Payment methods and systems
6.01 In domestic sale transactions, payment may be made by a variety of methods, ranging from the manual transfer of cash or cheques to interbank transfers. The latter transfers can embrace bank giro credits, standing orders, and direct debits, and the transfers themselves can be effected by various means.1 They may be carried out manually within the system or, as is increasingly likely and overwhelmingly in terms of value, through automatic systems such as BACS Ltd (Bankers Automated Clearing Services) and, especially, CHAPS (Clearing House Automated Payment Systems). International transfers2 may take place through mail (which is rare nowadays) and telegraphic transfers,3 as well as through SWIFT (Society for Worldwide Interbank Financial Telecommunications)4 transfers.5
6.02 The differences between an international and a domestic seller’s delivery duty are greater than the differences between the payment duty of an international and a domestic buyer. For example, it is a common feature of dry commodity sales on CIF terms for the buyer to pay ‘net cash against shipping documents’.6 This is a routine expression of the presumptive rule in s 28 of the Sale of Goods Act that the seller’s duty to deliver and the buyer’s duty to accept and pay are mutual and concurrent conditions. The above express term substitutes a duty to deliver documents for a duty to deliver the goods. Similarly, the term imposes an obligation on the buyer to take up the shipping documents instead of accepting the goods, but the other half of the buyer’s duty, the duty to pay, is on the face of it no different from the buyer’s duty under a cash on delivery domestic sale.
Place of payment
6.03 The Sale of Goods Act recites various rules concerning how and where the seller is to deliver the goods7 but it says nothing about how and where the buyer is to pay. These are matters to be settled by the construction of the particular contract.8 Sometimes the course of business between the parties will settle the matter.9 The place of payment will often be important for jurisdictional purposes. A useful starting point is s 28, which provides that presumptively delivery and payment are mutual and concurrent. Section 28 may be stretched a little to provide a presumptive rule that the buyer should pay the seller at the place as well as the time of delivery.10 Where payment and delivery are mutual and concurrent conditions, truly simultaneous performance is hard to effect unless it occurs in the same place. If s 28 applies, the starting point should be that the buyer presumptively pays the seller at the latter’s place of business11 since this is where delivery (p. 303) presumptively occurs.12 Presumptive rules are more or less strong, and the presumptive rule advanced above concerning payment at the seller’s place of business is one that would appear to have little application in the case of international sales. In some instances, clear provision will be made for the place of payment, as for example occurs where payment is to be made by a nominated bank under a letter of credit.13 Again, the seller’s duty to deliver may be performed through an agent who may not be authorized to accept payment from the buyer, or the seller may adopt a head seller’s shipment.14 In neither case will the performance of the seller’s duty to deliver the goods15 give the buyer any guidance on the place of payment. It was stated in an earlier chapter,16 that the CIF seller may be bound to deliver the shipping documents at the buyer’s place of business or at the offices of a collecting bank. The buyer should, unless the contract otherwise provides, be bound to pay in the same place. The issuing bank’s duty to pay under a letter of credit advised to the seller beneficiary has been held to arise at the offices of the advising bank where these were identified as the place where the shipping documents were to be presented.17 As for cases where delivery and payment are not mutual and concurrent, for example, where the seller is prepared to deliver on credit terms, the connection between delivery and payment is severed. There is now the common law fall-back position that the buyer, like any other debtor, must seek out his creditor.18 Where the obligation to pay amounts to a debt and the creditor chooses to seek out his debtor, the debtor will be bound to pay at the place where the demand for payment is made.19
Method of payment
6.04 There is also the method of payment to consider. At common law, the presumptive method of payment is by means of legal tender,20 which consists of currency or coin.21 Modern commercial practice, however, treats as cash ‘any commercially recognised method or transferring funds the result of which is to give the transferee the unconditional right to the immediate use of the funds transferred’.22 In addition, the cash (p. 304) payment rule may be displaced by previous practice between the parties or by custom or usage in a particular trade.23 It is easy to see that the waiver of a buyer’s strict payment duty may over time produce a new implied agreement between the parties or a custom or usage. Where credit is given, and the buyer is subsequently invoiced for the price, it is highly likely that the common law rule will have been displaced by an implied agreement that the buyer may pay by cheque; the invoice may even expressly permit a cheque in giving details of payment by such means.24
The seller’s risk
6.05 Both domestic and international sellers incur certain financial risks when supplying to the buyer goods that do not come out of existing stocks, though these risks tend to be more serious in the case of an international seller. If the goods have to be bought in, the seller may not obtain them on credit or on a sufficiently long credit term, and may have to lay out funds to acquire them from a third party or incur bank interest charges to achieve the same thing. The risk the seller runs, that the buyer will default before payment, is exacerbated if additional charges are incurred to modify the goods for the buyer’s particular needs or if the market for the goods is inactive or slow. If the goods have been shipped overseas and the seller has to repossess them upon default, the cost of this operation is likely to exceed that of its domestic counterpart and the risk of having to dispose of the goods at a distress price increased. Another possibility is that the seller is the manufacturer, who incurs substantial upfront costs in producing the goods. A manufacturing seller, particularly in the case of large projects such as shipbuilding contracts, will commonly stipulate for payment as the work progresses, in stages before delivery of the completed goods is made.
6.06 A seller who delivers goods on open account terms, with payment to occur by the end of a designated period, takes a risk of the buyer’s repudiation and insolvency, which is particularly acute in overseas sales if proceedings have to be started or judgments enforced overseas. The seller may seek protection by reserving the right of disposal25 until payment in full has been made by the buyer. This purpose is often effectuated by means of a documentary collection, whereby shipping documents are released to the buyer only upon payment. Documentary collections are usually administered through the banking system and made subject to uniform rules.26 If the buyer then becomes insolvent before payment, the seller’s reservation of the right of disposal, or, if the property in the goods has passed, its lien over the shipping documents,27 means that it will not have to prove as an unsecured creditor for the price of the goods if it has suffered no loss other than non-payment. Nevertheless, the seller may also have a damages claim which is hard to pursue even against a solvent overseas buyer committing a repudiatory breach, and is quite unproductive in the case of an insolvent buyer. For example, the costs of disposing of the goods against a defaulting buyer are likely to be substantial if the goods are in a (p. 305) distant, inaccessible, or inconvenient place, such as on lighter barges at the discharge port. The seller who wraps himself in the protective clothing of s 28 of the Sale of Goods Act, demanding payment against the tender of documents, thus covers himself against only some of the risks of the buyer’s insolvency. Consequently, the seller also needs the assurance before incurring financial commitment that expensive preparations for performance can safely be commenced and also the assurance that a downturn in the market will not leave him chasing a distant buyer for damages for non-acceptance of the goods.28 This is where other payment mechanisms giving full protection against all of the risks, notably, the documentary letter of credit,29 come into their own.
6.07 A seller, nevertheless, willing to court some of these risks may be unwilling to trust to a cheque on the buyer’s personal bank account. One alternative to the buyer’s cheque is a bank draft. This is an instrument drawn on a bank to the order of a named person30 and payable on demand and is a suitable vehicle for payment where the payer does not have details of the payee’s bank account. A bill of exchange drawn by one bank on another and payable on demand is a cheque.31 The risk with this form of payment is that it may be lost in the post or stolen. In the latter case, the risk is that the thief or an accomplice will fraudulently present it to the paying bank, forging the payee’s signature in the process. A bank that exercises care when paying the wrong individual or acts in good faith and in the ordinary course of business has certain statutory protections under English law.32
Time of the essence
6.08 Under sub-section 10(1) of the Sale of Goods Act, the time of payment is presumptively not of the essence of the contract; whether other time stipulations are of the essence depends upon the construction of the contract. In the modern law, the position has been reached that the duty of delivery is presumptively of the essence in commercial contracts,33 whereas any contention that the time of payment is of the essence in commercial contracts will have to be justified in the particular case.34 Given that payment and delivery (p. 306) are presumptively mutual and concurrent conditions,35 this position looks hard to justify.36 There are, however, two main responses to the apparent incoherence of the law. The first is to assert that s 28 of the Sale of Goods Act dictates only the order of performance: where it applies, a seller cannot be required to deliver by a non-performing buyer even if the performance date has arrived. The seller can in effect suspend his own performance until the delay of the buyer amounts to a frustrating breach, whereupon the seller may terminate the contract. If it were a case of the seller defaulting, not only would s 28 protect the buyer against having to pay; the non-performance of the seller amounting to a discharging breach, the buyer could terminate the contract immediately.37
Time and international sales
6.09 The second response is to assert that the bulk of authorities favouring the view that the seller’s delivery duty is of the essence are international commodity sale agreements. Moreover, when under such contracts the buyer’s payment duty comes under scrutiny, the authorities run counter to the presumptive rule in sub-section 10(1) that payment is not of the essence. Particularly in the case of payment by letter of credit,38 this judicial attitude amounts to a clear recognition that sub-section 10(1) is an inadequate response to the risks run by a seller who starts upon the task of performance. The duty of timely payment in international sales will usually be regarded as of the essence of the contract.39 In Sohio Supply Co v Gatoil (USA) Inc,40 it was common ground between the parties that the timely provision of a letter of credit was a contractual condition.41 In Gill & Duffus v Berger & Co,42 Lord Diplock stated, though without supporting authority, that in a CIF contract it was ‘so well established … as to be beyond the realm of (p. 307) controversy’ that the buyer’s refusal to pay against shipping documents that on their face conformed to the contract43 amounted to a fundamental breach of contract.44 The same strict approach is evident in the case of deposits.45 In SCCMO (London) Ltd v Société Générale de Compensation,46 the FOB buyer was required, if no vessel had been nominated by a stipulated date, to deposit a £10,000 guarantee that a letter of credit would be opened in accordance with the contract. The court held that the duty to open the guarantee on that date was a fundamental term of the contract: ‘The clause is fundamental in its purpose of giving security.’47 As this case shows, the contract may call for a certain type of payment so as to reassure the seller that steps towards performance may safely be taken. If the time of payment in such a case were not of the essence of the contract, the purpose of the contract in thus assuring the seller would be subverted. In cases where the time is of the essence but the seller waives late payment, the seller will have to serve a notice making time of the essence again, giving the buyer a reasonable time to make payment, unless the buyer could not have performed in any event in the reasonable time provided.48
Bills of exchange
6.10 As stated above, a banker’s draft may as a demand bill of exchange drawn on a bank amount to a cheque. Bills of exchange are sometimes also used in connection with letters of credit.49 The statutory definition, in sub-section 3(1) of the Bills of Exchange Act 1882, of a bill of exchange is as follows:
A bill of exchange is an unconditional order in writing, addressed by one person [the drawer] to another [the drawee], signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time,50 a sum certain in money to or to the order of a specified person [the payee], or to bearer.
A bill of exchange payable at a future time is known as a usance bill, the usance (or interval) before payment being commonly thirty days or multiples of thirty days.
6.11 When the bill is accepted by the drawee (who now becomes the acceptor), he becomes liable on the instrument to the payee or any lawful holder51 of the instrument. Where the drawee dishonours the bill, either by refusing the order for payment when it is presented for acceptance, or by refusing to pay when it is presented for payment, the drawer of the bill, having signed it, is personally liable on it to the lawful holder.52 The drawer is therefore liable to a payee in possession of the bill or to an indorsee in possession of the bill.53 Where the drawer and payee are the same person, it is common for a bill to be negotiated54 before acceptance by the drawee.
6.12 Bills of exchange are highly flexible instruments. To take one example of the way a bill of exchange works,55 suppose that the buyer, under the terms of an export credit facility, draws on its bank for payment of the sale price due under a sale of goods contract that gives the buyer thirty days’ credit.56 The bill is a thirty-day usance bill. The buyer delivers this draft bill to the seller before it matures (that is, before the thirty-day period elapses). The seller now has a choice. It may wait for the bill to mature and then present the bill for payment to the drawee bank. Or the seller may, either before or after the bill has been accepted, discount it in the bills market.57 In the latter case, the seller will negotiate the bill to a discount house which will take it as a holder, indeed, since it purchased the bill for valuable consideration, as a holder for value.58 A holder for value who takes it without notice of any defect in the transferor’s title to it is called a holder in due course.59 As a holder in due course, the discount house will be entitled to assert against the drawee bank, provided the drawee bank accepts the bill, its right to payment free from any defects of title and personal defences60 that the drawer (that is, the buyer) might have had to an action by the seller for payment under the contract of sale, and free from any claims the bank might have against the buyer. If the drawee bank dishonours the bill, the discount house may have recourse against the buyer as the drawer of the bill and against the seller as indorser.61
Negotiating the bill
6.13 The process of negotiation will take the form of the payee (that is, the seller) indorsing the bill on its back with the instruction to the drawee ‘Pay Discount House or order’ followed by his signature. The discount house could, in turn, negotiate the bill to another party. Where this happens, not only is the drawee’s acceptance and payment of the bill guaranteed by the drawer;62 it is guaranteed also by the discount house as (p. 309) a result of its indorsement and negotiation of the bill to the new holder.63 In this example, the buyer aggrieved by the quality of the goods delivered by the seller, will have to pursue the seller in a damages action. If credit was advanced by the drawee bank to the drawer buyer when the bank accepted the draft, the buyer will have to repay this loan to the bank.
Draft bills of exchange and bills of lading
6.14 A common nineteenth-century practice was for the seller to draw on the buyer for the price, remitting the draft (bill of exchange) together with the bill of lading to the buyer. The bill of lading had been duly indorsed and the buyer was supposed to take up the bill of lading only if he accepted the draft, which then was to be returned to the seller. The practice is dealt with in sub-section 19(3) of the Sale of Goods Act 1979, which provides that, if the buyer does not accept the draft bill of exchange, the general property in the goods does not pass to the buyer.64 Nevertheless, as the buyer in possession of a document of title, the buyer will be able to transfer a good title to the underlying goods to a bona fide purchaser for value without notice.65
6.15 It is possible though unlikely66 that payment in an international sale transaction will be made with a promissory note. Whereas a bill of exchange drawn on the buyer originates with the seller, as the drawer of the bill, a promissory note originates with the buyer as its maker. According to sub-section 83(1) of the Bills of Exchange Act: ‘A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.’ Like a bill of exchange, a promissory note may be discounted before maturity. Furthermore, the holder in due course of a promissory note is insulated from any underlying transaction in the same way as is the holder in due course of a bill of exchange. Since the promissory note originates with the buyer, in the above sale example, the buyer as the maker of the note is always liable upon it, in contrast with the case of a buyer who, if the drawee of a bill of exchange, only becomes liable on the bill, as opposed to the contract of sale itself, when accepting it.
6.16 A seller drawing on the buyer for the price may wish to avoid recourse by an indorsee of the bill of exchange in the event of its dishonour by the buyer. The terms of the draft may then be such as to exclude recourse to the seller67 and will be acceptable in the bills market68 either because of the strength of the drawee buyer’s credit rating or because the bill is supported by a bank in the buyer’s country, which executes either a separate guarantee or backs the bill with an aval signature. The guarantee or aval may also be (p. 310) executed in support of a promissory note made by the buyer. This method of financing without recourse to the seller is known as forfaiting. The difference between a guarantee and an aval is that the former will be enforceable not only by those who become holders of the bill after the guarantee has been executed but also by prior holders.69 In the case of an aval, the likely treatment of it in English law is that it works as a security indorsement and therefore in favour only of subsequent holders of the bill.70 If the applicable law of the aval, however, is not English law, it may, depending on the terms of that applicable law, also work in favour of prior holders of the bill so as to protect them in the case of default by the acceptor of the bill.71
Types of collection
6.17 The primary concern of this chapter is with letters of credit so far as they bear upon the relationship of buyer and seller. In addition, the relationship of the seller to the relevant bank or banks should be considered because of its incidental effect upon the relationship of buyer and seller. The relations between banks, and between the buyer and his bank and the seller and his bank, is left to specialist texts.72 Before turning to the above aspects of letters of credit, it is useful briefly to consider the interbank collection process. This is a larger subject than letters of credit, in that the collection process may not be pursuant to a letter of credit at all. It also surpasses the contract of sale, in that a collection may not be related to a contract of sale as such but to some other type of transaction. When money transfers are effected between banks pursuant to international sale contracts, this gives rise to what is called a clean collection in those cases where payment is not made against shipping documents. Where shipping documents are transferred, this gives rise to a documentary collection. A letter of credit issued in favour of a seller who is to provide shipping documents against payment may appropriately be termed a documentary credit.73
Uniform collection rules
6.18 The Uniform Rules for Collections,74 published by the International Chamber of Commerce, exist to govern the processing of bills of exchange (including drafts and cheques), promissory notes, payment receipts, and similar instruments.75The rules deal with the duties and liabilities of banks towards other banks and their clients (or principals, as they are referred to in the rules). The bank charged with carrying out the principal’s collection instructions is the remitting bank, the bank that (p. 311) actually makes the presentation of documents is the presenting bank and any other bank (if there is one) involved in the collection process is the collecting bank.76
6.19 Since clean collections are divorced from performance of any underlying contract, they are not treated in this work. Documentary collections are also subject to the URC but additional provisions apply in this case. These emphasize that the banks’ obligations lie in the realm of verifying, checking, and accepting documents. They are not concerned to inquire into the underlying sale or other transaction.77 Thus, goods are not to be sent to the banks themselves78 and they incur no duty to protect the goods.79 The banks’ duty is to see that ‘the documents received appear to be as listed in the collection instruction’; they ‘have no further obligation in this respect’.80 Similarly, banks are not responsible for the genuineness of documents and assume no ‘liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s)’.81 The strength of their duty to other parties in the collection process82 is one of good faith and the taking of reasonable care.83 The above duties of banks in relation to the verification of shipping documents are also set out in greater detail in the UCP rules on letters of credit and will be discussed below.
