10.01  Consideration of the American courts’ approaches to the ascertainment of the governing law of the beneficiary’s claim for payment against documents tendered under a credit may conveniently begin with the choice of law provisions set forth in section 5-116 of Revised Article 5 that deals with letters of credit under the Uniform Commercial Code and is now statutorily operative throughout the country. Section 5-116 (a) and (b) contain the applicable choice of law precepts. They read as follows: Section 5-116 (a), ‘The liability of an issuer, nominated bank person, or adviser for action or omission is governed by the law of the jurisdiction chosen by an agreement in the form of ... a provision in the ... letter of credit, confirmation, or other undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction’. Section 5-116 (b), in relevant part provides: ‘Unless subsection (a) applies, the liability of an issuer, nominated person, or adviser for action or omission is governed by the law of the jurisdiction in which the person is located. The person is considered to be located at the address indicated in the person’s undertaking’.

10.02  Notably, however, section 5-116 (c) laid down that a credit is ‘governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits [or International Standby Practices (ISP98)¹] to which the credit is expressly made subject’. At first sight, this clause might be taken as implying that the UCP is a potential governing law of a credit. But the fact of the matter is that the proper law of a contract has to be the law of a country;² the UCP is a non-national code of standard banking practices, terms, and conditions designed to define certain of the substantive rights and obligations of the parties to the particular credit (or a credit-opening agreement) incorporating it. As such, they form part of the text of the credit as ordinary contractual provisions which the law selected by (p. 276) application of section 5-116 (a) or (b) will have to construe to determine the beneficiary’s claim of wrongful rejection of documents. In construing them, it is for the selected law to decide what effect, if any, they are entitled to be given within the four corners of the credit. If, for instance, the law is that of a jurisdiction, say, Michigan, in the US, section 5-116 (c) (iii) requires that the substantive provisions of the Article (i.e. Revised Article 5) and those of the UCP will both apply; and clarifies that where there is a conflict between them, the latter takes precedence.³ As a matter of construction of commercial contracts in the common law world, however, in the event of an irreconcilable inconsistency between a rule of practice and a stipulation in the credit, the former must give way.⁴

10.03  Section 5-116 (a) choice of law rule, as set forth in para 10.01, articulates that the liability of the issuing bank is governed by the law stated in the credit, and adds the very important clause that the ‘jurisdiction whose law is chosen need not bear any relation to the transaction’. The italicized word is to be read restrictively as referring to the credit; the sales contract or arrangement which generated the credit is excluded. So understood, what the clause means is that the law selected is not required to have any contact with the locality of the issuing bank where the credit is opened on the applicant’s instructions or with that of the beneficiary where the issuer’s promise to honour a conforming presentation ripens into a binding contractual, but contingent undertaking. The commercial significance of this provision would be greatly appreciated when it is remembered that it marks a departure from the choice of law rule under UCC section 1-105 which confines contracting parties to the selection of the law of a jurisdiction having a ‘reasonable relation’ to their transaction, in sharp contrast to modern choice of law requirements in other countries with substantial interests in fostering international trade and commerce, under which no such restriction prevails.⁵

10.04  It should be noted that if the credit containing the governing law entails the involvement of a confirming bank, the beneficiary’s claim to enforce the undertaking spelt out in the credit against this bank would be determined by reference to that law. In consequence, the law by which the conformity of the beneficiary’s presentation under the credit is judged does not vary according to whether the bank sued is the issuing or confirming bank. In addition, by reason of the abandonment of the erstwhile reasonable contact test, no account is to be taken of the fact that the designated applicable law in the credit belongs to a country with no significant connection to any of the parties.

10.05  Where, as is typically the case, the credit does not say anything about what law applies, the choice of law rule in section 5-116 (b) has to be put into play to ascertain it and thus fill the gap in a manner that would safeguard the contracting parties’ legitimate commercial interests; moreover, at the very least, a credit is essentially an obligation that the parties are irrebutably presumed to have intended and will be enforced under the substantive law of some jurisdiction; but the difficult question is, to what extent can it go to supply the law? (p. 277) Now, section 5-103 (c) of the Revised Article provides that ‘the effect of this article may be varied by agreement or by a provision stated or incorporated by reference in’ a credit. A direct consequence of this subsection is to render section 5-116 (b) inapplicable in determining the law governing the beneficiary’s claim against the issuing bank if the agreed terms of the credit, expressly or by necessary implication, compel the inapplicability.

