Co Ltd [1983] 1 NSWLR 735 at 742. 104 [1981] 2 Lloyd’s Rep 394 at 398. 105 [1981] 2 Lloyd’s Rep 394 at 399. 103


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Griffiths LJ said:105 Under the letter of credit the bank accepted the obligation of paying or arranging payment of the sums due in American dollars against presentation of documents at the sellers’ bank in North Carolina. The bank could not have discharged its obligation by offering payment in Kuwait. 10–45 A similar approach was taken by Robert Goff J in European Asian Bank AG v Punjab and Sind Bank106 in relation to a credit issued by a bank in India in favour of Singapore sellers and advised through a bank in Singapore. A distinction was that the credit was confirmed by the Singapore advising bank. Robert Goff J held that the law governing the credit was Singapore law. He said:107 True, the letter of credit was issuing by an Indian bank; but it was notified through a correspondent bank in Singapore, which later confirmed the credit, and was issued in favour of sellers in Singapore, who were advised of it through another bank in Singapore. The letter of credit was payable against documents; it contemplated negotiation of documents through certainly one bank in Singapore…, in which event payment to the beneficiary would have been made in Singapore, …At all events, payment would not have been made in India. In these circumstances, I do not consider that the governing law of the letter of credit was Indian law; most probably it was the law of Singapore—cf Offshore International SA v Banco Central SA… 10–46 These three cases can be taken to establish that the place with which the contract between the issuing bank and the beneficiary embodied in the credit is most closely connected is the place at which the documents will be presented and at which authority has been given to make payment of sums due or to accept drafts drawn under the credit.108 For these purposes it is not necessary for the bank so nominated to be under obligation to the beneficiary. The important matter is that such bank has accepted an obligation for “arranging payment”109 as agent for the issuing bank.110 The same principles apply to determination of the law governing the contract between a confirming bank and a beneficiary. 106

[1981] 2 Lloyd’s Rep 651, affirmed [1982] 2 Lloyd’s Rep 356. This case was decided less than a month after Power Curber International Ltd v National Bank of Kuwait [1981] 2 Lloyd’s Rep 394 and without reference to it. 107 [1981] 2 Lloyd’s Rep 651 at 656–7. These comments were repeated by Ackner LJ in the Court of Appeal [1982] 2 Lloyd’s Rep 356 at 368. 108 See Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227 at 237, which, although decided in 1994, concerned credits issued prior to the coming into force of the Contracts (Applicable Law) Act 1990. Relying on the principles stated in the cases discussed above and Bank ofBaroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 (discussed below), Cresswell J held that the contract between the issuing bank and the confirming


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bank was governed by the same law as that between the issuing bank and the beneficiary and the confirming bank and the beneficiary. See also Attock Cement Co Ltd v Romanian Bank for Foreign Trade [1989] 1 Lloyd’s Rep 572 at 580, Turkiye is Bankasi AS v Bank of China [1993] 1 Lloyd’s Rep 132 at 135 and Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470 at 473 (all involving performance guarantees or counter guarantees) and Batstone & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd [1996] CLC 1902 at 1910 (contracts relating to documentary collections). 109 As Griffiths LJ put it in Power Curber International Ltd v National Bank of Kuwait [1981] 2 Lloyd’s Rep 394 (paragraph 10–44 above). 110 One situation not covered by these cases is that where payment is to be made wholly by time drafts drawn on the issuing bank or the buyer (cf Power Curber International Ltd v


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10–47 In Bank ofBaroda v Vysya Bank Ltd111 the principal question that arose in the context of whether the English court had jurisdiction was as to the law that governed the relationship between an issuing bank and a confirming bank. In order to do this Mance J had to consider the principles of the Rome Convention. He decided that the characteristic performance of the contract between the issuing and confirming banks under article 4(2) of the Rome Convention is the addition and honouring by the confirming bank of its confirmation of the credit in favour of the beneficiary and that the liability of the issuing bank to reimburse or indemnify the confirming bank is consequential on the character of the contract. Having referred to the report on the Rome Convention by Professors Giuliano and Lagarde,112 Mance J said:113 …in the present case, even if the contract was concluded in India its whole focus was upon Bank of Baroda’s City of London branch acting as confirming banker under the credit advised to the beneficiary in London. The reference to an agent instructed to undertake his activity in a particular country is directly relevant. Also of some assistance by way of analogy (though not exact since a confirming bank does not act as guarantor of the issuing bank but assumes separate liabilities in identical terms) is the comment that the performance characteristic of a guarantee is always the guarantor’s performance (ie the giving and honouring of the guarantee) whether one looks at his contract with the creditor or the debtor. The same is in my view true of a confirming bank’s performance (the addition and honouring of its confirmation), whether one looks at its contract with the beneficiary or with the issuing bank. It followed from this conclusion that the law that governed the contract was the law of the place of business of the confirming bank and that since that performance was to be effected though the Bank of Baroda’s London office the presumption was that English law governed the contract. 10–48 Vysya Bank argued, however, that the presumption should be displaced pursuant to article 4(5) of the Convention because the contract was more closely connected with India. In order to determine this issue Mance J considered what law governed the contract between the issuing bank and the beneficiary. It was National Bank of Kuwait [1981] 2 Lloyd’s Rep 394 where 25% was to be paid at sight). In the light of the approach taken in the cases, however, it is difficult to see a court deciding that this factor alone could change the place with which the credit would otherwise have its closest connection. See, however, the comments of Waterhouse J in Power Curber International Ltd v National Bank of Kuwait [1981] 2 Lloyd’s Rep 394 at 401, where he said: “In the absence of any previous binding authority I have not been persuaded that the debt due under an unconfirmed letter of credit can be regarded as situated in North Carolina merely because there was provision for payment at a branch of a bank used by the sellers in Charlotte.” 111 [1994] 2 Lloyd’s Rep 87. The facts of the case are set out in paragraph 10–32 above. 112 OJ C282, 31.10.80. Reference to the report is permitted pursuant to section 3(3) of the Contracts (Applicable Law) Act 1990. 113 [1994] 2 Lloyd’s Rep 87 at 92.


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clear that under the common law principles established in Offshore International SA v Banco Central SA,114 Power Curber International Ltd v National Bank of Kuwait115 and European Asian Bank AG v Punjab and Sind Bank116 that the law governing this contract would have been English law. Mance J therefore had to consider whether the application of the Rome Convention changed the position. He had no difficulty in accepting that the presumption in article 4(2) produced the result that Indian law applied to this contract because the performance characteristic of the contract was Vysya Bank’s issue of the credit in London117 and Vysya Bank’s principal place of business was in India. The question therefore arose whether the provisions of article 4(5) should be applied. Mance J said118: In the present case the application of article 4(2) would lead to an irregular and subjective position where the governing law of a letter of credit would vary according to whether one was looking at the position of the confirming or the issuing bank. It is of great importance to both beneficiaries and banks concerned in the issue and operation of international letters of credit that there should be clarity and simplicity in such matters. Article 4(5) provides the answer. The Rome Convention was not intended to confuse legal relationships or to disrupt normal expectation in the way implicit in Vysya’s submissions. It follows from this that the contracts between the issuing bank and the beneficiary, the confirming bank and the beneficiary and the issuing bank and the confirming bank are each governed by the same law. In normal circumstances this will be the law of the place at which the credit is available for negotiation of documents and payment, which, where the credit is confirmed, will usually be the law of the place at which the confirmation is made.119 114

[1976] 2 Lloyd’s Rep 402. [1981] 2 Lloyd’s Rep 394. 116 [1981] 2 Lloyd’s Rep 651, affirmed [1982] 2 Lloyd’s Rep 356. 117 It is unclear why Mance J held that the performance characteristic of the contract was the issue of the letter of credit. It was only when the letter of credit was issued that a contract between the issuing bank and the beneficiary arose. Article 4(2) directs attention to the party who is to effect the performance that is characteristic of the contract. This is either performance of the payment obligation contained in the credit or the presentation of documents under the credit. Since the purpose of the credit is to provide payment to the beneficiary, the bank’s obligation to pay is the characteristic performance, the presentation of documents being a condition to be complied with before such obligation must be met. This further analysis does not therefore alter the conclusion to which Mance I came. 118 [1994] 2 Lloyd’s Rep 87 at 93. 119 Where there are back-to-back credits (as to which, see paragraphs 5–21 to 5–23 above), there is much to be said for credits being subject to the same law. To achieve such an outcome, it is necessary to modify the usual application of the principles stated above in relation to one of the credits (assuming that they are available in different countries). In this situation the appropriate outcome would be to determine the law that governs the credit issued on the application of the buyer in favour of the seller in accordance with the principles stated above and to hold that the credit issued in favour of the seller’s supplier 115


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The position where the credit is transferable or its benefit is assigned 10–49 This approach to determination of the governing law may cause difficulty where the credit is transferable. Often credits will be transferred in favour of a second beneficiary in a country different from that of the first beneficiary. Article 48(j) of the UCP provides that the first beneficiary may request that payment or negotiation be effected to the second beneficiary at the place to which the credit has been transferred.120 The effect of this may be that the effective place of performance of the issuing bank’s obligation under the credit is in a different country from that originally provided for in the credit and accordingly that the credit might be more closely connected with that country.121 It is within the issuing bank’s reasonable contemplation that payment or negotiation might take place in a different country, although the issuing bank might not know where that is when it issues the credit. Nevertheless the better view is probably that the credit is governed by the law of the place provided for payment and negotiation in the credit. This is likely to be the place at which the credit is first advised to the beneficiary and a binding contract will come into existence at that point. Further, there is no obligation on the beneficiary to transfer the credit or request that payment or negotiation be effected at a different place. Any other conclusion will mean that the contract is governed by a law determined effectively by the beneficiary and over which the issuing bank has no say or control. This cannot be the intention of the parties. If the advising bank confirms the credit, the position is even clearer. 10–50 Article 12 of the Convention deals with assignment of rights. It provides that the mutual obligations of assignor and assignee are governed by the law which applies to the contract between the assignor and assignee.122 However, the law governing the right to which the assignment relates determines assignability, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and any question whether the debtor’s obligatons have been discharged.123 These provisions have not yet been considered in the context of the transfer of a letter of credit or the assignment of the right to receive payment under a credit.124 is governed by the same law (which will usually be the law of the place of business of the correspondent issuing bank). 120 See paragraph 5–11 above. 121 It is not clear whether Cresswell J had this problem in mind or intended to deal with it when he said in Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227 at 237: “In my view the governing law is the law of Hong Kong (a) whether or not the beneficiary presented direct or through a presenting bank; and (b) whether or not a presenting bank negotiated/discounted the documents; and (c) whether or not the documents presented to the confirming bank conformed with the credit or did not conform…” 122 Article 12(1). 123 Article 12(2). 124 As to which, see chapter 5. For the application of article 12 to the assignment of a marine insurance policy, see Raiffeisen Zentralbank Österreich AG v Five Star General Trading LLC [2001] 1 Lloyd’s Rep 597.


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10–51 Since article 48 of the UCP regulates the conditions upon which transfer can take place and the consequences of it, it is unlikely that any issue will arise to which the answer will depend on what law governs the obligations concerned. If such an issue did arise, any question as between the transferee and the issuing or confirming bank would be determinable according to the law that governed the obligations of the bank under the credit.125 As between the transferor and the transferee, it might be expected that the same law will apply. If it can be said that the rights of the transferor and transferee between themselves derive from the terms of the credit itself, then the law governing the credit will govern their rights as between themselves.126 If, on the other hand, the transfer constitutes “a voluntary assignment of a right against another person” within the meaning of article 12, reaching this conclusion might be more difficult.127 10–52 It is arguable, however, that transfer of a letter of credit is not such an assignment. First a transfer to a second beneficiary is not a complete assignment of the first beneficiary’s rights under the credit. Secondly the effect of transfer is to confer on the second beneficiary particular rights provided to him by the credit itself. The second beneficiary’s rights derive from and are inherent in the credit. They do not derive solely from the act of transfer. The transfer nominates the person who will acquire such rights, albeit that it may modify them to a limited extent. 10–53 If the position is that a transfer is an assignment within the meaning of article 12, the obligations of first and second beneficiaries between themselves will be determined according to the law governing their contract, which must be determined under the provisions of the Convention. In this respect it is important to consider whether the obligations deriving from the transfer are based on a different contract from the contract of sale between the second beneficiary and the first beneficiary. According to the general principle of autonomy,128 this will be so. It will then be necessary to determine the country with which the contract is most closely connected. That will depend on what performance is characteristic of the contract, unless it can be shown that either the characteristic performance cannot be determined or the contract is more closely connected with another country. Determining the performance that is characteristic of the contract is itself difficult. Is it causing the transfer to be effected or is it the procuring and presentation of documents pursuant to the contract? Either answer could provide for the application of a law different from the law governing the credit. It is likely, however, that the court will apply the 125

As to which, see paragraph 10–49 above. Cf Dicey & Morris, The Conflict of Laws, 13th ed, p 997, Rule 118(2), which states: “But in [cases other than those provided for in article 12 of the Rome Convention], the validity and effect of an assignment of an intangible may be governed by the law with which the right assigned has its most significant connection.” 127 For a discussion of the legal nature of a transfer, see paragraph 5–20 above. 128 See paragraph 1–25 above. 126


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reasoning of Bank of Baroda v Vysya Bank Ltd,129 disregard the presumption and conclude under article 4(5) that the contract is more closely connected with the country of the law that governs the credit. 10–54 An assignment of the right to receive the proceeds of the credit is clearly “a voluntary assignment of a right” within the meaning of article 12 and accordingly article 12 will govern the situation. The assignee’s right to receive payment will therefore be governed by the law applicable to the credit. The mutual obligations of assignor and the assignee will, however, be determined in accordance with the law governing their contract. Such a contract will often contain an express choice of the law provision. If it does not the law of the place of business of the assignor will apply, since the assignment of the debt is the performance characteristic of the contract. In the case of an assignment of the right to receive the proceeds of the credit there is little reason to conclude that the contract of assignment is more closely connected with the country whose law governs the credit. Matters governed by the applicable law 10–55 The applicable law of each contract arising from the issue and confirmation of a credit will govern the interpretation and performance of the contract, the consequences of breach (including assessment of damage), whether a claim is time barred and the consequence of the contract being a nullity.130 The existence or validity of the contract or of any term in it must be determined by the law that would govern it under the Convention if the contract or term were valid.131 A contract is formally valid if its formal requirements satisfy the requirements of the applicable law or the requirements of the law of a country in which any party is at the time when the contract is made.132 In relation to the manner of performance and the steps to be taken in the event of defective performance regard must be had to the law of the country in which performance takes place.133 If the applicable law contains rules raising presumptions of law or determining the burden of proof, these must be applied.134 129

[1994] 2 Lloyd’s Rep 87 (discussed at paragraphs 10–47 to 10–48 above). See also Bank of Credit & Commerce Hong Kong Ltd (in liquidation) v Sonali Bank [1995] 1 Lloyd’s Rep 227, Wahda Bank v Arab Bank Plc [1996] 1 Lloyd’s Rep 470 and Batstone & Firminger Ltd v Nasima Enterprises (Nigeria) Ltd [1996] CLC 1902. 130 Article 10(1). Cf J.D’Almeida Araujo Lda v Sir Frederick Becker & Co Ltd [1952] 2 QB 297 at 302. 131 Article 8(1). 132 Article 9(1)(2). If the credit is concluded through an agent (for example the advising bank), the country in which the agent acts is a relevant country for establishing formal validity—see article 9(3). 133 Article 10(2). 134 Article 14(1).


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ACKNOWLEDGEMENTS ICC Uniform Customs and Practice for Documentary Credits—1993 Revision ICC Publication No.500—ISBN 92.842.1155.7(E) Published in its official English Version by the International Chamber of Commerce Copyright ©1993—International Chamber of Commerce (ICC), Paris International Standby Practices—ISP 98 ICC Publication No.590—ISBN 98.842.1247.2(E) Published in its official English version by the International Chamber of Commerce Copyright ©1998—The Institute of International Banking, Law & Practice, Inc. ICC Uniform Rules for Bank-to-Bank Reimbursements ICC Publication no 525—ISBN 92.842.1185.9(E) Published in its official English Version by the International Chamber of Commerce Copyright ©1995—International Chamber of Commerce (ICC), Paris All available from ICC Publishing, SA, 38 cours Albert 1, 75008 Paris, France ICC Uniform Customs and Practice for Documentary Credits and ICC Uniform Rules for Bank-to-Bank Reimbursements are also available from ICC United Kingdom, 14–15 Belgrave Sq., London SW1X 8PS.

Appendix 1 UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (UCP500) A. General Provisions and Definitions Article 1 Application of UCP The Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication N°500, shall apply to all Documentary Credits (including to the extent to which they may be applicable, Standby Letter(s) of Credit) where they are incorporated into the text of the Credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the Credit. Article 2 Meaning of Credit For the purposes of these Articles, the expressions “Documentary Credit(s)” and “Standby Letter(s) of Credit” (hereinafter referred to as “Credit(s)”), mean any arrangement, however named or described, whereby a bank (the “Issuing Bank”) acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf, i. is to make a payment to or to the order of a third party (the “Beneficiary”), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or ii. authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or iii. authorises another bank to negotiate, against stipulated document(s), provided that the terms and conditions of the Credit are complied with. For the purposes of these Articles, branches of a bank in different countries are considered another bank. Article 3

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Credits v. Contracts a Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary. b A Beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank. Article 4 Documents v. Goods/Services/Performances In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate. Article 5 Instructions to Issue/Amend Credits a Instructions for the issuance of a Credit, the Credit itself, instructions for an amendment thereto, and the amendment itself, must be complete and precise. In order to guard against confusion and mis-understanding, banks should discourage any attempt: i. to include excessive detail in the Credit or in any amendment thereto; ii. to give instructions to issue, advise or confirm a Credit by reference to a Credit previously issued (similar Credit) where such previous Credit has been subject to accepted amendment(s), and/or unaccepted amendment(s). b All instructions for the issuance of a Credit and the Credit itself and, where applicable, all instructions for an amendment thereto and the amendment itself, must state precisely the document(s) against which payment, acceptance or negotiation is to be made.

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B. Form and Notification of Credits Article 6 Revocable v. Irrevocable Credits a A Credit may be either i. revocable, or ii. irrevocable. b The Credit, therefore, should clearly indicate whether it is revocable or irrevocable. c In the absence of such indication the Credit shall be deemed to be irrevocable. Article 7 Advising Bank’s Liability a A Credit may be advised to a Beneficiary through another bank (the “Advising Bank”) without engagement on the part of the Advising Bank, but that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay. b If the Advising Bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the Credit and if it elects nonetheless to advise the Credit it must inform the Beneficiary that it has not been able to establish the authenticity of the Credit. Article 8 Revocation of a Credit a A revocable Credit may be amended or cancelled by the Issuing Bank at any moment and without prior notice to the Beneficiary. b However, the Issuing Bank must: i. reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation—for any payment, acceptance or negotiation made by such bank—prior to receipt by it of notice of amendment or cancellation, against documents which appear on their face to be in compliance with the terms and conditions of the Credit;

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ii. reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in compliance with the terms and conditions of the Credit. Article 9 Liability of Issuing and Confirming Banks a An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with: i. if the Credit provides for sight payment—to pay at sight; ii. if the Credit provides for deferred payment—to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance: a. by the Issuing Bank—to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or b. by another drawee bank—to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; iv. if the Credit provides for negotiation—to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s). b A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with: i. if the Credit provides for sight payment—to pay at sight; ii. if the Credit provides for deferred payment—to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance: a. by the Confirming Bank—to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or b. by another drawee bank—to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated

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in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; iv. if the Credit provides for negotiation—to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s). c i. If another bank is authorised or requested by the Issuing Bank to add its confirmation to a Credit but is not prepared to do so, it must so inform the Issuing Bank without delay. ii. Unless the Issuing Bank specifies otherwise in its authorisation or request to add confirmation, the Advising Bank may advise the Credit to the Beneficiary without adding its confirmation. d i. Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary. ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocably bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay. iii. The terms of the original Credit (or a Credit incorporating previously accepted amendment(s)) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended. iv. Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect. Article 10 Types of Credit a All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.

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b i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the “Nominated Bank”) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank. Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank. ii. Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation. c Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank’s receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. d By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles. Article 11 Teletransmitted and Pre-Advised Credits a i. When an Issuing Bank instructs an Advising Bank by an authenticated teletransmission to advise a Credit or an amendment to a Credit, the teletransmission will be deemed to be the operative Credit instrument or the operative amendment, and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent, it will have no effect and the Advising Bank will have no obligation to check such mail confirmation against the operative Credit instrument or the operative amendment received by teletransmission. ii. If the teletransmission states “full details to follow” (or words of similar effect) or states that the mail confirmation is to be the operative Credit instrument or the operative amendment, then the teletransmission will not be deemed to be the operative Credit instrument or the operative amendment. The Issuing Bank must forward the operative Credit instrument or the operative amendment to such Advising Bank without delay.

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b If a bank uses the services of an Advising Bank to have the Credit advised to the Beneficiary, it must also use the services of the same bank for advising an amendment(s). c A preliminary advice of the issuance or amendment of an irrevocable Credit (preadvice), shall only be given by an Issuing Bank if such bank is prepared to issue the operative Credit instrument or the operative amendment thereto. Unless otherwise stated in such preliminary advice by the Issuing Bank, an Issuing Bank having given such pre-advice shall be irrevocably committed to issue or amend the Credit, in terms not inconsistent with the pre-advice, without delay. Article 12 Incomplete or Unclear Instructions If incomplete or unclear instructions are received to advise, confirm or amend a Credit, the bank requested to act on such instructions may give preliminary notification to the Beneficiary for information only and without responsibility. This preliminary notification should state clearly that the notification is provided for information only and without the responsibility of the Advising Bank. In any event, the Advising Bank must inform the Issuing Bank of the action taken and request it to provide the necessary information. The Issuing Bank must provide the necessary information without delay. The Credit will be advised, confirmed or amended, only when complete and clear instructions have been received and if the Advising Bank is then prepared to act on the instructions. C. Liabilities and Responsibilities Article 13 Standard for Examination of Documents a Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit. Documents not stipulated in the Credit will not be examined by banks. If they receive such documents, they shall return them to the presenter or pass them on without responsibility. b The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether

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to take up or refuse the documents and to inform the party from which it received the documents accordingly. c If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not stated and will disregard them. Article 14 Discrepant Documents and Notice a When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound: i. to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated, ii. to take up the documents. b Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents. c If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub-Article 13 (b). d i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him. ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter. iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.

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e If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit. f If the remitting bank draws the attention of the Issuing Bank and/or Confirming Bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated under reserve or against an indemnity in respect of such discrepancy(ies), the Issuing Bank and/or Confirming Bank, if any, shall not be thereby relieved from any of their obligations under any provision of this Article. Such reserve or indemnity concerns only the relations between the remitting bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained. Article 15 Disclaimer on Effectiveness of Documents Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever. Article 16 Disclaimer on the Transmission of Messages Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other error(s) arising in the transmission of any telecommunication. Banks assume no liability or responsibility for errors in translation and/or interpretation of technical terms, and reserve the right to transmit Credit terms without translating them. Article 17 Force Majeure Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars

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or any other causes beyond their control, or by any strikes or lockouts. Unless specifically authorised, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business. Article 18 Disclaimer for Acts of an Instructed Party a Banks utilizing the services of another bank or other banks for the purpose of giving effect to the instructions of the Applicant do so for the account and at the risk of such Applicant. b Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). c i. A party instructing another party to perform services is liable for any charges, including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions. ii. Where a Credit stipulates that such charges are for the account of a party other than the instructing party, and charges cannot be collected, the instructing party remains ultimately liable for the payment thereof. d The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages. Article 19 Bank-to-Bank Reimbursement Arrangements a If an Issuing Bank intends that the reimbursement to which a paying, accepting or negotiating bank is entitled, shall be obtained by such bank (the “Claiming Bank”), claiming on another party (the “Reimbursing Bank”), it shall provide such Reimbursing Bank in good time with the proper instructions or authorisation to honour such reimbursement claims. b Issuing Banks shall not require a Claiming Bank to supply a certificate of compliance with the terms and conditions of the Credit to the Reimbursing Bank. c An Issuing Bank shall not be relieved from any of its obligations to provide reimbursement if and when reimbursement is not received by the Claiming Bank from the Reimbursing Bank. d The Issuing Bank shall be responsible to the Claiming Bank for any loss of interest if reimbursement is not provided by the Reimbursing Bank on first demand, or as otherwise specified in the Credit, or mutually agreed, as the case may be. e The Reimbursing Bank’s charges should be for the account of the Issuing Bank. However, in cases where the charges are for the account of another party, it is the

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responsibility of the Issuing Bank to so indicate in the original Credit and in the reimbursement authorisation. In cases where the Reimbursing Bank’s charges are for the account of another party they shall be collected from the Claiming Bank when the Credit is drawn under. In cases where the Credit is not drawn under, the Reimbursing Bank’s charges remain the obligation of the Issuing Bank. D. Documents Article 20 Ambiguity as to the Issuers of Documents a Terms such as “first class”, “well known”, “qualified”, “independent”, “official”, “competent”, “local” and the like, shall not be used to describe the issuers of any document(s) to be presented under a Credit. If such terms are incorporated in the Credit, banks will accept the relative document(s) as presented, provided that it appears on its face to be in compliance with the other terms and conditions of the Credit and not to have been issued by the Beneficiary. b Unless otherwise stipulated in the Credit, banks will also accept as an original document(s), a document(s) produced or appearing to have been produced: i. by reprographic, automated or computerized systems; ii. as carbon copies; provided that it is marked as original and, where necessary, appears to be signed. A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication. c i. Unless otherwise stipulated in the Credit, banks will accept as a copy(ies), a document(s) either labelled copy or not marked as an original—a copy(ies) need not be signed. ii. Credits that require multiple document(s) such as “duplicate”, “two fold”, “two copies” and the like, will be satisfied by the presentation of one original and the remaining number in copies except where the document itself indicates otherwise. d Unless otherwise stipulated in the Credit, a condition under a Credit calling for a document to be authenticated, validated, legalised, visaed, certified or indicating a similar requirement, will be satisfied by any signature, mark, stamp or label on such document that on its face appears to satisfy the above condition.