Collection and payment
6.20 With respect to the method of payment sought by a principal sending shipping documents,84 if the collection contains a bill of exchange payable at a future date, the collection instruction should state whether the shipping documents are to be released against payment or whether they are to be released against the acceptance of an accompanying draft, which may be a usance bill. The former is known as documents against payment (or D/P) and the latter as documents against acceptance (or D/A). If the collection instruction is silent on this point, the documents will only be released against payment.85 The risk run by the seller in the case of a D/A collection is that the draft may eventually be dishonoured by the drawee/acceptor of the bill of exchange or the seller may be left with an instrument drawn on an unknown individual, which cannot be discounted in the bills market. This risk is avoided when payment is made by letter of credit, which, however, is more expensive to arrange than a D/A collection.
Letters of credit: introduction
6.21 Letters of credit used in trade as payment devices are sometimes known as bankers’ documentary credits or more simply as documentary credits. If the reported (p. 312) cases are a reliable guide, they appear not to be in frequent use in the case of dry commodities like wheat and soya crossing the Atlantic and bound for European ports, where cash against documents is the usual system of settling payment. Letters of credit are certainly used, however, in the oil trade. There is no reason why they should be confined to international trade but that has been their traditional province. Where letters of credit are employed to effect payment under a contract governed by English law, they will usually be subject to the Uniform Customs and Practice for Documentary Credits.86 These authoritative trade customs and rules depend upon the parties’ intention to apply them; they are not of course binding as some sort of supranational legislation.87 It is not clear whether they will be applied by English courts as concordant with the parties’ intention if not expressly incorporated in the relevant contract.88 In view of their widespread use in practice, however, the better view is that they will apply to the credit unless they are excluded by it. In any case, the UCP rules are so expressive of modern banking practice that no appreciable difference is likely to exist between the application of English law without the rules and the application of English law with the rules. The distinction in the case law between an interpretation of the UCP rules and a statement of the English law on the subject can be very difficult indeed to discern. Unless otherwise stated below, it will therefore be assumed that letters of credit are subject to the UCP rules. When it comes to their application in the English courts, it has been stressed that they have been drawn up by bankers in English for use in a wide variety of jurisdictions. Consequently, a narrow and national approach to their interpretation is to be discouraged.89 The current version of the rules is UCP 600, adopted in 2007. UCP 600 does not depart radically from its predecessor, UCP 500 but, despite the addition of definitions, it is a shorter instrument, from which much duplicated material in UCP 500 has been removed. It also is rather more focused on contractual rules and less on banking practice than has been the case in the past. The few substantial differences between the two instruments will be mentioned in the following text. UCP 600 are supplemented by eUCP to permit the presentation of an electronic record, either alone or in combination with paper documents.90 There is little evidence to date of an extensive adoption of this instrument.
Compatibility of UCP rules and the letter of credit
6.22 The question of the partial application of the UCP rules remains to be considered. In Forestal Minosa Ltd v Oriental Credit Ltd,91 the court had to consider the compatibility of the UCP rules, expressly incorporated (p. 313) into the documentary credit by means of a marginal note, with the remaining terms of the credit. According to the note, the UCP rules applied except where otherwise ‘expressly’ stated in the credit. In this case, the defendant bank had confirmed a credit, whose express terms appeared to render the issuing bank’s payment undertaking ‘operative’ only in the event that the buyer accepted the seller’s draft. The issuing bank’s undertaking would then be to honour the draft if it were dishonoured by the buyer when presented on maturity. The UCP rules, on the other hand, would render the issuing bank, and therefore the confirming bank, liable for the draft being honoured at maturity, whether it had been accepted in the first place by the buyer or not.92 The court declined to read the credit first in isolation from the UCP rules. Rather, the terms of the marginal note required the UCP rules to be read alongside the other terms of the credit, since the credit was drawn up with the UCP rules in mind. The apparent meaning of the issuing bank’s express undertaking was therefore countered by the credit as a whole, taking in the UCP rules, with the consequence that the defendant bank was liable on its confirmation without the draft ever being accepted by the buyer. The terms of the marginal note, consequently, repelled the normal contractual rule of construction that the express terms of a contract override incorporated standard terms in the case of inconsistency.93 They did so by allowing the standard terms to play upon the express terms so as to abate any inconsistency.
6.23 The workings of the letter of credit system and the various contracts involved in it are best considered at the outset with the aid of an example. Suppose that a contract for the sale of machinery is concluded between a German seller and an Italian buyer. It may be that there have been few or no dealings between the parties in the past and that the seller wants to avoid the risk of eventual non-payment by the buyer for whatever reason (including insolvency). One way to avert this risk is for the parties to substitute, for the uncertain prospect of eventual payment by the buyer, the prospect of near-certain payment by a reliable paymaster, namely, a first-class bank. The Italian buyer, who is known as the applicant, instructs an Italian bank to issue a letter of credit to the German seller, who is known as the beneficiary. The Italian bank is called the issuing bank.
Operating the credit
6.24 This letter of credit contains a promise by the issuing bank to pay the seller once the seller complies with the stated delivery requirements in respect of the goods or of documents representing the goods.94 Payment under the letter of credit to the German seller will call for the assistance of a German bank. This bank, known as the advising or correspondent bank, will advise the beneficiary of the credit and will commonly add its own undertaking to that of the issuing bank so as to become a confirming bank.95 A confirming bank in the same jurisdiction as the beneficiary is more accessible (p. 314) than an issuing bank in a foreign jurisdiction. In some cases, an advising bank may add its confirmation at the expense of the beneficiary. If so authorized to do by the issuing bank, it will be a confirming bank for the purpose of UCP 600.96 If not, this so called ‘silent confirmation’ should take the case outside UCP 600 so as to leave the confirming bank as an advising bank qua the issuing bank, though courts might be reluctant to conclude there has been an absence of authority, especially in view of the fact that the practice is a common one. The issuing and confirming banks undertake joint and several liability to the beneficiary of the credit.97 The place of presentation of documents and payment depends upon the terms of the credit. This place may be the premises of the issuing bank, if the credit is unconfirmed. If the credit is confirmed, the confirming bank may be nominated as the place of payment. But if the confirming bank is not the place of payment, a third bank may be nominated for this purpose.98 Apart from the case of negotiation credits,99 the nominated bank is likely to be the confirming bank, though it need not be.100 It is highly desirable from the point of view of the German seller that the advising bank take the extra step of becoming a confirming bank.101 Notwithstanding the standardization of rules of jurisdiction and recognition of judgments within the European Community, a seller, if driven to sue, will always prefer to sue a bank in its own country rather than a bank in another country. So far, only two (or three, if the nominated bank is neither an advising nor a confirming bank) banks have been mentioned. There may, unusually, be separate banks advising and confirming the credit. The network of contracts contained in a letter of credit system might suggest some scope for the Contracts (Rights of Third Parties) Act 1999,102 which, if applicable, might for example allow a beneficiary to enforce directly a promise given by a bank to an applicant that it will open a letter of credit in favour of the beneficiary. Nevertheless, the UCP rules make it very plain that beneficiaries cannot ‘avail’ themselves of the contractual relationships between banks and between an issuing bank and the applicant.103
6.25 Where the credit is a negotiation credit,104 the bank does not as such honour the credit but stands in relation to the beneficiary of the letter of credit as the (p. 315) outright purchaser of the beneficiary’s rights under the credit.105 A credit must be a negotiation credit according to its terms for the beneficiary to be able to dispose of it in this way106 Furthermore, it must authorize the negotiating bank to advance funds, or agree to do so, before that bank in its capacity of nominated bank is due to be reimbursed.107 The negotiating bank purchasing the beneficiary’s rights will thus be acting as the nominated bank.108 This negotiating bank is just as much a beneficiary of the undertakings given by the issuing and confirming banks as the seller beneficiary itself; it supersedes the seller as the beneficiary. One method of payment in the case of negotiation is for the seller to draw a bill on the issuing or confirming bank109 and then discount that draft with the negotiating bank.110 The negotiating bank will have the status of a holder in due course of the bill and will thus take free of any personal defences, such as the fraud of the seller beneficiary.111 But this status on the bill is of value to the negotiating bank only in the event of the drawee bank accepting the draft. Another method of payment in the case of negotiation is for the beneficiary simply to sell the shipping documents to the negotiating bank in exchange for cash.112 The documents having been negotiated, the negotiating bank will then present them to the confirming or the issuing bank in order to receive payment. The inherent ambiguity in the word negotiation,113 which at one level may connote mere transfer, but at another the acquisition of rights free from defects of title and personal defences, came to the fore in Banco Santander SA v Banque Paribas,114 which was under UCP 500. In that case, the plaintiff confirming bank paid against shipping documents under the terms of a 180-day deferred payment credit115 before the due date of payment, taking an assignment of the beneficiary’s rights. Between the dates of actual payment and due payment, the fraud of the beneficiary came to light. The plaintiff bank had paid in advance without the authority of the issuing bank and could not claim reimbursement under the terms of its mandate. As an assignee of the fraudulent beneficiary’s rights to payment, it took subject to equities and defences available to the obligor issuing bank.116 Had this been a case (p. 316) where the nominated bank had been authorized to negotiate the documents, the plaintiff bank would have been contractually entitled to be reimbursed by the defendant issuing bank.117 The current rules in UCP 600 reverse the result in Banco Santander because they require a nominated bank that has honoured or negotiated a credit to be reimbursed by the confirming or issuing bank ‘whether or not the nominated bank prepaid or purchased before maturity’.118
6.26 It is common practice for the contract of sale expressly to stipulate for the opening of an irrevocable letter of credit.119 Sellers need the assurance that it is safe to press ahead with contractual performance. An irrevocable credit contains an enforceable promise of payment that when issued may not be withdrawn.120 If an international sale contract calls for payment by letter of credit, a likely presumption is that it means an irrevocable letter of credit since a revocable credit ‘is of no use to anyone’.121 Under UCP 500, a letter of credit was stated to be irrevocable, unless otherwise indicated,122 whereas UCP 600 makes no provision for revocable credits at all.123 The silence of UCP 600 amounts to a discouragement of the practice of issuing revocable credits, but there is nothing to prevent the issue of revocable credits if that is the wish of applicants and issuing banks. To a beneficiary with a need for an irrevocable credit, the unsatisfactory character of the following document is self-evident: ‘Negotiations of drafts under these credits are subject to the bank’s convenience. All drafts hereunder are negotiated with recourse against yourselves.’124 The introduction of such a condition affecting payment, going beyond the usual documentary and temporal requirements, detracts from the irrevocable character of a credit. Although a promise to pay, not against (p. 317) shipping documents but rather against the subsequent arrival of the goods at the discharge port, might not as such render a credit revocable, it is unlikely that such a credit would be acceptable under a contract of sale calling for a documentary credit.125 To require a bank to take notice of the actual arrival of the goods is inconsistent with the rule that banks deal in documents and contractual performances and the principle of the autonomy126 of the credit from the underlying sale transaction.127 It also runs counter to the rule that banks should disregard non-documentary conditions.128 Furthermore, an unconscientious CIF buyer could too easily seize the opportunity thus presented of declining to accept the risk of loss or damage as from shipment, which would contradict the character of such a sale.129
Payment under the credit
6.27 According to its type, the letter of credit may provide for payment in one of various ways.130 The method of payment must be clearly indicated in the credit.131 Payment by a confirming bank is dealt with under Article 8 of UCP 600. First of all, if the confirming bank is not the nominated bank, the confirming bank must reimburse a nominated bank that has honoured or negotiated a complying documentary presentation, whether or not the nominated bank prepaid the beneficiary or purchased documents from the beneficiary before the due date under a deferred payment credit, or before the due date of payment under an acceptance credit. If the nominated bank does not honour the credit or negotiate a complying presentation, then the confirming bank steps into the shoes of the nominated bank as regards the beneficiary. Depending on the terms of the credit, the confirming bank must make a sight payment or give a deferred payment undertaking, or accept a bill of exchange drawn on it,132 or negotiate a documentary presentation. The confirming bank may also be the nominated bank, in which case there is no question of waiting for another bank to fail to honour or negotiate the credit. The position of the issuing bank relative to the confirming bank is, under the terms of Article 7 of UCP 600, the same as that of the confirming bank relative to a separate nominated bank. Moreover, if there is no confirming bank, then the issuing bank stands in relation to the nominated bank in the same way as would a confirming bank.133 Finally, if there is no nominated bank, because the beneficiary is to look directly to the issuing bank, then the issuing bank is under a duty to honour or negotiate in the same way as a confirming bank that is also the nominated bank.
6.28 Sometimes it is a case of the buyer who wants the assurance that the seller will duly deliver.134 The use of letters of credit and similar instruments to achieve this assurance has been especially common in the case of government procurement in developing economies where the buyer is a government department or a main contractor. Complex project finance operations are particularly reliant on the timely delivery of capital goods. In this case, the seller will be required to provide something called a standby credit (or the functionally similar demand guarantee),135 which is tantamount to a performance bond.136 The standby credit will detail the circumstances in which the beneficiary, in this case the buyer, is entitled to call for payment on demand. The circumstances may vary from a simple demand to one coupled with a declaration of default by the performing party and possibly other declarations too.137 The greater the ease with which a call for payment may be made under the bond or standby credit, the greater the opportunities for fraud or oppression by the payee. Nevertheless, the ease with which payment may be drawn down under such an instrument may serve a perfectly legitimate purpose.138 Ultimately, the extent of the formal requirement to be met before payment is to be made is a matter of construction of the particular instrument,139 which may require reference to the terms of UCP 600 themselves.140 Given the autonomous character of the instrument,141 it is especially unlikely that a court will rule that a demand under a performance bond, for example, is invalid if the bank is in no doubt about a beneficiary’s right to make a demand and if the relevant bond is appropriately identified.142 Standby credits are also governed by UCP 600, though some of those rules, designed to deal with the performance of a primary obligation to pay against documents, are inapt to deal with (p. 319) standby credits, which function as guarantees of due performance.143 Standby credits may instead be made subject to ISP 98.144 Although there is in practice no particular importance in general attaching to the label chosen for the instrument—whether it is a standby, a performance bond or a first demand guarantee145—a significant issue that has emerged is whether the bank’s liability on an instrument is secondary as a surety (as in the case of a so-called ‘see to it’ guarantee) or primary (in the sense of independent or autonomous).146 This is a particular problem in the case of guarantees. It depends upon the construction of the guarantee whether it is independent of the underlying transaction.147 Standby credits (and first demand guarantees and performance bonds too) are akin to letters of credit in their separation from any underlying transaction.148 The need to insulate banks from the performance of underlying contracts is especially acute in the case of standby credits and performance bonds, for otherwise ‘the bank, by entering into the performance bond is taking upon itself the obligation of deciding the merits of a dispute under a contract of sale, a function for which it is … wholly unfitted and which the parties could not have sensibly intended’.149 Nevertheless, standby credits are essentially different from documentary letters of credit in that they are designed to be used, not in the performance of primary obligations in the underlying contract, but rather in the event only of a breach of those obligations.150 In consequence, their relationship to the beneficiary’s claim for damages for breach of contract has to be considered. In the absence of clear contractual provision to the contrary, the beneficiary will be able to recover an additional sum as damages, or be bound to reimburse a surplus, at a later date when the damage actually caused by the (p. 320) breach is established.151 Taking sale as an example, this approach is based upon an implied term in the underlying contract of sale that the buyer will account to the seller for a surplus and will pay, if there is a deficiency, an additional sum by way of debt, whether or not the seller has indemnified the paying bank or any person who has indemnified the paying bank.152 Apart from the autonomy principle, another justification for this approach is that a standby credit or similar instrument amounts to a provisional remedy,153 after which any necessary adjustments may be made between the relevant parties.