10.06  The question presented thus reduces to this: When may the parties be regarded as having implicitly intended to contract out of subsection (b), i.e. that the court should apply the contract choice of law of the forum rather than that in the clause? Subsection (b) itself affords a starting point in exploring the answer. According to it, failing an expressed choice of the applicable law, the law of the jurisdiction in which the issuing or confirming bank against whom he wishes to enforce the credit is located, governs the beneficiary’s claim for payment. A key feature of the provision is that the issuing bank’s and confirming bank’s engagements to the beneficiary will almost invariably be governed by different laws, since they are hardly ever in the same country. In effect, under a confirmed credit it is possible that the beneficiary’s presentation will be complying with the credit and valid according to the law governing the confirming bank’s obligation, but non-complying and unenforceable under the law controlling the issuing bank’s undertaking. However, the converse is also true.

10.07  Such inevitable consequence of the beneficiary’s tender being governed by a variety of significantly conflicting substantive laws, in any view, affords the beneficiary some degree of protection and comfort; however, in relation to a tender of documents liable to be treated as insufficient under the issuer’s law, it is directly at the expense of the confirming bank. This patently objectionable situation receives close scrutiny in Chapter 11, which covers the mode of ascertainment of the law governing compliance of the confirming bank’s presentation of documents to the issuing bank. Our focus for now is on establishing the law which should control the issuing bank’s obligation to honour the beneficiary’s documents under an unconfirmed credit. In the main, there are two types of such a credit to look at: one is a credit of that sort expressed to be available to the beneficiary with the issuing bank; the other is when the credit is to be realized at the designated bank in the beneficiary’s country.

10.08  With regard to the initial case, it is perfectly clear that the parties’ reasonable understanding of their agreement as expressed by the credit is that the presentation of the requisite documents must occur at the issuing bank’s counter in exchange for cash or for acceptance with the issuer incurring an undertaking to remit the sum on the due date. This shared expectation is wholly unaffected by the fact that the presentation is to be routed through a designated bank operating in the beneficiary’s locality. In the event of the issuing bank’s refusing to honour the tender by alleging non-compliance of the documents with the credit requirements, it is difficult to imagine that either of the parties would be legitimately surprised if the substantive law prevailing at the issuing bank’s location is utilized as the governing law owing to the application of section 5-116 (b).

10.09  An illustration of the credit under discussion is the one at the centre of the litigation in Shin-Etsu Chemical Co Ltd v ICICI Bank Ltd.⁶ The credit was issued by a New Delhi branch in favour of Shin-Etsu Chemical, a Tokyo-based seller, to finance the purchase of a cargo of fibre optic cables of Japanese origin. Under it, the defendant issuing bank undertook to pay Shin-Etsu, the beneficiary, upon its receipt in India of the documents enumerated in the (p. 278) credit within the stipulated time. Among the documents delivered there by courier was an airway bill executed by ‘Unitrans Ltd as Agent of Air India Ltd., carrier and as successor of Exel Japan Limited’, as opposed to ‘an airway bill issued by Exel Japan Limited, or its successor, if any’, called for in the credit. This variance from the credit was alleged by the issuing bank as material and justifying its refusal to accept the document and make payment. In an action raised in New York to contest the rejection, the Appellate Division (comprising four judges) unanimously declined jurisdiction on the ground that the claim was governed by Indian law, and that it would be more appropriate for the Indian courts to apply its law to determine the conformity of the airway bill.

10.10  In concluding that the law of India was controlling, it must be admitted that Justice Sullivan, speaking for the appellate court, made no reference to section 5-116 (b) but instead premised his ruling on the idea (originated by a minority of ill-considered common law decisions⁷ examined later) that the law of the place of issuance of a credit governs the issuing bank’s obligation, unless the credit is confirmed. It is submitted that the judge’s approach was wrong, not least because as a statutory matter⁸ the choice of law rule spelt out in the subsection cannot be ignored without a reason. Fortunately, however, the omission is by no means a fatal error in that the conclusion was entirely correct; only the reasoning appears unsatisfactory.