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Article 21 Unspecified Issuers or Contents of Documents When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented. Article 22 Issuance Date of Documents v. Credit Date Unless otherwise stipulated in the Credit, banks will accept a document bearing a date of issuance prior to that of the Credit, subject to such document being presented within the time limits set out in the Credit and in these Articles. Article 23 Marine/Ocean Bill of Lading a If a Credit calls for a bill of lading covering a port-to-port shipment, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by: – the carrier or a named agent for or on behalf of the carrier, or – the master or a named agent for or on behalf of the master. Any signature or authentication of the carrier or master must be identified as carrier or master, as the case may be. An agent signing or authenticating for the carrier or master must also indicate the name and the capacity of the party,i.e. carrier or master, on whose behalf that agent is acting, and ii. indicates that the goods have been loaded on board, or shipped on a named vessel. Loading on board or shipment on a named vessel may be indicated by preprinted wording on the bill of lading that the goods have been loaded on board a named vessel or shipped on a named vessel, in which case the date of issuance of the bill of lading will be deemed to be the date of loading on board and the date of shipment. In all other cases loading on board a named vessel must be evidenced by a notation on the bill of lading which gives the date on which the goods have

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been loaded on board, in which case the date of the on board notation will be deemed to be the date of shipment. If the bill of lading contains the indication “intended vessel”, or similar qualification in relation to the vessel, loading on board a named vessel must be evidenced by an on board notation on the bill of lading which, in addition to the date on which the goods have been loaded on board, also includes the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named as the “intended vessel”. If the bill of lading indicates a place of receipt or taking in charge different from the port of loading, the on board notation must also include the port of loading stipulated in the Credit and the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named in the bill of lading. This provision also applies whenever loading on board the vessel is indicated by pre-printed wording on the bill of lading, and iii. indicates the port of loading and the port of discharge stipulated in the Credit, notwithstanding that it: a. indicates a place of taking in charge different from the port of loading, and/or a place of final destination different from the port of discharge, and/or b. contains the indication “intended” or similar qualification in relation to the port of loading and/or port of discharge, as long as the document also states the ports of loading and/or discharge stipulated in the Credit, and iv. consists of a sole original bill of lading or, if issued in more than one original, the full set as so issued, and v. appears to contain all of the terms and conditions of carriage, or some of such terms and conditions by reference to a source or document other than the bill of lading (short form/blank back bill of lading); banks will not examine the contents of such terms and conditions, and vi. contains no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only, and vii. in all other respects meets the stipulations of the Credit. b For the purpose of this Article, transhipment means unloading and reloading from one vessel to another vessel during the course of ocean carriage from the port of loading to the port of discharge stipulated in the Credit. c Unless transhipment is prohibited by the terms of the Credit, banks will accept a bill of lading which indicates that the goods will be transhipped, provided that the entire ocean carriage is covered by one and the same bill of lading. d Even if the Credit prohibits transhipment, banks will accept a bill of lading which: i. indicates that transhipment will take place as long as the relevant cargo is shipped in Container(s), Trailer(s) and/or “LASH” barge(s) as evidenced by the bill of lading, provided that the entire ocean carriage is covered by one and the same bill of lading, and/or ii. incorporates clauses stating that the carrier reserves the right to tranship.

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Article 24 Non-Negotiable Sea Waybill a If a Credit calls for a non-negotiable sea waybill covering a port-to-port shipment, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by: – the carrier or a named agent for or on behalf of the carrier, or – the master or a named agent for or on behalf of the master, Any signature or authentication of the carrier or master must be identified as carrier or master, as the case may be. An agent signing or authenticating for the carrier or master must also indicate the name and the capacity of the party, i.e. carrier or master, on whose behalf that agent is acting, and ii. indicates that the goods have been loaded on board, or shipped on a named vessel. Loading on board or shipment on a named vessel may be indicated by preprinted wording on the non-negotiable sea waybill that the goods have been loaded on board a named vessel or shipped on a named vessel, in which case the date of issuance of the non-negotiable sea waybill will be deemed to be the date of loading on board and the date of shipment. In all other cases loading on board a named vessel must be evidenced by a notation on the non-negotiable sea waybill which gives the date on which the goods have been loaded on board, in which case the date of the on board notation will be deemed to be the date of shipment. If the non-negotiable sea waybill contains the indication “intended vessel”, or similar qualification in relation to the vessel, loading on board a named vessel must be evidenced by an on board notation on the non-negotiable sea waybill which, in addition to the date on which the goods have been loaded on board, includes the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named as the “intended vessel”. If the non-negotiable sea waybill indicates a place of receipt or taking in charge different from the port of loading, the on board notation must also include the port of loading stipulated in the Credit and the name of the vessel on which the goods have been loaded, even if they have been loaded on a vessel named in the non-negotiable sea waybill. This provision also applies whenever loading on board the vessel is indicated by pre-printed wording on the non-negotiable sea waybill, and iii. indicates the port of loading and the port of discharge stipulated in the Credit, notwithstanding that it: a. indicates a place of taking in charge different from the port of loading, and/or a place of final destination different from the port of discharge,

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and/or b. contains the indication “intended” or similar qualification in relation to the port of loading and/or port of discharge, as long as the document also states the ports of loading and/or discharge stipulated in the Credit, and iv. consists of a sole original non-negotiable sea waybill, or if issued in more than one original, the full set as so issued, and v. appears to contain all of the terms and conditions of carriage, or some of such terms and conditions by reference to a source or document other than the non-negotiable sea waybill (short form/blank back non-negotiable sea waybill); banks will not examine the contents of such terms and conditions, and vi. contains no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only, and vii. in all other respects meets the stipulations of the Credit. b For the purpose of this Article, transhipment means unloading and reloading from one vessel to another vessel during the course of ocean carriage from the port of loading to the port of discharge stipulated in the Credit. c Unless transhipment is prohibited by the terms of the Credit, banks will accept a nonnegotiable sea waybill which indicates that the goods will be transhipped, provided that the entire ocean carriage is covered by one and the same non-negotiable sea waybill. d Even if the Credit prohibits transhipment, banks will accept a non-negotiable sea waybill which: i. indicates that transhipment will take place as long as the relevant cargo is shipped in Container(s), Trailer(s) and/or “LASH” barge(s) as evidenced by the nonnegotiable sea waybill, provided that the entire ocean carriage is covered by one and the same non-negotiable sea waybill, and/or ii. incorporates clauses stating that the carrier reserves the right to tranship. Article 25 Charter Party Bill of Lading a If a Credit calls for or permits a charter party bill of lading, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. contains any indication that it is subject to a charter party, and ii. appears on its face to have been signed or otherwise authenticated by: – the master or a named agent for or on behalf of the master, or

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– the owner or a named agent for or on behalf of the owner. Any signature or authentication of the master or owner must be identified as master or owner as the case may be. An agent signing or authenticating for the master or owner must also indicate the name and the capacity of the party, i.e. master or owner, on whose behalf that agent is acting, and iii. does or does not indicate the name of the carrier, and iv. indicates that the goods have been loaded on board or shipped on a named vessel. Loading on board or shipment on a named vessel may be indicated by pre-printed wording on the bill of lading that the goods have been loaded on board a named vessel or shipped on a named vessel, in which case the date of issuance of the bill of lading will be deemed to be the date of loading on board and the date of shipment. In all other cases loading on board a named vessel must be evidenced by a notation on the bill of lading which gives the date on which the goods have been loaded on board, in which case the date of the on board notation will be deemed to be the date of shipment, and v. indicates the port of loading and the port of discharge stipulated in the Credit, and vi. consists of a sole original bill of lading or, if issued in more than one original, the full set as so issued, and vii. contains no indication that the carrying vessel is propelled by sail only, and viii. in all other respects meets the stipulations of the Credit. b Even if the Credit requires the presentation of a charter party contract in connection with a charter party bill of lading, banks will not examine such charter party contract, but will pass it on without responsibility on their part. Article 26 Multimodal Transport Document a If a Credit calls for a transport document covering at least two different modes of transport (multimodal transport), banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. appears on its face to indicate the name of the carrier or multimodal transport operator and to have been signed or otherwise authenticated by: – the carrier or multimodal transport operator or a named agent for or on behalf of the carrier or multimodal transport operator, or

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– the master or a named agent for or on behalf of the master. Any signature or authentication of the carrier, multimodal transport operator or master must be identified as carrier, multimodal transport operator or master, as the case may be. An agent signing or authenticating for the carrier, multimodal transport operator or master must also indicate the name and the capacity of the party, i.e. carrier, multimodal transport operator or master, on whose behalf that agent is acting, and ii. indicates that the goods have been dispatched, taken in charge or loaded on board. Dispatch, taking in charge or loading on board may be indicated by wording to that effect on the multimodal transport document and the date of issuance will be deemed to be the date of dispatch, taking in charge or loading on board and the date of shipment. However, if the document indicates, by stamp or otherwise, a date of dispatch, taking in charge or loading on board, such date will be deemed to be the date of shipment, and iii. a. indicates the place of taking in charge stipulated in the Credit which may be different from the port, airport or place of loading, and the place of final destination stipulated in the Credit which may be different from the port, airport or place of discharge, and/or b. contains the indication “intended” or similar qualification in relation to the vessel and/or port of loading and/or port of discharge, and iv. consists of a sole original multimodal transport document or, if issued in more than one original, the full set as so issued, and v. appears to contain all of the terms and conditions of carriage, or some of such terms and conditions by reference to a source or document other than the multimodal transport document (short form/blank back multimodal transport document); banks will not examine the contents of such terms and conditions, and vi. contains no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only, and vii. in all other respects meets the stipulations of the Credit. b Even if the Credit prohibits transhipment, banks will accept a multimodal transport document which indicates that transhipment will or may take place, provided that the entire carriage is covered by one and the same multimodal transport document.

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Article 27 Air Transport Document a If a Credit calls for an air transport document, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by: – the carrier, or – a named agent for or on behalf of the carrier. Any signature or authentication of the carrier must be identified as carrier. An agent signing or authenticating for the carrier must also indicate the name and the capacity of the party, i.e. carrier, on whose behalf that agent is acting, and ii. indicates that the goods have been accepted for carriage, and iii. where the Credit calls for an actual date of dispatch, indicates a specific notation of such date, the date of dispatch so indicated on the air transport document will be deemed to be the date of shipment. For the purpose of this Article, the information appearing in the box on the air transport document (marked “For Carrier Use Only” or similar expression) relative to the flight number and date will not be considered as a specific notation of such date of dispatch. In all other cases, the date of issuance of the air transport document will be deemed to be the date of shipment, and iv. indicates the airport of departure and the airport of destination stipulated in the Credit, and v. appears to be the original for consignor/shipper even if the Credit stipulates a full set of originals, or similar expressions, and vi. appears to contain all of the terms and conditions of carriage, or some of such terms and conditions, by reference to a source or document other than the air transport document; banks will not examine the contents of such terms and conditions, and vii. in all other respects meets the stipulations of the Credit. b For the purpose of this Article, transhipment means unloading and reloading from one aircraft to another aircraft during the course of carriage from the airport of departure to the airport of destination stipulated in the Credit.

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c Even if the Credit prohibits transhipment, banks will accept an air transport document which indicates that transhipment will or may take place, provided that the entire carriage is covered by one and the same air transport document. Article 28 Road, Rail or Inland Waterway Transport Documents a If a Credit calls for a road, rail, or inland waterway transport document, banks will, unless otherwise stipulated in the Credit, accept a document of the type called for, however named, which: i. appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by the carrier or a named agent for or on behalf of the carrier and/or to bear a reception stamp or other indication of receipt by the carrier or a named agent for or on behalf of the carrier. Any signature, authentication, reception stamp or other indication of receipt of the carrier, must be identified on its face as that of the carrier. An agent signing or authenticating for the carrier, must also indicate the name and the capacity of the party, i.e. carrier, on whose behalf that agent is acting, and ii. indicates that the goods have been received for shipment, dispatch or carriage or wording to this effect. The date of issuance will be deemed to be the date of shipment unless the transport document contains a reception stamp, in which case the date of the reception stamp will be deemed to be the date of shipment, and iii. indicates the place of shipment and the place of destination stipulated in the Credit, and iv. in all other respects meets the stipulations of the Credit. b In the absence of any indication on the transport document as to the numbers issued, banks will accept the transport document(s) presented as constituting a full set. Banks will accept as original(s) the transport document(s) whether marked as original(s) or not. c For the purpose of this Article, transhipment means unloading and reloading from one means of conveyance to another means of conveyance, in different modes of transport, during the course of carriage from the place of shipment to the place of destination stipulated in the Credit. d Even if the Credit prohibits transhipment, banks will accept a road, rail, or inland waterway transport document which indicates that transhipment will or may take place, provided that the entire carriage is covered by one and the same transport document and within the same mode of transport.

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Article 29 Courier and Post Receipts a If a Credit calls for a post receipt or certificate of posting, banks will, unless otherwise stipulated in the Credit, accept a post receipt or certificate of posting which: i. appears on its face to have been stamped or otherwise authenticated and dated in the place from which the Credit stipulates the goods are to be shipped or dispatched and such date will be deemed to be the date of shipment or dispatch, and ii. in all other respects meets the stipulations of the Credit. b If a Credit calls for a document issued by a courier or expedited delivery service evidencing receipt of the goods for delivery, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which: i. appears on its face to indicate the name of the courier/service, and to have been stamped, signed or otherwise authenticated by such named courier/service (unless the Credit specifically calls for a document issued by a named Courier/Service, banks will accept a document issued by any Courier/Service), and ii. indicates a date of pick-up or of receipt or wording to this effect, such date being deemed to be the date of shipment or dispatch, and iii. in all other respects meets the stipulations of the Credit. Article 30 Transport Documents issued by Freight Forwarders Unless otherwise authorised in the Credit, banks will only accept a transport document issued by a freight forwarder if it appears on its face to indicate: i. the name of the freight forwarder as a carrier or multimodal transport operator and to have been signed or otherwise authenticated by the freight forwarder as carrier or multimodal transport operator, or ii. the name of the carrier or multimodal transport operator and to have been signed or otherwise authenticated by the freight forwarder as a named agent for or on behalf of the carrier or multimodal transport operator. Article 31

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“On Deck”, “Shipper’s Load and Count”, Name of Consignor Unless otherwise stipulated in the Credit, banks will accept a transport document which: i. does not indicate, in the case of carriage by sea or by more than one means of conveyance including carriage by sea, that the goods are or will be loaded on deck. Nevertheless, banks will accept a transport document which contains a provision that the goods may be carried on deck, provided that it does not specifically state that they are or will be loaded on deck, and/or ii. bears a clause on the face thereof such as “shipper’s load and count” or “said by shipper to contain” or words of similar effect, and/or iii. indicates as the consignor of the goods a party other than the Beneficiary of the Credit. Article 32 Clean Transport Documents a A clean transport document is one which bears no clause or notation which expressly declares a defective condition of the goods and/or the packaging. b Banks will not accept transport documents bearing such clauses or notations unless the Credit expressly stipulates the clauses or notations which may be accepted. c Banks will regard a requirement in a Credit for a transport document to bear the clause “clean on board” as complied with if such transport document meets the requirements of this Article and of Articles 23, 24, 25, 26, 27, 28 or 30. Article 33 Freight Payable/Prepaid Transport Documents a Unless otherwise stipulated in the Credit, or inconsistent with any of the documents presented under the Credit, banks will accept transport documents stating that freight or transportation charges (hereafter referred to as “freight”) have still to be paid. b If a Credit stipulates that the transport document has to indicate that freight has been paid or prepaid, banks will accept a transport document on which words clearly indicating payment or prepayment of freight appear by stamp or otherwise, or on which payment or prepayment of freight is indicated by other means. If the Credit requires courier charges to be paid or prepaid banks will also accept a transport document issued by a courier or expedited delivery service evidencing that courier charges are for the account of a party other than the consignee. c The words “freight prepayable” or “freight to be prepaid” or words of similar effect, if appearing on transport documents, will not be accepted as constituting evidence of the payment of freight.

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d Banks will accept transport documents bearing reference by stamp or otherwise to costs additional to the freight, such as costs of, or disbursements incurred in connection with, loading, unloading or similar operations, unless the conditions of the Credit specifically prohibit such reference. Article 34 Insurance Documents a Insurance documents must appear on their face to be issued and signed by insurance companies or underwriters or their agents. b If the insurance document indicates that it has been issued in more than one original, all the originals must be presented unless otherwise authorised in the Credit. c Cover notes issued by brokers will not be accepted, unless specifically authorised in the Credit. d Unless otherwise stipulated in the Credit, banks will accept an insurance certificate or a declaration under an open cover pre-signed by insurance companies or underwriters or their agents. If a Credit specifically calls for an insurance certificate or a declaration under an open cover, banks will accept, in lieu thereof, an insurance policy. e Unless otherwise stipulated in the Credit, or unless it appears from the insurance document that the cover is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods, banks will not accept an insurance document which bears a date of issuance later than the date of loading on board or dispatch or taking in charge as indicated in such transport document. f i. Unless otherwise stipulated in the Credit, the insurance document must be expressed in the same currency as the Credit. ii. Unless otherwise stipulated in the Credit, the minimum amount for which the insurance document must indicate the insurance cover to have been effected is the CIF (cost, insurance and freight (…“named port of destination”)) or CIP (carriage and insurance paid to (…“named place of destination”)) value of the goods, as the case may be, plus 10%, but only when the CIF or CIP value can be determined from the documents on their face. Otherwise, banks will accept as such minimum amount 110% of the amount for which payment, acceptance or negotiation is requested under the Credit, or 110% of the gross amount of the invoice, whichever is the greater. Article 35 Type of Insurance Cover a Credits should stipulate the type of insurance required and, if any, the additional risks which are to be covered. Imprecise terms such as “usual risks” or “customary risks”

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shall not be used; if they are used, banks will accept insurance documents as presented, without responsibility for any risks not being covered. b Failing specific stipulations in the Credit, banks will accept insurance documents as presented, without responsibility for any risks not being covered. c Unless otherwise stipulated in the Credit, banks will accept an insurance document which indicates that the cover is subject to a franchise or an excess (deductible). Article 36 All Risks Insurance Cover Where a Credit stipulates “insurance against all risks”, banks will accept an insurance document which contains any “all risks” notation or clause, whether or not bearing the heading “all risks”, even if the insurance document indicates that certain risks are excluded, without responsibility for any risk(s) not being covered. Article 37 Commercial Invoices a Unless otherwise stipulated in the Credit, commercial invoices; i. must appear on their face to be issued by the Beneficiary named in the Credit (except as provided in Article 48), and ii. must be made out in the name of the Applicant (except as provided in sub–Article 48 (h)), and iii. need not be signed. b Unless otherwise stipulated in the Credit, banks may refuse commercial invoices issued for amounts in excess of the amount permitted by the Credit. Nevertheless, if a bank authorised to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate under a Credit accepts such invoices, its decision will be binding upon all parties, provided that such bank has not paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated for an amount in excess of that permitted by the Credit. c The description of the goods in the commercial invoice must correspond with the description in the Credit. In all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the Credit. Article 38 Other Documents If a Credit calls for an attestation or certification of weight in the case of transport other than by sea, banks will accept a weight stamp or declaration of weight which appears to have been superimposed on the transport document by the carrier or his agent unless the

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Credit specifically stipulates that the attestation or certification of weight must be by means of a separate document. E.Miscellaneous Provisions Article 39 Allowances In Credit Amount, Quantity and Unit Price a The words “about”, “approximately”, “circa” or similar expressions used in connection with the amount of the Credit or the quantity or the unit price stated in the Credit are to be construed as allowing a difference not to exceed 10% more or 10% less than the amount or the quantity or the unit price to which they refer. b Unless a Credit stipulates that the quantity of the goods specified must not be exceeded or reduced, a tolerance of 5% more or 5% less will be permissible, always provided that the amount of the drawings does not exceed the amount of the Credit. This tolerance does not apply when the Credit stipulates the quantity in terms of a stated number of packing units or individual items. c Unless a Credit which prohibits partial shipments stipulates otherwise, or unless subArticle (b) above is applicable, a tolerance of 5% less in the amount of the drawing will be permissible, provided that if the Credit stipulates the quantity of the goods, such quantity of goods is shipped in full, and if the Credit stipulates a unit price, such price is not reduced. This provision does not apply when expressions referred to in sub-Article (a) above are used in the Credit. Article 40 Partial Shipments/Drawings a Partial drawings and/or shipments are allowed, unless the Credit stipulates otherwise. b Transport documents which appear on their face to indicate that shipment has been made on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering partial shipments, even if the transport documents indicate different dates of shipment and/or different ports of loading, places of taking in charge, or despatch. c Shipments made by post or by courier will not be regarded as partial shipments if the post receipts or certificates of posting or courier’s receipts or dispatch notes appear to have been stamped, signed or otherwise authenticated in the place from which the Credit stipulates the goods are to be dispatched, and on the same date. Article 41 Instalment Shipments/Drawings

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If drawings and/or shipments by instalments within given periods are stipulated in the Credit and any instalment is not drawn and/or shipped within the period allowed for that instalment, the Credit ceases to be available for that and any subsequent instalments, unless otherwise stipulated in the Credit. Article 42 Expiry Date and Place for Presentation of Documents a All Credits must stipulate an expiry date and a place for presentation of documents for payment, acceptance, or with the exception of freely negotiable Credits, a place for presentation of documents for negotiation. An expiry date stipulated for payment, acceptance or negotiation will be construed to express an expiry date for presentation of documents. b Except as provided in sub-Article 44(a), documents must be presented on or before such expiry date. c If an Issuing Bank states that the Credit is to be available “for one month”, “for six months”, or the like, but does not specify the date from which the time is to run, the date of issuance of the Credit by the Issuing Bank will be deemed to be the first day from which such time is to run. Banks should discourage indication of the expiry date of the Credit in this manner. Article 43 Limitation on the Expiry Date a In addition to stipulating an expiry date for presentation of documents, every Credit which calls for a transport document(s) should also stipulate a specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the Credit. If no such period of time is stipulated, banks will not accept documents presented to them later than 21 days after the date of shipment. In any event, documents must be presented not later than the expiry date of the Credit. b In cases in which sub—Article 40(b) applies, the date of shipment will be considered to be the latest shipment date on any of the transport documents presented. Article 44 Extension of Expiry Date a If the expiry date of the Credit and/or the last day of the period of time for presentation of documents stipulated by the Credit or applicable by virtue of Article 43 falls on a day on which the bank to which presentation has to be made is closed for reasons other than those referred to in Article 17, the stipulated expiry date and/or the last day

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of the period of time after the date of shipment for presentation of documents, as the case may be, shall be extended to the first following day on which such bank is open. b The latest date for shipment shall not be extended by reason of the extension of the expiry date and/or the period of time after the date of shipment for presentation of documents in accordance with sub-Article (a) above. If no such latest date for shipment is stipulated in the Credit or amendments thereto, banks will not accept transport documents indicating a date of shipment later than the expiry date stipulated in the Credit or amendments thereto. c The bank to which presentation is made on such first following business day must provide a statement that the documents were presented within the time limits extended in accordance with sub-Article 44(a) of the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 500. Article 45 Hours of Presentation Banks are under no obligation to accept presentation of documents outside their banking hours. Article 46 General Expressions as to Dates for Shipment a Unless otherwise stipulated in the Credit, the expression “shipment” used in stipulating an earliest and/or a latest date for shipment will be understood to include expressions such as, “loading on board”, “dispatch”, “accepted for carriage”, “date of post receipt”, “date of pick-up”, and the like, and in the case of a Credit calling for a multimodal transport document the expression “taking in charge”. b Expressions such as “prompt”, “immediately”, “as soon as possible”, and the like should not be used. If they are used banks will disregard them. c If the expression “on or about” or similar expressions are used, banks will interpret them as a stipulation that shipment is to be made during the period from five days before to five days after the specified date, both end days included. Article 47 Date Terminology for Periods of Shipment a The words “to”, “until”, “till”, “from” and words of similar import applying to any date or period in the Credit referring to shipment will be understood to include the date mentioned. b The word “after” will be understood to exclude the date mentioned.