Autonomy of credit: introduction
6.29 As will be shown,154 the basic rule governing payment under letters of credit is that the beneficiary need only formally comply with the requirements for payment laid down in the letter. The bank is not as against the applicant bound, or as against the beneficiary entitled, to inquire beneath the surface of the transaction of sale that led to the issue of the letter of credit. This means that the bank accepts the seller’s documents if they conform to the letter of credit and makes payment. In the case of a standby credit, the bank will pay the beneficiary of the credit, usually the buyer, when the buyer duly invokes the payment machinery in the letter of credit. The bank’s obligation to pay under the letter of credit is an absolute one.155 Both types of letter of credit give rise to the risk of fraud by the beneficiary and fraud indeed is an exception to the rule that the bank must pay without question or inquiry into the underlying transaction.156 The risk of fraud or sharp practice is greater in the case of standby credits and similar instruments: depending upon the terms of the credit, it may call for nothing more from the buyer than a simple demand.157 If the Uniform Rules for Demand Guarantees apply, the demand has to be coupled with a written statement that the seller is in breach of the contract.158 In the case of compliance by the seller with a documentary letter of credit, there is a documentary check: the seller must provide the documents called for by the letter of credit and a bank may be astute to look out for documentary non-compliance, which occurs with remarkable regularity in practice, though excused or waived in many transactions.
Opening the letter of credit
Binding character of letters of credit
6.30 In view of the assurance that a letter of credit gives to the seller, particularly where it takes the form of an irrevocable credit, the opening of a letter of credit is vitally important.159 Assuming the terms of the credit are adequately defined, expressly or by implication in the sale contract, the issue of the credit to the seller (p. 321) (the beneficiary) gives rise to a binding contract between the issuing bank and the beneficiary and between any confirming bank and the seller.160 According to the rules in UCP 600, a letter of credit binds the issuing bank as soon as it is issued and binds the conforming bank when that bank adds its confirmation.161 This does not settle the matter since UCP 600 is not as such an applicable law and so cannot determinate whether or not consideration is required in order for the letter of credit to bind the bank. Assuming English law to be the applicable law, Lord Denning has described the credit as ‘an irrevocable promise to pay money to the seller in return for the shipping documents’.162 This is a clear rule of convenience that is hard to reconcile with contractual orthodoxy on consideration. The bank’s letter amounts to a promise that the bank will pay if the seller performs certain acts of a documentary character, but yet the credit is binding before these acts are done. In the words of Jenkins LJ in the Hamzeh Malas case: ‘[T]he opening of a confirmed letter of credit constitutes a bargain between the bank and the vendor, which imposes upon 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.’163 As against the bank, the seller does not promise to perform these acts: the promise the seller has given to the buyer under the contract of sale is res inter alios acta as far as the bank is concerned. And yet it is settled that the bank is bound when the letter is opened,164 that is, even before the seller performs the requested act or detrimentally relies upon the bank’s promise by commencing performance. Dispensing the seller even from having to prove detrimental reliance is part of the structural security afforded by a binding letter of credit. It is as though the bank’s promise has been given under seal, so far removed is the bank’s liability from compliance with the doctrine of consideration. Jenkins LJ in the Hamzeh Malas case was plainly unwilling to disturb ‘an elaborate commercial system … built up on the footing that bankers’ confirmed credits are of that [binding] character’.165 Commercial custom thus dispenses altogether with the doctrine of consideration and English law aligns itself with UCP 600.
Meaning of opening a credit
6.31 An issue that arises, whether the contract of sale is concluded on FOB or CIF terms, concerns the date when is a letter of credit opened. Since this method of payment gives the seller the assurance needed to go ahead and perform, it might appear unusual if a court should hold that the letter is opened before it is duly communicated to the seller. Until that happens, the letter of credit contract between the bank(s) and the seller is not concluded.166 As Neill J expressed it in Bunge Corp v Vegetable Vitamin Foods (Private) Ltd: ‘[I]t is not until the contracts between the banks and the seller come into existence and communication has been made that the letter of credit can (p. 322) be said to be opened.’167 Nevertheless, in this same case the judge deferred to the finding of the board of appeal that the letter of credit had been timeously opened by the buyer on the last permissible day when it issued instructions to its bank to open the credit, even though this occurred four days before the confirming bank sent a formal typed letter of credit to the seller. The buyer, on the same date that it instructed its bank, telexed the seller with the number of the credit and the names of the banks concerned, although it is not clear from the report how significant this action was. In deferring to the board of appeal, ‘who had all the facts before them’,168 the judge appeared to have treated the opening of a letter of credit as a question of fact rather than one of law. If this is the case, then a critical distinction has to be drawn between, on the one hand, compliance by the buyer with the contract of sale so far as it requires a confirmed credit to be opened no later than a stipulated date, and, on the other hand, the date or dates on which the issuing and confirming banks incur an obligation on the credit to the seller beneficiary. As stated above,169 the latter issue is one for the applicable law of the contract and not for the terms of UCP 600. Regarding the former issue, so far the facts of the Bunge case demonstrate that the beneficiary had the assurance it needed to press ahead with performance, then it may be regarded as having correctly decided that the buyer had timeously arranged for the opening of a letter of credit.’’’
Date of bank’s commitment to beneficiary
6.32 As for the date the bank becomes bound to the beneficiary when issuing or confirming a letter of credit, it has been argued that the bank’s promise to pay becomes binding, not when the letter is received by the beneficiary but when it is released from the control of the bank, authorities to the contrary being criticized as contrary to banking practice.170 Banking practice and banking law, however, may not be the same thing. Moreover, the issue here concerns the date of the bank’s commitment to a beneficiary who is not a banker and who may well not be aware of banking practice. Certainly, there may be sound practical reasons why the beneficiary of an undertaking under this Convention should be spared having to deal with the receipt of conflicting documents, the undertaking itself and a communication received earlier that overtakes it and countermands it. The loss of control test would allow the beneficiary to disregard the countermanding instruction, but conflicting statements from the bank, regardless of whether the bank is or is not liable on the credit, would be destructive of the certainty that the beneficiary needs. Some support for the loss of control test is to be found in the United Nations Convention on Independent Guarantees and Stand-By Letters of Credit 1995, which defines issuance in terms of an undertaking ‘leav[ing] the sphere of control’ of the bank.171 Unlike UCP 600, however, the terms of a convention displace contrary national law once those terms come into force. It is surely the case, as seen above, that the integrity of letters of credit demands the sacrifice of the doctrine of consideration,172 even in the form of the requested act of acceptance in a unilateral contract. But there seems no practical need also to sacrifice the principle that an offer is ineffectual before it is received by (p. 323) the offeree.173 There is no good reason to apply the postal rule of acceptance or an extended equivalent to contractual offers. This reasoning applies a fortiori to the case of the bank that has merely made an internal decision to issue the credit. Accepting for the moment the argument that UCP 600 could provide binding rules on contractual formation, it is regrettable that the instrument, whilst containing definitions and rules of interpretation in Articles 2 and 3, does not say what it means by issuing and confirming when imposing liability on banks that issue and confirm letters of credit.174 As a matter of contract principle, the issuing bank should be bound when the credit is actually communicated to the beneficiary and the confirming bank should be similarly bound when its confirmation is communicated,175 notwithstanding any argument derived from UCP 600 that the contract is concluded when the credit is dispatched to the beneficiary, rather than when it is received, or the similar argument that the bank is bound when it surrenders control of the letter of credit.
Conditions precedent to opening the letter of credit
6.33 If the contract calls upon the seller to open a standby credit or a performance guarantee, it is likely that the contract will treat this as a condition precedent to the buyer’s duty to open a letter of credit.176 It can be a difficult question of construction whether other acts collateral to performance by the seller are conditions precedent to the buyer’s contractual duty to open a credit.177 Foreign exchange difficulties experienced in many countries have encouraged the development of countertrade, by which the seller is paid the price or a portion of the price in different goods. There are many ways in which transactions of this sort can be arranged. The result is often not dissimilar to barter. Suppose that a transaction of this sort is staggered so that the seller’s duty to take goods in return springs at a later date. The buyer may in the meantime need the assurance of future performance on the seller’s part. How important then is a counter-trading seller’s duty to provide in time the agreed countertrade guarantee? In State Trading Corpn of India Ltd v Golodetz (M) & Co Inc Ltd,178 the seller’s duty to procure, within an agreed schedule, a countertrade guarantee, for 60 per cent in value of the sugar being sold, was held not to be a condition precedent to the buyer’s duty to open a credit within seven days of the contract. It certainly had no place in the performance schedule of a typical CIF contract but, given foreign exchange difficulties faced by the buyer, it is arguable that the result does less than justice to the basic bargain between the parties. One of the leading cases in the development of modern breach of contract law recognizes the importance to the seller of a business of the agreed guarantee from the buyer that the delayed price would be duly forthcoming,179 which was treated as the equivalent of a modern promissory condition.
6.34 It is convenient here to consider the buyer’s liability in damages for failure to open the letter of credit. In Trans Trust SPRL v Danubian Trading Co Ltd,180 the court held that performance of the contract of sale was not subject to any non-promissory condition that first a letter of credit be opened. The condition was a promissory one and the buyer was contractually liable for its lack of success in opening the credit,181 a conclusion which should be even more obvious in modern conditions, given the ease with which letters of credit facilities are made available by banks. Lord Denning MR considered that liability of the non-performing buyer to be distinct from the buyer’s liability in damages for non-acceptance of the goods. In the latter case, he said aptly, an intermediate seller without funds to pay his own seller may not be able on a rising market to protect himself from the effects of the buyer’s breach by disposing of the goods. Consequently, he preferred to see the buyer’s liability based separately on the failure to open the credit, with damages to be assessed, and not for non-acceptance.182 He was concerned to characterize the seller’s claim as something more than a claim based upon a failure to pay a money sum183 and did so, with conviction it is submitted, on the ground that a credit was not payment but rather the assurance that payment would be made.
Precondition to delivery
6.35 The reasons why the seller needs a letter of credit have been stated above.184 In the words of Diplock J: ‘A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another.’185 It has also been seen that the timely opening of a letter of credit will conventionally be treated as of the essence of the contract.186 The opening of a letter of credit is a condition precedent to the seller’s duty to deliver.187 This raises the question of the seller who has not accepted the buyer’s discharging breach and who finds that as the delay continues the delivery date comes ever nearer. Suppose, say, that a C&F seller stipulates for a credit to be opened thirty days before the shipment date. The buyer is late in providing the credit but eventually does so two days before the date. May the buyer complain of a failure by the seller to ship on the agreed date or is the seller entitled to say that he has a defence to an action for non-delivery to the extent that the delay was caused by attendance upon the opening of a letter of credit? One approach is to assert that, as the contract gives the seller a thirty-day margin, the shipment date is, as a matter of contractual construction, set back pari passu with the buyer’s delay. Alternatively, the seller’s duty to ship, once the letter of credit has been opened, may have to be performed within a reasonable time, which may or may not accord with the thirty-day contractual margin. (p. 325) Whichever way it is put—and the latter has the disadvantage of ignoring what the contracting parties estimated as a proper margin—the seller given extra time would in effect benefit from a contractual suspension right of sorts. A similar predicament was faced by the sellers in Wahbe Tamari & Sons Ltd v ‘Colprogeca’,188 where Megaw J appears to treat the problem as matter of negotiation between the seller and the defaulting buyer. This hardly seems satisfactory.189 A seller accepting a letter of credit opened after the shipment date should not by condoning the buyer’s delay thereupon render himself open to an action for non-delivery by a buyer purporting to terminate the contract.190 It is submitted that the best response to the above problem is to give the seller a right of suspension, arising out of the construction of the contract and corresponding to the buyer’s delay. This would accord with the solution to a similar problem in Kronos Worldwide Ltd v Sempra Oil Trading SARL,191 where a notice of readiness to load an FOB cargo had been given on behalf of the buyer before the buyer opened the agreed letter of credit. The question was whether the lay time provisions were held in suspense until the credit was opened, or whether the opening of the credit retrospectively set the clock running from the giving of the notice of readiness. The court held that the seller was entitled to do nothing until the condition precedent to its delivery obligation, the opening of the credit, had occurred.192 Since lay time was the period allowed for the loading operation, it did not begin to run until that condition precedent had been satisfied.
Timely opening of credit by buyer
No specific date
6.36 The contract of sale may state a precise date for the opening of a letter of credit or may stipulate that it shall be opened before a certain date or may make an unspecific reference to time. In State Trading Corp of India Ltd v Cie Française d’Importation et de Distribution,193 three contracts on GAFTA 119 terms, under which the first shipment could be made in February, failed to state when letters of credit were to be opened. The contracts were then varied on 29 January to provide that they should be opened ‘immediately but in no case later than 15th January, 1979’. Even though the reference to 15 January made no sense, Lloyd J concluded that the word ‘immediately could stand on its own. The facts of the case spared him having to state what ‘immediately’ meant. Nevertheless, it is submitted that the above qualifying words, ‘but in any case no later than 15th January, 1979’, as unhelpful as they were, could be invoked to temper the meaning of ‘immediately’ by denying it anything like a literal meaning and interpreting it rather to mean ‘without delay’. The meaning of ‘immediately’ has elsewhere been defined as within the time that would be taken by a person acting with due diligence,194 which is more generous than its literal meaning.
6.37 In Ets Chainbaux SARL v Harbormaster Ltd,195 the contract of sale called for the letter of credit to be opened ‘within a few weeks’. This apparently vague phrase represented the parties’ assessment of how long it would take to implement bank machinery to produce a letter of credit. It therefore amounted to giving the buyers a reasonable time from the conclusion of the contract. The significance of this way of putting it is that the period should be defined in an elastic fashion if the buyers, applying with due diligence, encounter unexpected difficulties not of their own making in procuring the opening of a letter of credit.196 The parties, nevertheless, may not intend the buyers’ liberty to extend to all difficulties. In the Ets Chainbaux case, the stated period was an estimate of the time needed for the bank machinery to bring the letter of credit into existence; it was not meant to deal with delays in obtaining sterling at a time of exchange controls.197
6.38 The prescribed date for opening may be fixed according to a formula, the meaning of which has to be determined. In Sohio Supply Co v Gatoil (USA) Inc,198 this date was ‘ten days prior to estimated loading date’ in an FOB contract where the sellers had the right to nominate a three-day lifting range. It was the sellers’ contention, in proceedings brought by the buyers to set aside notice of a writ overseas, that the ten days preceded the first of these three days. The buyers, on the other hand, argued that the date referred to was the last of the three days in the lifting range, which was the last day on which the buyers’ tanker could arrive, or was the estimated date of arrival of the tanker. The court was prepared to say only that the sellers had a good arguable case for service overseas but, it is submitted, the preferable construction favours the date when on a reasonable estimation the ship will actually be ready to load (provided that this is within the three-day lifting range). The clause could have been, but was not, expressed as ‘ten days prior to commencement of lifting range’, which was the meaning that the sellers sought to give to the clause used in the contract. The use of such a vague word as ‘estimated’ is regrettable but a commercially reasonable solution can be found by pitching the date between the seller’s and the buyers’ rival contentions.