10.11  A reassuring view of the point being made is exemplified by Andersen J.’s dictum in the more recent case of BCM Electronics Corporations v LaSalle Bank N.A.⁹ There, LaSalle Bank in Illinois at the request of a Mr Franklin issued two letters of credit for the benefit of BCM, an exporter of certain electronic products in Malaysia. After effecting to Franklin five separate shipments of the goods covered by the credit, BCM tendered various documents to LaSalle under the credit for payment. Citing ‘inspection certificate and air way bill not included’, LaSalle dishonoured the presentation. In the ensuing action in the Illinois Northern District Court for wrongful denial of payment, an issue arose as to the extent of LaSalle’s right to insist on compliance with the credit in circumstances when Franklin had waived the missing documents and the goods had also arrived safely at the agreed destination in Chicago. Noting that the credit was silent as to choice of the applicable law, Anderson J. said that by virtue of section 5-116 (b) of Revised Article 5 as adopted by Illinois,¹⁰ Illinois law being the law of the issuing bank’s location governed the dispute.¹¹ Applying that law, the court concluded that for ‘LaSalle to be bound by the waivers, it would have had to agree in writing that the waivers modified’ the terms of the credit.¹² Had Malaysian law applied, the need for written consent might have been eliminated on the facts of the case, thereby requiring judgment for BCM, the beneficiary.

10.12  Nevertheless, there is no valid reason why a reasonable beneficiary in such circumstances as arose in the Shin-Etsu Chemical and LaSalle Bank cases would be surprised to find the law of the issuing bank’s country being applied to the dispute instead of his locality’s law, i.e. the substantive law of Japan and Malaysia, respectively. Typically, a beneficiary’s most important (p. 279) commercial motive for choosing to have a credit issued in his favour to settle the purchase price of the goods is the assurance of prompt payment that the credit provides, once he makes a conforming presentation. To be absolutely confident that the credit will indeed perform what it promises, the beneficiary’s first line of defence is to contract for the credit to be made available to him at a local bank, and not at the counters of the issuing bank operating under a legal system with potentially unpredictable and idiosyncratic features. Thus, in cases of the instant type, the beneficiary, having by omission apparently decided against adopting such alternative courses of action, it is submitted that he is not in a position to complain about the risks which his obtaining payment on the credit must face on account of the application of the law of the issuing bank’s country.

10.13  Bearing the just mentioned exercise of choice in mind, we turn now to the case of a credit expressed to be available to the beneficiary through a non-obligated nominated bank in a country other than the issuing bank’s own. If this designated bank does not honour the beneficiary’s presentation under the credit, for example, on grounds of uncertainty of obtaining reimbursement from the issuing bank or, in the worst case scenario, because the nominated bank has gone into insolvency or liquidation, the beneficiary has to fall back on the only option given to him by Article 7 of the UCP 600, namely, deliver the documents to the issuing bank in the manner, if any, stated in the credit for payment.

10.14  In that event, the issuing bank is under an obligation to honour the presentation if, upon examination, it is determined to be in apparent sufficiency and conforming, and has the absolute discretion to withhold payment if it is otherwise. A conflicts problem for our consideration emerges: what law would be applied to determine the beneficiary’s rights against the issuing bank in the event of dishonour of the tender? The contest is between the law of the place where the credit is originally expressed to be available and that of the issuing bank’s country in which the beneficiary, owing to the supervening circumstance of the paying nominated bank’s refusal to carry out its mandate, is obliged to tender his documents to enable the issuing bank to ascertain whether the condition for honouring its payment undertaking has been met. Which of the two laws applies?

10.15  On the surface, by virtue of section 5-116 (b), it is the law of the location at which the issuing bank opened the credit in question. However, a close perusal of the credit at hand demonstrates that, by stating on its face that it is available in a jurisdiction different from the issuing bank’s place of business, the parties impliedly contracted to take advantage of the unique banking system and regulatory protection the jurisdiction can offer. When, for example, an Indonesian issuing bank issues a credit available to a Californian beneficiary not in Jakarta, but with a designated Californian bank, it would seem clear that the parties are to be understood as requiring Californian rather than Indonesian law to have a controlling effect in the operation of, in particular the fulfilment of the issuing bank’s payment undertaking under, the credit. Accordingly, insofar as section 5-116 (b) would select the law of Indonesia to govern the transaction, thereby ultimately altering the legal risks attendant upon utilizing the credit, it is in conflict with the parties’ contractual expectations, and, as directed by section 5-103 (c), has to be disregarded to ensure that the credit obtains the operational protection it justly seeks.