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c The terms “first half”, “second half” of a month shall be construed respectively as the 1st to the 15th, and the 16th to the last day of such month, all dates inclusive. d The terms “beginning”, “middle”, or “end” of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th, and the 21st to the last day of such month, all dates inclusive. F. Transferable Credit Article 48 Transferable Credit a A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate (the “Transferring Bank”), or in the case of a freely negotiable Credit, the bank specifically authorised in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more other Beneficiary(ies) (Second Beneficiary(ies)). b A Credit can be transferred only if it is expressly designated as “transferable” by the Issuing Bank. Terms such as “divisible”, “fractionable”, “assignable”, and “transmissible” do not render the Credit transferable. If such terms are used they shall be disregarded. c The Transferring Bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank. d At the time of making a request for transfer and prior to transfer of the Credit, the First Beneficiary must irrevocably instruct the Transferring Bank whether or not he retains the right to refuse to allow the Transferring Bank to advise amendments to the Second Beneficiary(ies). If the Transferring Bank consents to the transfer under these conditions, it must, at the time of transfer, advise the Second Beneficiary(ies) of the First Beneficiary’s instructions regarding amendments. e If a Credit is transferred to more than one Second Beneficiary(ies), refusal of an amendment by one or more Second Beneficiary (ies) does not invalidate the acceptance(s) by the other Second Bene-ficiary(ies) with respect to whom the Credit will be amended accordingly. With respect to the Second Beneficiary(ies) who rejected the amendment, the Credit will remain unamended. f Transferring Bank charges in respect of transfers including commissions, fees, costs or expenses are payable by the First Beneficiary, unless otherwise agreed. If the Transferring Bank agrees to transfer the Credit it shall be under no obligation to effect the transfer until such charges are paid. g Unless otherwise stated in the Credit, a transferable Credit can be transferred once only. Consequently, the Credit cannot be transferred at the request of the Second Beneficiary to any subsequent Third Beneficiary. For the purpose of this Article, a retransfer to the First Beneficiary does not constitute a prohibited transfer.

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Fractions of a transferable Credit (not exceeding in the aggregate the amount of the Credit) can be transferred separately, provided partial shipments/drawings are not prohibited, and the aggregate of such transfers will be considered as constituting only one transfer of the Credit. h The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of: – the amount of the Credit, – any unit price stated therein, – the expiry date, – the last date for presentation of documents in accordance with Article 43, – the period for shipment, any or all of which may be reduced or curtailed. The percentage for which insurance cover must be effected may be increased in such a way as to provide the amount of cover stipulated in the original Credit, or these Articles. In addition, the name of the First Beneficiary can be substituted for that of the Applicant, but if the name of the Applicant is specifically required by the original Credit to appear in any document(s) other than the invoice, such requirement must be fulfilled. i The First Beneficiary has the right to substitute his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount stipulated in the Credit and for the original unit prices if stipulated in the Credit, and upon such substitution of invoice(s) (and Draft(s)) the First Beneficiary can draw under the Credit for the difference, if any, between his invoice(s) and the Second Beneficiary’s(ies’) invoice(s). When a Credit has been transferred and the First Beneficiary is to supply his own invoice(s) (and Draft(s)) in exchange for the Second Bene-ficiary’s(ies’) invoice(s) (and Draft(s)) but fails to do so on first demand, the Transferring Bank has the right to deliver to the Issuing Bank the documents received under the transferred Credit, including the Second Beneficiary’s(ies’) invoice(s) (and Draft(s)) without further responsibility to the First Beneficiary. j The First Beneficiary may request that payment or negotiation be effected to the Second Beneficiary(ies) at the place to which the Credit has been transferred up to and including the expiry date of the Credit, unless the original Credit expressly states that it may not be made available for payment or negotiation at a place other than that stipulated in the Credit. This is without prejudice to the First Beneficiary’s right to substitute subsequently his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies) and to claim any difference due to him. G.Assignment of Proceeds Article 49

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Assignment of Proceeds The fact that a Credit is not stated to be transferable shall not affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under such Credit, in accordance with the provisions of the applicable law. This Article relates only to the assignment of proceeds and not to the assignment of the right to perform under the Credit itself.

Appendix 2 INTERNATIONAL STANDBY PRACTICES (ISP98) Copyright ©19981 The Institute of International Banking Law & Practice, Inc. Preface The International Standby Practices (ISP98) reflects generally accepted practice, custom, and usage of standby letters of credit. It provides separate rules for standby letters of credit in the same sense that the Uniform Customs and Practice for Documentary Credits (UCP) and the Uniform Rules for Demand Guarantees (URDG) do for commercial letters of credit and independent bank guarantees. The formulation of standby letter of credit practices in separate rules evidences the maturity and importance of this financial product. The amounts outstanding of standbys greatly exceed the outstanding amounts of commercial letters of credit. While the standby is associated with the United States where it originated and where it is most widely used, it is truly an international product. Non-U.S. bank outstandings have exceeded those of U.S. banks in the United States alone. Moreover, the standby is used increasingly throughout the world. 1

All rights reserved. No part of this work may be reproduced or copied, in any form or by any means—graphic, electronic or mechanical, including recording, taping or information retrieval systems—without the written permission of ICC Publishing SA, or ICC Publishing, Inc. for the USA, or of the Institute of International Banking Law and Practice, Inc.

Standbys are issued to support payment, when due or after default, of obligations based on money loaned or advanced, or upon the occurrence or non-occurrence of another contingency. For convenience, standbys are commonly classified descriptively (and without operative significance in the application of these Rules) based on their function in the underlying transaction or other factors not necessarily related to the terms and conditions of the standby itself. For example: A “Performance Standby” supports an obligation to perform other than to pay money including for the purpose of covering losses arising from a default of the applicant in completion of the underlying transactions. An “Advance Payment Standby” supports an obligation to account for an advance payment made by the beneficiary to the applicant.

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A “Bid Bond/Tender Bond Standby” supports an obligation of the applicant to execute a contract if the applicant is awarded a bid. A “Counter Standby” supports the issuance of a separate standby or other undertaking by the beneficiary of the counter standby. A “Financial Standby” supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money. A “Direct Pay Standby” supports payment when due of an underlying payment obligation typically in connection with a financial standby without regard to a default. An “Insurance Standby” supports an insurance or reinsurance obligation of the applicant. A “Commercial Standby” supports the obligations of an applicant to pay for goods or services in the event of non-payment by other methods. In the past, many standbys have been issued subject to the UCP even though it was intended for commercial letters of credit. The UCP reinforced the independence and documentary character of the standby. It also provided standards for examination and notice of dishonor and a basis to resist market pressures to embrace troublesome practices such as the issuance of standbys without expiration dates. Despite these important contributions, it has long been apparent that the UCP was not fully applicable nor appropriate for standbys, as is recognized in UCP 500 Article 1 which provides that it applies to the extent to which they may be applicable. Even the least complex standbys (those calling for presentation of a draft only) pose problems not addressed by the UCP. More complex standbys (those involving longer terms or automatic extensions, transfer on demand, requests that the beneficiary issue its own undertaking to another, and the like) require more specialized rules of practice. The ISP fills these needs. The ISP differs from the UCP in style and approach because it must receive acceptance not only from bankers and merchants, but also from a broader range of those actively involved in standby law and practice corporate treasurers and credit managers, rating agencies, government agencies and regulators, and indenture trustees as well as their counsel. Because standbys are often intended to be available in the event of disputes or applicant insolvency, their texts are subject to a degree of scrutiny not encountered in the commercial letter of credit context. As a result, the ISP is also written to provide guidance to lawyers and judges in the interpretation of standby practice. Differences in substance result either from different practices, different problems, or the need for more precision. In addition, the ISP proposes basic definitions should the standby permit or require presentation of documents by electronic means. Since standbys infrequently require presentation of negotiable documents, standby practice is currently more conducive to electronic presentations, and the ISP provides definitions and rules encouraging such presentations. The development of S.W.I.F.T. message types for the ISP is anticipated. The ISP, like the UCP for commercial letters of credit, simplifies, standardizes, and streamlines the drafting of standbys, and provides clear and widely accepted answers to common problems. There are basic similarities with the UCP because standby and commercial practices are fundamentally the same. Even where the rules overlap,

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however, the ISP is more precise, stating the intent implied in the UCP rule, in order to make the standby more dependable when a drawing or honor is questioned. Like the UCP and the URDG, the ISP will apply to any independent undertaking issued subject to it. This approach avoids the impractical and often impossible task of identifying and distinguishing standbys from independent guarantees and, in many cases, commercial letters of credit. The choice of which set of rules to select is, therefore, left to the parties as it should be. One may well choose to use the ISP for certain types of standbys, the UCP for others, and the URDG for still others. While the ISP is not intended to be used for dependent undertakings such as accessory guarantees and insurance contracts, it may be useful in some situations in indicating that a particular undertaking which might otherwise be treated as dependent under local law is intended to be independent. For the ISP to apply to a standby, an undertaking should be made subject to these Rules by including language such as (but not limited to): This undertaking is issued subject to the International Standby Practices 1998. or Subject to ISP98. Although the ISP can be varied by the text of a standby, it provides neutral rules acceptable in the majority of situations and a useful starting point for negotiations in other situations. It will save parties (including banks that issue, confirm, or are beneficiaries of standbys) considerable time and expense in negotiating and drafting standby terms. The ISP is designed to be compatible with the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (which represents a useful and practical formulation of basic standby and independent guarantee law) and also with local law, whether statutory or judicial, and to embody standby letter of credit practice under that law. If these rules conflict with mandatory law on issues such as assignment of proceeds or transfer by operation of law, applicable law will, of course, control. Nonetheless, most of these issues are rarely addressed by local law and progressive commercial law will often look to the practice as recorded in the ISP for guidance in such situations, especially with respect to cross border undertakings. As a result, it is expected that the ISP will complement local law rather than conflict with it. The ISP is intended to be used also in arbitration as well as judicial proceedings (such as the expert based letter of credit arbitration system developed by the International Center for Letter of Credit Arbitration (ICLOCA) Rules or general commercial ICC arbitration) or with alternative methods of dispute resolution. Such a choice should be made expressly and with appropriate detail. At a minimum, it can be made in connection with the clause relating to ISP98—e.g. This undertaking is issued subject to ISP98, and all disputes arising out of it or related to it are subject to arbitration under ICLOCA Rules (1996). Although translations of the ISP into other languages are envisioned and will be monitored for integrity, the English text is the official text of the ISP in the event of disputes.

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The ISP is the product of the work of the ISP Working Group under the auspices of the Institute of International Banking Law & Practice, Inc. which interacted with hundreds of persons over a five year period, and has benefited from comments received from individuals, banks, and national and international associations. In particular, the participation of the International Financial Services Association (formerly the USCIB) and the Ad Hoc Working Group under the chairmanship of Gary Collyer (which led to its endorsement by the ICC Banking Commission) is gratefully recognized. In addition, the sponsorship and support of Citibank N.A., The Chase Manhattan Bank, ABN-AMRO, Baker & McKenzie, and the National Law Center for Inter-American Free Trade is acknowledged. Perhaps the greatest significance of the ISP is that its creation marks a new chapter in the collaboration between the international banking operations community and the legal community at an international level. In this respect, the active role played in this process by the Secretariat of the United Nations Commission on International Trade Law has been invaluable. The ISP is drafted as a set of rules intended for use in daily practice. It is not intended to provide introductory information on standbys and their uses. While it is recognized that specific rules would benefit from explanatory comments, such comments are not appended to the ISP because the resulting work would be too cumbersome for daily use. Instead, introductory materials and Official Comments are available in the Official Commentary on the International Standby Practices (ISP98). For further information on support materials and developments on the ISP and to pose queries, consult the ISP98 website: http://www.isp98.com/. To address inevitable questions, to provide for official interpretation of the rules, and to assure their proper evolution, the Institute of International Banking Law & Practice, Inc. has created a Council on International Standby Practices which is representative of the several constituencies which have contributed to the ISP and has charged it with the task of maintaining the integrity of the ISP in cooperation with the Institute, the ICC Banking Commission, the IFSA, and various supporting organizations. Professor James E.Byrne Director, Institute of International Banking Law & Practice, Inc.; Chair & Reporter, ISP Working Group James G.Barnes Baker & McKenzie; Vice-Chair, ISP Working Group Gary W.Collyer Vice-President, Citibank, N.A; Chair, ICC Ad Hoc Working Group & Technical Adviser to the ICC Banking Commission

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Prologue by Dr. Gerold Herrmann, Secretary, United Nations Commission on International Trade Law (UNCITRAL) It was an extremely interesting and enriching experience for me to assist in drafting ISP98. This participation allowed me to witness (and now bear witness to) the very thorough and pragmatic drafting process in a superbly selected group, with representatives of all interested sectors actively involved in standby letter of credit practice such as: bankers, especially those responsible for letter of credit operations and global trade transactions, bank counsel, attorneys, academics, regulators, government officials, corporate treasurers, and likely influential beneficiaries. The treasure trove of experience and expertise and the diversity of interests and perspectives proved invaluable in determining—as was continuously done by examining concrete practical examples— whether on a given issue an operational rule would be desirable and useful and, if so, which solution would work best and reflect good practice. Continued participation in the preparatory work has also convinced me—as, I am sure, it would have anyone else—of the special characteristics of standbys at the operational level of practical detail and usage. Their special features, in my view, not only justify but also necessitate special contractual rules designed for standbys. As the constant comparison with the UCP clearly revealed, quite a few UCP Articles are inappropriate for standbys and quite a few issues of paramount importance in standby practice are not addressed at all in the UCP. While a similar disparity in practice exists between the standby and the independent guarantee (the bank or demand guarantee European style), this seems particularly, if not exclusively, true for those types of actual use (e.g. financial standby, direct-pay standby) hitherto found only extremely rarely in guarantee practice. For this and other reasons, including firmness of the undertaking, I would not be surprised to see not only standbys but also some demand guarantees issued subject to ISP98. For a professional unifier of law, participation in the preparatory work was particularly satisfying because of its interconnection with other harmonisation and reform efforts. In addition to the concordance with revised Article 5 UCC (the letter-of-credit law of the homeland of the standby) and the similarly close contact (and personal overlap) with the 1993 UCP revision task force, I am referring in particular to UNCITRAL’s work which culminated in the adoption in 1995 by the General Assembly of the “United Nations Convention on Independent Guarantees and Stand-by Letters of Credit.” The idea of preparing special operational rules for standbys was born during the extensive debates comparing national laws as well as the two instruments to be married by that Convention. Since bride and groom were presented there in all facets and critically scrutinized by their future in-laws, UNCITRAL’s travaux préparatoires make for highly informative reading (as will future abstracts of court decisions to be published in UNCITRAL’s case collection system called CLOUT; homepage: www.un.or.at/uncitral). It was gratifying to see the group preparing ISP98 refer continuously to the UNCITRAL Convention in order to ensure complete consistency. I must admit to special gratification by overhearing one of the world’s leading letter of credit expert’s remark to his banking colleague: “The more I look at this UN Convention, the more I really like it.”

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The above co-ordination or co-operation in the universal harmonisation and modernization efforts is welcome and in fact crucial because of the (often neglected or ignored) interdependence between the two very different levels of legal norms: the contractual level, where such sets of rules like ISP98, UCP 500, or URDG become effective by agreement of the individual parties, and the statutory level, where internationally elaborated law like the UN Convention or domestic law (e.g. Art. 5 UCC) recognise and give full effect to the exercise of that party autonomy and regulate certain issues that can effectively be settled only at that level (e.g. standards of fraud exception, injunctive relief and other court matters). Therefore, ISP98 and the Convention supplement each other in an ideal manner and together lay the necessary basis for a smooth functioning of standby practice worldwide. Rule 1 : General Provisions Scope, Application, Definitions, and Interpretation of These Rules 1.01 Scope and Application a. These Rules are intended to be applied to standby letters of credit (including performance, financial, and direct pay standby letters of credit). b. A standby letter of credit or other similar undertaking, however named or described, whether for domestic or international use, may be made subject to these Rules by express reference to them. c. An undertaking subject to these Rules may expressly modify or exclude their application. d. An undertaking subject to these Rules is hereinafter referred to as a “standby”. 1.02 Relationship to Law and Other Rules a. These Rules supplement the applicable law to the extent not prohibited by that law. b. These Rules supersede conflicting provisions in any other rules of practice to which a standby letter of credit is also made subject. 1.03 Interpretative Principles These Rules shall be interpreted as mercantile usage with regard for: a. integrity of standbys as reliable and efficient undertakings to pay; b. practice and terminology of banks and businesses in day-to-day transactions; c. consistency within the world-wide system of banking operations and commerce; and d. world-wide uniformity in their interpretation and application. 1.04 Effect of the Rules Unless the context otherwise requires, or unless expressly modified or excluded, these Rules apply as terms and conditions incorporated into a standby, confirmation, advice, nomination, amendment, transfer, request for issuance, or other agreement of.

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i. the issuer; ii. the beneficiary to the extent it uses the standby; iii. any advisor; iv. any confirmer; v. any person nominated in the standby who acts or agrees to act; and vi. the applicant who authorises issuance of the standby or otherwise agrees to the application of these Rules. 1.05 Exclusion of Matters Related to Due Issuance and Fraudulent or Abusive Drawing These Rules do not define or otherwise provide for: a. power or authority to issue a standby; b. formal requirements for execution of a standby (e.g. a signed writing); or c. defences to honour based on fraud, abuse, or similar matters. These matters are left to applicable law. General Principles 1.06 Nature of Standbys a. A standby is an irrevocable, independent, documentary, and binding undertaking when issued and need not so state. b. Because a standby is irrevocable, an issuer’s obligations under a standby cannot be amended or cancelled by the issuer except as provided in the standby or as consented to by the person against whom the amendment or cancellation is asserted. c. Because a standby is independent, the enforceability of an issuer’s obligations under a standby does not depend on: i. the issuer’s right or ability to obtain reimbursement from the applicant; ii. the beneficiary’s right to obtain payment from the applicant; iii. a reference in the standby to any reimbursement agreement or underlying transaction; or iv. the issuer’s knowledge of performance or breach of any reimbursement agreement or underlying transaction. d. Because a standby is documentary, an issuer’s obligations depend on the presentation of documents and an examination of required documents on their face. e. Because a standby or amendment is binding when issued, it is enforceable against an issuer whether or not the applicant authorised its issuance, the issuer received a fee, or the beneficiary received or relied on the standby or the amendment. 1.07 Independence of the Issuer-Beneficiary Relationship An issuer’s obligations toward the beneficiary are not affected by the issuer’s rights and obligations toward the applicant under any applicable agreement, practice, or law. 1.08 Limits to Responsibilities

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An issuer is not responsible for: a. performance or breach of any underlying transaction; b. accuracy, genuineness, or effect of any document presented under the standby; c. action or omission of others even if the other person is chosen by the issuer or nominated person; or d. observance of law or practice other than that chosen in the standby or applicable at the place of issuance. Terminology 1.09 Defined Terms In addition to the meanings given in standard banking practice and applicable law, the following terms have or include the meanings indicated below: a. Definitions “Applicant” is a person who applies for issuance of a standby or for whose account it is issued, and includes (i) a person applying in its own name but for the account of another person or (ii) an issuer acting for its own account. “Beneficiary” is a named person who is entitled to draw under a standby. See Rule 1.11 (c)(ii). “Business Day” means a day on which the place of business at which the relevant act is to be performed is regularly open; and “Banking Day” means a day on which the relevant bank is regularly open at the place at which the relevant act is to be performed. “Confirmer” is a person who, upon an issuer’s nomination to do so, adds to the issuer’s undertaking its own undertaking to honour a standby. See Rule 1.11(c)(i). “Demand” means, depending on the context, either a request to honour a standby or a document that makes such request. “Document” means a draft, demand, document of title, investment security, invoice, certificate of default, or any other representation of fact, law, right, or opinion, that upon presentation (whether in a paper or electronic medium), is capable of being examined for compliance with the terms and conditions of a standby. “Drawing” means, depending on the context, either a demand presented or a demand honoured. “Expiration Date” means the latest day for a complying presentation provided in a standby. “Person” includes a natural person, partnership, corporation, limited liability company, government agency, bank, trustee, and any other legal or commercial association or entity. “Presentation” means, depending on the context, either the act of delivering documents for examination under a standby or the documents so delivered. “Presenter” is a person who makes a presentation as or on behalf of a beneficiary or nominated person.