No stated date: CIF contracts
6.39 The letter of credit may in some cases lack any reference to time at all. Where the sale contract fails to state the date of opening the credit or provide machinery for determining it, difficult questions of interpretation are presented. It is appropriate to separate CIF and FOB contracts. In Pavia & Co v Thurmann-Nielsen,199 a CIF Genoa contract for the sale of Brazilian groundnuts, entered into on 20 January, called for payment by confirmed, irrevocable letter of credit and permitted the seller to ship half the goods between 1 February and 30 April and the remaining half between 1 March and 31 May. The seller contended that the buyer should have made the credit available throughout the shipment period (from 1 February onwards), alternatively as soon as possible after, or within a reasonable time of, the commencement of the shipment period. Invited thus to choose between these two positions, the Court of Appeal held that the first of them was (p. 327) the correct one since the seller was contractually entitled to begin shipping the goods on 1 February.
6.40 In the complex circumstances of the Pavia case,200 nevertheless, the approach applied to the facts was more nuanced than this. So long as the availability of export and import licences had not been settled at the commencement of the shipment period, Somervell LJ was of the view that the date of opening the credit should, in the normal case where the applicant for a licence is bound to apply with due diligence, have to be delayed until the uncertainty was dispelled. Curiously perhaps, he thought the uncertainty had been removed by an amendment to the contract, on the date immediately preceding the shipment period, by which each party guaranteed to the other that the requisite licence would be forthcoming. At trial, nevertheless, the judge had taken 9 February as the date when the buyer’s duty to open a letter of credit commenced because it was only on this date that the seller supplied certain information necessary for the opening of the letter of credit. And even then, the buyer should be given the further time needed to take ‘reasonable steps’ to open the letter of credit.201 The Court of Appeal would seem to have accepted this approach to the matter.
6.41 The possibility that the buyer should have made the credit available before the commencement of the shipment period was not presented to the Court of Appeal in the Pavia case,202 which assumed that the seller needed the security of the letter of credit at the time when the seller decided to ship. The court also reasoned in terms of the mutual dependency of delivery and payment in s 28 of the Sale of Goods Act. But the court rejected the proposition that the letter of credit should be put in place by the buyer at the time of shipment: there was no machinery for the buyer’s determining when shipment occurred and the seller was not bound to tell the buyer when he intended to ship. Consequently, in the court’s view, the letter of credit should be available throughout the whole of the shipment period.203 This conclusion is consistent with the fact that the CIF seller controls the timetable. Yet in certain contracts at least, especially those involving goods custom-built by the seller for the buyer, the seller may need the security of eventual payment long before the date of shipment. If the buyer did have to act in advance of the shipment period, the question of how far in advance ought to depend on the gap between the contract date and the start of the shipment period and on the speed with which a bank letter of credit could in practical terms be made available.
Reasonable time before shipment
6.42 In Sinason-Teicher Grain Corp v Oilcakes and Oilseed Ltd,204 which involved a bank guarantee of payment, a contract for the CIF Antwerp/Hamburg sale of Canadian grain was entered into on 11 August and called for shipment October/November. On 10 September, the seller repudiated the contract, not having received the guarantee by that date, and refused to relent when the guarantee was forthcoming on the same date. The Court of Appeal upheld an arbitral ruling that the guarantee had to be made available a reasonable time before the beginning of the shipment period. (p. 328) Since, however, the buyer (to the seller’s knowledge) was engaged in a ‘switch’ transaction, buying in American dollars and selling on in sterling, which in those days of exchange control required the consent of the Bank of England, the reasonable time had not expired. The approach in the Sinason-Teicher case, it is submitted, is the correct one: it united the CIF seller’s freedom to ship on the first date in the range with the earlier assurance to take steps to prepare for delivery.
No stated date: FOB contracts
6.43 There is authority for the view that, if an FOB contract calls for shipment on a precise date, the buyer has to arrange for the credit to be opened a reasonable time before that date.205 The position is not so obvious where the FOB contract states a shipment period, since the buyer will usually control the shipping timetable by nominating an effective ship at some point within the agreed period. Apart from cases where the seller incurs early expenses, such as where the goods are specially manufactured to the buyer’s order, this reasoning might suggest that such a buyer need inform the seller that the credit has been opened only when the ship is named, since the nomination of the ship gives the seller lead time to perform. The time needed to arrange for a letter of credit ought not to be any longer than the time needed to buy in or call forward a cargo.
Throughout the shipment period
6.44 But the view that opening the letter should coincide with nomination of the ship was rejected by Diplock J in Stach (Ian) Ltd v Baker Bosley Ltd,206 which concerned an August/September contract for ship plates. Both parties were in the middle of a sales string and the buyer never did succeed in opening the credit within the shipment period. The court held that it was the buyer’s duty to open the credit ‘at latest by the earliest shipping date’,207 namely, by 1 August. As Diplock J put it:
It seems to me that, particularly in a trade of this kind, where it is known to all parties participating, there may well be a string of contracts all of which are financed by, and can only be financed by, the credit opened by the ultimate user which goes down the string, getting less and less until it comes to the ultimate supplier, the business sense of the arrangement requires that by the time the shipment period starts each of the sellers should receive the assurance from the banker that if he performs his part of the contract he will receive payment. That seems to me at least to have the advantage of providing for a definite date by which the parties know that they have to fulfil the obligation of opening a credit.208
6.45 The approach in the Ian Stach case209 is based upon the use of a transferable credit, which is by no means the conventional case of payment by letter of credit. It does have the merit of certainty in a sales string, though it should be noted that string contracts are usually to be found in the grain trade where payment by letter of credit is far from the normal case. In dating the opening of the letter of credit from the commencement of the shipment period, even at the latest, Diplock J’s approach does not accommodate the case of the buyer who wants to have the goods shipped on the first day of the shipment period. The much-vaunted certainty supplied by that approach falls away if the letter of credit has to be provided a reasonable time before the commencement of the shipment period, in order to accommodate this possibility. The ease with which a reasonable time before the shipment period is calculated is no greater than the ease with which a reasonable period before shipment is calculated. The merits of Diplock J’s approach are also inherently less obvious where the parties are not trading in a string. In English contract law, there is no general duty on each contracting party to provide the other on request with an adequate assurance of due performance of the contract when circumstances require it. In the United States, Article 2–609 of the Uniform Commercial Code allows a party, ‘[w]hen reasonable grounds for insecurity arise with respect to the performance’ of the other, to ‘in writing demand adequate assurance of due performance’ from that other and, until assurance is forthcoming, to suspend performance of the contract. The approach of Diplock J comes close to demanding this for letters of credit at all times in FOB contracts and is vulnerable to the charge that, had the parties really wanted it, they could have made provision for it in the contract by stipulating expressly for the credit to be opened on the first day of the shipment period. An alternative means for a seller to have early assurance that payment will be forthcoming, when the opening of the letter is aligned with the giving of notice of readiness to load, is to stipulate for a guarantee to be lodged that a letter of credit will be opened at the due date.210
6.46 Although the issue was only mentioned incidentally, there is superficial support for the approach taken by Diplock J in the Ian Stach case211 by the Court of Appeal in Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce,212 where it is also confusingly stated that, in the absence of a special agreement, the FOB seller is entitled to have a conforming letter of credit in place before beginning shipment.213 Support for the Ian Stach approach appears to be present too in the earlier case of ‘Baltimex’ Baltic Import & Export Co Ltd v Metallo Chemical Refining Co Ltd,214 as well as (though without discussion) in the judgment of Lloyd J in State Trading Corp of India Ltd v Cie Française d’Importation et de Distribution,215 where the contract called for the ‘prompt delivery FOB London of a quantity of lead and recited that the letter of credit was (p. 330) ‘expected in a day or two’. In the ‘Baltimex’ case, Sellers J said that ‘the buyer was under the obligation to have the letter of credit available at the very first time when the seller was entitled, if he wished, to ship’.216 But this was an unusual case where all relevant parties were in close contact and the FOB seller appeared to control the shipping timetable. Moreover, Sellers J appears to rely upon unidentified ‘well-known authorities’, which at that date must have been CIF cases, where different considerations apply.217 There also appears to be some confusion in one CIF case218 where, unusually, the buyer controlled the timetable, so that the position was akin to that in an FOB contract. Roskill J, in an uncharacteristically obscure passage, seems to be leaving open the question whether the credit has to be opened a reasonable time before the shipment or before the shipping period. The issue came up again in Kolmar Group AG v Traxpo Enterprises Pvt Ltd,219 where the judge was mindful of the particular case of classic FOB contracts where it is the buyer who controls the timetable, but nevertheless was of the view that considerations of certainty compelled the opening of the credit as stated in the Ian Stach case.220 Below and possibly in the Court of Appeal, the position advocated by Diplock J must be treated as binding. Nevertheless, despite the very substantial body of authority supporting Diplock J’s approach, there is a better view. It is submitted that, in the general case, where it is the FOB buyer who controls the shipping timetable,221 the buyer should be required to open the letter of credit a reasonable time before shipment, provided the contract does not stipulate an opening date. This date, presumptively, may for the sake of convenience be the same date on which the buyer gives notice of readiness to load. A seller wanting greater certainty and assurance should stipulate for a precise and earlier date.
Waiving delay in opening a letter of credit
Waiver and variation
6.47 It is not every beneficiary of a letter of credit who pounces upon a right to terminate the contract of sale for the applicant’s default in ensuring the timely opening of a letter of credit. Delay can be and often is waived. Quite often it may be difficult to determine whether the contract is being informally varied or whether the seller is waiving the buyer’s default. Whilst a waiver may be retracted, a variation cannot, but otherwise it may not matter whether a court comes down in favour of variation or waiver. An example of such a case is ‘Baltimex’ Baltic Import & Export Co v Metallo Chemical Refining Co Ltd,222 which concerned a complex contract involving the re-export into the Soviet Union of goods originating in South-West Africa and refined in Belgium. It was always known that Russian sub-buyers were the ultimate recipients, that the sellers would be paid out of the proceeds of a letter of credit opened by them and that the sub-buyers were ‘safe for their money. It was understood by sellers and buyers that the delivery dates (p. 331) under the contract of sale should be commensurable with the date for the opening of the credit. Consequently, as the delivery dates were set back, the sellers could not complain of the buyers’ failure to open the letter of credit by the agreed date; the prospect of delay in performing the sale contract was always within the contemplation of buyers and sellers.223 Alternatively, and instead of this variation analysis, the sellers could be said to have waived timely opening of the letter of credit by the buyers.
6.48 Assuming that there is no agreed variation and that the seller has waived delay on the part of opening the credit, the seller’s patience may not last indefinitely. In such circumstances, the seller retracting the waiver must give the buyer a further reasonable period to perform,224 which should not be equated to the concession already granted to the buyer to date. If, nevertheless, the seller fails to give a notice making time of the essence again, with a further reasonable period to perform, but the buyer would not in any event have been able to perform within that extra period, the seller’s repudiation of the contract will be lawful.225
Presentation and documentary compliance
Date of presentation
6.49 UCP 600 requires that the presentation of documents including original transport documents has to be made no later than twenty-one days after shipment.226 This is in addition to the requirement that credits issued have to stipulate an expiry date for presentation.227 As for determining the date of shipment in the case of a bill of lading, where the bill indicates in pre-printed language that the goods have been loaded on board, the date of issuance will be deemed to be the date of shipment.228 The date of issuance of the bill will also be deemed to be the date of shipment in the case of bills containing an on board notation, except in cases where that notation is dated to different effect.229 In a case where the letter of credit provided that documents had to be tendered within twenty days of shipment, a further express requirement that they be ‘accepted as presented’ was held not to extend the permitted time.230
Strictness of documentary compliance
6.50 Apart from documentary compliance as such, the documents tendered must be clean, in the absence of contrary indication in the (p. 332) credit.231 The circumstances and nature of amendments made to the stipulated documents may nevertheless provide sufficient assurance of proper practice as to prevent the bank from rejecting them.232 A long-standing rule of English law is that the standard of documentary compliance with the terms of the letter of credit is a strict one.233 In a well-known passage, Lord Sumner once said: ‘There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines.’234 So strict is the standard of compliance that there is no scope for the application of the maxim de minimis non curat lex where it could be raised in matters of physical delivery by the seller,235 though there appears to be latitude in some cases where the documentary non-compliance can be regarded as ‘slight’ or ‘trivial’236 or as resulting from a typographical error.237 In scrutinizing the conformity of documentary presentations, English courts do not appear to draw a distinction between the demands of English law as such and the demands of UCP 600 when the latter is incorporated into the terms of a documentary credit. UCP 600, as a statement of common practice, may be taken to be in concordance with English law; however, as demonstrated below, UCP 600 is framed in such a way as to discourage highly technical objections to documents. In a different context, a narrow and national approach to the interpretation of the UCP rules has been deprecated,238 which implies a degree of unwillingness to apply English law on strict compliance, in default of UCP 600, in a narrow and national way.239 The presence of additional wording in (p. 333) documents will not necessarily vitiate them: this will depend upon the circumstances of the particular case.240 In that the documentary letter of credit amounts to an assurance of payment, the frequency with which documentary tenders are non-conforming241 tends to undermine the credit system and goes some way to explaining modern attempts to ease the stated standard of documentary compliance whilst at the same time preserving the principle that letters of credit are autonomous instruments, divorced from the underlying contract that prompted their issue.242
UCP rules and strict compliance
6.51 The UCP rules do not as such state that compliance must be ‘strict’. Whereas UCP 500 called for documents that are compliant in accordance with ‘international standard practice as reflected in these Articles’, a formula that could be used to justify a tolerance of minor departures from the requirements of the credit,243 Article 14(d) of UCP 600 strives for greater precision. It provides that: ‘Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with … the credit.’244 It is questionable how far the degree of latitude in either text can be pressed, given the great difficulty of determining what constitutes a minor documentary departure. The margin between the limits of minor discrepancies and full conformity of the documents may be very slight indeed. A further issue arising out of the toleration of minor documentary discrepancies is whether this can be accomplished without reading through the documents to the underlying transaction and the circumstances surrounding it. In Kredietbank Antwerp v Midland Bank plc,245 the requirement of a draft survey report issued by ‘Griffith Inspectorate’ was met by a document issued by ‘Daniel C. Griffith (Holland) BV’ accompanied with the logo ‘Inspectorate’. The court held the document to be a conforming one, approving the trial judge’s reasoning that ‘any banker used to examining documents tendered under letters of credit would know that there are a number of groups which carry out surveys … on a world-wide basis, and that individual companies or partnerships at different ports are members of or loosely affiliated with those organisations’.246 A strict application of the principle of autonomy should prevent the introduction of extrinsic trade information into the process of examining documents for compliance with the (p. 334) credit.247 The approach in Kredietbank Antwerp is not easy to reconcile with a case where the court rejected the assertion that discrepancies in the documents should be overlooked if the required information had already become known to the bank by other means. The court disapproved of ‘the documentary checker having to investigate the facts rather than merely examine the documents’.248 Apart from the distinction between minor discrepancies and full documentary compliance, the strictness of language in the credit itself might prevent an examining bank from tolerating minor irregularities in the documents. This happened in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran,249 where the credit stipulated that the number of the credit and the buyer’s name had to be present on all documents and these items were not on the packing list. The documentary tender was held to be non-conforming. It is not uncommon for a letter of credit to allow a margin of tolerance in the case of the quantity of goods.250 Indeed, a margin will be implied unless the credit demands precision.251
6.52 In practice, the commercial invoice is the most significant document for the description of the goods252 and documentary compliance is most exacting in this case. This may be justified on the ground that, of all documents required for a documentary presentation, the invoice is one that has been prepared by the seller itself. UCP 600 states that ‘[t]he description253 of the goods … in a commercial invoice must correspond with that appearing in the credit’.254 For other documents, identical compliance is not essential provided there is no documentary inconsistency.255 For these other documents, according to UCP 600, ‘the description of the goods … if stated, may be in general terms not conflicting with their description in the credit.256
6.53 In addition to the question of compliance of documents with the credit, there is the question of consistency within a single document and consistency as between documents in the documentary presentation. According to UCP 600, what is (p. 335) required is the absence of inconsistency257 and not the presence of identicality,258 judged by the measure of ‘international standard banking practice’. These UCP rules conform with the modern tendency in English law for the documents, taken as a whole, to give a full and accurate description of the goods:259 there is no need for each and every document to provide this. According to Parker J in Banque de l’Indochine et de Suez SA v Rayner (JH) (Mincing Lane) Ltd: ‘I have no doubt that as 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.’260 Nevertheless, the principle that the various documents must be sufficiently linked to each other means that they must each identify the same parcel of goods.261 In one case concerning a bank’s claim to be reimbursed by the applicant, the letter of credit did not state what had to be in the bill of lading but it did state that the invoice should be for 500 tons. The documents against which payment was made included an invoice for 5,895 bags of maize meal equalling 500 tons and a bill of lading for 5,895 bags which made no reference to weight. There was no documentary inconsistency and the bank was held entitled to be reimbursed by the applicant.262
Examples of non-compliance
6.54 Examples of non-compliance include, not only the tender of documents that do not conform to those expressly required by the credit, but also the tender of documentary types that do not have the characteristics called for by the UCP rules.263 Another clear case of non-compliance is the bill of lading that is dated outside the stipulated period.264 Most of the litigated cases are less straightforward. In Bank Melli Iran v Barclays Bank (Dominion Colonial and Overseas),265 a commercial invoice describing the goods as ‘in new condition’ instead of ‘new’, and a certificate of origin describing them as ‘new good’ instead of ‘new’, were held to be non-conforming. Given the somewhat absolute character of the word ‘new’, any qualifying words might be thought to strike an ominous note. In Rayner (JH) &Co Ltd v Hambro’s Bank Ltd,266 a letter of credit called for bills of lading covering a shipment of ‘about 1400 tons Coromandel groundnuts’. The bills of lading presented, however, referred to ‘machine-shelled groundnut kernels’ and had a marginal reference to ‘C.R.S.’, a trade abbreviation for ‘Coros’ or ‘Coromandels’. The bank (p. 336) was held entitled to refuse to pay against the sellers’ documents; it was not to be affected with the special knowledge of dealers in Mincing Lane that the sellers’ bill described the same goods as ‘Coromandel groundnuts’.