10.16  It may be thought that this view is far-fetched as to the reasonable contemplation of the issuing bank, the beneficiary, and the applicant when they agreed that the credit be drawn in a form which entitles the beneficiary to realize it in his locality or elsewhere other than (p. 280) at the issuer’s counters upon delivering the requisite documents in the stipulated manner. But it is submitted that there is nothing fanciful about the proposition advanced; on the contrary, ample support for it is provided by a substantial line of high authority. Once it is accepted that section 5-116 (b) has no application to the credit under focus, in that to apply it would undermine the parties’ legitimate expectations and cripple their implied agreement to contract out of the clause,¹³ one must have recourse to the American common law choice of law test for ascertaining the law applicable to the issuing bank’s liability to honour the beneficiary’s presentation under such a credit, i.e. an unconfirmed credit stated on its face to be available in a country different from the issuing bank’s.

10.17  In modern times, judges in the state of New York and other jurisdictions in the United States often articulate the basic test in infinitely varying degrees of clarity.¹⁴ In substance, however, they all appear to be saying the same thing, except that, as will be seen shortly, the devil lies in its proper application. Stated simply, the rule is that the controlling law is that of the jurisdiction having the greatest interest in the resolution of the dispute in issue or the most intimate relationship with,¹⁵and thus the ‘centre of gravity’ of, the transaction giving rise to the dispute.¹⁶A jurisdiction is regarded as possessing the requisite attributes in relation to a beneficiary’s claim against an issuing bank if it is where payment of the credit sought to be enforced is envisaged by the parties to occur.¹⁷

10.18  An early case in which authoritative guidance was provided as to when a credit should be so treated in connection with a given state or country is afforded by the landmark decision of the New York Court of Appeals in J. Zeevi & Co Ltd v Grindlays Bank (Uganda) Ltd.¹⁸ An unrestricted negotiation credit originating from the defendant Ugandan bank provided that the amount on it was available against a tender of specified clean drafts.¹⁹ Chemical Bank in New York considered certain drafts presented by Zeevi, the beneficiary, conforming, and then negotiated and forwarded them to Citibank, Grindlays Bank’s correspondent bank also in New York, for reimbursement. Upon the drafts being returned unpaid, Chemical obtained a refund from Zeevi, who then sued Grindlays Bank to recover the money under the credit. The bank resisted the action by asserting that (p. 281) the law of Uganda governed its obligation to Zeevi, and pursuant to that law payment on the credit had been forbidden by the Ugandan Government. Naturally, if Ugandan law had control over Zeevi’s claim as Grindlays strenuously pressed, its liability for failing to fulfil the promise spelt out in the credit would usually²⁰ be excused by reason of supervening illegality.

10.19  But Judge Cooke, with the concurrence of six other members of the Court of Appeals, made short work of Grindlays’ submission. After underscoring the principle that the law of the jurisdiction having the most substantial interest in the matter would be applied, the judge took the view that ‘New York has an overriding and paramount interest in the outcome of this litigation’.²¹ According to him, the state ‘is a financial capital of the world, serving as an international clearing house and market place for a plethora of international transactions, such as to be so recognized by our decisional law ... A vast amount of international letter of credit business is customarily handled by certain New York banks whose facilities and foreign connections are particularly adaptable to the field of letter of credit operation[s]’.²² He then goes on to explain that the issuing bank and beneficiary ‘impliedly accepted [those] facts and set up procedures to implement their trust in [New York] policies’ when they purposely denominated the credit in US dollars and ‘listed’ New York as the ‘site of payment’.²³ The judge concluded: ‘In order to maintain its preeminent financial position, it is important that the justified expectations of the parties to the [letter of credit] contract be protected’.²⁴ Compared with Uganda, since New York is indispensably concerned with the determination of the solution to the dispute, its law is to be accorded preponderant control over the legal issues arising in the case.