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“Signature” includes any symbol executed or adopted by a person with a present intent to authenticate a document. b. Cross References “Amendment”—Rule 2.06 “Advice”—Rule 2.05 “Approximately” (“About” or “Circa”)—Rule 3.08(f) “Assignment of Proceeds”—Rule 6.06 “Automatic Amendment”—Rule 2.06(a) “Copy”—Rule 4.15(d) “Cover Instructions”—Rule 5.08 “Honour”—Rule 2.01 “Issuer”—Rule 2.01 “Multiple Presentations”—Rule 3.08(b) “Nominated Person”—Rule 2.04 “Non-documentary Conditions”—Rule 4.11 “Original”—Rule 4.15(b) & (c) “Partial Drawing”—Rule 3.08(a) “Standby”—Rule 1.01(d) “Transfer”—Rule6.01 “Transferee Beneficiary”—Rule l.11(c)(ii) “Transfer by Operation of Law”—Rule 6.11 c. Electronic Presentations The following terms in a standby providing for or permitting electronic presentation shall have the following meanings unless the context otherwise requires: “Electronic Record” means: i. a record (information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form); ii. communicated by electronic means to a system for receiving, storing, retransmitting, or otherwise processing information (data, text, images, sounds, codes, computer programmes, software, databases, and the like); and iii. capable of being authenticated and then examined for compliance with the terms and conditions of the standby. “Authenticate” means to verify an electronic record by generally accepted procedure or methodology in commercial practice: i. the identity of a sender or source, and ii. the integrity of or errors in the transmission of information content. The criteria for assessing the integrity of information in an electronic record is whether the information has remained complete and un-altered, apart from the addition of any endorsement and any change which arises in the normal course of communication, storage, and display. “Electronic signature” means letters, characters, numbers, or other symbols in electronic form, attached to or logically associated with an electronic record

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that are executed or adopted by a party with present intent to authenticate an electronic record. “Receipt” occurs when: i. an electronic record enters in a form capable of being processed by the information system designated in the standby, or ii. an issuer retrieves an electronic record sent to an information system other than that designated by the issuer. 1.10 Redundant or Otherwise Undesirable Terms a. A standby should not or need not state that it is: i. unconditional or abstract (if it does, it signifies merely that payment under it is conditioned solely on presentation of specified documents); ii. absolute (if it does, it signifies merely that it is irrevocable); iii. primary (if it does, it signifies merely that it is the independent obligation of the issuer); iv. payable from the issuer’s own funds (if it does, it signifies merely that payment under it does not depend on the availability of applicant funds and is made to satisfy the issuer’s own independent obligation); v. clean or payable on demand (if it does, it signifies merely that it is payable upon presentation of a written demand or other documents specified in the standby). b. A standby should not use the term “and/or” (if it does it means either or both). c. The following terms have no single accepted meaning: i. and shall be disregarded: “callable”, “divisible”, “fractionable”, “indivisible”, and “transmissible”, ii. and shall be disregarded unless their context gives them meaning: “assignable”, “evergreen”, “reinstate”, and “revolving”. 1.11 Interpretation of These Rules a. These Rules, are to be interpreted in the context of applicable standard practice. b. In these Rules, “standby letter of credit” refers to the type of independent undertaking for which these Rules were intended, whereas “standby” refers to an undertaking subjected to these Rules. c. Unless the context otherwise requires:

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i. “Issuer” includes a “confirmer” as if the confirmer were a separate issuer and its confirmation were a separate standby issued for the account of the issuer; ii. “Beneficiary” includes a person to whom the named beneficiary has effectively transferred drawing rights (“transferee beneficiary”); iii. “Including” means “including but not limited to”; iv. “A or B” means “A or B or both”; “either A or B” means “A or B, but not both”; and “A and B” means “both A and B”; v. Words in the singular number include the plural, and in the plural include the singular; and vi. Words of the neuter gender include any gender. d. i. Use of the phrase “unless a standby otherwise states” or the like in a rule emphasizes that the text of the standby controls over the rule; ii. Absence of such a phrase in other rules does not imply that other rules have priority over the text of the standby; iii. Addition of the term “expressly” or “clearly” to the phrase “unless a standby otherwise states” or the like emphasizes that the rule should be excluded or modified only by wording in the standby that is specific and unambiguous; and iv. While the effect of all of these Rules may be varied by the text of the standby, variations of the effect of some of these Rules may disqualify the standby as an independent undertaking under applicable law. e. The phrase “stated in the standby” or the like refers to the actual text of a standby (whether as issued or effectively amended) whereas the phrase “provided in the standby” or the like refers to both the text of the standby and these Rules as incorporated. Rule 2: Obligations 2.01 Undertaking to Honour by Issuer and Any Confirmer to Beneficiary a. An issuer undertakes to the beneficiary to honour a presentation that appears on its face to comply with the terms and conditions of the standby in accordance with these Rules supplemented by standard standby practice. b. An issuer honours a complying presentation made to it by paying the amount demanded of it at sight, unless the standby provides for honour: i. by acceptance of a draft drawn by the beneficiary on the issuer, in which case the issuer honours by: (a) timely accepting the draft; and (b) thereafter paying the holder of the draft on presentation of the accepted draft on or after its maturity. ii. by deferred payment of a demand made by the beneficiary on the issuer, in which case the issuer honours by:

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(a) timely incurring a deferred payment obligation; and (b) thereafter paying at maturity. iii. by negotiation, in which case the issuer honours by paying the amount demanded at sight without recourse. c. An issuer acts in a timely manner if it pays at sight, accepts a draft, or undertakes a deferred payment obligation (or if it gives notice of dishonour) within the time permitted for examining the presentation and giving notice of dishonour. d. i. A confirmer undertakes to honour a complying presentation made to it by paying the amount demanded of it at sight or, if the standby so states, by another method of honour consistent with the issuer’s undertaking. ii. If the confirmation permits presentation to the issuer, then the confirmer undertakes also to honour upon the issuer’s wrongful dishonour by performing as if the presentation had been made to the confirmer. iii. If the standby permits presentation to the confirmer, then the issuer undertakes also to honour upon the confirmer’s wrongful dishonour by performing as if the presentation had been made to the issuer. e. An issuer honours by paying in immediately available funds in the currency designated in the standby unless the standby states it is payable by: i. payment of a monetary unit of account, in which case the undertaking is to pay in that unit of account; or ii. delivery of other items of value, in which case the undertaking is to deliver those items. 2.02 Obligation of Different Branches, Agencies, or Other Offices For the purposes of these Rules, an issuer’s branch, agency, or other office acting or undertaking to act under a standby in a capacity other than as issuer is obligated in that capacity only and shall be treated as a different person. 2.03 Conditions to Issuance A standby is issued when it leaves an issuer’s control unless it clearly specifies that it is not then “issued” or “enforceable”. Statements that a standby is not “available”, “operative”, “effective”, or the like do not affect its irrevocable and binding nature at the time it leaves the issuer’s control. 2.04 Nomination a. A standby may nominate a person to advise, receive a presentation, effect a transfer, confirm, pay, negotiate, incur a deferred payment obligation, or accept a draft. b. Nomination does not obligate the nominated person to act except to the extent that the nominated person undertakes to act. c. A nominated person is not authorised to bind the person making the nomination. 2.05 Advice of Standby or Amendment a. Unless an advice states otherwise, it signifies that:

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i. the advisor has checked the apparent authenticity of the advised message in accordance with standard letter of credit practice; and ii. the advice accurately reflects what has been received. b. A person who is requested to advise a standby and decides not to do so should notify the requesting party. 2.06 When an Amendment is Authorised and Binding a. If a standby expressly states that it is subject to “automatic amendment” by an increase or decrease in the amount available, an extension of the expiration date, or the like, the amendment is effective automatically without any further notification or consent beyond that expressly provided for in the standby. (Such an amendment may also be referred to as becoming effective “without amendment”.) b. If there is no provision for automatic amendment, an amendment binds: i. the issuer when it leaves the issuer’s control; and ii. the confirmer when it leaves the confirmer’s control, unless the confirmer indicates that it does not confirm the amendment. c. If there is no provision for automatic amendment: i. the beneficiary must consent to the amendment for it to be binding; ii. the beneficiary’s consent must be made by an express communication to the person advising the amendment unless the beneficiary presents documents which comply with the standby as amended and which would not comply with the standby prior to such amendment; and iii. an amendment does not require the applicant’s consent to be binding on the issuer, the confirmer, or the beneficiary. d. Consent to only part of an amendment is a rejection of the entire amendment. 2.07 Routing of Amendments a. An issuer using another person to advise a standby must advise all amendments to that person. b. An amendment or cancellation of a standby does not affect the issuer’s obligation to a nominated person that has acted within the scope of its nomination before receipt of notice of the amendment or cancellation. c. Non-extension of an automatically extendable (renewable) standby does not affect an issuer’s obligation to a nominated person who has acted within the scope of its nomination before receipt of a notice of non-extension. Rule 3: Presentation 3.01 Complying Presentation Under a Standby A standby should indicate the time, place and location within that place, person to whom, and medium in which presentation should be made. If so, presentation must be so made in order to comply. To the extent that a standby does not so

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indicate, presentation must be made in accordance with these Rules in order to be complying. 3.02 What Constitutes a Presentation The receipt of a document required by and presented under a standby constitutes a presentation requiring examination for compliance with the terms and conditions of the standby even if not all of the required documents have been presented. 3.03 Identification of Standby a. A presentation must identify the standby under which the presentation is made. b. A presentation may identify the standby by stating the complete reference number of the standby and the name and location of the issuer or by attaching the original or a copy of the standby. c. If the issuer cannot determine from the face of a document received that it should be processed under a standby or cannot identify the standby to which it relates, presentation is deemed to have been made on the date of identification. 3.04 Where and to Whom Complying Presentation Made a. To comply, a presentation must be made at the place and any location at that place indicated in the standby or provided in these Rules. b. If no place of presentation to the issuer is indicated in the standby, presentation to the issuer must be made at the place of business from which the standby was issued. c. If a standby is confirmed, but no place for presentation is indicated in the confirmation, presentation for the purpose of obligating the confirmer (and the issuer) must be made at the place of business of the confirmer from which the confirmation was issued or to the issuer. d. If no location at a place of presentation is indicated (such as department, floor, room, station, mail stop, post office box, or other location), presentation may be made to: i. the general postal address indicated in the standby, ii. any location at the place designated to receive deliveries of mail or documents; or iii. any person at the place of presentation actually or apparently authorised to receive it. 3.05 When Timely Presentation Made a. A presentation is timely if made at any time after issuance and before expiry on the expiration date. b. A presentation made after the close of business at the place of presentation is deemed to have been made on the next business day. 3.06 Complying Medium of Presentation a. To comply, a document must be presented in the medium indicated in the standby. b. Where no medium is indicated, to comply a document must be presented as a paper document, unless only a demand is required, in which case:

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i. a demand that is presented via S.W.I.F.T., tested telex, or other similar authenticated means by a beneficiary that is a S.W.I.F.T. participant or a bank complies; otherwise ii. a demand that is not presented as a paper document does not comply unless the issuer permits, in its sole discretion, the use of that medium. c. A document is not presented as a paper document if it is communicated by electronic means even if the issuer or nominated person receiving it generates a paper document from it. d. Where presentation in an electronic medium is indicated, to comply a document must be presented as an electronic record capable of being authenticated by the issuer or nominated person to whom it is presented. 3.07 Separateness of Each Presentation a. Making a non-complying presentation, withdrawing a presentation, or failing to make any one of a number of scheduled or permitted presentations does not waive or otherwise prejudice the right to make another timely presentation or a timely representation whether or not the standby prohibits partial or multiple drawings or presentations. b. Wrongful dishonour of a complying presentation does not constitute dishonour of any other presentation under a standby or repudiation of the standby. c. Honour of a non-complying presentation, wither without notice of its noncompliance, does not waive requirements of a standby for other presentations. 3.08 Partial Drawing and Multiple Presentations; Amount of Drawings a. A presentation may be made for less than the full amount available ( “partial drawing”). b. More than one presentation (“multiple presentations”) may be made. c. The statement “partial drawings prohibited” or a similar expression means that a presentation must be for the full amount available. d. The statement “multiple drawings prohibited” or a similar expression means that only one presentation may be made and honoured but that it may be for less than the full amount available. e. If a demand exceeds the amount available under the standby, the drawing is discrepant. Any document other than the demand stating an amount in excess of the amount demanded is not discrepant for that reason. f. Use of “approximately”, “about”, “circa”, or a similar word permits a tolerance not to exceed 10% more or 10% less of the amount to which such word refers. 3.09 Extend or Pay A beneficiary’s request to extend the expiration date of the standby or, alternatively, to pay the amount available under it: a. is a presentation demanding payment under the standby, to be examined as such in accordance with these Rules; and b. implies that the beneficiary:

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i. consents to the amendment to extend the expiry date to the date requested; ii. requests the issuer to exercise its discretion to seek the approval of the applicant and to issue that amendment; iii. upon issuance of that amendment, retracts its demand for payment; and iv. consents to the maximum time available under these Rules for examination and notice of dishonour. 3.10 No Notice of Receipt of Presentation An issuer is not required to notify the applicant of receipt of a presentation under the standby. 3.11 Issuer Waiver and Applicant Consent to Waiver of Presentation Rules In addition to other discretionary provisions in a standby or these Rules, an issuer may, in its sole discretion, without notice to or consent of the applicant and without effect on the applicant’s obligations to the issuer, waive a. the following Rules and any similar terms stated in the standby which are primarily for the issuer’s benefit or operational convenience: i. treatment of documents received, at the request of the presenter, as having been presented at a later date (Rule 3.02); ii. identification of a presentation to the standby under which it is presented (Rule 3.03(a)); iii. where and to whom presentation is made (Rule 3.04(b), (c), and (d)), except the country of presentation stated in the standby, or iv. treatment of a presentation made after the close of business as if it were made on the next business day (Rule 3.05(b)). b. the following Rule but not similar terms stated in the standby: i. a required document dated after the date of its stated presentation (Rule 4.06); or ii. the requirement that a document issued by the beneficiary be in the language of the standby (Rule 4.04). c. the following Rule relating to the operational integrity of the standby only in so far as the bank is in fact dealing with the true beneficiary: acceptance of a demand in an electronic medium (Rule 3.06(b)). Waiver by the confirmer requires the consent of the issuer with respect to paragraphs (b) and (c) of this Rule. 3.12 Original Standby Lost, Stolen, Mutilated, or Destroyed a. If an original standby is lost, stolen, mutilated, or destroyed, the issuer need not replace it or waive any requirement that the original be presented under the standby. b. If the issuer agrees to replace an original standby or to waive a requirement for its presentation, it may provide a replacement or copy to the beneficiary without affecting the applicant’s obligations to the issuer to reimburse, but, if it does so, the issuer must mark the replacement or copy as such. The issuer may, in its sole

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discretion, require indemnities satisfactory to it from the beneficiary and assurances from nominated persons that no payment has been made. Closure on Expiry Date 3.13 Expiration Date on a Non-Business Day a. If the last day for presentation stated in a standby (whether stated to be the expiration date or the date by which documents must be received) is not a business day of the issuer or nominated person where presentation is to be made, then presentation made there on the first following business day shall be deemed timely. b. A nominated person to whom such a presentation is made must so notify the issuer. 3.14 Closure on a Business Day and Authorization of Another Reasonable Place for Presentation a. If on the last business day for presentation the place for presentation stated in a standby is for any reason closed and presentation is not timely made because of the closure, then the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business, unless the standby otherwise provides. b. Upon or in anticipation of closure of the place of presentation, an issuer may authorise another reasonable place for presentation in the standby or in a communication received by the beneficiary. If it does so, then i. presentation must be made at that reasonable place; and ii. if the communication is received fewer than thirty calendar days before the last day for presentation and for that reason presentation is not timely made, the last day for presentation is automatically extended to the day occurring thirty calendar days after the last day for presentation. Rule 4: Examination 4.01 Examination for Compliance a. Demands for honour of a standby must comply with the terms and conditions of the standby. b. Whether a presentation appears to comply is determined by examining the presentation on its face against the terms and conditions stated in the standby as interpreted and supplemented by these Rules which are to be read in the context of standard standby practice. 4.02 Non-Examination of Extraneous Documents Documents presented which are not required by the standby need not be examined and, in any event, shall be disregarded for purposes of determining compliance of the presentation. They may without responsibility be returned to the presenter or passed on with the other documents presented. 4.03 Examination for Inconsistency

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An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby. 4.04 Language of Documents The language of all documents issued by the beneficiary is to be that of the standby. 4.05 Issuer of Documents Any required document must be issued by the beneficiary unless the standby indicates that the document is to be issued by a third person or the document is of a type that standard standby practice requires to be issued by a third person. 4.06 Date of Documents The issuance date of a required document may be earlier but not later than the date of its presentation. 4.07 Required Signature on a Document a. A required document need not be signed unless the standby indicates that the document must be signed or the document is of a type that standard standby practice requires be signed. b. A required signature may be made in any manner that corresponds to the medium in which the signed document is presented. c. Unless a standby specifies: i. the name of a person who must sign a document, any signature or authentication will be regarded as a complying signature. ii. the status of a person who must sign, no indication of status is necessary. d. If a standby specifies that a signature must be made by: i. a named natural person without requiring that the signer’s status be identified, a signature complies that appears to be that of the named person; ii. a named legal person or government agency without identifying who is to sign on its behalf or its status, any signature complies that appears to have been made on behalf of the named legal person or government agency; or iii. a named natural person, legal person, or government agency requiring the status of the signer be indicated, a signature complies which appears to be that of the named natural person, legal person, or government agency and indicates its status. 4.08 Demand Document Implied If a standby does not specify any required document, it will still be deemed to require a documentary demand for payment. 4.09 Identical Wording and Quotation Marks If a standby requires: a. a statement without specifying precise wording, then the wording in the document presented must appear to convey the same meaning as that required by the standby; b. specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, then typographical errors in spelling, punctuation, spacing, or the

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like that are apparent when read in context are not required to be duplicated and blank lines or spaces for data may be completed in any manner not inconsistent with the standby; or c. specified wording by the use of quotation marks, blocked wording, or an attached exhibit or form, and also provides that the specified wording be “exact” or “identical”, then the wording in the documents presented, including typographical errors in spelling, punctuation, spacing and the like, as well as blank lines and spaces for data, must be exactly reproduced. 4.10 Applicant Approval A standby should not specify that a required document be issued, signed, or counter-signed by the applicant. However, if the standby includes such a requirement, the issuer may not waive the requirement and is not responsible for the applicant’s withholding of the document or signature. 4.11 Non-Documentary Terms or Conditions a. A standby term or condition which is non-documentary must be disregarded whether or not it affects the issuer’s obligation to treat a presentation as complying or to treat the standby as issued, amended, or terminated. b. Terms or conditions are non-documentary if the standby does not require presentation of a document in which they are to be evidenced and if their fulfillment cannot be determined by the issuer from the issuer’s own records or within the issuer’s normal operations. c. Determinations from the issuer’s own records or within the issuer’s normal operations include determinations of: i. when, where, and how documents are presented or otherwise delivered to the issuer; ii. when, where, and how communications affecting the standby are sent or received by the issuer, beneficiary, or any nominated person; iii. amounts transferred into or out of accounts with the issuer; and iv. amounts determinable from a published index (e.g., if a standby provides for determining amounts of interest accruing according to published interest rates). d. An issuer need not re-compute a beneficiary’s computations under a formula stated or referenced in a standby except to the extent that the standby so provides. 4.12 Formality of Statements in Documents a. A required statement need not be accompanied by a solemnity, officialization, or any other formality. b. If a standby provides for the addition of a formality to a required statement by the person making it without specifying form or content, the statement complies if it indicates that it was declared, averred, warranted, attested, sworn under oath, affirmed, certified, or the like. c. If a standby provides for a statement to be witnessed by another person without specifying form or content, the witnessed statement complies if it appears to

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contain a signature of a person other than the beneficiary with an indication that the person is acting as a witness. d. If a standby provides for a statement to be counter-signed, legalized, visaed, or the like by a person other than the beneficiary acting in a governmental, judicial, corporate, or other representative capacity without specifying form or content, the statement complies if it contains the signature of a person other than the beneficiary and includes an indication of that person’s representative capacity and the organization on whose behalf the person has acted. 4.13 No Responsibility to Identify Beneficiary Except to the extent that a standby requires presentation of an electronic record: a. a person honouring a presentation has no obligation to the applicant to ascertain the identity of any person making a presentation or any assignee of proceeds; b. payment to a named beneficiary, transferee, an acknowledged assignee, successor by operation of law, to an account or account number stated in the standby or in a cover instruction from the beneficiary or nominated person fulfills the obligation under the standby to effect payment. 4.14 Name of Acquired or Merged Issuer or Confirmer If the issuer or confirmer is reorganized, merged, or changes its name, any required reference by name to the issuer or confirmer in the documents presented may be to it or its successor. 4.15 Original, Copy, and Multiple Documents a. A presented document must be an original. b. Presentation of an electronic record, where an electronic presentation is permitted or required is deemed to be an “original”. c. i. A presented document is deemed to be an “original” unless it appears on its face to have been reproduced from an original. ii. A document which appears to have been reproduced from an original is deemed to be an original if the signature or authentication appears to be original. d. A standby that requires presentation of a “copy” permits presentation of either an original or copy unless the standby states that only a copy be presented or otherwise addresses the disposition of all originals. e. If multiples of the same document are requested, only one must be an original unless: i. “duplicate originals” or “multiple originals” are requested in which case all must be originals; or ii. “two copies”, “two-fold”, or the like are requested in which case either originals or copies may be presented. Standby Document Types

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4.16 Demand for Payment a. A demand for payment need not be separate from the beneficiary’s statement or other required document. b. If a separate demand is required, it must contain: i. a demand for payment from the beneficiary directed to the issuer or nominated person; ii. a date indicating when the demand was issued; iii. the amount demanded; and iv. the beneficiary’s signature. c. A demand may be in the form of a draft or other instruction, order, or request to pay. If a standby requires presentation of a “draft” or “bill of exchange”, that draft or bill of exchange need not be in negotiable form unless the standby so states. 4.17 Statement of Default or Other Drawing Event If a standby requires a statement, certificate, or other recital of a default or other drawing event and does not specify content, the document complies if it contains: a. a representation to the effect that payment is due because a drawing event described in the standby has occurred; b. a date indicating when it was issued; and c. the beneficiary’s signature. 4.18 Negotiable Documents If a standby requires presentation of a document that is transferable by endorsement and delivery without stating whether, how, or to whom endorsement must be made, then the document may be presented without endorsement, or, if endorsed, the endorsement may be in blank and, in any event, the document may be issued or negotiated with or without recourse. 4.19 Legal or Judicial Documents If a standby requires presentation of a government-issued document, a court order, an arbitration award, or the like, a document or a copy is deemed to comply if it appears to be: i. issued by a government agency, court, tribunal, or the like; ii. suitably titled or named; iii. signed; iv. dated; and v. originally certified or authenticated by an official of a government agency, court, tribunal, or the like. 4.20 Other Documents a. If a standby requires a document other than one whose content is specified in these Rules without specifying the issuer, data content, or wording, a document complies if it appears to be appropriately titled or to serve the function of that type of document under standard standby practice.

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b. A document presented under a standby is to be examined in the context of standby practice under these Rules even if the document is of a type (such as a commercial invoice, transport documents, insurance documents or the like) for which the Uniform Customs and Practice for Documentary Credits contains detailed rules. 4.21 Request to Issue Separate Undertaking If a standby requests that the beneficiary of the standby issue its own separate undertaking to another (whether or not the standby recites the text of that undertaking): a. the beneficiary receives no rights other than its rights to draw under the standby even if the issuer pays a fee to the beneficiary for issuing the separate undertaking; b. neither the separate undertaking nor any documents presented under it need be presented to the issuer; and c. if originals or copies of the separate undertaking or documents presented under it are received by the issuer although not required to be presented as a condition to honour of the standby: i. the issuer need not examine, and, in any event, shall disregard their compliance or consistency with the standby, with the beneficiary’s demand under the standby, or with the beneficiary’s separate undertaking; and ii. the issuer may without responsibility return them to the presenter or forward them to the applicant with the presentation. Rule 5: Notice, Preclusion, and Disposition of Documents 5.01 Timely Notice of Dishonour a. Notice of dishonour must be given within a time after presentation of documents which is not unreasonable. i. Notice given within three business days is deemed to be not unreasonable and beyond seven business days is deemed to be unreasonable. ii. Whether the time within which notice is given is unreasonable does not depend upon an imminent deadline for presentation. iii. The time for calculating when notice of dishonour must be given begins on the business day following the business day of presentation. iv. Unless a standby otherwise expressly states a shortened time within which notice of dishonour must be given, the issuer has no obligation to accelerate its examination of a presentation. b. i. The means by which a notice of dishonour is to be given is by telecommunication, if available, and, if not, by another available means which allows for prompt notice. ii. If notice of dishonour is received within the time permitted for giving the notice, then it is deemed to have been given by prompt means.