6.55 The case of Soproma SpA v Marine & Animal By-Products Corp267 illustrates well the various ways in which a seller might fall short of the conforming documents requirement. It was a contract for 500 tons of ‘CHILEAN FISH FULLMEAL’ to be shipped C&F Savona. The banker’s letter of credit called for a commercial invoice, a weight list, a health certificate showing the goods to be free from salmonella, origin, analysis, and quality certificates, and a full set of on board bills of lading marked ‘freight prepaid’. The covering letter described the goods as: ‘500 CHILEAN FISH FULLMEAL 70% Protein, 10%Max. Fat, 2%Max.Salt, 2%Max.Sand, 10%Max.Moisture’. The court held that the documents tendered were non-conforming and for the following reasons. First, the bill of lading described the goods as ‘Chilean Fishmeal’; the protein content was stated as 69.7 per cent in the analysis certificate and as ‘67%minimum’ in the quality certificate; and the health certificate referred to ‘Fishmeal’ but made no reference to salmonella. Therefore the health certificate was non-conforming; so too the quality and analysis certificates because of the lower protein count. But the bill of lading description was acceptable since it was not inconsistent with the full and accurate description of the goods in the commercial invoice.268 Secondly, the bills of lading tendered were marked ‘freight collect’. These were unacceptable, though the court had some difficulty in dealing with the arbitrator tribunal’s finding that it was common practice for freight collect bills to be accepted under a C&F contract if the seller deducted freight from the price (which the seller in this case had not done). The Soproma case, however, is a letter of credit case and not a sale case. Despite their close relationship in practice, the two types of contract do not necessarily have the same documentary requirements. The UCP 500 Rules did admittedly call for banks to accept documents showing that freight charges still have to be paid,269 but this was only a presumptive rule and the letter of credit in the Soproma case clearly stipulated for freight prepaid bills of lading. The tribunal’s finding should therefore be confined to cases where the letter of credit fails to make inconsistent express provision for the form of the bill of lading in this respect. Thirdly, the bills of lading were straight consigned to the seller’s bank instead of being to order (in negotiable form).270 They did not conform to the letter of credit and would have been non-conforming under the contract of sale even if the contract had been silent as to the negotiable character of the bills. The CIF buyer is entitled to transferable documents. Fourthly, the bills of lading reserved a wide liberty to tranship, not in fact exercised in the present case. This point, which concerns the seller’s duty to enter into a reasonable contract of carriage,271 was left open.
6.56 Another aspect of documentary compliance should be considered. The documents may be non-conforming either because of omissions or because for other reasons they do not fulfil their intended purpose. The documents may also be security for an advance made by the bank to the applicant, and so the bank has its own reasons for (p. 337) accepting only documents that can be said to be in ‘good merchantable order’ and for confining its acceptance to documents against which questions cannot be raised.272 This requirement points to documents as non-conforming when, apart from any inaccuracies therein, there are such omissions as would make any subsequent disposal of them a difficult matter. This was the position in one case where bills of lading did not name the shipper and were simply made out ‘to order’ so that it could not be discerned from them who had the right to indorse them.273 It has been said that documents may also be non-conforming when dated in such a way that they do not serve the purpose for which they were designed, as occurred with certificates concerning the conformity of the goods to the contract that were dated too far in advance of delivery.274 This is difficult to reconcile with Article 14(i) of UCP 600, which requires banks to accept documents, presented in a timely fashion, with a date of issuance prior to that of the credit.275 Unlike its UCP predecessor,276 Article 14(i) is not stated to be subject to contrary provision in the letter of credit, but this should be the position in any case.
Photocopies and reprographic documents I
6.57 The acceptability of photocopies and reprographic documents has in the past been a vexed one. In view of the major changes made in UCP 600, the position in UCP 500 will first be considered before attention is turned to UCP 600.The starting point is that the documents a bank was required to accept under UCP 500 had to be originals unless the credit otherwise stipulated.277 Modern methods of producing high-quality copied documents, nevertheless, have rendered it difficult to determine the difference between originals and copies. Moreover, computers and word-processing systems have largely buried original documents in a computer’s memory system. For these reasons, an adjustment was made to the UCP 400 rules when they were revised in 1993 as UCP 500. According to Article 20(b) of UCP 500,278 documents produced by automated and computer systems might also be treated as originals provided they were marked as such.279 Furthermore, a signature might take the form of ‘any … mechanical or electronic method of authentication’. The interpretation of this provision produced a difficult case law that sent some tremors through the international banking community. In the first of three important cases, Glencore International AG v Bank of China,280 the credit called for a ‘[b]eneficiary’s certificate … certifying that one full set of non-negotiable document (sic) have been sent to the buyer’. The beneficiary tendered a document that was probably a photocopy of a document produced by reprographic means from a computer file281 but bearing an original signature. The ordinary eye could not distinguish between a photocopy and the version initially printed off the computer. The Court of Appeal concluded that the (p. 338) certificate did not comply with Article 20(b) of UCP 500 and was thus non-conforming. First of all, a signature could not be regarded as marking a document as original: Article 20(b) differentiated between the separate processes of marking and signing. Secondly, if the document was a photocopy, then to be accepted as an original document it had to be marked as original, which it was not. Thirdly, even if the document was the version printed off the computer, Article 20(b) still required it to be marked as an original. This could have been easily done. According to Bingham MR: ‘To have marked the certificates “original”, as other of the tendered documents were marked, would have been simple and without cost.’282
Photocopies and reprographic documents II
6.58 In the second case, Kredietbank Antwerp v Midland Bank plc,283 one of the reasons for rejecting a documentary tender was that the stipulated ‘original insurance policy or certificate’ had not been marked as original, though it had been signed by the insurers and produced by means of a word processor and laser printer. The insurance document was on high-quality watermarked and headed paper bearing the name of the insurance company and its blue logo, which was fed manually into the laser printer. The bank conceded that the document was an original one but insisted that its reprographic origins required it to be marked as original. The question for the court, as summarized by Evans LJ, was whether a bank was bound to reject such a document when it would have had to accept a document on the same paper produced by a manual or electric typewriter. Examining the history of Article 20(b) of UCP 500, the court concluded that the rule was designed to render acceptable documents that previously would have been unacceptable as non-originals, hence the word ‘also’. It was not designed to render unacceptable documents that were ‘clearly’ original, simply because they were not marked as original. The case of Glencore International AG v Bank of China284 was distinguished on the ground that it concerned a photocopy and not an original reprographic document. In the third case, Credit Industriel v China Merchants Bank,285 the judge was faced with the difficult task of distinguishing Glencore and Kredietbank where objection had been taken to the packing list and certificates of quantity and quality. There was no evidence as to how these documents had been created. Though they did not appear to have been produced on an original typewriter, they might have been produced by either reprographic or photocopy means and they might have been created by one document being inserted into the body of an existing document. According to the judge, as Article 20(b) stood, with its reference to documents ‘produced or appearing to have been produced’286 by reprographic means, a bank would have to reject documents that had in fact been produced by reprographic means, whether this was apparent or not, if the views expressed in Glencore were correct.287 The judge confined Glencore to cases of ‘documents appearing or known to be copies or, (p. 339) in some analogous respect, of a class not prior thereto treated as originals’. Since the documents in the present case would have been treated as originals before the rule changes in UCP 500 (and its predecessor), they were acceptable.288 Not without some difficulty, the law appeared to have been settled by UCP 500 in favour of the bank’s duty to pay against any documents that prior to the rule changes would have been treated as original, whether they were marked as original or not or were ‘clearly’ originals or not. A bank moreover was entitled to pay against documents that appeared to be originals. Any bank looking to take technical points should have been hard pressed to demonstrate the non-conformity of apparently conforming documents, but beneficiaries concerned about the risk of this could readily have taken steps to avert it by marking all documents as original in case of doubt.
Photocopies and reprographic documents III: UCP 600
6.59 The implied requirement that the documents be original is expressly restated in Article 17(a),289 which more precisely calls for at least one original of each document. The core of Article 17 is para (b), which would seem largely to defuse the problems raised in the past, by imposing on banks a duty that may briefly be summarized as a duty to pay against documents that appear to be original. According to para (b): ‘A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.’ There is thus no requirement that a document be ‘clearly’ an original. The burden is therefore on the bank of showing that what might appear to be an original document is a copy when more closely examined. The bank is clearly confined to an examination of the document and may not take into account other considerations. In particular, it may not demand that the beneficiary provide evidence of the originality of the document. To rebut the appearance of originality, the bank must find something in the document that counters the appearance presented by a signature, mark, stamp, or label. The inscription on the document of ‘copy’ would suffice. A more difficult case is a clumsy photocopy which betrays a shadow line or is slightly blurred or contains text that does not sit squarely on the page. A bank may fairly contest the originality of such a document, except that, if the document ‘states’ that it is an original, the bank must accept it.290 This amounts to a useful clarification of what it takes to mark a document as an original, except that it does not lay down any test for the authenticity of the statement on the document that it is an original. The bank must also accept as an original a document that appears to be written, typed, perforated or stamped by the document issuer’s hand’291 or that appears to be on the issuer’s ‘original stationery’.292
Curing deficiencies in the letter of credit
6.60 It appears to be settled that, provided the buyer opens a conforming letter of credit by the due date, a non-conforming letter of credit (p. 340) may be cured by the bank’s issue of an amending letter.293 The buyer’s right to cure a non-conforming letter of credit was common ground in Bunge Corp v Vegetable Vitamin Foods (Private) Ltd.294 There are similarities here with the giving of notices of appropriation in CIF contracts.295 The letter of credit is not payment itself but an assurance of future payment, just as a notice of appropriation is an assurance of future documentary performance by the seller. This pre-tender feature should distinguish the cure of a non-conforming letter of credit from cases where, defective performance having occurred, there is no unilateral right by the non-performing party to effect a cure of that performance.296 From the bank’s point of view, it makes a binding contractual offer as soon as it issues the credit, so it does not have a locus poenitentiae to alter it if it repents of the terms.297
Examination and rejection
6.61 Under UCP 500, it was the bank’s duty to take reasonable care to see that the documents conformed ‘on their face’ to the letter of credit.298 This included a comparison of each document with the other documents to see that they were consistent with each other.299 It was of no concern to the bank whether any stipulated document served a useful purpose300 or achieved a particular legal effect.301 The bank had to make quick decisions on the documents alone302 and was therefore entitled to reject documents that invited further inquiry.303 A bank paying against apparently conforming documents was, and remains, entitled to be reimbursed even if it transpires that the documents have been forged.304 Since in examining the documents the bank is performing a ‘demanding, but essentially clerical, task’ of scrutiny,305 it should not be supposed that a duty of reasonable care will be more tolerant of shortcomings on the part of a bank than a strict duty. Indeed, this is implicit in Article 14(a) of UCP 600, which removes from the bank’s duty of examination the reference to reasonable care.306 Banks are not experts in the physical trade underlying the export contract.307 (p. 341) They confine themselves to the examination of documents308 and are not concerned to inquire into the substance of contractual performance.309 They are carrying out a mandate and are thus strictly bound by their principals’ instructions,310 though in cases of ambiguity they are permitted to follow a reasonable interpretation of those instructions.311 It is in the light of this position that the entitlement of a nominated bank to be indemnified should be considered. The right to reimbursement depends upon the nominated bank honouring a complying presentation.312 It has been held that an issuing bank is entitled to form its own judgment on the complying character of a presentation,313 which is not readily to be reconciled with the view that a nominated bank carrying out a mandate is entitled to be indemnified if it adopts a reasonable interpretation of documentary instructions. Although the nominated bank was formerly under a duty of reasonable care when examining the documents, which no longer is the case, this change in the wording should not be seen as bringing about a substantial change in the relations of nominated bank and issuing bank. On the face of it, the position taken that the issuing bank exercises its own independent judgment when receiving the documents is pregnant with potential inter-bank disputes. Given, nevertheless, the essentially mechanical character of the examination process, then, exceptional cases apart, there ought to be few cases where the judgments of two banks should differ. Furthermore, even though it has been held that the nominated bank must forward all documents that form part of a presentation— even drafts on the nominated bank where this is the stipulated form of payment, which must be questioned because it serves no practical purpose and is not generally observed in the banking community—it has been held that a bank must reimburse even if these drafts are missing, on the ground that they can be forwarded if the reimbursing bank demands them.314 The threat of disputes is therefore more apparent than real.
6.62 If the bank decides to reject the documents,315 it is required to inform the beneficiary directly (if it received the documents directly from him) and to state all the discrepancies.316 Even though the UCP rules state that notification has to be by telecommunication and, only if telecommunication is not possible, may it be effected by other expeditious means,317 it was held by the Court of Appeal in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran318 that the notice of rejection could be oral pursuant to an implied term of the letter of credit contract.319 The notice in that case took place after a meeting between a senior official of the collecting bank and the sales manager of the beneficiary. When documents are rejected by the bank, the bank may return the documents to the beneficiary, or hold them pending further instructions, or deal with them as previously instructed by the beneficiary.320 A failure on the part of the confirming bank or issuing bank to comply with the requirements relating to notices of rejection, which includes a failure to act in accordance with the terms of its own notice of rejection, will preclude that bank from claiming that the documents amounted to a non-complying presentation.321 This means that the bank will have to honour the presentation. When documents have been rejected by a nominated bank, it seems that the beneficiary is permitted to make a fresh, conforming tender,322 though this would have to be done before the expiry of the letter of credit and should also not entail altering the documents so that they become unclean.323 It was common ground between the parties in Glencore International AG v Bank (p. 343) of China324 that the statement of discrepancies in a notice of rejection is binding on the bank, which may not thereafter raise new grounds. This position represents a departure from the earlier and controversial case of Kydon Cia Naviera SA v National Westminster Bank Ltd (The Lena),325 where documents were presented on a number of occasions, the bank not acting consistently as to the grounds of rejection. The court held the bank had made no representations for the purpose of a binding estoppel.326 Further, any duty owed by the bank when paying against a letter of credit was owed to the applicant and not to the beneficiary. It is submitted that The Lena is no longer a reliable authority on the raising of fresh objections. The decision is not to be reconciled with Article 16(c) of UCP 600, which allows the bank only a ‘single’ notice of discrepancies. Although that notice must state ‘each’ discrepancy in response to which the bank declines to honour or negotiate,327 the requirement of a single notice should lead to ‘each’ being interpreted as ‘all’. If the single notice rule were confined only to the grounds that prompted the bank on the first occasion to reject the beneficiary’s documentary presentation, it would serve little purpose and would be impossible to police. The corollary to a single notice rule, it is submitted, is that a bank may not raise further objections once all previously stated discrepancies have been resolved on the second tender.