10.20  An essential aspect of the Zeevi decision is the recognition that the issuing bank and the beneficiary as reasonable contracting parties put a premium on the jurisdiction in which their credit is, by its terms, available; the country where the credit is opened (i.e. the issuing bank’s locality, in the instant litigation Kampala) takes a back seat in the whole scheme of things. Equally noteworthy is the parties’ reasonable supposition, which is inextricably bound up with the fundamental policy of assurance of payment underlying the field of letters of credit, that the law of the relevant jurisdiction as against that of the issuing bank will apply to determine whether the beneficiary is entitled to payment or has submitted complying documents to the issuing bank to trigger the engagement clause in the credit.(p. 282)

10.21  A considerable number of cases²⁵ have thus far, surely correctly, followed Zeevi without any criticism. For instance, in Optopics Laboratories Corp. v Savannah Bank of Nigeria Ltd,²⁶ an unconfirmed negotiation letter of credit put up in Lagos by Mabson Pharmaceuticals at the defendant bank, SBN, named Ashford Laboratories in New Jersey as the beneficiary, to effect payment at Bank of America (BA) in New York for a large quantity of cold capsules. Upon shipment of the Pharmaceuticals to Mabson, Ashford presented conforming documents to BA for negotiation. Almost simultaneously with that tender, BA received a telegraphic advice from SBN that remittance of BA’s payment under the credit might not be prompt due to the difficulties the Central Bank of Nigeria was encountering in meeting foreign exchange needs of local banks and their customers. BA, quite reasonably, was swift to deny Ashford’s request. Optopics, an assignee of Ashford’s right to receive the letter of credit proceeds,²⁷ then filed an action against SBN. It was argued for SBN that Nigerian law governed the action and according to the requirements of that law, the bank, having not consented to the assignment, was not bound to recognize Optopics’ demand for payment of the credit.²⁸ Rejecting this argument and applying Zeevi, Sand J. reasoned that Ashford ‘contracted for United States dollars to be paid on the letter of credit in New York’.²⁹ He accordingly concluded that New York is the centre of gravity of the payment undertaking of SBN, the issuing bank, with the inevitable result that New York law had to be applied.

10.22  As with the conclusion in Zeevi, Sand J.’s ruling, it is submitted, furthers the essential purpose of the sort of credit at the centre of the litigation: by agreeing a credit available for payment or negotiation at a solid financial centre of international repute rather than at a relatively still maturing centre in the issuing bank’s location, the parties implicitly consented to accord primacy to the former together with its law as opposed to the latter centre so far as concerns the beneficiary’s right to draw and the issuing bank’s obligation to pay on the credit. Inextricably intertwined with the agreement is the anticipation that section 5-116 (b) is inapplicable to the credit to the extent that it allocates the financial centre of the issuing bank predominant interest in the application of its law.(p. 283)

10.23  Worth considering, however, are the three cases of RSB Mfg. Corp. v Bank of Baroda,³⁰ Sabolyk v Morgan Guaranty Trust Co of New York,³¹ and Chuidian v Philippine National Bank,³² which appear to be out of tune with the Zeevi line of authorities. It is appropriate to examine briefly these decisions one after another in order to determine if the deviation might be justified in the particular circumstances of the cases.

10.24  In Bank of Baroda, the Bombay (now Mumbai) branch of the defendant, Baroda Bank, issued a letter of credit in favour of a New York corporation, RSB, to finance the purchase by its customer, Elegant Industries, of a shipment of jewellery making equipment. Chemical Bank in New York was named in the credit as the ‘advising and paying bank’. Elegant was apparently dissatisfied with the terms of the sales contract soon after the opening of the credit. Alleging fraud against RSB, Elegant sought and obtained an injunction in an Indian court restraining Baroda Bank from ‘encashing or paying the credit in any manner whatsoever’. Meanwhile, RSB had shipped the goods as ordered by Elegant and incurred substantial expenses. Nevertheless, Chemical, having been notified by Baroda Bank of the subsisting injunction, dishonoured RSB’s presentation for payment of the credit, which ultimately obliged RSB to file for bankruptcy. In the resulting proceedings raised in New York, the court noted that whether or not the Indian court order was effective to prevent Baroda Bank from honouring its obligation to RSB depended principally on the threshold question of whether the obligation under the credit was to be performed in India or in New York, because in principle the order cannot excuse the bank from fulfilling an obligation that the credit requires to take place in New York; it can only do so if the obligation is to be carried out in India. Agreeing with the trial judge’s ruling³³ that the action to enforce the credit against Baroda Bank was doomed to defeat by the restraining order, the appeal court said that RSB’s claim ‘does not [engage] any interest of New York’ so as to cause the court to apply New York rather than Indian law, especially because Baroda as issuing bank was obligated to honour RSB’s conforming documents at its location in Bombay, not New York. In so concluding, it did not matter to the court that under the credit New York, and not Bombay, was the expressly designated place of payment, and that the mere fact that RSB had to look to Baroda in Bombay for payment could not by itself shift the place of availability of the credit from New York to Bombay. In fairness, however, it should be noted that Zeevi was not brought to Sand J.’s attention. Otherwise, he would probably have concluded differently.