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c. Notice of dishonour must be given to the person from whom the documents were received (whether the beneficiary, nominated person, or person other than a delivery person) except as otherwise requested by the presenter. 5.02 Statement of Grounds for Dishonour A notice of dishonour shall state all discrepancies upon which dishonour is based. 5.03 Failure to Give Timely Notice of Dishonour a. Failure to give notice of a discrepancy in a notice of dishonour within the time and by the means specified in the standby or these rules precludes assertion of that discrepancy in any document containing the discrepancy that is retained or represented, but does not preclude assertion of that discrepancy in any different presentation under the same or a separate standby. b. Failure to give notice of dishonour or acceptance or acknowledgment that a deferred payment undertaking has been incurred obligates the issuer to pay at maturity. 5.04 Notice of Expiry Failure to give notice that a presentation was made after the expiration date does not preclude dishonour for that reason. 5.05 Issuer Request for Applicant Waiver without Request by Presenter If the issuer decides that a presentation does not comply and if the presenter does not otherwise instruct, the issuer may, in its sole discretion, request the applicant to waive non-compliance or otherwise to authorize honour within the time available for giving notice of dishonour but without extending it. Obtaining the applicant’s waiver does not obligate the issuer to waive non-compliance. 5.06 Issuer Request for Applicant Waiver upon Request of Presenter If, after receipt of notice of dishonour, a presenter requests that the presented documents be forwarded to the issuer or that the issuer seek the applicant’s waiver: a. no person is obligated to forward the discrepant documents or seek the applicant’s waiver; b. the presentation to the issuer remains subject to these Rules unless departure from them is expressly consented to by the presenter; and c. if the documents are forwarded or if a waiver is sought: i. the presenter is precluded from objecting to the discrepancies notified to it by the issuer; ii. the issuer is not relieved from examining the presentation under these Rules; iii. the issuer is not obligated to waive the discrepancy even if the applicant waives it; and iv. the issuer must hold the documents until it receives a response from the applicant or is requested by the presenter to return the documents, and if the issuer receives no such response or request within ten business days of its notice of dishonour, it may return the documents to the presenter. 5.07 Disposition of Documents

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Dishonoured documents must be returned, held, or disposed of as reasonably instructed by the presenter. Failure to give notice of the disposition of documents in the notice of dishonour does not preclude the issuer from asserting any defense otherwise available to it against honour. 5.08 Cover Instructions/Transmittal Letter a. Instructions accompanying a presentation made under a standby may be relied on to the extent that they are not contrary to the terms or conditions of the standby, the demand, or these Rules. b. Representations made by a nominated person accompanying a presentation may be relied upon to the extent that they are not contrary to the terms or conditions of a standby or these Rules. c. Notwithstanding receipt of instructions, an issuer or nominated person may pay, give notice, return the documents, or otherwise deal directly with the presenter. d. A statement in the cover letter that the documents are discrepant does not relieve the issuer from examining the presentation for compliance. 5.09 Applicant Notice of Objection a. An applicant must timely object to an issuer’s honour of a noncomplying presentation by giving timely notice by prompt means. b. An applicant acts timely if it objects to discrepancies by sending a notice to the issuer stating the discrepancies on which the objection is based within a time after the applicant’s receipt of the documents which is not unreasonable. c. Failure to give a timely notice of objection by prompt means precludes assertion by the applicant against the issuer of any discrepancy or other matter apparent on the face of the documents received by the applicant, but does not preclude assertion of that objection to any different presentation under the same or a different standby. Rule 6: Transfer, Assignment, and Transfer by Operation of Law Transfer of Drawing Rights 6.01 Request to Transfer Drawing Rights Where a beneficiary requests that an issuer or nominated person honour a drawing from another person as if that person were the beneficiary, these Rules on transfer of drawing rights (“transfer”) apply. 6.02 When Drawing Rights are Transferable a. A standby is not transferable unless it so states. b. A standby that states that it is transferable without further provision means that drawing rights: i. may be transferred in their entirety more than once; ii. may not be partially transferred; and

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iii. may not be transferred unless the issuer (including the confirmer) or another person specifically nominated in the standby agrees to and effects the transfer requested by the beneficiary. 6.03 Conditions to Transfer An issuer of a transferable standby or a nominated person need not effect a transfer unless: a. it is satisfied as to the existence and authenticity of the original standby, and b. the beneficiary submits or fulfills: i. a request in a form acceptable to the issuer or nominated person including the effective date of the transfer and the name and address of the transferee; ii. the original standby; iii. verification of the signature of the person signing for the beneficiary; iv. verification of the authority of the person signing for the beneficiary; v. payment of the transfer fee; and vi. any other reasonable requirements. 6.04 Effect of Transfer on Required Documents Where there has been a transfer of drawing rights in their entirety. a. a draft or demand must be signed by the transferee beneficiary; and b. the name of the transferee beneficiary may be used in place of the name of the transferor beneficiary in any other required document. 6.05 Reimbursement for Payment Based on a Transfer An issuer or nominated person paying under a transfer pursuant to Rule 6.03(a), (b)(i), and (b)(ii) is entitled to reimbursement as if it had made payment to the beneficiary. Acknowledgment of Assignment of Proceeds 6.06 Assignment of Proceeds Where an issuer or nominated person is asked to acknowledge a beneficiary’s request to pay an assignee all or part of any proceeds of the beneficiary’s drawing under the standby, these Rules on acknowledgment of an assignment of proceeds apply except where applicable law otherwise requires. 6.07 Request for Acknowledgment a. Unless applicable law otherwise requires, an issuer or nominated person i. is not obligated to give effect to an assignment of proceeds which it has not acknowledged; and ii. is not obligated to acknowledge the assignment, b. If an assignment is acknowledged:

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i. the acknowledgment confers no rights with respect to the standby to the assignee who is only entitled to the proceeds assigned, if any, and whose rights may be affected by amendment or cancellation; and ii. the rights of the assignee are subject to: (a) the existence of any net proceeds payable to the beneficiary by the person making the acknowledgment; (b) rights of nominated persons and transferee beneficiaries; (c) rights of other acknowledged assignees; and (d) any other rights or interests that may have priority under applicable law. 6.08 Conditions to Acknowledgment of Assignment of Proceeds An issuer or nominated person may condition its acknowledgment on receipt of: a. the original standby for examination or notation; b. verification of the signature of the person signing for the beneficiary; c. verification of the authority of the person signing for the beneficiary; d. an irrevocable request signed by the beneficiary for acknowledgment of the assignment that includes statements, covenants, indemnities, and other provisions which may be contained in the issuer’s or nominated person’s required form requesting acknowledgment of assignment, such as: i. the identity of the affected drawings if the standby permits multiple drawings; ii. the full name, legal form, location, and mailing address of the beneficiary and the assignee; iii. details of any request affecting the method of payment or delivery of the standby proceeds; iv. limitation on partial assignments and prohibition of successive assignments; v. statements regarding the legality and relative priority of the assignment; or vi. right of recovery by the issuer or nominated person of any proceeds received by the assignee that are recoverable from the beneficiary; e. payment of a fee for the acknowledgment; and f. fulfillment of other reasonable requirements. 6.09 Conflicting Claims to Proceeds If there are conflicting claims to proceeds, then payment to an acknowledged assignee may be suspended pending resolution of the conflict. 6.10 Reimbursement for Payment Based on an Assignment An issuer or nominated person paying under an acknowledged assignment pursuant to Rule 6.08(a) and (b) is entitled to reimbursement as if it had made payment to the beneficiary. If the beneficiary is a bank, the acknowledgment may be based solely upon an authenticated communication. Transfer by Operation of Law 6.11 Transferee by Operation of Law

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Where an heir, personal representative, liquidator, trustee, receiver, successor corporation, or similar person who claims to be designated by law to succeed to the interests of a beneficiary presents documents in its own name as if it were the authorized transferee of the beneficiary, these Rules on transfer by operation of law apply. 6.12 Additional Document in Event of Drawing in Successor’s Name A claimed successor may be treated as if it were an authorized transferee of a beneficiary’s drawing rights in their entirety if it presents an additional document or documents which appear to be issued by a public official or representative (including a judicial officer) and indicate: a. that the claimed successor is the survivor of a merger, consolidation, or similar action of a corporation, limited liability company, or other similar organization; b. that the claimed successor is authorized or appointed to act on behalf of the named beneficiary or its estate because of an insolvency proceeding; c. that the claimed successor is authorized or appointed to act on behalf of the named beneficiary because of death or incapacity; or d. that the name of the named beneficiary has been changed to that of the claimed successor. 6.13 Suspension of Obligations upon Presentation by Successor An issuer or nominated person which receives a presentation from a claimed successor which complies in all respects except for the name of the beneficiary: a. may request in a manner satisfactory as to form and substance: i. a legal opinion; ii. an additional document referred to in Rule 6.12 (Additional Document in Event of Drawing in Successor’s Name) from a public official; iii. statements, covenants, and indemnities regarding the status of the claimed successor as successor by operation of law; iv. payment of fees reasonably related to these determinations; and v. anything which may be required for a transfer under Rule 6.03 (Conditions to Transfer) or an acknowledgment of assignment of proceeds under Rule 6.08 (Conditions to Acknowledgment of Assignment of Proceeds); but such documentation shall not constitute a required document for purposes of expiry of the standby. b. Until the issuer or nominated person receives the requested documentation, its obligation to honour or give notice of dishonour is suspended, but any deadline for presentation of required documents is not thereby extended. 6.14 Reimbursement for Payment Based on a Transfer by Operation of Law An issuer or nominated person paying under a transfer by operation of law pursuant to Rule 6.12 (Additional Document in Event of Drawing in Successor’s Name) is entitled to reimbursement as if it had made payment to the beneficiary.

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Rule 7: Cancellation 7.01 When an Irrevocable Standby is Cancelled or Terminated A beneficiary’s rights under a standby may not be cancelled without its consent. Consent may be evidenced in writing or by an action such as return of the original standby in a manner which implies that the beneficiary consents to cancellation. A beneficiary’s consent to cancellation is irrevocable when communicated to the issuer. 7.02 Issuer’s Discretion Regarding a Decision to Cancel Before acceding to a beneficiary’s authorization to cancel and treating the standby as cancelled for all purposes, an issuer may require in a manner satisfactory as to form and substance: a. the original standby; b. verification of the signature of the person signing for the beneficiary; c. verification of the authorization of the person signing for the beneficiary; d. a legal opinion; e. an irrevocable authority signed by the beneficiary for cancellation that includes statements, covenants, indemnities, and similar provisions contained in a required form; f. satisfaction that the obligation of any confirmer has been cancelled; g. satisfaction that there has not been a transfer or payment by any nominated person; and h. any other reasonable measure. Rule 8: Reimbursement Obligations 8.01 Right to Reimbursement a. Where payment is made against a complying presentation in accordance with these Rules, reimbursement must be made by: i. an applicant to an issuer requested to issue a standby; and ii. an issuer to a person nominated to honour or otherwise give value. b. An applicant must indemnify the issuer against all claims, obligations, and responsibilities (including attorney’s fees) arising out of: i. the imposition of law or practice other than that chosen in the standby or applicable at the place of issuance; ii. the fraud, forgery, or illegal action of others; or iii. the issuers performance of the obligations of a confirmer that wrongfully dishonours a confirmation. c. This Rule supplements any applicable agreement, course of dealing, practice, custom or usage providing for reimbursement or indemnification on lesser or other grounds. 8.02 Charges for Fees and Costs

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a. An applicant must pay the issuer’s charges and reimburse the issuer for any charges that the issuer is obligated to pay to persons nominated with the applicant’s consent to advise, confirm, honour, negotiate, transfer, or to issue a separate undertaking. b. An issuer is obligated to pay the charges of other persons: i. if they are payable in accordance with the terms of the standby; or ii. if they are the reasonable and customary fees and expenses of a person requested by the issuer to advise, honour, negotiate, transfer, or to issue a separate undertaking, and they are unrecovered and unrecoverable from the beneficiary or other presenter because no demand is made under the standby. 8.03 Refund of Reimbursement A nominated person that obtains reimbursement before the issuer timely dishonours the presentation must refund the reimbursement with interest if the issuer dishonours. The refund does not preclude the nominated person’s wrongful dishonour claims. 8.04 Bank-to-Bank Reimbursement Any instruction or authorization to obtain reimbursement from another bank is subject to the International Chamber of Commerce standard rules for bank-tobank reimbursements. Rule 9: Timing 9.01 Duration of Standby A standby must: a. contain an expiry date; or b. permit the issuer to terminate the standby upon reasonable prior notice or payment. 9.02 Effect of Expiration on Nominated Person The rights of a nominated person that acts within the scope of its nomination are not affected by the subsequent expiry of the standby. 9.03 Calculation of Time a. A period of time within which an action must be taken under these Rules begins to run on the first business day following the business day when the action could have been undertaken at the place where the action should have been undertaken. b. An extension period starts on the calendar day following the stated expiry date even if either day falls on a day when the issuer is closed. 9.04 Time of Day of Expiration If no time of day is stated for expiration, it occurs at the close of business at the place of presentation. 9.05 Retention of Standby Retention of the original standby does not preserve any rights under the standby after the right to demand payment ceases.

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Rule 10: Syndication/Participation 10.01 Syndication If a standby with more than one issuer does not state to whom presentation may be made, presentation may be made to any issuer with binding effect on all issuers. 10.02 Participation a. Unless otherwise agreed between an applicant and an issuer, the issuer may sell participations in the issuer’s rights against the applicant and any presenter and may disclose relevant applicant information in confidence to potential participants. b. An issuer’s sale of participations does not affect the obligations of the issuer under the standby or create any rights or obligations between the beneficiary and any participant. Index to ISP 98

Advice/Advisor Amendment 2.05; 2.07 Application of Rules to 1.04 Generally 2.05 Nominated Party 2.04 Obligation of 2.05 Reimbursement of Costs of 8.02 Refusal to 2.05 Acknowledgment of Assignment of Proceeds see Assignment of Proceeds Amendment Advice of, Advisor 2.05; 2.07 Application of Rules to 1.04 Automatic 2.06(a) Binding 1.06 Extend or Pay 3.09 Generally 2.06; 2.07 Irrevocable 1.06 Issuer’s Amendment 1.06; 2.06; 2.07 Non-Documentary Conditions 4.11 Partial Consent to 2.06 Routing 2.07 Transfer of Drawing Rights 6.07(b) Applicant Application of Rules 1.04 Approval of Required Document 4.10 Consent to Amendment (Issuer/Confirmer/Beneficiary) 2.06 Defined 1.09(a) Independence 1.06 Irrevocable 1.06

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Notice of Presentation 3.10 Double Payment (Risk of) 4.13 Objection to Discrepancies 5.09 Reimbursement 8.01 Waiver by 3.11; 3.12; 5.05; 5.06 Consent to 3.12 Notice of 3.11 Request for 5.05; 5.06 Archives see Records Assignment of Proceeds Acknowledgment of 6.07 Beneficiary as a Bank 6.10 Conditions to 6.08; 6.13 “Assignable” 1.10 Assignee Identification of 4.13 Rights of 6.07 Suspension of Payment 6.09 Conflicting Claims 6.09 Generally 6.06; 6.07; 6.08; 6.09; 6.10 Partial, Limited 6.08 Reimbursement 6.10 Attorney’s Fees Reimbursement of 6.13; 8.01 Bank-to-Bank Reimbursement see Reimbursement Beneficiary Amendment, Consent to 2.06 Application of Rules to 1.04 Assignment, Request for 6.08 Change of Name due to Succession 6.12 Defined 1.09; 1.11 Double Payment 4.13 Obligations of Notice of Dishonour 5.01; 6.13 Waiver by Issuer 3.11 Cancellation 7.03 Transferee 6.04 Transferee Beneficiary 1.11 see Types of Documents Business Day/Business Hours Calculation of Time 9.03 Closure on 3.14 Definition of 1.09 Notice of Dishonour 5.01 Presentation After End of 3.05 see “Calendar Day”; Non-Business Day Calendar Day 3.14

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Cancellation Beneficiary’s Consent to 7.01 Effect on Assignee 6.07 Effect on Issuer or Nominated Person 1.06; 2.07; 7.02 Generally 7.01 Implied by Return of Original 7.01 Requirements of 7.02 Closure Generally 3.13; 3.14 see Business Day, Closure; Presentation, Closure Communication Authentication Required for Acknowledgment of Assignment 6.10 Electronic 1.09 Comply; Complying; Compliance Delivery 3.04 Examination 1.06; 2.01; 3.01; 3.02 Separate Undertaking 4.21 Condition see Non-Documentary Conditions Confirmation—Confirmer Acquisition or Merger, Change of Name 4.14 Amendment 2.06 Application of Rules to 1.04 Cancellation 7.02 Definition 1.09; 1.11 Issuer: Use of Term 1.11 Nomination by Applicant 2.04; 8.02 Obligations of to Honour Complying Presentation 2.01 upon Issuer’s Wrongful Dishonour 2.01 Place of Presentation 3.04 Rights of Reimbursement of Costs 8.02 Transfer of Drawing Rights 6.02 Wrongful Dishonour by 8.01 Copies Generally 4.15 Letter of Credit Documents 3.03; 3.12 Original Standby Lost, Stolen, Mutilated or Destroyed 3.12 Separate Undertaking (Documents Under) 4.21 Cover Letter Generally 5.08 Identification of Standby 3.03 Payment 4.13 Cure Generally 3.07 Date Issuance of Documents 4.06 Judicial/Legal Document 4.19

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Presentation 4.06 Separate Demand 4.16 Statement of Default 4.17 see Calculation; Expiry Date Defences to Honour Generally 1.05 Deferred Payment Undertaking Honour 2.01 Nomination 2.04 Notice of Dishonour 5.03 Suspension 6.13 Definitions Generally 1.09 “Standby” 1.01 Demand Acceptance 2.01; 2.04 Conflict With Cover Letter 5.08 Definition 1.09 Document Implied 4.08 Generally 4.16 Honour 4.01 Reimbursement of Costs 8.02 Separate, Requirements 4.16 Separate Undertaking 4.21 Suspension of Honour 6.13 Transfer of Drawing Rights 6.04 Discrepant Documents Forwarding at Beneficiary’s Request 5.06 Issuer’s Request to Waive 5.05 Notice of Objection 5.09 Standard of Examination 5.01 Timely Assertion 5.03 Dishonour Cure 3.07 Disposition of Documents 5.07 Issuer, Affect on Confirmer 2.01 Nominated Bank 2.04 Notice of, see Notice of Dishonour Reimbursement Before 8.03 Re-presentation 3.07 Statement of Grounds 5.02 Wrongful, see Wrongful Dishonour Document Copy 3.03; 3.12; 4.15; 4.21 Date 4.06; 4.16; 4.17; 4.19 Definition 1.09 Demand 4.01; 4.16; 4.21; 5.08; 6.04 Implied 4.08 Discrepant 5.03; 5.05; 5.06; 5.09 Disposition 5.07 Effect of Transfer 6.04 Examination 3.02

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for Compliance 4.01 for Inconsistency 4.03 Extraneous—see Extraneous Documents Formality of 4.12 Held by Issuer 5.06 Issued by Beneficiary/Third Party 4.05 Judicial/Legal 4.19 Language of 4.04 Multiple 4.15 Name of Beneficiary 6.04; 6.11 Name of Issuer/Confirmer 4.14 Nature of Standby 1.06 Negotiable 4.18 Original Required 4.15 Other 4.20 Separate Undertaking 4.21 Signature Required 4.07; 4.10 Statement of Default 4.17 Successor Beneficiary 6.12; 6.13 Witnessing 4.12 Wording of Attached Exhibit/Form; Blocked Wording;“Exact” or “Identical”; Quoted Wording “Identical”; 4.09 Draft see Demand Drawings Assignment of Proceeds 6.06 Definition 1.09 Fraudulent/Abusive 1.05 Installment 3.07 Multiple 3.08; 3.07; 6.08 Request for Acknowledgment of Assignment of Proceeds 6.08; 6.13 Partial 3.08 Separate Undertaking, Beneficiary’s Right 4.21 Successor 6.12 Transfer 6.01; 6.02 Electronic Commerce Electronic Presentation Electronic Record Evergreen Automatic Non-Extension of Reinstate 1.09 1.09 1.10 2.07 1.10 Examination of Documents Condition to Acknowledgment of Assignment of Proceeds 6.08; 6.13 Extend or Pay 3.09 Extraneous Documents 4.02 Generally Rule 4 Separate Undertaking, Documents Under 4.21

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Standard of 1.06; 4.03 Succession 6.13 Time, when Commences 3.02 Timely 2.01; 5.01 Expiry; Expiration; Expiry Date; Expiration Date Document Required 6.13 Effect on Nominated Person 9.02 Expiration Date 3.13; 3.09 Definition of 1.09 Required 1.09; 3.09; 3.13; 9.01 Extension 2.06; 3.09; 3.13; 3.14; 9.03 Failure to Identify Standby 3.03 Notice 5.04 Presentation After Expiry 3.13; 3.14; 5.04 Timely 3.05; 3.01 Time, Calculated at Place of Presentation 3.05; 9.04 Extend or Pay 3.09 Extraneous Documents Cover Document 4.02 Transfer by Operation of Law 4.02 Force Majeure Closure Due to 3.14 see Business Day, Closure;Presentation, Closure Fraud ISP98 Does Not Address 1.05 Not Responsible to Identify Beneficiary 4.13 Reimbursement Arising Out of 8.01 Honour Conditions to 4.21 Confirmer 2.01 Demand for Compliance with Terms of Standby 4.01 Suspension of Obligation 6.13 Generally 3.07 Issuer 2.01 Multiple Presentations 3.08 Negotiation 2.01 Obligation to Identify Presenter or Assignee 4.13 Timely Acceptance of 2.01 Transfer of Drawing Rights 6.01 Wrongful, see Wrongful Honour Independence Generally 1.06 Issuer/Beneficiary Relationship 1.07 Irrevocable Conditions to Issuance of Standby 2.03

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Nature of Standby 1.06 ISP98 Application of 1.01; 1.03 Interpretation of 1.03, 1.11 Modification of 1.01; 1.04 Relation to Other Laws 1.02 Issuance Conditions to 2.03 Irrevocable Upon 1.06 Issuer Amendment 2.06; 2.07 Routing of 2.07 Application of Rules to 1.04 Branch, Agency or Other Office of 2.03 Closure On a Business Day 3.14 On First Day of Extension Period 9.03 Confirmer 1.11; 3.11 Discretion 3.11 Issuance 2.03 Location 3.03 Multiple 10.01 Name of if Acquired or Merged 4.14 Obligations of 3.10; 4.10 Applicant 1.07 Applicant Waiver 5.05; 5.06 Beneficiary 1.07 Confirmer’s Wrongful Dishonour 2.01 Honour Complying Presentation 2.01 Suspension of 6.13 Irrevocable 1.06 Nominated Person 2.07; 8.02 Notice of Dishonour 5.02; 5.03 Reimbursement Prior to 8.03 Suspension 6.13 Underlying Transaction 1.08 Participation 10.02 Place of Presentation 3.04; 3.14 Power to Act as 1.05 Records 4.11 Rights Acknowledgment of Assignment of Proceeds 6.08 Applicant Waiver 5.05; 5.06 Available Defences 1.05; 5.07 Cover Instructions 5.08 Indemnities 3.12 Payment 1.06; 6.05 Reimbursement 3.12; 6.10; 6.12; 6.14; 8.01; 8.02 Separate Undertaking 4.21

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Successor 6.13 Waiver 3.02; 3.03; 3.04; 3.05; 3.06; 3.11; 4.04; 4.06; 4.09; 4.10 Syndication 10.02 Timely Action 2.01 Transfer of Drawing Rights 6.01; 6.02; 6.03; 6.13 Waiver on Own Initiative 5.05 see also Assignment of Proceeds; Documents, Examination; Standby, Identification; Transfer by Operation of Law Medium Electronic 1.09 Electronic Record 1.09 Presentation 4.11 for Notice of Dishonour 5.01; 5.03 for Notice of Objection 5.09 Multiple Drawings see Drawings Negotiation Negotiable Documents—see Documents, Negotiable Nomination of Negotiator 2.04; 8.02 Reimbursement of Costs of 8.02 Recourse 4.18 Nominated Person Application of Rules to Cover Instructions from Expiry, Effect of Obligations of 2.04 Assignment of Proceeds 6.06 Acknowledgment of 6.07; 6.08; 6.13 Examination for Inconsistency 4.03 Presentation 3.13 Expiration on a Non-Business Day 3.13 Notification to Issuer 3.13 Reimbursement 6.10; 6.12; 6.14; 8.01; 8.03 Reimbursement of Issuer 8.02 Rights 2.04 Transfer of Drawing Rights 6.01; 6.02; 6.03; 6.05; 6.13; 7.02 Non-Business Day Closure on 3.13 Non-Documentary Conditions Generally 2.01; 4.11 Notice, Receipt of Amendment 2.07 Consent to Waive 3.11 Dishonour—see Notice of Dishonour Disposition of Documents 5.07 Expiry–see Expiry, Notice of Non-Renewal 2.07

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Objection 5.09 Receipt of Presentation 3.10 Refusal to Advise 2.05 Termination 9.01 Notice of Dishonour Communication of 5.01 Content 5.02 Notice of Disposition of Documents 5.07 Suspension 6.13 Time, When Commences 3.02; 5.01 Timely 2.01; 3.09; 5.01; 5.03 Seek Applicant Waiver 5.05; 5.06 Original As a Condition to Acknowledgment of Assignment of Proceeds 6.08 Cancellation 7.01; 7.02 Existence and Authenticity of 6.03 “Multiple” and “Duplicate” 4.15 Presentation of 3.03; 4.15 Replacement of Lost, Stolen, Mutilated or Destroyed Standby 3.12 Retention of After Expiry 9.05 Separate Undertaking 4.21 Signature–see Signature, Original Partial Drawings see Drawing Paying Bank 2.04 Payment Expiry 9.05 Identification of Person Receiving 4.13 Method 2.01 Sight 2.01 Suspension 6.09 Termination by 9.01 Unit of Account 2.01 Preclusion Disposition of Documents 5.07 Documents Forwarded or Waiver Sought 5.06 Expiry 5.04 Objection 5.09 Timely Notice, Failure to Give 5.03 Presentation Closure of Place of 3.13; 3.14 Complying 1.06; 2.01; 3.13; 3.04; 3.02; 3.01 Extraneous Documents 4.02 Non-Documentary Conditions 4.11 Payment Against 8.01 Cover Instructions 5.08 Date 4.06

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Definition 1.09 Demand 4.16 Dishonour, Timely Notice 5.01 Suspension 6.13 Documents Forwarded to Issuer 5.06 Electronic 4.13; 4.15 Examination, Standards 4.01; 4.02; 4.11 Generally Rule 3 Identification of Standby 3.03 Inability 3.14 Issuer/Confirmer 2.01 Judicial/Legal Document 4.19 Medium 3.01 Multiple 3.08; 3.07 Documents 4.15 Issuers 10.01 Negotiable Documents 4.18 Non-Complying 3.07; 5.03; 5.04; 5.05; 5.06; 5.09 Obligation to Notify 3.10 Original/Copy 3.12; 4.15 Person to Whom Made 3.01 Place 3.01; 3.04; 3.14; 4.11 Re–presentation 5.03; 5.09 Separate Undertaking 4.21 Successor 6.11; 6.12; 6.13 Timely 3.14; 3.13; 3.05; 3.01; 5.04; 6.13; 9.04 Waiver of Rules 3.11; 5.05; 5.06 Proceeds see Assignment of Proceeds Reasonable Time 3.09 Notice of Dishonour 5.01 Suspension of 6.13 see Notice, Receipt of Records see Document; Issuer, Records Reimbursement Agreement 1.06 Assignment of Proceeds 6.10 Attorney’s Fees 6.13; 8.01 Bank-to-Bank 8.03 Costs of Nominated Person 8.02 Right to 1.06; 8.01 Transfer of Drawing Rights 6.05 Transfer by Operation of Law 6.12; 6.14 Signature Beneficiary Authorizing Cancellation 7.02 Request for Acknowledgment of Assignment of Proceeds 6.08; 6.13 Separate Demand 4.16