6.63 The letter of credit is not itself payment or a payment instrument but contains a promise of payment.328 The UCP rules impose a duty on issuing and confirming banks to pay according to the tenor of the letter of credit.329 If the credit provides for payment at sight (that is, on presentation), the bank must pay on sight, and if for deferred payment, the bank must pay on the date specified. Payment at sight is not to be interpreted too literally; the bank is given time to examine the documents for compliance.330 The modern practice is no longer for the beneficiary to arrive in person at a counter in the bank’s letter of credit department expecting immediate payment but to dispatch the documents by post or courier,331 though it is common enough for a credit to state that it is payable across the counters of a stipulated bank branch.332
Payment and examination
6.64 The bank is not bound to pay or take any action in relation to payment until it has first examined the documents to see if they conform to the credit. Article 15 of UCP 600 makes it clear that the duty to honour the credit arises when the bank determines that the documentary presentation is compliant. Although the issuing (p. 344) bank may consult the applicant if it judges shipping documents to be non-compliant so that the applicant might consider waiving any discrepancy,333 the bank may not forward those documents to the applicant for the purpose of independent examination by the latter.334
UCP 500 and the time allowed for examination
6.65 The conclusion reached above that a bank is not entitled at a later date to alter the grounds for rejecting shipping documents335 accords with the bank being time-bound when examining the documentary presentation. The time allowed for examination has now been modified in UCP 600. According to UCP 500, the bank’s decision to take up documents, or reject them for non-compliance, had to be made ‘within a reasonable time, not to exceed seven banking days following the receipt of the documents’.336 A bank failing to abide by this reasonable time was by Article 14(e) of UCP 500 precluded from claiming that the documents were non-conforming. This seven-day period was not supposed to be a reasonable period, which might expire before the seven days were up, but rather was a cut-off point. Prior to the introduction of UCP 500, it was stated in one case that various factors were to be considered in computing a reasonable time:337 the need to consult a foreign language translator, a technical expert, and the applicant itself; the complexity of the transaction and documentation; and the availability of staff in a large bank in a busy financial centre.338 In the same case, one member of the court dissented from the conclusion that the computation of a reasonable time might include the time needed to consult the applicant for a waiver of documentary discrepancies, since this was inconsistent with the requirement that the bank communicate with the beneficiary ‘without delay’.339 The majority view, however, did have the merit of according with the practice of issuing banks when handling import credits in the City of London. In addition, this approach sanctioned the reference of discrepancies to the applicant and not the more time-consuming forwarding of the documents to the applicant.340 Furthermore, in giving the bank the opportunity to approach the applicant instead of rejecting the documents out of hand, its inherent tendency was to uphold a documentary presentation and thus forward the purpose of assuring payment that underlay the practice of issuing documentary credits. A later decision, however, appeared to take a stricter line than that taken (p. 345) by the majority in the above case. There it was said that, if a bank accomplished the process of examination with particular dispatch, it might not add the time thus saved to the time it took to communicate with the beneficiary.341 When deciding to reject the documents, its duty to notify the beneficiary without delay meant that the notice of rejection had to be sent on the next banking day. When UCP 500 was introduced, this stricter approach was apparently sanctioned in so far as the bank, though entitled to approach the applicant for a waiver, could not add the time taken to the time allowed for the examination of the documents.342 Some ambiguity remained present in that the time thus referred to might have been the reasonable time allowed for the examination or the seven-day maximum. If the latter were meant, then scope would be allowed for the added time needed to approach the applicant for a waiver, as long as the seven-day limit was not breached. Overall, the position arrived at under UCP 500 was hardly clear and coherent. A sensible approach to the computation of a reasonable time would treat the bank’s behaviour as a coherent whole when computing time, rather than breaking it up into separate activities, not all of which could be accommodated within that computation.
UCP 600 and the time allowed for examination
6.66 The position concerning the time for examination has been simplified in UCP 600. Article 14(b) provides that the relevant bank shall have a ‘maximum of five banking days’ to determine whether a presentation is compliant. Moreover, there is no duty to notify beneficiaries of a rejection of documents ‘without delay’. Since maximum periods have a tendency also to become minimum periods if there are no criteria stated for shortening the period, on one interpretation a conventional period of five days will be applied regardless of circumstances. The shortening of the period for examination from seven to five days lends some support to that view, since the shorter the period the less scope there is for varying treatments of different circumstances, as does the evident desirability of commercial certainty and the need for banks to be able to give clear directions to their staff. The alternative view, that a maximum means a maximum and that in particular circumstances the period might be shorter, is more sensitive to varying circumstances, yet the former view is to be preferred for the reasons stated.343 The former view also makes sense of the provision in Article 16(b) that an approach to the beneficiary does not extend the examination period. The only time to which Article 16(b) can refer is the maximum period of five days, given the absence of any reference to a reasonable time. Consequently, the bank acts in time provided that the beneficiary is informed of a rejection within five days even if the beneficiary could and would have been notified sooner had it not been for the time needed to consult the applicant.
Payment under reserve
6.67 Just as a CIF buyer will sometimes accept non-conforming documents under reserve, so as to pass them down a sales chain to see if no subsequent party objects to them, so a nominated bank may make payment under reserve, waiting upon the response of the issuing bank. This practice, although sanctioned under earlier versions of (p. 346) the UCP rules, is not mentioned at all in UCP 600.344 There is no reason, however, why beneficiary and nominated bank may not reach an agreement for provisional payment falling outside the terms of UCP 600, so that the absence of any mention of payment under reserve in UCP 600 is to be regarded as merely a discouragement of the practice. Assuming that an enforceable reserve agreement has been reached, the question is what effect does this reservation have upon the relations of reserving bank and beneficiary. In Banque de l’Indochine v Rayner (JH) (Mincing Lane) Ltd,345 a confirming bank had made ‘payment under reserve’346 after rejecting the documents for stated discrepancies and had then sought the recovery of the money from the beneficiary. Acting on the applicant’s instructions, the issuing bank had refused to take up the documents for some of the reasons stated by the confirming bank. The beneficiary contended that the issuing bank had to prove that it was entitled to reject the documents for at least one of the confirming bank’s stated discrepancies; the confirming bank maintained that it was entitled to be repaid by the beneficiary by reason of the mere fact that the issuing bank had rejected the documents.347 Construing the ‘payment under reserve’ agreement, the Court of Appeal held that, for the confirming bank to recover, the issuing bank had to reject the documents, whether on its own initiative or on the applicant’s instructions. Kerr LJ also considered it to be implied in the agreement that the issuing bank had to reject the documents for at least one of the reasons earlier given by the confirming bank.348 The confirming bank did not have to prove that the issuing bank was entitled to reject the documents or even that it, the confirming bank, was entitled as against the beneficiary to reject the documents.349 The commercial sense of the ‘under reserve’ agreement was that the confirming bank was entitled to be repaid on demand and without becoming involved in litigation. The practical outcome is that the onus would be on the beneficiary to bring proceedings against the confirming bank to recover the sum payable under the credit and to prove that the documents were conforming, and not for the confirming bank to prove they were non-conforming when seeking to recover the sum paid.350
Default by bank
6.68 Suppose the bank, in breach of the letter of credit contract, either declines to pay the seller when the latter duly presents conforming documents or anticipatorily repudiates the contract351 before the seller presents the documents. Apart from any rights the seller will have against the buyer,352 the seller as beneficiary will have a claim against the bank. The possibilities are a claim in damages, or a claim, by way of debt, for the amount stated in the credit. In the case of damages, a further distinction has to be made between a claim for damages assessed as the amount stated in the credit and a claim (p. 347) based on the losses actually incurred by the beneficiary, for example, the ‘loss of bargain on the contract of sale’.353 There is little practical difference between a debt claim and a claim for damages based on the stated amount in the credit, except that the claimant in the case of the former should remain willing and able to perform the letter of credit contract. This lack of difference may explain a certain lack of clarity in the earlier authorities. Before the nature of the beneficiary’s claim is assessed, the timing of the bank’s duty under the UCP rules to make payment should first be considered. The UCP 500 Rules did not expressly state when the bank’s duty to pay arose. They stated a positive duty on banks to ‘take up’ the shipping documents,354 which on one view pointed towards the beneficiary having a debt claim only as of the moment that conforming documents are in fact taken up by the bank and not at the point of tender.355 In contrast, the UCP 600 rules refer to the honouring of credits356 and not to the taking up of documents, but they do make it plain that the bank may examine the documents before honoring the credit.357 The nature of the bank’s payment obligation, however, points to the seller having a debt claim even if the bank refuses to accept the tender of documents.358 The entitlement of a seller to maintain a debt claim against the bank seems even more firmly established when the bank has taken receipt of the documents for the purpose of examination and then wrongfully rejects them and refuses to pay. The assurance needed by the seller in proceeding to perform a contract of international sale,359 which gave rise to the practice of documentary credits, is less than adequately provided if, on default by the bank, the seller is put to proving the loss caused by the bank’s dishonour of the credit. The terms of the letter of credit will require payment to be made on the presentation of stated documents, which, together with the seller’s physical release of the documents, lends added support to the seller having a debt claim against a bank when in this position. The seller’s debt entitlement should thus lie even if the bank refuses to examine the documents in its possession, though examination of the documents360 is normally the precondition to payment. This solution accords with practical considerations. The seller without shipping documents is in no position to deal with the underlying goods and to obtain from them a benefit in addition to the sum stipulated in the credit; a bank in possession of the documents is able to deal constructively with the underlying goods. As for the case law, which does not on its face differentiate between the position within or outside the UCP rules, the position is now very clear that the beneficiary’s claim sounds in debt ‘provided the beneficiary is willing and able to transfer the documents to the bank’.361 This accords with the above analysis of UCP 600.
6.69 Assuming that the beneficiary may not,362 or chooses not to, press a claim in debt for the amount of the credit, an action for damages will lie for the bank’s failure to pay.363 Damages will be assessed at large. In this regard, the quantum difference between debt and damages disappears to the extent that a court is prepared to treat the damages action as lying for the amount of the credit.364 This is the position, too, in the case of a bill of exchange that has been dishonoured, where clearly the payee’s claim is stated as one for liquidated damages.365 In appropriate cases, the seller may recover damages representing both the amount of the credit and additional loss caused by the bank’s breach of contract.366 In Urquart Lindsay & Co v Eastern Bank Ltd,367 Rowlatt J emphasized that the beneficiary’s damages claim was not one for the non-payment of money and treated it in the same way as a seller’s claim against a buyer for damages for non-acceptance.368 The award of damages may not accord with the traditional common law position on the non-recovery of damages for failure to pay a sum of money,369 but documentary credits offend common law orthodoxy at other points too, notably in contract formation and consideration and, quite possibly too, compliance with conditions precedent to the maintenance of a debt claim. Finally, if the beneficiary has disposed of the documents by other means, ordinary principles of mitigation of damages should be brought into play to the extent that the debtor’s action has reduced the loss caused by the bank’s breach of contract.
Letter of credit and sale contract
6.70 The contract of sale may be incomplete and unenforceable where buyer and seller agree to payment by letter of credit but fail to settle the terms of the credit370 (though (p. 349) it may now be that the UCP rules could fill in the gaps so as to render the contract enforceable). There is also the possibility,371 an unlikely one, that the opening of a letter of credit under a contract that states that it is ‘subject to the opening of a letter of credit’, is a condition precedent to the formation of a binding contract of sale, in the same way that the conclusion of contracts for the sale of land is usually conditioned by a ‘subject to contract’ clause.
Parallel documentary requirements
6.71 Where a documentary sale calls for payment by letter of credit, there will or ought to be parallel and identical documentary requirements, relating to the documentary duties of the CIF seller under the contract of sale and to the conditions that the CIF seller, as beneficiary, must fulfil in order to enforce payment under the terms of the letter of credit.372 The contract of sale and the letter of credit contract between the beneficiary and the issuing or confirming bank are therefore contiguous but distinct contracts. Nevertheless, since due payment by the bank against the letter of credit will discharge the buyer from his duty to pay the price,373 it is clear that the letter of credit contract directly affects the performance of the contract of sale. This prompts the question: What is the position if the letter of credit requires the seller as a condition of payment to perform in a way other than that demanded by the contract of sale? It is not a case of inconsistent obligations on the seller: the letter of credit contract, as a unilateral contract,374 does not bind the seller to do anything. But the seller is placed in a quandary: the contract of sale will expressly or by implication require certain documents to be tendered by the seller to the nominated bank, which will take up the documents as the buyer’s agent or sub-agent under the contract of sale, yet the seller will want to comply with the terms of the letter of credit in order to be assured of payment when tendering documents to that same bank.
Sale qualified by credit
6.72 Speaking about the autonomy of the letter of credit contract from the underlying sale contract,375 Rowlatt J in Urquart Lindsay &Co v Eastern Bank Ltd 376 said that it was not a case of the letter of credit contract being qualified by the contract of sale but of the contract of sale having to accommodate itself to the letter of credit. These words should not be taken out of context to support the position that buyer and seller agree as a matter of course that the terms of documentary delivery may be varied by a letter of credit, though possibly within the limits of customary requirements, such as are to be found in UCP 600. The contract of sale may have little to say about the contents of the ensuing letter of credit. Nevertheless, it may be that the credit departs from the contract of sale in various ways. For example, it may be of a type other than that required by the contract,377 or it may stipulate additional documents or introduce qualifications concerning (p. 350) the particular documents that have to be tendered by the seller. If there is no time in which the buyer can cure the non-conformity in the letter of credit,378 the seller, if unwilling to waive the non-conformity in the credit or submit to a variation of the contract of sale, will be entitled to terminate the contract of sale.379
Effect of credit on sale
6.73 Once issued, the effect of a letter of credit on the contract of sale, in those cases where the two diverge, may take various forms. First, it may amplify a term of the contract impliedly giving a limited discretion to the buyer to settle the terms of the credit. Its conditions must therefore be ‘fair and reasonable and not inconsistent with the terms of the contract of sale’.380 This process is explained by Robert Goff J in Ficom SA v Sociedad Cadex Lda381 as yielding ‘where possible, by means of implication or by resort to any approved custom of the trade, the terms upon which the parties must be taken to have agreed that the letter of credit should in due course be issued’. A variant of this first point is that the terms of the letter of credit are required by the contract to be settled, not by the buyer acting unilaterally, but by both parties in negotiation.382 This process may lead to the letter of credit being agreed in terms that depart from the contract of sale,383 thus producing a contractual variation.384 A court, it is submitted, should not be ready to adopt this variant, given the absence of a binding duty to negotiate at common law,385 but this objection does not arise after the fact when the two parties have successfully agreed the terms of the credit.
6.74 Secondly, if the letter of credit is a non-conforming one and the seller does not terminate the contract of sale or give the buyer a period of grace in which to rectify the credit, the seller may forbear from insisting upon his contractual rights. Forbearance here is a form of waiver, or equitable estoppel,386 in the sense of a unilateral concession from the seller.387 Upon reasonable notice being given, it may be withdrawn with future effect. In (p. 351) Panoutsos v Hadley (Raymond) Corp of New York,388 under a contract for the sale of a quantity of flour in instalments, the seller refused to make further shipments because the buyer had opened a non-conforming letter of credit (it had not been confirmed) at the start of the shipment period. The seller was entitled to put the buyer on notice that future deliveries would be made only against a conforming credit.
6.75 Thirdly, the parties may enter into a binding variation of the contract, con-sensually agreeing that the credit shall be taken out on terms other than those initially settled.389 In some cases, the court may not be concerned to establish whether the seller has waived a non-conformity in the credit or has agreed a variation with the buyer.390 The difference between the two will not matter in practical terms if, treating it as a waiver, the seller’s concession is too late to withdraw.391
Absolute or conditional payment?