10.25  Much the same issue as involved enforcement of the credit in Bank of Baroda arose in the Sabolyk case. Sabolyk was the beneficiary of a standby letter of credit issued by Morgan Guaranty Trust in Zurich (Morgan-Zurich) to secure the payment of some promissory notes given by Genius Corporation in Texas in respect of the shares it purchased from Sabolyk. Following an order of attachment granted by the District Court of Zurich against the credit on Genius’ petition that Sabolyk obtained the promissory notes by deception, Sabolyk sued Morgan Guaranty’s head office in New York claiming entitlement to the amount of the credit. This defendant argued that its Zurich branch was perfectly ready and willing to honour Sabolyk’s complying presentation, but that as long as the attachment order was in effect, payment on the credit was legally impossible. A threshold question arising therefore was a (p. 284) determination of the law which had control over the issuing bank’s obligation to Sabolyk, which necessarily requires ascertainment of the place of performance of the payment obligation.

10.26  Mary Johnson Lowe J. found that nothing was to be done under the credit in New York. Interfirst Bank of Dallas, who advised the credit to Sabolyk in Texas, was the bank authorized to effect payment under the credit and claim reimbursement from Morgan-Zurich, the issuing bank. Morgan-New York was not identified as playing any role in the credit transaction at all. Curiously, nonetheless, the judge held that Zurich was the place of payment of the credit. Again, as in Bank of Baroda, the Zeevi decision was not cited to the court.

10.27  Nevertheless, looking at the facts of the Sabolyk case, the judge’s view is hard to support. At bottom, the jurisdictions which had contacts with the matter raised in the litigation were Texas and Zurich; New York was out of the question. So far as the issuing bank and beneficiary were concerned at the time of issuance of the credit, the place where the beneficiary was to receive payment on the credit was Dallas in Texas, not Zurich. The state which had the most essential relationship with the transaction was accordingly Texas, which carries with it the further consequence that the law of this state, as opposed to Swiss law, governed the Morgan-Zurich payment undertaking. It would thus seem that the court ought to have rejected the defence of supervening illegality of performance and denied recognition to the Zurich court order.

10.28  However, although not explicitly intimated in Lowe J.’s judgment, a possible ground for her ruling that the place of performance was Zurich was that only Morgan-Zurich, the issuing bank, undertook payment responsibility under the credit; Interfirst Bank Dallas was authorized but not obligated to accept the beneficiary’s conforming tender. So, the issuing bank and beneficiary must have anticipated that if Interfirst declined to carry out its mandate, the beneficiary would submit the documents to the issuing bank in Zurich and demand payment there, which was in fact what actually transpired. Still, that eventuality does not go to affect the circumstance that the beneficiary was entitled, according to the explicit terms of the credit, to insist on payment by the issuing bank at the place where the credit on its face says it is available upon the beneficiary’s delivery of regular documents. On this issue, insofar as the Sabolyk and Bank of Baroda decisions are at variance with Zeevi, their standing as decisional authority is open to doubt.

10.29  Despite their highly debatable precedent value, both decisions were discussed and applied in the Chuidian case. An intriguing feature of this case is that it followed Sobolyk and Bank of Baroda in apparent preference to Zeevi. In so doing, Chuidian has substantially potentially weakened the utility of an unconfirmed cross-border credit payable against a tender of complying documents in California and brought to the Californian courts, or to a court within the Ninth Circuit jurisdiction,³⁴ for enforcement. For an example of how it has that effect, see the Averbach case³⁵ discussed later. It is important to look at the Chuidian decision a little more closely.(p. 285)

10.30  Chuidian involved the same problem as we have seen in most of the cases considered earlier, namely, whether an issuing bank’s obligation to honour the beneficiary’s conforming presentation under an unconfirmed credit is governed by the law at the place designated in the credit for payment or by the law of the issuing bank’s country; put alternatively, where is the place of performance of an unconfirmed credit opened in one jurisdiction but to be realized by the beneficiary in another? A further alternative is, which place has the most significant contact with the beneficiary’s claim against the issuing bank under the credit?