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Statement of Default 4.17 Complying 4.07 Definition 1.09 Electronic 1.09 Judicial/Judicial Document 4.19 Medium of 4.07 Negotiable Documents 4.18 Original 4.15 Required 4.07; 4.10; 4.12 Status of Signer 4.07 Transfer of Drawing Rights 6.03; 6.04 Verification/Authority 6.08; 7.02 Witness 4.12 Standard Standby Practice Advice 2.05 Examination 4.01; 4.20 Interpretation of Rules 1.03 Other Rules 1.02 Presentation 2.01 Required Documents Issued by Third Party 4.05 Other 4.20 Required Signature 4.07 Standby Authorized by Applicant 1.06 Conditions to Issuance 2.03 Definition 1.01, 1.11 Formalities 1.05 Identification 3.03 Nature 1.06 Undesirable Terms 1.10 see Original Statement of Default Generally 4.17 Successor; Succession; Successor by Operation of Law Additional Documents Required 6.12 Beneficiary Identification 4.13 Transferee 6.11 Payment 6.14 Name of lssuer/Confirmer 4.14 Presentation 6.11; 6.12; 6.13 Syndication Generally 10.01; 10.02 Termination Generally 7.01 Issuer 9.01 Non-Documentary Conditions 4.11 Notice 9.01 see Cancellation

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Time Business Day 1.09 Calculation 9.03 Day of Expiry 9.04 Extension of Expiry 9.03 Notice of Dishonour 5.01 Suspension 6.13 Notice of Objection 5.09 Presentation 3.05 Transfer Application of Rules 1.04 Conditions 6.02; 6.03 Form of Request 6.03; 6.13 Transferee Payment to 6.14 Generally 6.01; 6.02; 6.03; 6.04; 6.05; 6.11; 6.12; 6.13; 6.14 Partial Transfers 6.02 Payment 6.05 Transferee 1.11 Identification of 4.13 Successor as 6.12 Presentation by 6.11; 6.12; 6.13 Transfer By Operation of Law 6.11–6.14 Typographical Errors see Documents—Wording of Undesirable Terms Conditions to Issuance of Standby 2.03 Generally 1.10 Uniform Customs and Practice for Documentary Credits Documents, Examination 4.20 Waiver Applicant Consent 3.11 Generally 3.07 Issuer’s Request 5.05; 5.06 Issuer’s Right 3.02; 3.03; 3.04; 3.05; 3.06; 3.11; 4.06; 4.09; 4.10 Original, Presentation 3.12 Wrongful Dishonour Complying Presentation 3.07 Confirmer 2.01 Issuer Reimbursement 8.01 Issuer 2.01 Reimbursement, Effect on 8.03 Wrongful Honour Non-Complying Presentation 3.08 Notice of Objection 5.09

Appendix 3 ICC UNIFORM RULES FOR BANK-TO– BANK REIMBURSEMENTS UNDER DOCUMENTARY CREDITS (URR525)1 Foreword The ICC has long been active in the facilitation of trade. In that regard, the rules and definitions provided by the ICC Uniform Customs and Practice for Documentary Credits—familiar to those in international trade as the UCP-are universally accepted as the means for offering the commercial parties security of payment in their transactions, under the umbrella of the banking system. The 1974 revision of the UCP, updating the 1962 version, reflected the increasing importance of currency markets in international trade and first made specific reference to the involvement of a “third bank” in processing the claims for reimbursement of payments made under documentary credits. This definition of the functions of the reimbursing bank was further developed in the 1983 UCP revision and updated in the current UCP 500. It had become clear that, while the UCP was the international standard for documentary credit operations, the huge growth in the volume of inter-bank currency reimbursements remained largely subject to local accepted practice in the major 1

In force as of July 1, 1996.

financial centres, with the one exception of the United States of America, where banks had formulated their own operating rules. To meet the need for international standards, and to assist trade facilitation, the ICC Banking Commission in 1993 established a Working Party to draft a suitable framework for a new set of rules. This publication, the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, is the result of the Working Party’s efforts. The new Rules reflect considerable credit on all ICC members involved in this process, and on the previous efforts of the American practitioners, whose rules provided a useful starting point for this project. Jean-Charles Rouher Secretary-General of the ICC Preface

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Since 1933, the ICC has been promoting the adherence to customs and practice in the documentary credit area. Over time, these practices change and evolve and new practices are developed. During the past 30 years, specific practices have developed around bank-to-bank reimbursements under documentary credits. These practices, while covered in the Uniform Customs and Practice (UCP), have developed into more sophisticated procedures followed by banks, not a party to the credit, which provide reimbursement for payments made under another bank’s credit and help provide prompt payment to beneficiaries. These practices, however, have “outgrown” what is contained in the UCP on this subject. In 1993, the ICC Banking Commission authorised a Working Party to develop rules specific to the bank-to-bank reimbursement process. This publication is a result of that process. The work in creating new rules is often difficult. Unlike the revision of prior publications, creation of new rules requires an in-depth look at practices and procedures of banks from every part of the world which are involved in the transaction. Thanks to the comprehensive comments of the ICC National Committees and banking organisations around the world, the Working Party creating these rules has had a wealth of information to work from. Merging differing views is often difficult. The mission of the Working Party was to document current practice, weigh differing views and, occasionally, choose the best practice. Fortunately, the Working Party included knowledgeable bankers who contributed their time and knowledge to the process. Without the dedication of these individuals and the support of their organisations furthering the understanding and standardisation of the reimbursement process, the task would have been impossible. The members of the Working Party were: Leif Anderson, Skandinaviska Enskilda Banken, Sweden F.E.Chavannes, MeesPierson, Netherlands Gary Collyer, Midland Bank, United Kingdom Sia Chee Hong, Overseas Union Bank, Singapore Professor Salvatore Maccarone, Maccarone & Associates, Italy Ole Malmqvist, Den Danske Bank, Denmark Dieter Meurer, Westdeutsche Landesbank Girozentrale, Germany Ferdinand Müller, Deutsche Bank, Germany Carlos Velez Rodriguez, International Chamber of Commerce, France L.Y.Wickremeratne, The Hongkong and Shanghai Banking Corporation, United Kingdom These rules will become effective on July 1, 1996. It is the hope of the Working Party and the ICC that these new rules will expedite the process of bank-to-bank reimbursements. Additionally, it is hoped that by creating these rules, all parties to the transaction will have a better understanding of the process and become more knowledgeable of the implications on their daily business. Without rules such as these, the business of documentary credits and the bank-to-bank reimbursements under those credits is more difficult, costly and time consuming. If these

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rules improve on the current process, provide a more structured basis for processing and help educate the users, then they will have served the community well. Dan Taylor Chairman, ICC Working Party on Bank-to-Bank Reimbursements under Documentary Credits President, U.S. Council on International Banking, Inc. Please note that the title or classification on the heading of each article is for reference as to intent and purpose. It is not to be construed as being other than solely for benefit or guidance and there should be no legal imputation.

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Table of Contents Foreword Preface Introduction A. General Provisions and Definitions Article 1 —Application of URR Article 2 —Definitions Article 3 —Reimbursement Authorisations Versus Credits B. Liabilities and Responsibilities Article 4 —Honour of a Reimbursement Claim Article 5 —Responsibilities of the Issuing Bank C. Form and Notification of Authorisations, Amendments and Claims Article 6 —Issuance and Receipt of a Reimbursement Authorisation or Reimbursement Amendment Article 7 —Expiry of a Reimbursement Authorisation Article 8 —Amendment or Cancellation of Reimbursement Authorisations Article 9 —Reimbursement Undertakings Article 10 —Standards for Reimbursement Claims Article 11 —Processing Reimbursement Claims Article 12 —Duplications of Reimbursement Authorisations D. Miscellaneous Provisions Article 13 —Foreign Laws and Usages Article 14 —Disclaimer on the Transmission of Messages Article 15 —Force Majeure Article 16 —Charges

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Article 17 —Interest Claims/Loss of Value

Introduction The Working Party that has prepared these Rules has attempted to accurately reflect the world-wide practice in Bank-to-Bank Reimbursements. During the Working Party meetings it has reviewed all comments made by ICC National Committees and other commentators and has, where practical, incorporated their suggestions into these Rules. It is often difficult when posed with two differing positions to choose between them. The Working Party has attempted where conflict exists, to choose the more logical and fair practice, balanced by the practice engaged in by the majority of banks conducting Bank-to-Bank Reimbursement transactions. The Rules document the current practices in Bank-to-Bank Reimbursements and are written so that every party to a Bank-to-Bank Reimbursement fully understands how to conduct its business and what to expect from others it is dealing with. Particularly as these Rules are new, the comments of the Working Party on the structure of the individual Articles are being made available separately from this text of the Rules as ICC Publication N°551. The Working Party believes this will both help the reader understand the reasoning behind the Articles and provide additional information as to how the Bank-to-Bank Reimbursement process works with documentary credits. Such comments are, or course, not intended to replace, in any way, the official text of the Articles contained in the pages which follow. A. General Provisions and Definitions Article 1: Application of URR The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (“Rules”), ICC Publication N°525, shall apply to all Bank-to-Bank Reimbursements where they are incorporated into the text of the Reimbursement Authorisation. They are binding on all parties thereto, unless otherwise expressly stipulated in the Reimbursement Authorisation. The Issuing Bank is responsible for indicating in the Documentary Credit (“Credit”) that Reimbursement Claims are subject to these Rules. In a Bank-to-Bank Reimbursement subject to these Rules, the Reimbursing Bank acts on the instructions and/or under the authority of the Issuing Bank. These Rules are not intended to override or change the provisions of the ICC Uniform Customs and Practice for Documentary Credits. Article 2: Definitions As used in these Rules, the following terms shall have the meanings specified in this Article and may be used in the singular or plural as appropriate:

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a. “Issuing Bank” shall mean the bank that has issued a Credit and the Reimbursement Authorisation under that Credit. b. “Reimbursing Bank” shall mean the bank instructed and/or authorised to provide reimbursement pursuant to a Reimbursement Authorisation issued by the Issuing Bank. c. “Reimbursement Authorisation” shall mean an instruction and/or authorisation, independent of the Credit, issued by an Issuing Bank to a Reimbursing Bank to reimburse a Claiming Bank, or, if so requested by the Issuing Bank, to accept and pay a time draft(s) drawn on the Reimbursing Bank. d. “Reimbursement Amendment” shall mean an advice from the Issuing Bank to a Reimbursing Bank stating changes to a Reimbursement Authorisation. e. “Claiming Bank” shall mean a bank that pays, incurs a deferred payment undertaking, accepts draft(s), or negotiates under a Credit and presents a Reimbursement Claim to the Reimbursing Bank. “Claiming Bank” shall include a bank authorised to present a Reimbursement Claim to the Reimbursing Bank on behalf of the bank that pays, incurs a deferred payment undertaking, accepts draft(s), or negotiates. f. “Reimbursement Claim” shall mean a request for reimbursement from the Claiming Bank to the Reimbursing Bank. g. “Reimbursement Undertaking” shall mean a separate irrevocable undertaking of the Reimbursing Bank, issued upon the authorisation or request of the Issuing Bank, to the Claiming Bank named in the Reimbursement Authorisation, to honour that bank’s Reimbursement Claim provided the terms and conditions of the Reimbursement Undertaking have been complied with. h. “Reimbursement Undertaking Amendment” shall mean an advice from the Reimbursing Bank to the Claiming Bank named in the Reimbursement Authorisation, stating changes to a Reimbursement Undertaking. i. For the purposes of these Rules branches of a bank in different countries are considered separate banks. Article 3: Reimbursement Authorisations Versus Credits A Reimbursement Authorisation is separate from the Credit to which it refers, and a Reimbursing Bank is not concerned with or bound by the terms and conditions of the Credit, even if any reference whatsoever to the terms and conditions of the Credit is included in the Reimbursement Authorisation. B. Liabilities and Responsibilities Article 4: Honour of a Reimbursement Claim Except as provided by the terms of its Reimbursement Undertaking a Reimbursing Bank is not obligated to honour a Reimbursement Claim. Article 5: Responsibilities of the Issuing Bank

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The Issuing Bank is responsible for providing the information required in these Rules in both the Reimbursement Authorisation and Credit and is responsible for any consequences resulting from non-compliance with this provision. C. Form and Notification of Authorisations, Amendments, and Claims Article 6: Issuance and Receipt of a Reimbursement Authorisation or Reimbursement Amendment a. All Reimbursement Authorisations and Reimbursement Amendments must be issued in the form of an authenticated teletransmission or a signed letter. When a Credit, or amendment thereto which has an effect on the Reimbursement Authorisation, is issued by teletransmission, the Issuing Bank should advise its Reimbursement Authorisation or Reimbursement Amendment to the Reimbursing Bank by authenticated teletransmission. The teletransmission will be deemed the operative Reimbursement Authorisation or the operative Reimbursement Amendment and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent, it will have no effect and the Reimbursing Bank will have no obligation to check such mail confirmation against the operative Reimbursement Authorisation or the operative Reimbursement Amendment received by teletransmission. b. Reimbursement Authorisations and Reimbursement Amendments must be complete and precise. To guard against confusion and misunderstanding, Issuing Banks must not send to Reimbursing Banks: i. a copy of the Credit or any part thereof or a copy of an amendment to the Credit in place of, or in addition to, the Reimbursement Authorisation or Reimbursement Amendment. If such copies are received by the Reimbursing Bank they shall be disregarded; ii. multiple Reimbursement Authorisations under one teletransmission or letter, unless expressly agreed to by the Reimbursing Bank. c. Issuing Banks shall not require a certificate of compliance with the terms and conditions of the Credit in the Reimbursement Authorisation. d All Reimbursement Authorisations must (in addition to the requirement of Article 1 for incorporation of reference to these Rules) state the following: i. Credit number; ii. currency and amount; iii. additional amounts payable and tolerance, if any; iv. Claiming Bank or, in the case of freely negotiable credits, that claims can be made by any bank. In the absence of any such indication the Reimbursing Bank is authorised to pay any Claiming Bank; v. parties responsible for charges (Claiming Bank’s and Reimbursing Bank’s charges) in accordance with Article 16 of these Rules.

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Reimbursement Amendments must state only the relative changes to the above and the Credit number. e. If the Reimbursing Bank is requested to accept and pay a time draft(s), the Reimbursement Authorisation must indicate the following, in addition to the information specified in (d) above: i. tenor of draft(s) to be drawn; ii. drawer; iii. party responsible for acceptance and discount charges, if any. Reimbursement Amendments must state the relative changes to the above. Issuing Banks should not require a sight draft(s) to be drawn on the Reimbursing Bank. f. Any requirement for: i. pre-notification of a Reimbursement Claim to the Issuing Bank must be included in the Credit and not in the Reimbursement Authorisation; ii. pre-debit notification to the Issuing Bank must be indicated in the Credit. g. If the Reimbursing Bank is not prepared to act for any reason whatsoever under the Reimbursement Authorisation or Reimbursement Amendment, it must so inform the Issuing Bank without delay. h. In addition to the provisions of Articles 3 and 4, Reimbursing Banks are not responsible for the consequences resulting from non-reimbursement or delay in reimbursement of Reimbursement Claims, where any provision contained in this Article is not followed by the Issuing and/or Claiming Bank. Article 7: Expiry of a Reimbursement Authorisation Except to the extent expressly agreed to by the Reimbursing Bank, the Reimbursement Authorisation must not have an expiry date or latest date for presentation of a claim except as indicated in Article 9. Reimbursing Banks will assume no responsibility for the expiry date of Credits and if such date is provided in the Reimbursement Authorisation it will be disregarded. The Issuing Bank must cancel its Reimbursement Authorisation for any unutilised portion of the Credit to which it refers, informing the Reimbursing Bank without delay. Article 8: Amendment or Cancellation of Reimbursement Authorisations Except where the Issuing Bank has authorised or requested the Reimbursing Bank to issue a Reimbursement Undertaking as provided in Article 9 and the Reimbursing Bank has issued a Reimbursement Undertaking: a. The Issuing Bank may issue a Reimbursement Amendment or cancel a Reimbursement Authorisation at any time upon sending notice to that effect to the Reimbursing Bank. b. The Issuing Bank must send notice of any amendment to a Reimbursement Authorisation that has an effect on the reimbursement instructions contained in the Credit to the nominated bank or, in the case of a freely negotiable Credit, the advising

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bank. In the case of cancellation of the Reimbursement Authorisation prior to expiry of the Credit, the Issuing Bank must provide the nominated bank or the advising bank with new reimbursement instructions. c. The Issuing Bank must reimburse the Reimbursing Bank for any Reimbursement Claims honoured or draft(s) accepted by the Reimbursing Bank prior to the receipt by it of notice of cancellation or Reimbursement Amendment. Article 9: Reimbursement Undertakings a. In addition to the requirements of sub-Article 6 (a), (b) and (c) of these Rules, all Reimbursement Authorisations authorising or requesting the issuance of a Reimbursement Undertaking must comply with the provisions of this Article. b. An authorisation or request by the Issuing Bank to the Reimbursing Bank to issue a Reimbursement Undertaking is irrevocable (“Irrevocable Reimbursement Authorisation”) and must (in addition to the requirement of Article 1 for incorporation of reference to these Rules) contain the following: i. Credit number; ii. currency and amount; iii. additional amounts payable and tolerance, if any, iv. full name and address of the Claiming Bank to whom the Reimbursement Undertaking should be issued; v. latest date for presentation of a claim including any usance period; vi. parties responsible for charges (Claiming Bank’s and Reimbursing Bank’s charges and Reimbursement Undertaking fee) in accordance with Article 16 of these Rules. c. If the Reimbursing Bank is requested to accept and pay a time draft(s), the Irrevocable Reimbursement Authorisation must also indicate the following, in addition to the information contained in (b) above: i. tenor of draft(s) to be drawn; ii. drawer; iii. party responsible for acceptance and discount charges, if any. Issuing Banks should not require a sight draft(s) to be drawn on the Reimbursing Bank. d. If the Reimbursing Bank is authorised or requested by the Issuing Bank to issue its Reimbursement Undertaking to the Claiming Bank but is not prepared to do so, it must so inform the Issuing Bank without delay. e. A Reimbursement Undertaking must indicate the terms and conditions of the undertaking and: i. Credit number and Issuing Bank; ii. currency and amount of the Reimbursement Authorisation, iii. additional amounts payable and tolerance, if any; iv. currency and amount of the Reimbursement Undertaking; v. latest date for presentation of a claim including any usance period;

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vi. party to pay the Reimbursement Undertaking fee, if other than the Issuing Bank. The Reimbursing Bank must also include its charges, if any, that will be deducted from the amount claimed. f. If the latest date for presentation of a claim falls on a day on which the Reimbursing Bank is closed for reasons other than those mentioned in Article 15, the latest date for presentation of a claim shall be extended to the first following day on which the Reimbursing Bank is open. g. i. An Irrevocable Reimbursement Authorisation cannot be amended or cancelled without the agreement of the Reimbursing Bank. ii. When an Issuing Bank has amended its Irrevocable Reimbursement Authorisation, a Reimbursing Bank which has issued its Reimbursement Undertaking may amend its undertaking to reflect such amendment. If a Reimbursing Bank chooses not to issue its Reimbursement Undertaking Amendment it must so inform the Issuing Bank without delay. iii. An Issuing Bank which has issued its Irrevocable Reimbursement Authorisation Amendment, shall be irrevocably bound as of the time of its advice of the Irrevocable Reimbursement Authorisation Amendment. iv. The terms of the original Irrevocable Reimbursement Authorisation (or an Authorisation incorporating previously accepted Irrevocable Reimbursement Authorisation Amendments) will remain in force for the Reimbursing Bank until it communicates its acceptance of the amendment to the Issuing Bank. v. A Reimbursing Bank must communicate its acceptance or rejection of an Irrevocable Reimbursement Authorisation Amendment to the Issuing bank. A Reimbursing Bank is not required to accept or reject an Irrevocable Reimbursement Authorisation Amendment until it has received acceptance or rejection from the Claiming Bank to its Reimbursement Undertaking Amendment. h. i. A Reimbursement Undertaking cannot be amended or cancelled without the agreement of the Claiming Bank. ii. A Reimbursing Bank which has issued its Reimbursement Undertaking Amendment shall be irrevocably bound as of the time of its advice of the Reimbursement Undertaking Amendment. iii. The terms of the original Reimbursement Undertaking (or a Reimbursement Undertaking incorporating previously accepted Reimbursement Amendments) will remain in force for the Claiming Bank until it communicates its acceptance of the Reimbursement Undertaking Amendment to the Reimbursing Bank. iv. A Claiming Bank must communicate its acceptance or rejection of a Reimbursement Undertaking Amendment to the Reimbursing Bank. Article 10: Standards for Reimbursement Claims a. The Claiming Bank’s claim for reimbursement:

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i. must be in the form of a teletransmission, unless specifically prohibited by the Issuing Bank, or an original letter. A Reimbursing Bank has the right to request that a Reimbursement Claim be authenticated and in such case the Reimbursing Bank shall not be liable for any consequences resulting from any delay incurred. If a Reimbursement Claim is made by teletransmission, no mail confirmation is to be sent. In the event such a mail confirmation is sent, the Claiming Bank will be responsible for any consequences that may arise from a duplicate reimbursement; ii. must clearly indicate the Credit number and Issuing Bank (and Reimbursing Bank’s reference number, if known); iii. must separately stipulate the principal amount claimed, any additional amount(s) and charges; iv. must not be a copy of the Claiming Bank’s advice of payment, deferred payment, acceptance or negotiation to the Issuing Bank; v. must not include multiple Reimbursement Claims under one teletransmission or letter; vi. must, in the case of a Reimbursement Undertaking, comply with the terms and conditions of the Reimbursement Undertaking. b. In cases where a time draft is to be drawn on the Reimbursing Bank, the Claiming Bank must forward the draft with the Reimbursement Claim to the Reimbursing Bank for processing, and include the following in its claim if required by the Credit and/or Reimbursement Undertaking: i. general description of the goods and/or services; ii. country of origin; iii. place of destination/performance. and if the transaction covers the shipment of merchandise, iv. date of shipment; v. place of shipment. c. Claiming Banks must not indicate in a Reimbursement Claim that a payment, acceptance or negotiation was made under reserve or against an indemnity. d. Reimbursing Banks assume no liability or responsibility for any consequences that may arise out of any non-acceptance or delay of processing should the Claiming Bank fail to follow the provisions of this Article. Article 11: Processing Reimbursement Claims a. i. Reimbursing Banks shall have a reasonable time, not to exceed three banking days following the day of receipt of the Reimbursement Claim, to process claims. Reimbursement Claims received outside banking hours are deemed to be received on the next banking day. If a pre-debit notification is required by the Issuing Bank, this pre-debit notification period shall be in addition to the processing period mentioned above.