6.76 The presumptive rule is that opening a letter of credit in favour of the seller operates like payment by cheque in domestic sales law392 in the following sense: if it is dishonoured by the bank, the seller can call upon the buyer under the contract to pay for the goods. The opening of the letter of credit is therefore not outright payment by the buyer,393 for the buyer promises to pay by means of a letter of credit and not to provide a letter of credit in lieu of payment. Rather, the letter of credit is merely conditional payment in the sense that it suspends the buyer’s primary duty to pay. A bank that honours a credit therefore discharges the buyer’s duty to pay the price, though it is not as such paying the price, since its obligation to honour the credit is autonomous394 of the underlying contract.395 Nevertheless, if the bank defaults, the buyer’s duty to pay is reactivated and the seller is entitled to pursue the buyer for payment. Putting it another way, the buyer warrants that the bank will honour a letter of credit if the seller complies with the terms of the letter. Letters of credit are therefore to be distinguished from bank credit cards, where it is settled that the use of the card discharges the buyer’s payment obligation, so that there is no recourse against the buyer if the bank later defaults in paying the seller.396 Since the rule of conditional payment is a presumptive one, it is open to the buyer to argue that (p. 352) on its true construction the contract of sale provides for absolute payment by the buyer in this way.397
Autonomy, fraud, and related matters
6.77 It has been repeatedly held in the case law398 that the bank’s concern is with the documents and not with the underlying contract.399 The letter of credit contract is therefore autonomous of that underlying contract.400 A buyer’s complaint about the goods may no more defeat payment under the letter of credit than it can serve as a defence to a claim brought against the buyer as maker of a promissory note or acceptor of a bill of exchange.401 The autonomy principle relates to matters extraneous to the letter of credit; it does not preclude an examination of the terms of the letter of credit itself to identify the obligation that payment is intended to discharge.402 It is a generally accepted principle of the law of documentary credits that an undermining of the autonomy principle would be destructive of commercial confidence to the point of undermining trade itself.403 Hence, the principle of autonomy has been invoked to resist the implication of terms into payment undertakings, on the ground that ‘it is essential to the maintenance of commerce’ that payment undertakings should be given effect in accordance with their express terms.404 Nevertheless, the English courts have enforced collateral agreements between applicant and beneficiary that the latter will not draw upon the credit without the consent of the applicant or without previous compliance with stated, ‘blocking’, conditions.405 Owing to the autonomy principle, the bank itself could not have been prevented from making payment. The enforcement of such collateral undertakings is not easily reconciled with the idea of a documentary letter of credit as an autonomous instrument that bears on its face (p. 353) the payment obligation of the bank. Nor is it easily reconciled with the established position that an injunction to prevent a beneficiary from claiming payment under a letter of credit, on the ground of fraud, should not be more readily available than an injunction against a bank to prevent payment.406 The justification for the autonomy of irrevocable obligations assumed by banks has been firmly expressed by Kerr J, when referring the role of such obligations as the life-blood of commerce, lending collateral support to the obligations of contracting parties at each end of the banking chain. Disputes arising between these parties should be settled by litigation or arbitration as an aspect of the conventional risks run by merchants.407 In one New York case408 involving a sale of paper it was said:
The bank … was under no obligation to ascertain, either by a personal examination or otherwise, whether the paper conformed to the contract between the buyer and the seller. The bank was concerned only in the drafts and the documents accompanying them… If the drafts, when presented, were accompanied by proper documents then it was absolutely bound to make the payment under the letter of credit, irrespective of whether it knew, or had reason to believe, that the paper was not of the tensile strength contracted for.409
This point was also expressed in strong terms in Urquhart Lindsay & Co v Eastern Bank Ltd,410 where Rowlatt J said: ‘[S]o far from the letter of credit being qualified by the contract of sale, the latter must accommodate itself to the letter of credit.’411 The autonomy approach is expressed again in Article 4(a) of UCP 600, which states that credits are ‘separate transactions’ from the underlying contract of sale and that the bank’s duty to pay is not qualified by any defences the buyer may have under the contract of sale. It does not matter that the bank has knowledge at the time the seller presents conforming documents that the seller has committed a discharging breach of the contract of sale.412
Defences to payment
6.78 If documents are tendered that on their face are conforming documents, the beneficiary’s entitlement to be paid may be met by one or more possible defences to be considered.413 First of all, there is the case of documents that contain false statements, that are forged, or that are nullities. UCP 600 require the issuing and confirming banks to pay against the ‘stipulated documents’.414 In so doing, they are required to see that the documents ‘on their face’ are conforming documents.415 This formula stresses that a bank should not actively seek out underlying reasons for declining to pay. Apart from this, on the issue of false statements and forgery the UCP rules give no express guidance. (p. 354) Secondly, there is the case of illegality, whether in the letter of credit contract or contracts or in the underlying transaction. Thirdly, there is the case of fraud. The UCP rules do not make provision for fraud, whether this is to be found in the underlying transaction or in the drawing or completing of one or more of the stipulated documents.416 It is left instead to the applicable law. Overall, English law is reluctant to recognize all of the above defences because of the conviction that a letter of credit should be as good as cash or a negotiable instrument,417 which itself should be as good as cash.418
6.79 If a bank’s obligation to pay under a documentary credit were to be vitiated by the presence of a false statement in any of the documents, the assurance of payment given by such credits would be illusory. The confidence of beneficiaries would be undermined by the concern that, even if the false statement were not picked up before payment, its subsequent discovery could lead to a claim by the bank to recover payment. The movement of documents down a transaction chain would be compromised by concerns that the documents contained statements that could not be verified by the party passing them on if called upon to do so. In United City Merchants (Investments) Ltd v Royal Bank of Canada,419 the House of Lords rejected the argument that the presence of even material misstatements420 in the documents operated as a defence to payment. Nevertheless, if a bank is directly induced into entering the letter of credit contract by the beneficiary’s misrepresentation, directed to the bank for that purpose, this would provide a defence to payment and permit the court not to give summary judgment in favour of the beneficiary.421
6.80 The position of a bank resisting payment, or of an applicant seeking to prevent it, is not improved by the fact that the presence in one or more documents of a false statement renders them forgeries. In the Court of Appeal in United City Merchants (Investments) Ltd v Royal Bank of Canada, Stephenson LJ defined a forgery as a document that told a lie about its maker or about the time and place of its making.422 The bill of lading in that case was certainly forged, in that it was falsely dated, but this fact in the judgment of the House of Lords did not of itself prevent payment to a beneficiary who was not the forger or the forger’s principal.423
6.81 The fact that a document contains a false statement, even a false statement of material fact, does not make it a nullity.424 Nor does the fact that it has been (p. 355) forged,425 though documentary nullities will certainly contain false statements and may also be forged. So, a bill of lading forged to show the incorrect shipment date would not be a nullity, but a bill of lading issued by someone other than the carrier or the carrier’s actual or apparent agent might be.426 A bill of lading attesting to an imaginary shipment would certainly be a nullity since it recites something that never in fact took place.427 According to the American case of O’Meara (Maurice) Co v National Park Bank: ‘[t]he bank’s obligation [is] to pay sight drafts when presented if accompanied by genuine documents specified in the letter of credit [emphasis added] … ‘.428 Equating a non-genuine document with a nullity, the position under English law is not so accommodating to a nullity defence to payment. In United City Merchants (Investments) Ltd v Royal Bank of Canada, Lord Diplock stated that the bank’s duty to the seller was, subject to the fraud defence,429 to pay against documents that on their face conform to the terms of the credit, even if they turn out to contain false statements.430 He stated as the basis for this rule the bank’s entitlement to be reimbursed by the buyer for paying out against documents that it did not know, and was not negligent in failing to know, were forged,431 and the bank’s freedom from liability for the genuineness or accuracy of the documents.432United City Merchants (Investments) Ltd v Royal Bank of Canada433 draws a distinction between forged documents that are not nullities, where the bank is required to pay in the absence of fraud by the beneficiary, and forged documents that are nullities. In the case of the latter, the House of Lords did not itself resolve the question whether the bank is bound to pay. The falsely dated bill of lading in that case, though forged, was not a nullity. It performed the functions of a receipt and a document of title to the goods, as well as providing evidence of the terms of the contract of carriage. Moreover, the question of documentary nullities would only be a live one in those infrequent cases where the beneficiary had not acted fraudulently but had innocently acquired the null document.
The Montrod case
6.82 The decision of the Court of Appeal in Montrod Ltd v Grundkotter Fleischvertriebs-GmbH 434 concerned an inspection certificate that was supposed to be (p. 356) signed by Montrod, which was not a party to the underlying contract but was liable to repay the issuing bank in the event of that bank making payment under the letter of credit. There was never any intention that Montrod would sign any inspection certificate: the clause requiring was a ‘locking in’ clause that permitted Montrod to control any drawing on the letter of credit. Persuaded by the buyer that it could sign the certificate on behalf of Montrod, the seller acting in good faith did so. Taking the view that it was undesirable to extend the fraud exception to payment so as also to include cases of nullity where there was no fraud, the Court of Appeal concluded that no exception for nullity should be recognized. According to Potter LJ, a general nullity exception was not ‘susceptible of precision, involves making undesirable inroads into the principles of autonomy and negotiability universally recognized in relation to letter of credit transactions’.435 The words of caution concerning the definition of a nullity are well taken; indeed, it is questionable whether the inspection certificate in this case was a nullity in the same sense that a bill of lading reciting a non-existent shipment is a nullity. The locking-in clause in the credit calling for the certificate was of a type that undermined the integrity of the letter of credit as an autonomous instrument and on that account was representative of a practice that ought not to be encouraged. Were a restrictive approach to be taken towards the defining of a nullity, so as to include only documents that amount to worthless paper, then the way would be open to reconsider the decision of the Court of Appeal in Montrod.436 An inspection certificate signed by the wrong person may still in appropriate cases be called an inspection certificate, but a bill of lading reciting a non-existent shipment is no less a mere scrap of paper than a bill of lading issued by a non-existent shipping line. Such a ‘bill of lading’ evidences or embodies none of the obligations to which a genuine bill of lading gives rise. The bank’s undertaking to pay against a bill of lading must be an undertaking to pay against something that can be described as a genuine bill of lading, embodying at least one of the functions associated with a bill of lading properly so-called.437 It may be, however, that the issue is determined as a matter of construction by the precise words used in the letter of credit. Moreover, if the UCP rules are considered carefully in the light of interpreting what amounts to ‘stipulated documents’, then it might properly be concluded that the bank is entitled to refuse payment. A piece of paper entitled ‘bill of lading’ but performing none of the functions performed by bills of lading cannot be a stipulated document. Despite the views expressed in the United City Merchants case,438 about the alignment between a bank’s duty to pay and an applicant’s duty to reimburse the bank, there is no good reason to treat the two duties as identical in scope. A bank, having paid with due care, is entitled to be indemnified even if it did not detect that documents were nullities,439 but that cannot mean that it had to pay in the first place against documents that it knew to be nullities. (p. 357) Taking a different point in Montrod, Potter LJ was at pains to show the desirable similarity between a letter of credit and a negotiable instrument.440 Nevertheless, the so-called real defences, such as non est factum, which have a close kinship with documentary nullities, may be asserted even against a holder in due course of a negotiable instrument.441 There is a strong case for developing a nullity defence to payment that defines nullity in restrictive terms so as to comprise sham pieces of paper as opposed to unauthorized documents and documents containing misstatements.
The illegality exception
6.83 In recent years, illegality442 has emerged as an independent ground for preventing payment under a letter of credit. The illegality may present itself either in the relevant letter of credit contract or in the underlying transaction. So far as it affects the latter, then illegality as an impediment to payment constitutes an exception to the autonomy principle. The question of whether, in the absence of conclusive pre-existing authority, a bank could rely upon illegality affecting a letter of credit was treated at length in Mahonia Ltd v JP Morgan Chase Bank (No 1).443 The facts, as assumed to be true for the present proceedings, were as follows. The Enron Corporation procured for itself a loan by means of a chain of swaps transactions, starting and ending with Enron itself and involving other entities, including a special purpose vehicle, Mahonia, the claimant in the present case. The swaps transactions were supported by letters of credit. The reason for using swaps transactions was to disguise a loan that would otherwise have had to appear as a liability in Enron’s accounts. The failure to show the loan in those accounts was contrary to US financial practice444 and gave rise therefore to a breach of US securities laws for failing to file proper accounts with the Securities and Exchange Commission. The defendant bank, which had issued a letter of credit in favour of Mahonia, was not aware of this illegality at the time documents were presented to it for payment or on the last date for payment under the credit. The court had to decide whether an illegality exception analogous to the fraud exception existed as a defence to payment; whether there had to be ‘clear evidence’ of this illegality when the bank came under a duty to pay; and whether a distinction had to be drawn between a letter of credit that was intrinsically illegal and one that was tainted by any illegal purpose in the underlying transaction.
The decision of the court in Mahonia
6.84 The court concluded that the claimant on these facts could not have enforced the letter of credit against the defendant bank, even though only the claimant and not the defendant had an illegal purpose. There was long-standing (p. 358) authority that English courts will not enforce contracts that involve the commission of illegal acts in foreign friendly countries.445 In the present case, a distinction had to be drawn between conduct prohibited by legislation and conduct collateral to such legislation.446 Letters of credit that were merely a ‘facility’ to assist performance in a manner not specifically made illegal were enforceable. Nevertheless, the court then retreated from this distinction in what might be called flagrant cases of illegal underlying transactions, such as illegal arms sales and the sale of heroin. The present case was an ‘appropriately serious’ case for there to be a strongly arguable case that the letter of credit ought not to be enforced against the bank.447 There was therefore sufficient evidence for the bank to resist payment and defend its actions when the beneficiary sought summary judgment.448 The scope of the illegality exception, somewhat unsatisfactorily, would therefore seem to be a matter of degree, dependent on the extent to which a letter of credit is tainted by the underlying transaction.
The fraud exception to payment
6.85 To the principle of the autonomy of the letter of credit, there is an important exception that will rarely be successfully established in practice, namely that the beneficiary has been guilty of fraud. The need to ensure that the integrity of payment by way of letters of credit, the ‘lifeblood of commerce’, is maintained will always render the fraud exception difficult to maintain. As stated above, this fraud exception is not to be found in the text of the UCP rules.449 Moreover, it is not in the Uniform Rules on Demand Guarantees (URDG 458), or the International Standby Practices (ISP 98),450 though it is to be found secreted within the definition of a broader exception to payment in the United Nations Convention on Independent Guarantees and Stand-By Letters of Credit 1995.451 Not recognized in earlier case law,452 the fraud exception has now been firmly accepted by English law.453 Although the failure of fraud cases to go to trial gives rise to some difficulty in defining fraud and giving instructive examples, fraud has its (p. 359) ordinary common law meaning,454 which is the making of representations by word or conduct without believing them to be true,455 the instance of actual disbelief by the maker of a statement being a particularly clear case of fraud. In the United City Merchants case, Lord Diplock said that the necessary fraud had to embrace ‘expressly or by implication, material representations of fact456 that to [the seller’s] knowledge are untrue’.457 Fraud can be manifested in the state of mind that accompanies the forging of documents or in the making of deliberately untrue statements in documents.458 In the New York case of Sztejn v Schroder (Henry J) Banking Corp,459 goods described by the seller in the bill of lading and invoice as bristles amounted to nothing more than rubbish. The buyer was granted an injunction to prevent the issuing bank from making payment under the letter of credit. There is no requirement in principle that the fraud be manifested in the form of false statements in the shipping documents themselves.460 Such a requirement, indeed, would blur the line that separates the established fraud exception and the rejected forgery exception to payment. In the case of a standby credit, fraud occurs for example when the beneficiary asserts that a precondition to making a call, namely, serving a notice on the other contracting party, has been done when this in fact to the sure knowledge of the beneficiary is untrue.461
Legal basis of fraud exception
6.86 It is not just the applicant who is liable to suffer a loss in the case of fraud. A bank may also suffer loss to the extent that any security it has acquired over shipping documents is of diminished value. A bank, moreover, may be the victim of a collusive scheme by the applicant and the beneficiary to raise money on the back of imaginary shipments.462 As a matter of ordinary contract principle, therefore, it ought to be possible to find in the contract between an issuing bank and an applicant an implied term that the applicant shall not defraud the bank, and in the contracts between issuing bank and beneficiary, and confirming bank and beneficiary, a term to like effect.463 The inference of such implied terms would not accord with the documentary and comprehensive character of a credit, but neither does the fraud exception itself, accepted in English and other national laws as an exception to the bank’s payment obligation. Lord Diplock has asserted the vital interests of the courts in suppressing fraud, by rationalizing it on the basis of ex turpi causa non oritur actio or ‘fraud unravels all’.464 The problem of fraud and its (p. 360) contamination of financial systems ensures that it can never be looked at as a matter purely of private right. The law has its own interest in not allowing fraud to succeed.465
Injunctions sought by applicant
6.87 The buyer applicant may take action to prevent payment,466 usually, if the bank does not comply with a request to stop payment, by seeking an injunction. The injunction sought may be directed at more than one possible defendant: it may for example seek to restrain the bank from making payment or it may seek to enjoin the seller from claiming under the letter of credit.467 Alternatively,468 the buyer may be seeking to avoid reimbursing a bank that has already paid the beneficiary and will succeed only if the bank was ‘clearly aware’ of the fraud at the time of payment or if fraud was the only reasonable inference to be drawn at the time.469 As a practical matter, it is very difficult and rare for a buyer seeking to prevent payment being made to succeed in proving fraud.470 Courts will generally be loath to accede to the buyer’s application for an injunction: the systemic trade losses that might occur if sufficient doubt were cast on the reliability of the bank letter of credit system of payment might be incalculable. Ackner LJ has said that ‘[w]e would expect the Court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the buyer’ so that the buyer has to show that it is seriously arguable that ‘the only realistic inference to draw is that of fraud’.471 In broader terms, reference (p. 361) has been made in one case to the invalid drawing down of a claim on a letter of credit as having been ‘positively established’.472 There is some evidence of a tendency, however, for the court to require, not this test or the ‘obvious fraud’ demanded by the so-called heightened test, but the ‘real prospect’ of fraud laid down by a laxer test and applicable in the normal case of a summary judgment application under CPR Pt 24.473 It is likely, nevertheless, that the heightened test will prevail in cases where it is the applicant who is seeking an injunction. The Privy Council has recently affirmed the heightened test for fraud in stating that in interlocutory proceedings it must be shown that the only realistic inference to be drawn was that the beneficiary could not honestly have believed in the validity of its demands.474 For the purpose of the New York proceedings in the Sztejn case,475 it had to be assumed that the buyer had established the seller’s fraud. Such a procedural assumption or concession is now unlikely to be made. An additional consideration in documentary sales relates to the difficulty of a buyer discovering fraud in time to seek the prevention of payment. Apart from the level of proof required in the case of fraud, the normal equitable requirement that the balance of convenience476 should be in favour of granting an injunction demonstrates with particular force how hard is the task of the applicant seeking to enjoin payment by the bank under a letter of credit. As the matter was expressed by Kerr J in Harbottle (RD) (Mercantile) Ltd v National Westminster Bank Ltd,477 the applicant has an ‘insuperable difficulty’: if the bank pays and debits the applicant’s bank account, it either did so pursuant to the contract with the applicant, in which case the applicant cannot complain of payment, or it did so in breach of contract, in which case the bank is good for a damages action brought by the applicant. Consequently, the balance of convenience in cases of this sort is ‘hopelessly weighted’ against an applicant seeking to enjoin payment.478 This is so despite the law’s keen interest in suppressing fraud and despite the lower forensic standard for establishing the existence of fraud in interlocutory proceedings.479
6.88 The bank itself may resist payment under the letter of credit without an injunction being sought by the applicant. The normal concern of the bank to protect its reputation for payment, which might lead it otherwise to resist an applicant’s request to stop payment, may be less compelling in those cases where the bank itself is liable to incur losses if it makes payment under the letter of credit. It has been stated that the position concerning the grant of an injunction against the bank is ‘not the same as the position in cases in which the beneficiary of the letter of credit seeks summary judgment against the bank’.480 The questions that now arise are whether the bank, like the beneficiary seeking to enjoin payment, must have ‘clear evidence’ of fraud to resist the beneficiary’s demand for payment, and, if it does initially resist payment, what evidence of fraud must the bank lead to resist applications by the beneficiary to strike out the bank’s fraud defence to payment and to resist an application for summary judgment in favour of the beneficiary. The requirement of clear fraud appears to stem from Lord Diplock’s speech in United City Merchants but that speech has been cogently shown to make no such demand.481 More recently, as already stated, stringent requirements of proof of fraud have in some cases been relaxed in favour of the test applied for a summary judgment application,482 but even here it has been emphasized that there is a need for ‘particularly cogent evidence to establish the fraud exception’.483 That said, the position now favours a lesser standard when it is the bank that is resisting payment: the heightened test at this point gives way to the real prospect test of CPR Pt 24.484 Suppose now that a bank, lacking the necessary evidence, refuses payment to the beneficiary in the expectation that, by the time the matter is brought by the beneficiary to court, the bank will have acquired the necessary evidence. The question is whether the court will look at that evidence or will restrict itself to the evidence before the bank at the time of the refusal of the demand. The issue was discussed at length in Balfour Beatty Civil Engineering v Technical & General Guarantee Co Ltd.485 According to the court in that case, a bank with a clear case that emerges after the demand, but by the time of the summary judgment stage, has a counterclaim to the beneficiary’s claim for payment under the credit. Whilst a counterclaim would not ordinarily prevent summary judgment from being given in respect of the claim under the credit, it might be strong enough to generate its own summary judgment, in which case the two judgments would cancel each other out. If the evidence of beneficiary fraud is not quite so strong but nevertheless powerful, there might ensue a stay of execution on the beneficiary’s summary judgment until the issue of fraud is resolved.486 The evidence of fraud may however be insufficient for either of these steps to be taken, in which case the bank will have to pay and then seek to recover payment in the ordinary course.
6.89 In United City Merchants (Investments) Ltd v Royal Bank of Canada,487 the fraud in question took the form of a falsification of the shipment date in the bill of lading but was committed, not by the seller beneficiary, but by a loading broker who was not acting as the seller’s agent. The confirming bank had declined to pay against the shipping documents to an assignee of the letter of credit. The House of Lords held that the bank was under a duty to pay against the documents: the seller had not acted fraudulently.488 It did not matter that the document was false in a material fact to the knowledge of the person issuing it. A more difficult question concerns the beneficiary who, though not privy to the fraud and not the principal of any fraudulent agent, becomes aware of the fraud at any time before payment is made by the bank. In principle, the beneficiary should have the right to be paid so far as the beneficiary presents the stipulated documents to the bank, especially since forgery per se is not a separate exception to the payment obligation of the bank. Moreover, in English law, the beneficiary does not warrant the accuracy or genuineness of the documents489 and the bank’s duty is to pay against apparently conforming documents.490 There is no convincing argument that to insist on payment by the bank is to encourage fraud: the beneficiary is not fraudulent and indeed is as much a victim of fraud as any bank or the applicant. The fruits of payment under the credit will not find their way into the hands of the fraudulent party. To stop the payment system in its tracks before a claim is made for repayment by the issuing bank to the applicant would be an interruptive outcome produced by the collateral acquisition of knowledge of falsity by the beneficiary. It may be a matter of pure accident that the beneficiary comes to know of the earlier fraud and at what time. There is a risk in referring, as so many courts and writers do, to the pathetic fallacy of documents being fraudulent. It is the person knowingly making the false statements who is fraudulent, not the documents or the person innocent of, but now aware of, the fraud seeking payment against the documents. A beneficiary presenting the documents for payment, candidly notifying the bank of false statements in the documents but insisting on payment further to the letter of credit contract, cannot in any way be said to be acting fraudulently. Yet there is judicial support for the bank’s right to resist payment to the beneficiary who knows of the fraud at the time of presentation (as opposed to the later time of payment).491 If beneficiaries did warrant the accuracy of the documents they present, which they do not, the bank would be freed from having to pay whether the beneficiary knew of the fraud or not. For the reasons stated above, it is therefore submitted that a beneficiary who knows of fraud but is not responsible for it remains entitled to be paid under the terms of a documentary credit. Likewise, a nominated bank that has made payment under a letter of credit should be entitled to reimbursement even if (p. 364) it subsequently learns of the fraud before claiming reimbursement. It has acted in accordance with a mandate and is entitled to be indemnified.492 The same should hold for a negotiating bank, given the UCP 600 provisions treating negotiating banks like other types of nominated bank.493 If a negotiating bank with knowledge acquired prior to presentation has the right to be paid, it is difficult to see why another recipient of the documents should be denied the right to be paid because of subsequent knowledge of a third-party fraud.
Fraud and the UN Convention
6.90 The risk of abusive claims to be paid is particularly great in the case of standby credits and similar documents, especially where the beneficiary needs to do no more than make the claim itself without supporting evidence. The UN Convention on Independent Guarantees and Stand-By Letters of Credit 1995494 attempts to set out clear rules concerning the circumstances in which payment may be refused. Article 19 creates an exception to the payment obligation, not labelled fraud as such, where the bank is acting in good faith and it is ‘manifest and clear’ that any document that has to be tendered is false, or where payment is not due, or where the ‘the demand has no conceivable basis’ judged by ‘the type and purpose of the undertaking’. The provision goes on to give illustrative examples of a demand for which there is no conceivable basis. These include the following: the risk against which the undertaking was sought ‘has undoubtedly not materialized’; the underlying obligation has been declared ‘invalid’ by a court or arbitrator;495 the underlying obligation has ‘undoubtedly’ been fulfilled to the beneficiary’s satisfaction; and fulfilment of the undertaking has been prevented by the beneficiary’s ‘wilful misconduct’. It may be no easier to establish an exception to the bank’s duty to pay the beneficiary but it is undoubtedly an advance to set out practical examples of where a refusal to pay is justified. In Article 20, the Convention goes on to provide that there should be a ‘high probability’ based upon ‘immediately available strong evidence’ that payment may be refused under Article 19 before a court should adopt ‘provisional court measures’ blocking or freezing payment to the beneficiary.
Applicable law: general
6.91 Perhaps the most striking feature of the choice of law process in relation to letters of credit and similar documents is that a number of like contracts are linked together in a type of contractual network. Furthermore, the risk in related contracts is sought to be equalized to limit exposure of one or more parties. For example, a bank confirming a letter of credit is assuming the same risk as an issuing bank and seeks reimbursement from the issuing bank that matches its disbursement in favour of the beneficiary. Again, a bank issuing a performance bond seeks to match its exposure in the bond to the counter-indemnity that in turn it receives from the applicant. In these cases, the calculations of the relevant bank are at some risk of being falsified if the applicable law of the related contracts is different. For documentary credits, the risk of having different applicable laws is reduced, though not obviated, by having UCP 600 apply in all the relevant contracts. But the interpretation of those rules may vary between different legal (p. 365) systems and there are matters, such as fraud, that are not dealt with in UCP 600. There are sound commercial considerations, therefore, for having the same applicable law in related contracts in the network. This outcome can be achieved by means of express choice of the applicable law, a feature, however, that is often absent from documentary letters of credit. If choice of law rules could accommodate the selection of a default law that relates to the network of contracts rather than individual contracts therein, then the commercial expectations of the various parties would be advanced. Neither the Rome Convention496 nor its successor, the Rome I Regulation,497 is apt for the treatment of contracts in networks.
Pre-Rome Convention cases
6.92 Before turning to the Rome Convention and Rome I Regulation, it is worth considering the approach taken in earlier cases in order to assess what difference, if any, has been made by the two Rome instruments. In Wahda Bank v Arab Bank plc,498 the plaintiff bank issued to the buyer a guarantee of the seller’s performance, governed by Libyan law. At the request of the seller, the defendant bank issued a counter-guarantee in favour of the plaintiff bank. The question in the present case concerned the identity of the law applicable to this counter-guarantee. The seller, under a contract expressly made subject to English law, undertook to reimburse the defendant bank. Looking at the matter from the plaintiff bank’s point of view, its purpose was to equalize its exposure on the performance guarantee with its rights under the counter-guarantee and, given the small commission it received, this was a wholly reasonable ambition. In the absence of express choice in the counter-guarantee, it could readily be inferred that the two banks intended the performance guarantee and the counter-guarantee to be governed by the same law. In this sense, it could be said that a so-called doctrine of infection operated between them, though it would not operate as between a letter of credit and an underlying contract of sale or other commercial contract.499 Libyan law, applicable to the performance guarantee, therefore applied also to the counter-guarantee.500
Applicable law of unconfirmed credit pre-Rome
6.93 The identity of the law applicable to an unconfirmed letter of credit arose in another pre-Rome case, Power Curber International Ltd v National Bank of Kuwait SA,501 where the Court of Appeal held that the letter of credit was governed by North Carolina law. North Carolina was the place of payment in US dollars against shipping documents presented by the CIF seller. The letter of credit had its closest and most real connection with North Carolina.502 The merit of this conclusion is that a bank may feel more comfortable than a seller in its exposure to foreign legal systems. It would, nevertheless, be more difficult to reach the same conclusion now, however disconcerting this might be for the American seller. Under the Rome I Regulation,503 in the absence of an express or implied choice, the applicable law is the law of the place of central administration of the characteristic performer.504 There is little doubt that the characteristic (p. 366) performance of a letter of credit contract is that of the issuing bank.505 The contract is a unilateral one under which the beneficiary incurs no obligations. If this conclusion is to be avoided, the beneficiary will have to show, under Article 4(3), that the contract is ‘manifestly’ more closely connected with another country. On its face, this test is more restrictive than the antecedent exception to characteristic performance of close connection in the Rome Convention.506 An English court might nevertheless conclude that the letter of credit contract is manifestly more closely connected with the country where payment is to be made against documents. In the more usual case where a letter of credit is confirmed and not just advised, the doctrine of infection will play a key role.507
Connected contracts and infection
6.94 The issue of infection and confirmed credits arose in Bank of Baroda v Vysya Bank Ltd.508 Treating the contract between issuing bank and confirming bank for the moment as independent of the letter of credit contract itself, the reasoning runs as follows. This contract between the two banks is essentially one of agency, the confirming bank acting as agent for the issuing bank in confirming the credit and making payment on a documentary presentation. It is the adding of the confirmation and the honouring of the obligation incurred that is the characteristic performance of this contract. So, where the confirmation is given by a bank in the beneficiary’s own country, the presumptively applicable law of the contract between issuing and confirming bank will be the law of the confirming bank’s central administration. If, however, that confirmation is effected through a place of business in a different country, it is the law of that country that will be applied pursuant to the characteristic performance rule. In Bank of Baroda, where performance was carried out through the London office of the Bank of Baroda, this meant that English law was the applicable law pursuant to the characteristic performance rule. Turning now to the contract between the issuing bank and the beneficiary, an application of the characteristic performance rule would lead to the law of the central administration of the issuing bank. Nevertheless, the confusion liable to be caused by having different laws operating to related contracts in the letter of credit network prompted a reference in the case to Article 4(5) of the Rome Convention and the law most closely connected to the transaction. Hence English law applied to the letter of credit contract between issuing bank and beneficiary. In reaching this conclusion, the court in Bank of Baroda first looked to the contract between beneficiary and confirming bank: ‘A suggestion that English law did not, as between beneficiary and confirming bank, govern a credit through the London branch of a foreign bank for payment in London would be wholly uncommercial.’509 In the interests of clarity and simplicity, Mance J therefore applied the close connection rule in Article 4(5) of the Rome Convention to conclude that English law applied also to the contract between the issuing bank and the beneficiary. Although the equivalent provision in the Rome I Regulation, based on a ‘manifestly’ closer connection than the place of residence of the characteristic performer, is less easy to satisfy than the close connection rule (p. 367) in the Rome Convention, it is likely that an English court would arrive at the same result under the Rome I Regulation. The outcome in Bank of Baroda, nevertheless, owes more to commercial common sense than to a desire to follow the Rome Convention to the letter. The same approach was adopted in Marconi Communications International v PT Pan Indonesia Bank Ltd TBK,510 where a negotiation credit was advised and negotiated by the advising bank in England, which however did not confirm it. As between the beneficiary and the second and third banks, issuing and confirming bank respectively, and between the confirming bank and the negotiating bank, the court applied Article 4(5) of the Rome Convention in favour of English law since it was contemplated that the credit would be paid in sterling in England against documents verified in England. Similarly, in a case where a performance guarantee was governed by Syrian law, the court concluded that a counter-guarantee in favour of the performance guarantor, a Syrian bank, was subject to Syrian law in the absence of a chosen applicable law.511 The place of residence of the counter-guarantor, the characteristic performer, was in England, but the principle of close connection in Article 4(5) of the Rome Convention militated against the characteristic performance rule. This was despite the fact that a further counter-guarantee, this time in favour of the counter-guarantor, was expressly made subject to English law.512 Again, it is submitted, the result should be the same under the stricter wording of the Rome I Regulation.(p. 368)