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ii. If the Reimbursing Bank determines not to reimburse, either because of a nonconforming claim under a Reimbursement Undertaking, or for any reason whatsoever under a Reimbursement Authorisation, it shall give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay, but no later than the close of the third banking day following the day of receipt of the claim (plus any additional period mentioned in sub-Article (i) above). Such notice shall be sent to the Claiming Bank and the Issuing Bank and, in the case of a Reimbursement Undertaking, it must state the reasons for nonpayment of the claim. b. Reimbursing Banks will not process requests for back value (value dating prior to the date of a Reimbursement Claim) from the Claiming Bank. c. Where a Reimbursing Bank has not issued a Reimbursement Undertaking and a reimbursement is due on a future date: i. The Reimbursement Claim must specify the predetermined reimbursement date. ii. The Reimbursement Claim should not be presented to the Reimbursing Bank more than ten (10) of its banking days prior to such predetermined date. If a Reimbursement Claim is presented more than ten (10) banking days prior to the predetermined date, the Reimbursing Bank may disregard the Reimbursement Claim. If the Reimbursing Bank disregards the Reimbursement Claim it must so inform the Claiming Bank by teletransmission or other expeditious means without delay. iii. If the predetermined reimbursement date is more than three banking days following the day of receipt of the Reimbursement Claim, the Reimbursing Bank has no obligation to provide notice of non-reimbursement until such predetermined date, or no later than the close of the third banking day following the receipt of the Reimbursement Claim plus any additional period mentioned in (a) (i) above, whichever is later. d. Unless otherwise expressly agreed to by the Reimbursing Bank and the Claiming Bank, Reimbursing Banks will effect reimbursement under a Reimbursement Claim only to the Claiming Bank. e. Reimbursing Banks assume no liability or responsibility if they honour a Reimbursement Claim that indicates that a payment, acceptance or negotiation was made under reserve or against an indemnity and shall disregard such indication. Such reserve or indemnity concerns only the relations between the Claiming Bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained. Article 12: Duplications of Reimbursement Authorisations An Issuing Bank must not, upon receipt of documents, give a new Reimbursement Authorisation, or additional instructions, unless they constitute an amendment to, or a cancellation of an existing Reimbursement Authorisation. If the Issuing Bank does not comply with the above and a duplicate reimbursement is made, it is the responsibility of the Issuing Bank to obtain the return of the amount of the duplicate reimbursement. The

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Reimbursing Bank assumes no liability or responsibility for any consequences that may arise from any such duplication. D. Miscellaneous Provisions Article 13: Foreign Laws and Usages The Issuing Bank shall be bound by and shall indemnify the Reimbursing Bank against all obligations and responsibilities imposed by foreign laws and usages. Article 14: Disclaimer on the Transmission of Messages Reimbursing Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s), or for delay, mutilation or other errors arising in the transmission of any telecommunication. Reimbursing Banks assume no liability or responsibility for errors in translation. Article 15: Force Majeure Reimbursing Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control, or by any strikes or lockouts. Article 16: Charges a. The Reimbursing Bank’s charges should be for the account of the Issuing Bank. However, in cases where the charges are for the account of another party, it is the responsibility of the Issuing Bank to so indicate in the original Credit and in the Reimbursement Authorisation. b. When honouring a Reimbursement Claim, a Reimbursing Bank is obligated to follow the instructions regarding any charges contained in the Reimbursement Authorisation. c. In cases where the Reimbursing Bank’s charges are for the account of another party they shall be deducted when the Reimbursement Claim is honoured. Where a Reimbursing Bank follows the instructions of the Issuing Bank regarding charges (including commissions, fees, costs or expenses) and these charges are not paid or a Reimbursement Claim is never presented to the Reimbursing Bank under the Reimbursement Authorisation, the Issuing Bank remains liable for such charges. d. Unless otherwise stated in the Reimbursement Authorisation, all charges paid by the Reimbursing Bank will be in addition to the amount of the Authorisation provided that the Claiming Bank indicates the amount of such charges. e. If the Issuing Bank fails to provide the Reimbursing Bank with instructions regarding charges, all charges shall be for the account of the Issuing Bank. Article 17

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— Interest Claims/Loss of Value All claims for loss of interest, loss of value due to any exchange rate fluctuations, revaluations or devaluations are between the Claiming Bank and the Issuing Bank, unless such losses result from the non-performance of the Reimbursing Bank’s obligation under a Reimbursement Undertaking. The ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits were granted advanced authorisation by the ICC Executive Board on 26 September 1995, and were first published as ICC publication N°525 in November 1995. This English language edition gives the official text of the Rules. Translations in other languages and bilingual versions may be available from ICC National Committees. Please contact ICC Publishing for more information. Published in November 1995 by ICC PUBLISHING S.A. (Paris) and ICC PUBLISHING, Inc. (New York) Copyright © 1995 International Chamber of Commerce All rights reserved. No part of this work may be reproduced or copied in any form or by any means-graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems-without the written permission of ICC Publishing S.A., or ICC Publishing, Inc. for the USA. ICC Publication N° 525 ISBN 92-842-1185.9

Appendix 4 FORM OF APPLICATION FOR OPENING OF A LETTER OF CREDIT USED BY HSBC BANK PLC

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Appendix 5 EXTRACTS FROM THE SEVENTH EDITION ON THE LEGAL ASPECTS OF THE CONTRACTS CREATED BY THE ISSUE OF A CREDIT Letters of credit are governed by the same general legal principles as are all contracts. They are not negotiable instruments… The practice of commerce is, often, somewhat in advance of the development of legal doctrine, and this is particularly true of the kind of mercantile instrument with which we are here concerned.1 As has been said by an American writer, to a businessman nothing is simpler than the nature of the obligation created by a bank’s commercial credit. A seller relying on such an instrument believes that he has got the direct obligation of the issuing bank running in his favour, enforceable by him against that bank, that it will pay his drafts if drawn in compliance with the terms of the letter of credit.2 Both Anglo-American and Continental lawyers have been concerned to define the exact nature of the legal relationships created by these transactions. In the 1

Perhaps an illustration of the reverse of this assertion may be found in Devlin J’s treatment of the bank’s argument as to the place of availability of the credit in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147. In International Banking Corporation v Barclays Bank Ltd (1925) 5 Legal Decisions Affecting Bankers 1, Atkin LJ said that “the law relating to such transactions is not at the present moment so crystallized that it is not dependent upon proof of custom.” It would rather seem that he was speaking of credits “for use in the East”. 2 Mead, 22 Col. L. Rev. 300–301.

case of jurisdictions governed by the common law the problem is twofold, ie (i) to define the nature of the contract created by the issue of the credit, and (ii) to surmount the obstacle presented by an apparent lack of consideration for the bank’s promise to pay the drafts of the beneficiary. Either (it is argued) there is no consideration for this promise or, if there is, then it fails because it does not move from the promisee (the beneficiary) but from a stranger (the customer of the issuing bank, usually the buyer).3 No apology is needed, therefore, for an attempt to analyse the legal characteristics of a banker’s commercial credit in the light of the rules of the common law of England. In 1972, Browne J in Bank Russo-Iran v Gordon Woodroffe & Co Ltd4 expressed the view that “the legal principles as to the nature of the transaction have now become part of the Law Merchant”….5

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The usual business object of a credit is to carry a contract for the sale of goods into effect by means of at least two further contracts which are ancillary to the contract of sale itself. These are: (i) a contract between the buyer of the goods and his bank, by which the latter agrees to advance the amount of the price (as by paying the seller-beneficiary or the seller’s bank), receiving a commission by way of remuneration for its services and also a pledge of the documents of title to the goods by way of security; (ii) a contract between the bank (either the issuing, but perhaps an intermediary, bank) and the seller of the goods by which the bank agrees to become liable to the seller for the contract price of the goods.6 Where, as is generally the case, the transaction is affected by the intervention between the issuing bank and the beneficiary of an intermediary bank, the latter may be in privity with both issuer and beneficiary. So far as the first is concerned there is no difficulty; the nature of the contract is clear and there is ample consideration for the issue of a credit. The third is normally though not necessarily an agency 3

French lawyers, for instance, define the nature of the contract, as a delegation perfect or imperfect, or again, a stipulation pour autrui. See Stoufflet, Le crédit documentaire, 1957, Titre IV, Chap. II, 372; Marais, Du rôle, de la nature et des effets du crédit confirmé en banque (Annales de Droit Commercial, 1925, No. 2, 138); Brethe, Le Crédit confirmé en Droit francais, 22. See also notes by the following: Cheron, Dalloz, P. 1923, 137; Hamel, Dalloz, P. 1926, 1. 201. The Italian view is very clearly stated in Folco, Il Credito Confermato, Chap. II, and the Spanish in Garrigues, Contratos Bancarios, 1958, 596, et seq. So far as German law is concerned, it is today generally accepted that a confirmed credit is to be regarded as a Geschäftsbesorgungsvertrag under Article 675 of the Civil Code (RGZ 106/27; 114/270). See generally, on the Comparative Law of Bankers’ Credits, Akkreditivgeschäft, by Koch, in Rechtsvergleichendes Handwörterbuch des Zivil- und Handelsrechts, 1929, Vol. II, 57 and Zahn, Zahlung und Zahlungssicherung im Aussenhandel, 19 et seq. 4 (1972) 116 SJ 921. 5 An irrevocable letter of credit is a valuable security within the meaning of section 20 of the Theft Act 1968 and the beneficiary has the right to enforce the obligation it bears on complying with its conditions. That right is a chose in action and a right of property—see R v Benstead (1982) 75 Cr. App. Rep. 276. 6 There are also cases in practice where the bank assumes liability to other persons, eg where it accepts a bill drawn by the seller which is subsequently negotiated by the latter. This does not, however, affect the position between bank and seller as outlined above.

contract, on which no question arises at this stage. It is when we come to the second contract—that between bank and seller-beneficiary—that a complex legal problem arises. First of all, at which moment does the contract between the bank and the seller come into existence? Second, what is the consideration for the bank’s undertaking to the seller to honour the credit? Third, if there is consideration, from whom does it move? And, lastly, if there is no consideration, can the validity of the transaction be supported on other grounds? It has been doubted whether the liability of the bank to the seller can be based on a contract entered into directly between them. The problem is to find some ground for the existence of a concluded contract at the moment at which the issue of the credit is communicated by the bank to the seller. The intention of the parties is that the credit shall be effective ab initio, but the difficulty is that the credit, standing alone, is, at first sight, merely an offer which has to be accepted by the seller before a contract can come into existence.

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Consideration The difficulty arising out of the absence of consideration for the bank’s undertaking is still unsolved because the English courts have never decided it in terms. The defence has either not been raised or, if raised, has not been pressed; it appears to have been assumed in all cases that there was good consideration for the bank’s promise. Rowlatt J in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd7 had no doubt that upon the plaintiffs’ acting upon the undertaking contained in the letter of credit consideration moved from the seller. In Donald H.Scott & Co Ltd v Barclays Bank Ltd8 Scrutton LJ appears to take it for granted that privity of contract had been established between the seller and the bank in that case. But in neither of these actions was the point definitely in issue. In Dexters Ltd v Schenker & Co9 the defence of no consideration was raised but withdrawn by counsel. Alluding to this defence, Greer J pointed out that until the seller of goods which are to be paid for by a commercial credit receives the credit, he is under no obligation to hand the documents to anyone, and he thought that the observations of Rowlatt J in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd10 applied. The arguments advanced against the existence of a valid consideration are based on the common 7

[1922] 1 KB 318. See also Re Agra and Masterman’s Bank, ex parte Asiatic Banking Corporation, LR 2 Ch 396, where Cairns LJ said that it was not disputed that the credit constituted a contract based upon a sufficient consideration moving from the beneficiaries to the bank. This was, however, a case in which the negotiation of drafts was contemplated by the credit. See Dexters Ltd v Schenker & Co (1923) 14 Ll.L.R. 586. 8 [1923] 2 KB 1. The decision of the Court of Appeal in this case went on other grounds. The Court was in fact very careful to indicate that it declined to adjudicate on a number of contentions raised in the course of the case; the defence of no consideration does not seem to have been pleaded or raised in argument. In Anglo-European SS Co v Blane & Co (1922) 12 Ll.L.R. 67, it was held by Darling J that a commercial contract must be presumed to have been for consideration (sea quaere). 9 (1923) 14 L1.L.R. 586 at 588. 10 [1922] 1KB 318.

law rule that consideration must move from the promisee.11 It has been said that in the case of a banker’s commercial credit, ie the promise to remunerate the bank and to secure it against loss, moves solely from the buyer of the goods and is thus insufficient to support any promise made by the bank to the seller.12 It therefore becomes necessary to consider what it is that constitutes consideration for this promise on the part of the bank. The undertaking by the seller to deliver the goods to the buyer cannot as a rule be relied on for this purpose because the contract of sale is almost invariably made before the bank issues its credit, and consideration would be past. In any event performance of what one is already bound to perform by a contract with A cannot be good consideration for a fresh promise by B, who is a stranger to the original contract. In other words, an undertaking by the seller to perform the contract of sale cannot constitute consideration for the bank’s promise to pay the price of the goods. On the other hand there is authority for Sir Frederick Pollock’s view that a promise made for valuable consideration, and otherwise good as between the parties, is not the less valid because the performance will

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operate in discharge of an independent liability of the promiser to a third party under an independent contract already existing.13 If A promised to C that he will carry out his contract with B by placing C in possession of documents of title there is a benefit to C, because he gets something which he had not got before. So also A suffers a detriment because he has given up something, ie he has surrendered any possibility which he may have of ridding himself of his liability to B under the contract of sale. The question is, perhaps academic; if the view be taken14 that the buyer is the seller’s agent to make a contract with the banker, it is submitted that there is consideration for the banker’s promise to pay. The seller’s undertaking to deliver the documents of title to the bank would appear to be sufficient.15 11

Dunlop v Selfridge & Co [1915] AC 847. See the dictum of Lord Chelmsford in Morgan v Larivière LR 7 HL 435. 13 Pollock, Contract, (13th ed 1950) p 150, and authorities there cited; cf Anson, Contract (23rd ed 1969) p 386; see also Cheshire and Fifoot, Law of Contract, 8th ed., 433, in which the statement of the Law Revision Committee is mentioned, to the effect that the liquidator of a bank might well be obliged to raise a technical defence. The learned authors suggest that “the simplest method of giving legal effect to these credits, should the judges be disposed to lend their aid, would be to uphold them on the ground of commercial custom”, which they regard as a realistic approach such as was encouraged by Jenkins LJ in Hamzeh Malas v British Imex Industries Ltd [1958] 2 QB 127 at 129 and by Lord Denning MR in United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431. And, on the question of custom, see Lord Chorley, Law of Contract in relation to the Law of Banking—Gilbart Lectures, 1967, p. 24. 14 See page 413 below. 15 McGowan, Assignability of Documentary Credits, 13 Law and Contemporary Problems (Duke Univ 1948, p 667): “The bank’s issuance of the letter of credit, therefore, has a two-fold result, since…it also results in a perfection of the seller’s obligation to sell and deliver”; and again: “…by issuing the credit the bank causes an automatic change 12

This question would be academic if the recommendations of the Law Revision Committee in its 6th Interim Report, published in 1937 (Cmd 5449) were carried into law. One recommendation was that an agreement should be enforceable if the promise or offer had been made in writing by the promisor or his agent. As is stated in paragraph 29 of the Report, the recommendation does not mean that a promise in writing will be binding in either case; it would still be necessary for the court to find that the parties intended to create a binding obligation. A further recommendation was: That where a contract by its express terms purports to confer a benefit directly on a third party, it shall be enforceable by the third party in his own name subject to any defences that would have been valid between the contracting parties. Unless the contract otherwise provides, it may be cancelled by the mutual consent of the contracting parties at any time before the third party has adopted it either expressly or by conduct (paragraph 48).16 In Trans Trust S.P.R.L v Danubian Trading Co Ltd17 Denning LJ was in no doubt as to the juridical nature of a credit. Dealing with the argument (which he said reminded him

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of that in Pavia & Co SpA v Thurmann-Nielsen18) that a credit is only a way of paying the price, he thought it a mistake, that a credit was a different thing, and went on: It is an assurance in advance that the seller will get paid. It is even more than that. It is a chose in action which is of immediate benefit to the seller … To be a chose in action, the credit must represent a binding contract and, presumably, from the moment it is communicated to the seller. It is thus clear that Denning LJ again considered that there was adequate consideration for the contract. While consideration is still a real factor in the English law of contract, the attempt to find a legal basis for the contract between a banker issuing a credit and the beneficiary is yet academic because of the view of the Courts that a binding contract arises… in the position of the seller, who, because the buyer has opened the irrevocable letter of credit in accordance with the contract of purchase and sale, becomes bound to perform his end of the bargain”. 16 The learned Author of this book was a member of the Committee which made this recommendation. The Committee thought it was, to say the least, doubtful whether the third party was entitled to sue the banker issuing the credit in the event of a refusal by the latter to honour it, and they thought it “very undesirable that the validity in law of a commercial contract of such importance should remain in doubt”. 17 [1952] 2 QB 297. 18 [1952] 1 Lloyd’s Rep 153.

Nevertheless many theories have from time to time been put forward to account for the relationship between the two parties. Among these are the following.19 The Offer and Acceptance Theory The so-called “offer and acceptance” theory is that the issue of the credit to the seller is an offer which the seller can accept by tendering the documents and a draft to the issuing banker.20 This suggestion does not meet the situation which arises in the case of an irrevocable credit. If the credit in such a case is merely an offer there must be an intervening space of time (ie until the documents are tendered) during which the banker can withdraw the offer and cancel the credit, thus defeating the very object for which it was issued. With a revocable credit this difficulty does not arise; because a revocable credit postulates that the banker is not to be bound unless and until he is willing to be bound, the intimation of such willingness taking the form of an acceptance of the documents when tendered to him.21 However, in Elder Dempster Lines Ltd v Ionic Shipping Agency Inc22 Donaldson J said:23 The best explanation of the legal phenomenon constituted by a banker’s letter of credit is that it is an offer which is accepted by being drawn upon. Accordingly what matters is the offer which was made to the plaintiffs

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and not the way in which, as a matter of history, the individual parts of the offer came together and the completed offer was built up. The learned Judge does not appear to have been saying that an issuing bank can withdraw its “offer” once it has been communicated to the beneficiary. The Guarantee Theory It has been suggested that bankers’ commercial credits are in fact merely contracts by which the banker guarantees the due payment of the price of the goods.24 This theory cannot, however, stand scrutiny in view of the fact that the whole object of the transaction from the business point of view is the assumption by the banker of a primary and not a secondary liability. The banker agrees to 19

See also the discussion in Davis, The Law Relating to Commercial Letters of Credit, 2nd ed., 1954 Chap. VII; the article by the same Author in (1936) 52 LQR 225; and the extensive treatment of all theories given by Ellinger in Documentary Letters of Credit, University of Singapore Press, 1970, Chapters III, IV and V. 20 This is possibly the view taken by Rowlatt J in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1KB 318 at 321. 21 Especially in view of the fact that a revocable credit can be cancelled without notice. 22 [1968] 1 Lloyd’s Rep 529. 23 [1968] 1 Lloyd’s Rep 529 at 535. 24 This view of the matter has been put forward in America but has not found favour. See Finkelstein, Legal Aspects of Commercial Letters of Credit (1930), p 32 passim, and Pan-American Bank and Trust Co v National City Bank, 6F, (2d) 762, (2nd Cir. 1925).

pay independently of whether the buyer is in default or not. The “guarantee” theory is also open to objection on the ground that it would go far towards destroying the business utility of credits. It is only necessary to allude in this connection to the possibility of defences based either on the absence of the written memorandum required by the Statute of Frauds, or on the rules of the law of suretyship which provide for the release of the guarantor in the event of any variation of the original contract. The Estoppel or Trustee Theory Another view is that the issue of the credit amounts to a representation that the banker has received the price or its equivalent to the use of the seller, and that the banker is consequently estopped, as against a seller who acts in reliance on the representation, from denying that he holds the moneys on behalf of the seller. This theory is one which does violence to the facts and to the intention of the parties. Moreover, it has been rejected by the English courts. In Morgan v Larivière25 a contract had been entered into between the plaintiff and the French government for the supply of ammunition. The defendant bank issued a credit containing a statement that a special credit for the sum of £40,000 had been opened with it in favour of the plaintiff, and that this sum would be paid to him

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“rateably as the goods are delivered, upon receipt of certificates of reception issued by the French Ambassador”. A dispute arose and the French authorities cancelled the credit, with the result that the plaintiff instituted proceedings against them in order to obtain a declaration that they held the residue of the £40,000 in trust for him. The court below held that there had been an equitable assignment of the sum deposited by the French government with the bankers, and ordered that the residue of this sum should be paid into court to meet the plaintiffs claims as they fell due. On appeal to the House of Lords this decision was reversed, on the ground that there was no assignment or trust. It must, of course, be borne in mind that where a bank receives moneys for the express purpose of satisfying a debt from its customer it cannot utilize these moneys for any other purpose26 and there is some authority for saying that if it communicates to the creditor the fact that it holds such moneys at the disposal of the creditor in satisfaction of the debt an action will lie against the bank for money had and received if the amount is not paid over in due course.27 But normally such a situation cannot arise, for even where a buyer places his bank in funds on the establishment of a credit, this is no concern of the seller and is not communicated to him. 25

(1875)LR 7 HL 423. Farley v Turner (1857) 26 L.J. Ch. 710; cf. Re Barned’s Banking Co, Massey’s Case (1870) 39 LJ Ch 635. 27 Walker v Rostron (1842) 9 M &MI 411; Griffin v Weatherby and Henshaw (1868) LR 3 QB 735. 26

The Assignment and Novation Theories An alternative solution of the problem has been suggested by McCurdy,28 who advances two theories. The first is that the benefit of the contract which is indisputably entered into by the buyer with his bank should be regarded as simultaneously assigned by the buyer to the seller with immediate notice to the bank. This theory derives a certain amount of support from some of the cases,29 but it is difficult to bring it into line with the facts of a transaction in which the credit is issued direct to the seller. Moreover, the seller would only acquire a right subject to any equities which might be subsisting between the bank and the buyer.30 The second theory advanced is that there is a novation, ie the buyer drops out of the transaction altogether and the contract becomes one between the bank and the beneficiary. The objection to the theory of novation would seem to be that it involves the release of the buyer from his liability to pay for the goods, which cannot be said to be contemplated by the parties. These suggestions may furnish a way out of the difficulty, but they appear to be unnecessarily artificial, if judged by the intentions of the parties. Buyer the Seller’s Agent It is admittedly the aim to give effect to the business object of a commercial contract of this description, provided that violence is not thereby done to any fundamental principle. It is inconceivable that the binding effect of a firmly established and valuable instrument

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of international trade such as the irrevocable credit should be doubted merely because it is found difficult to bring it within any of the existing categories of legal obligations. It would seem to be the duty of the courts to ascertain the intentions of the parties and to give effect to them without involving the creation of fictitious relationships or the distortion of any existing rule of law. The parties contemplate that the seller is not content to rely on the buyer’s ability or readiness to pay the price, but insists on payment being made in such form as will obviate the possibility of the buyer’s failing to pay, for whatever reason. The seller, therefore requires the buyer to procure an independent promise of payment made by a bank of indisputable integrity and solvency.31 If a contract of sale is entered into in these circumstances there does not seem to be any reason why it should not be held that the buyer has the implied authority of the seller to arrange for payment of the price to be made in the manner stipulated for. Therefore a buyer may be deemed to act as the seller’s 28

35 Harv. L. Rev. 583. Re Agra and Masterman’s Bank, ex parte Asiatic Banking Corporation (1867) LR 5 Ex 92; Lefargue v Harrison (1870) 70 Cal. 380. 30 But see the judgment of Cairns LJ in Re Agra and Masterman’s Bank, ex parte Asiatic Banking Corporation (1867) LR 5 Ex 92. 31 See per McNair J in Soproma SpA v Marine & Animal By-Products Corporation Ltd [1966] 1 Lloyd’s Rep 367 at 385–6. 29

agent for this purpose32 and there comes into existence a contract ancillary to the contract of sale by which the bank promises to pay the seller when the seller places him in possession of the documents specified in the credit. The buyer’s application for a credit is for the benefit of the seller; pursuant to the contract the issuing banker enters into another also for the benefit of the seller. The consideration for the first is the seller’s obligations under the contract of sale, pursuant to which the buyer on behalf of the seller provides consideration to the issuing bank for entering into the second contract. It would be easy so to frame the contract of sale as to embody an express authority to the buyer to contract with the bank on the seller’s behalf, and it is difficult to see why a stipulation should not be implied having regard in particular to the fact that it carries out the commercial intentions of the parties. Jenkins LJ (as he then was) in Hamzeh Malas & Sons v British Imex Industries Ltd33 said:34 We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes on the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers’ confirmed credits are of that character, and in my judgment it would be wrong for this court in the present case to interfere with that established practice.

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It is submitted that the bank becomes bound to the seller the moment the credit is communicated to him but that its liability is unenforceable until the seller complies with the conditions laid down in the credit. Today the question is academic. 32

McCurdy (35 Harv. L. Rev. 583) rejects this view; he contents himself with observing that the buyer cannot be regarded as an agent for the seller, but does not give any reasons for this conclusion. This theory is not dissimilar to that of Professor Thayer given in (1936) 36 Columbia Law Review 1056 as the Seller’s Offer Theory; Ellinger finds many objections to the agency theory (see Documentary Letters of Credit, 1970, pp. 64–6). 33 [1958] 2 QB 127. 34 [1958] 2 QB 127 at 129.

INDEX Note: References are to chapter and paragraph numbers, e.g. 3-25 refers to chapter 3, paragraph 25. Footnotes are indicated by the abbreviation n. The index does not cover material contained in the appendices.

absolute payment 3-25–3-26 acceptance credit 2-06, 2-09, 4-96–4-99 advising bank 4-65, 4-69, 4-83–4-84 agency 4-05,4-66–4-67 air waybill 7-60, 7-82, 7-85, 7-91, 7-97, 7-100 altered documents 6-68–6-71 ambiguous instructions 4-19–4-20 anticipatory credit 2-14 applicant (see also buyer) duty to make instructions complete and precise 4-15–4-18 application form 4-06 assignment 5-25 conflict of laws 10-49–10-54 right to perform under the credit 5-33–5-37 right to receive proceeds of a credit 5-26–5-32 standby credit 5-43–5-46 authentication of documents 7-27–7-35, 7-84–7-87 autonomy 1-25 back-to-back credit 2-13, 5-21–5-24 bailment 8-21, 8-37 bank see intermediary bank; issuing bank; nominated bank bank’s security see security beneficiary 1-20–1-21 (see also seller) delivery of documents 6-41 recovery of damages 9-06–9-21 transfer of credit see transferable credit bills of exchange 1-02, 1-05, 1-10, 8-32 (see also draft) bills of lading 3-13

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(see also transport documents) authentication 7-84–7-87 charterparty 7-55, 7-57 compliance 7-51–7-57 defective goods or packing 7-64–7-71 description of goods 7-47–7-49 discrepancies 7-15 forgeries 6-70 freight paid 3-13, 7-75–7-80 indication that goods have been shipped or taken in charge 7-88–7-91 merchantability 7-22–7-23 partial shipments 7-43 pledge see pledged documents quantity of goods 7-39–7-40 sets of documents 7-99–7-102 staleness 6-31, 7-58–7-63 stowage on deck 7-72–7-74 terms of carriage 7-103 time of shipment 7-58–7-63 type of vessel 7-104 whole transit covered 7-92–7-98 Bolero.net 7-35n book debts 8-25–8-29 breach of contract 3-42–3-45 damages see damages Brussels Convention 10-02 (see also jurisdiction) buyer claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–2-31 contract with issuing bank 4-06 agency 4-05 ambiguity 4-19–4-20 bank’s right to reimbursement or indemnity 4-12–4-33 bank’s security 4-11 duty to make instructions complete and precise 4-15–4-18 financing arrangements 4-10 fraudulent documents 4-21–4-22 ratification 4-24–4-25 restraint of payment 4-23–4-33 terms of the contract 4-07–4-09 frustration of a credit 3-40–3-41 instructions 1-17–1-18, 4-15–4-18 loss of documents 6-56 obligation to open a credit 3-01 consequences of breach 3-42–3-45 time within which credit should be opened 3-14–3-22 condition precedent 3-02–3-03 recovery of damages by seller 9-03–9-05 terms on which credit should be

Index

405

opened 3-04–3-13 cable credit 2-17 cause of action 10-23 certificate of analysis 7-126 certificate of inspection 7-126 certificate of quality 7-129 charged goods 8-20, 8-25–8-29 charterparty 7-57 claims in tort 10-13, 10-14 commercial credit (see also documentary credit) buyer’s frustration of a credit 3-40–3-41 claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 contractual relationships see contractual relationships credit as payment 3-23–3-24 absolute or conditional payment 3-25–3-26 procedure 1-16 buyer’s instructions 1-17–1-18 containers of goods 1-23 electronic communication 1-23 importer 1-22 issuing bank’s instructions 1-19 payment of beneficiary 1-20–1-21 purpose 1-01–1-05 commercial invoices 7-119–7-123 compliance 7-01–7-02 amount claimed 7-36–7-40 commercial invoices 7-119–7-123 dating of documents 7-27–7-35 description of goods 7-46–7-49 documents other than transport documents, insurance documents and commercial invoices 7-124–7-131 insurance documents amount of cover 7-116–7-117 currency 7-116–7-117 forgeries 7-118 issuance 7-108–7-110 type of cover 7-114–7-115 type of document 7-111–7-113 voidable policies 7-118 ISP98 7-132–7-141 issue of documents 7-27–7-35 partial shipments and drawings 7-41–7-45 quantity of goods shipped 7-36–7-40 signature of documents 7-27–7-35, 7-136 standby credit see ISP98 strict compliance 7-04–7-16 consistency of documents 7-17–7-18

Index

406

immaterial documents 7-19–7-21 merchantability 7-22–7-23 non-documentary conditions 7-24–7-26 usual documents 7-22–7-23 transport documents 7-50 authentication 7-84–7-87 bills of lading see bills of lading clean 7-64–7-71 compliance with other stipulations of the credit 7-105 consignor/notify party 7-81 defective goods or packing 7-64–7-71 freight paid 3-13, 7-75–7-80 indication that goods have been shipped or taken in charge 7-88–7-91 sets of documents 7-9–7-102 stale documents 7-58–7-63 stowage on deck 7-72–7-74 terms of carriage 7-103 time of shipment 7-58–7-63 type of vessel 7-104 UCP requirements 7-82–7-105 whole transit covered 7-92–7-98 documents other than transport documents, insurance documents and commercial invoices 7-124–7-131 condition precedent 3-02–3-03 conditional payment 3-25–3-26 confirmation irrevocable credit 2-05 terms on which credit should be opened 3-04, 3-11 confirming bank 4-65, 4-71–4-73, 4-86–4-89 examination of documents 7-04–7-16 (see also compliance) loss of documents 6-43–6-45 presentation of documents 6-08 bank’s obligations if documents do not comply 6-11–6-25 payment under reserve or against indemnity 6-30, 6-32, 6-36 security see security conflict of laws 10-37 determination of applicable law 10-39–10-40 law governing contract between buyer and issuing bank 10-41 law governing contracts arising on the issue and confirmation of credit 10-42–10-48 position where credit is transferable or benefit is assigned 10-49–10-54 matters governed by applicable law 10-55 Rome Convention 10-38 connected claims 10-18 consideration 4-43–4-44 consignor of goods 7-81 containers 1-23 contract of sale buyer’s obligation to open a credit 3-01 consequences of breach 3-42–3-45 partial shipments and drawings 7-41–7-42 terms on which credit should be opened 3-06–3-10

Index

407

contractual relationships 1-24 autonomy 1-25 buyer and issuing bank 4-06 agency 4-05 ambiguity 4-19–4-20 bank’s right to reimbursement or indemnity 4-12–4-33 bank’s security 4-11 duty to make instructions complete and precise 4-15–4-18 financing arrangements 4-10 fraudulent documents 4-21–4-22 ratification 6-24–6-25 restraint of payment 4-23–4-33 terms of the contract 4-07–4-09 concerned parties 4-01–4-05 conflict of laws see conflict of laws intermediary bank and seller 4-82 intermediary instructed to act as nominated bank 4-85 intermediary instructed to advise 4-83–4-84 intermediary instructed to confirm 4-86–4-89 issuing bank and intermediary bank 4-64–4-65 agency 4-66–4-67 frustration of credit 4-81 intermediary entitled to reimbursement from issuing bank 4-66–4-67, 4-74–4-80 intermediary instructed to act as nominated bank 4-70 intermediary instructed to advise 4-69 intermediary instructed to confirm 4-71–4-73 liability for acts of intermediary 4-68 issuing bank and seller 4-34–4-38 irrevocable credits 4-39–4-57 (see also irrevocable credits) payment 4-90 revocable credits 4-58–4-63 parties are concerned only with documents 1-26–1-27 payment see payment repudiation of contract 3-15, 3-22, 3-42 damages see damages copy documents 7-29–7-34, 7-135 courier receipt 7-60, 7-82, 7-87, 7-102 credit classification 2-01–2-02 anticipatory credit 2-14 back-to-back credit 2-13 export credit 2-19 general credit 2-16 green clause credit 2-14n25 import credit 2-19 manner in which credit is issued 2-17–2-18 method of payment 2-06–2-10 obligations of banks 2-03–2-05 open credit 2-16 red clause credit 2-14 revolving credit 2-12 special credit 2-16

Index

408

standby credit 2-15 transferable credit 2-11 transit credit 2-19 currency euro 4-111–4-113 insurance documents 7-116–7-117 damages 9-01–9-02 recovery by beneficiary if bank dishonours a draft or fails to pay 9-06–9-21 recovery by seller if buyer fails to open a credit 9-03–9-05 dating of documents 7-27–7-35 defective documents altered documents 6-68–6-71 documents that are a nullity 6-72 forged documents 6-68–6-71 fraudulent documents 4-21–4-22, 6-57–6-67 restraint of payments 4-23–4-33 defective goods 7-64–7-71 deferred payment credit 1-07, 2-06, 2-08, 4-94–4-95 delivery orders 7-53, 8-16 description of goods 7-46–7-49 dock warrants 8-16n documentary compliance see compliance documentary credit (see also commercial credit) acceptance credit see acceptance credit buyer’s frustration of a credit 3-40–3-41 buyer’s obligation 3-01 condition precedent 3-02–3-03 consequences of breach 3-42–3-45 terms on which credit should be opened 3-04–3-13 time within which credit should be opened 3-14–3-22 claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 contractual relationships see contractual relationships credit as payment 3-23–3-24 absolute or conditional payment 3-25–3-26 deferred payment credit see deferred payment credit means of payment 1-09–1-10 negotiation credit see negotiation credit parties to the transaction 1-06–1-08 procedure 1-16 buyer’s instructions 1-17–1-18 containers of goods 1-23 electronic communication 1-23 importer 1-22 issuing bank’s instructions 1-19 payment of beneficiary 1-20–1-21 purpose 1-01–1-05 revocable credit see revocable credit

Index

409

sight payment credit see sight payment credit Uniform Customs and Practice see UCP documents copy documents see copy documents defective altered documents 6-68–6-71 documents that are a nullity 6-72 forged documents 6-68–6-71 fraud see fraudulent documents nullity 6-72 irregularity payment under reserve or against indemnity 6-26–6-39 refusal of documents 6-11–6-25 return of documents 6-21–6-22 loss 6-40 delivery by beneficiary to intermediary or issuing bank 6-41 documents in possession of intermediary bank 6-42–6-49 documents in possession of issuing bank 6-52–6-55 documents in transit from intermediary to issuing bank 6-50–6-51 documents in transit from issuing bank to buyer 6-56 original documents see original documents pledge see pledged documents presentation see presentation of documents refusal 6-15–6-19 security see security domicile 10-04–10-18 drafts 1-05, 1-10 (see also bills of exchange) acceptance of 4-96–4-99 dishonoured by bank 9-06–9-21 presentation of 4-93, 4-97, 7-130 electronic communication 1-23 electronic documents 7-35, 7-137 estoppel 3-08, 3-13 euro 4-111–4-113 expiry date 6-02–6-03 export credit 2-19 express terms 1-13 claims by seller against buyer 3-28 false documents see fraudulent documents financing arrangements 4-10 foreign trade 1-02, 1-04–1-05 forfaiting 4-94n, 5-30–5-31 forged documents 6-68–6-71 insurance documents 7-118 fractional transfers 5-09–5-10, 5-13

Index

410

fraudulent documents 4-21–4-22, 6-57–6-67 restraint of payment 4-23–4-33 freezing orders 4-33 freight pre-paid bills of lading 3-13, 7-75–7-80 frustration of credit 4-81 by buyer 3-40–3-41 general credit 2-16 goods defective condition or packing 7-64–7-71 description 7-46–7-49 insurance cover 7-107 quantity 7-36–7-40 partial shipments 7-41–7-45 hypothecation 8-20, 8-25–8-29 illegality 4-51, 4-54 import credit 2-19 importers 1-22 indemnity 4-12–4-33 payment where documents do not comply 6-26–6-39 injunctions restraining payment 4-23–4-33 inland waterway transport document 7-60, 7-82, 7-85, 7-91, 7-97, 7-101 insolvent banks 3-32–3-39 instalment shipments 7-41–7-45 insurance documents 7-106 amount of cover 7-116–7-117 currency 7-116–7-117 forgeries 7-118 goods covered 7-107 issuance 7-108–7-110 type of cover 7-114–7-115 type of document 7-111–7-113 voidable policies 7-118 intermediary bank 1-19–1-20, 4-34 (see also confirming bank; nominated bank) contract with issuing bank 4-64–4-65 agency 4-66–4-67 frustration of credit 4-81 intermediary entitled to reimbursement from issuing bank 4-66–4-67, 4-74–4-80 intermediary instructed to act as nominated bank 4-70 intermediary instructed to advise 4-69 intermediary instructed to confirm 4-71–4-73 liability for acts of intermediary 4-68 contract with seller 4-82 intermediary instructed to act as nominated bank 4-85 intermediary instructed to advise 4-83–4-84 intermediary instructed to confirm 4-86–4-89 loss of documents

Index

411

delivery by beneficiary to intermediary or issuing bank 6-41 documents in possession of intermediary 6-42–6-49 documents in possession of issuing bank 6-52–6-55 documents in transit from intermediary to issuing bank 6-50–6-51 payment under reserve or against indemnity 6-33–6-35, 6-38 presentation of documents 6-09–610 bank’s obligations if documents do not comply 6-11–6-25 payment under reserve or against indemnity 6-30, 6-32, 6-33, 6-38 time to examine documents 6-05–6-08 refusal to transfer credit 5-14 return of irregular documents 6-21–6-22 security see security invoices 7-11–7-123 amount claimed and quantity of goods shipped 7-39–7-40 compliance 7-19 partial shipments and drawings 7-43 irregular documents 6-11–6-25 irrevocable credit 1-02, 1-09, 2-03–2-05 amendment and the time when the credit becomes binding 4-47–4-50 bank’s obligation 4-39–4-42 beneficiary’s contractual rights 4-43–4-46 contractual relationships 1-24 parties are concerned only with documents 1-26–1-27 issuing bank’s right to refuse payment 4-51–4-56 payment 4-57 ISP98 5-38–5-40, 5-44 documentary compliance 7-132–7-141 issue of documents 7-27–7-35 issuing bank claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 contract with buyer 4-06 ambiguity 4-19–4-20 bank’s right to reimbursement or indemnity 4-12–4-33 bank’s security 4-11 duty to make instructions complete and precise 4-15–4-18 financing arrangements 4-10 fraudulent documents 4-21–4-22 restraint of payment 4-23–4-33 terms of the contract 4-07–4-09 contract with intermediary bank 4-64–4-65 agency 4-66–4-67 frustration of credit 4-81 intermediary entitled to reimbursement from issuing bank 4-66–4-67, 4-74–4-80 intermediary instructed to act as nominated bank 4-70 intermediary instructed to advise 4-69 intermediary instructed to confirm 4-71–4-73 liability for acts of intermediary 4-68 contract with seller 4-34–4-38

Index

412

irrevocable credit 4-39–4-57 (see also irrevocable credit) payment 4-90 revocable credits 4-58–4-63 examination of documents 7-04–7-16 (see also compliance) instructions 1-19 loss of documents delivery by beneficiary to intermediary or issuing bank 6-41 documents in possession of intermediary bank 6-42–6-49 documents in possession of issuing bank 6-52–6-55 documents in transit from intermediary to issuing bank 6-50–6-51 documents in transit from issuing bank to buyer 6-56 presentation of documents 6-09–6-10 bank’s obligations if documents do not comply 6-11–6-25 payment under reserve or against indemnity 6-30, 6-32, 6-33–6-38 time to examine documents 6-05–6-08 security see security jurisdiction outside the Conventions 10-02, 10-27 permission to serve proceedings outside the jurisdiction 10-29–10-36 presence within the jurisdiction 10-28 status of UCP 10-01 under the Conventions 10-02, 10-03 allocation between different parts of the UK 10-26 claims brought in more than one contracting state 10-22–10-25 contracting states in which claimant may sue 10-06–10-18 domicile 10-04–10-18 one contracting state has exclusive jurisdiction 10-21 parties choose a jurisdiction in which suits should be brought 10-19–10-20 letter of credit (see also documentary credit) buyer’s frustration of a credit 3-40–3-41 buyer’s obligation 3-01 condition precedent 3-02–3-03 consequences of breach 3-42–3-45 terms on which credit should be opened 3-04–3-13 time within which credit should be opened 3-14–3-22 claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 credit as payment 3-23–3-24 absolute or conditional payment 3-25–3-26 letter of trust 1-22, 8-20–8-30 liability of intermediary bank 4-68 loss of documents 6-40 delivery by beneficiary to intermediary or issuing bank 6-41 documents in possession of intermediary bank 6-42–6-49 documents in possession of issuing bank 6-52–6-55

Index

413

documents in transit from intermediary to issuing bank 6-50–6-51 documents in transit from issuing bank to buyer 6-56 Lugano Convention 10-02 (see also jurisdiction) mate’s receipts 7-53, 8-16 merchantable documents 7-22–7-23 misrepresentation 10-14, 10-15 mistake 4-51, 4-56 mortgaged goods 8-20, 8-25–8-29 multimodal transport document 7-50, 7-55, 7-60, 7-82, 7-85, 7-91, 7-97, 7-99 negotiation credit 2-06, 2-10, 4-100–4-110 nominated bank 4-65, 4-70, 4-85 examination of documents 7-04–7-16 (see also compliance) presentation of documents 6-01 bank’s obligations if documents comply 6-09–6-10 bank’s obligations if documents do not comply 6-11–6-25 time to examine documents 6-05–6-08 notification of refusal to accept documents 6-15–6-19 notify party 7-81 nullity 6-72 open credit 2-16 original documents 7-29–7-34, 7-135 overseas commerce 1-02, 1-04–1-05 partial drawings 7-41–7-45 partial shipments 5-09, 7-41–7-45 payment 1-09–1-10, 2-06–2-10, 3-23–3-24, 4-91 absolute or conditional 3-25–3-26 acceptance of drafts 4-96–4-99 against indemnity 6-26–6-39 bank’s refusal 9-06–9-21 by negotiation 4-100–4-110 claims by seller against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 contract between issuing bank and seller 4-90 deferred 1-07, 2-06, 2-08, 4-94–4-95 introduction of the euro 4-111–4-113 irrevocable credits 4-57 issuing bank’s right to refuse payment 4-51–4-56 restraint of payment 4-23–4-33 seller’s rights on failure of banks to fulfil obligations 4-114 sight payment 1-07, 2-06, 2-07, 4-92–4-93 transferable credit 5-17–5-19 under reserve 6-26–6-39 place of performance 10-10–10-16

Index

414

pledged documents 8-02–8-08 bill of lading made out to the order of the buyer 8-15 bill of lading made out to the order of the issuing bank 8-12–8-14 bill of lading made out to the order of the shipper or intermediary bank 8-09–8-11 release of documents 8-19–8-30 transport document not a negotiable bill of lading 8-16–8-18 post receipt 7-60, 7-82, 7-87, 7-102 presentation of documents 6-01 amount claimed 6-02–6-04 bank’s obligations if documents comply 6-09–6-10 bank’s obligations if documents do not comply 6-11–6-25 compliance see compliance date and place of presentation 6-02–6-04 defective documents altered documents 6-68–6-71 documents that are a nullity 6-72 forged documents 6-68–6-71 fraud see fraudulent documents loss of documents 6-40 delivery by beneficiary to intermediary or issuing bank 6-41 documents in possession of intermediary bank 6-42–6-49 documents in possession of issuing bank 6-52–6-55 documents in transit from intermediary bank to issuing bank 6-50–6-51 documents in transit from issuing bank to buyer 6-56 payment under reserve or against indemnity 6-26–6-39 time for bank to examine documents 6-05–6-08 quantity of goods 7-36–7-40 rail consignment note 7-60, 7-82, 7-85, 7-91, 7-97, 7-101 ratification 4-24–4-25 red clause credit 2-14 refusal of documents 6-11–6-25 refusal to pay 9-06–9-21 reimbursement bank’s obligations if documents do not comply 6-23–6-25 fraudulent documents 6-62–6-65 of intermediary bank by issuing bank 4-66–4-67, 4-74–4-80 of issuing bank by buyer 4-12–4-33 permission to serve proceedings outside the jurisdiction 10-32 place of performance 10-11 repudiation of contract 3-15, 3-22, 3-42 damages see damages restraint of payment 4-23–4-33 revocable credit 2-03, 4-58–4-63 revolving credit 2-12 road consignment note 7-60, 7-82, 7-85, 7-91, 7-97, 7-101 Rome Convention 10-38 (see also conflict of laws) sea waybills 7-52, 7-57, 8-16

Index

415

(see also transport documents) security 8-01 claim to documents or goods by persons other than the bank 8-31–8-35 contract between buyer and issuing bank 4-11 pledged documents 8-02–8-08 bill of lading made out to the order of the buyer 8-15 bill of lading made out to the order of the issuing bank 8-12–8-14 bill of lading made out to the order of the shipper or intermediary bank 8-09–8-11 release of documents 8-19–8-30 transport document not a negotiable bill of lading 8-16–8-18 realisation 8-36–8-37 seller (see also beneficiary) claims against buyer bank insolvent 3-32–3-39 bank not insolvent 3-27–3-31 recovery of damages 9-03–9-05 contract with intermediary bank 4-82 intermediary instructed to act as nominated bank 4-85 intermediary instructed to advise 4-83–4-84 intermediary instructed to confirm 4-86–4-89 contract with issuing bank 4-34–4-38 irrevocable credit 4-39–4-57 (see also irrevocable credit) payment 4-90 revocable credit 4-58–4-63 right to sue on failure of bank to fulfil obligations 4-114 set off 4-51, 4-55 ship’s releases 7-53 sight payment credit 1-07, 2-06, 2-07, 4-92–4-93 signature of documents 7-27–7-35, 7-136 special credit 2-16 standby credit 2-15, 5-38 assignment of proceeds 5-43–5-46 compliance under ISP98 7-132–7-141 transfer by operation of law 5-47 transfer of drawing rights 5-39–5-42 stowage on deck 7-72–7-74 strict compliance 7-04–7-16 consistency of documents 7-17–7-18 immaterial documents 7-19–7-21 merchantability 7-22–7-23 non-documentary conditions 7-24–7-26 usual documents 7-22–7-23 successive transfers 5-09–5-10 SWIFT 1-13n, 1-19, 2-17, 4-34 transferable credits 5-15 teletransmitted credits 2-17, 4-34–4-37 time drafts 4-96 fraudulent documents 6-65

Index

416

torts 10-13, 10-14 transferable credit 2-11 bank’s right to refuse to transfer 5-14 conflict of laws 10-49–10-54 establishment 5-04–5-08 fractional transfers 5-09–5-10, 5-13 legal nature of transfer 5-20 payment 5-17–5-19 presentation of documents 5-17–5-19 process of transfer 5-15–5-16 purpose 5-01–5-03 successive transfers 5-09–5-10 terms on which transfer may be effected 5-11–5-13 transhipment 7-94–7-98 transit credit 2-19 transport documents 7-50 authentication 7-84–7-87 bills of lading see bills of lading clean 7-64–7-71 compliance with other stipulations of the credit 7-105 consignor/notify party 7-81 defective goods or packing 7-64–7-71 freight paid 3-13, 7-75–7-80 indication that goods have been shipped or taken in charge 7-88–7-91 goods covered 7-107 name of carrier 7–84 pledge see pledged documents sets of documents 7-99–7-102 stale documents 7-58–7-63 stowage on deck 7-72–7-74 terms of carriage 7-103 time of shipment 7-58–7-63 type of vessel 7-104 UCP requirements 7-82–7-105 whole transit covered 7-92–7-98 trust receipts 1-22, 8-20–8-30 UCP (Uniform Customs and Practice for Documentary Credits) 1-11–1-15 altered documents 6-71 assignment 5-26 autonomy 1-25 bills of lading 7-51, 7-52, 7-54, 7-57 contract terms 4-07–4-09 contractual relationships 4-02, 4-34 credit classification 2-02, 2-03 standby credit 2-15 teletransmitted credits 2-17–2-18 defective goods or packing 7-66, 7-67, 7-70, 7-71 description of goods 7-46 documentary compliance 7-01, 7-04, 7-24–7-26 authentication 7-29, 7-35

Index

417

consistency of documents 7-17–7-18 duty to make instructions complete and precise 4-15, 4-17–4-18 e-supplement 7-35 electronic communication 1-23 forged documents 6-69 fraudulent documents 4-22, 6-59 insurance documents 7-107, 7-113, 7-116 intermediary banks 4-65, 4-68, 4-69, 4-83, 4-86 frustration of credit 4-81 reimbursement by issuing bank 4-74, 4-76 irrevocable credit 4-39, 4-42, 4-47 jurisdictional issues 10-01 loss of documents 6-49, 6-50, 6-54–6-56 presentation of documents bank’s obligations if documents do not comply 6-13 payment under reserve or against indemnity 6-29, 6-30 time for bank to examine documents 6-07 revocable credit 4-58 standby credit 5-38, 5-39 time of shipment 7-58, 7-61–7-62 transferable credit 5-01, 5-03, 5-05–5-08, 5-10, 10-49, 10-51 transport documents 7-82–7-105 unenforceability 4-51, 4-53 Uniform Customs and Practice for Documentary Credits see UCP Uniform Rules for Bank-to-Bank Reimbursements (URR) 4-76–4-77, 4-80 usance drafts 4-96n variation of contract 3-08 waiver contract of sale 3-08–3-10, 3-12, 3-13 discrepancies in documents 6-11, 6-12 waybills 7-52, 7-57, 8-16 weight certificate 7-127 without recourse credit 4-1

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Gutteridge and Megrah's Law of Bankers' Commercial Credits

Commercial Law (Principles of Law)

Commercial and Consumer Law

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Russian Commercial Law

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Harmonization of Civil and Commercial Law in Europe

13 Bankers

International Commercial Tax (Cambridge Tax Law Series)

The Jurisprudential Foundations of Corporate and Commercial Law (Cambridge Studies in Philosophy and Law)

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Eine Milliarde Credits

All the Presidents Bankers

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Organising the Firm: Theories of Commercial Law, Corporate Governance and Corporate Law

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In Praise of Commercial Culture

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Drafting Corporate and Commercial Agreements

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