10.31  In the instant case, the credit in dispute was opened in Manila by Philippine National Bank (PNB) for some US$5.3 million and made available to Chuidian against sight drafts presented in Los Angeles. PNB dishonoured Chuidian’s apparently complying request for payment, claiming that it was excused from performing its obligation because the credit had been frozen by an order issued by the Philippine Commission on Good Government (PCGG) in its effort to recover what the Commission suspected to be ‘ill-gotten wealth’ accumulated by former President Ferdinand Marcos and his business associates. Lew J. at first instance in the district court of the Central District of California said that the evidence that the credit was set up in Manila and called for payment at the counters of a named non-obligated bank in Los Angeles, ‘considered in light of Sabolyk and Bank of Baroda, [leads to] the conclusion that the L/C was to be performed in the Philippines’.³⁶ As a result, the credit was under the control of Philippine law, and giving effect to the PCGG order would not violate some fundamental policy of California or of the United States.³⁷

10.32  The Ninth Circuit Court of Appeals by a majority of two to one affirmed³⁸ Lew J.’s decision, with the dissentient, Judge Fernandez, presenting the evidently convincing argument³⁹ that the majority went in the wrong direction by declining to follow the New York Court of Appeal’s lead in Zeevi, adopted in several other jurisdictions,⁴⁰ a lead which recognizes the place where an unconfirmed credit on its face, i.e. by its express terms, designates for payment as the place of performance of the issuing bank’s obligation to the beneficiary and therefore the place with the most significant relationship to the beneficiary’s claim before the court and paramount interest in having its law applied to the dispute involving the claim.

10.33  In their commentary on Chuidian, Professor Byrne and James Barnes⁴¹ consider ‘persuasive’ the majority opinion’s treatment of the place of issuance of the credit as the predominant factor in determining the place of performance of the issuing bank’s obligation. Elaborating on the point, they said: ‘[T]he fact that the LC was available to the beneficiary in Los Angeles should not control for purposes of choosing the applicable law ... The critical performance of an issuer under an LC is the examination of documents and the determination to honour or dishonour. In Chuidian, that was to occur in Manila, not Los Angeles’.⁴²(p. 286)

10.34  No judicial or academic authority is cited for their proposition. This is indeed unsurprising on the straightforward ground that the idea seems commercially implausible. In particular, it is beyond dispute that the issuing bank has an obligation to examine the documents presented to it by the beneficiary and, if determined to be complying with the requirements of the credit, to accept them. But what is often not so readily realized is that the issuing bank owes the obligation primarily to the applicant, not to the beneficiary, and accordingly not the centrepiece of the issuing bank’s undertaking to the beneficiary.

10.35  The ‘critical’ obligation of an issuing bank to a beneficiary is payment of the credit at the agreed place of availability of the credit upon the beneficiary’s presentation of the required documents. Putting the matter another way, the UCP⁴³ itself is very clear on the distinction between, on the one hand, the obligation to examine properly tendered documents for conformity and, on the other hand, the obligation to honour the presentation following conclusion of the examination exercise. The latter separate act of performance is the principal ingredient which the beneficiary normally seeks to enforce under a credit in virtually every case in this area of the law.

10.36  That practical distinction, in addition to the reasons already discussed, essentially explains why the place a credit, by its terms, states it is available to the beneficiary is regarded as having the predominant interest in the application of its law to, and the most significant contact with, the issuing bank’s undertaking to the beneficiary. It is also largely the justification for the principle, unfortunately ignored by the Chuidian Ninth Circuit Court of Appeals, that the law of the place of issuance of a credit does not control the issuing bank’s liability to the beneficiary unless that place is where the credit on its face is available.

10.37  Overall, what seems particularly sad about the Chuidian decision is that it is currently a binding precedent, especially in the nine states⁴⁴ falling within the federal jurisdiction of the Ninth Circuit. Hence, in 2003, under the doctrine of stare decisis, the district court of the Northern District of California in the case of Averbach v Vnescheconombank⁴⁵ found itself in the difficult position of following Chuidian. However, the Chuidian ruling of course remains effective until overruled. But in the meantime, a beneficiary of an unconfirmed credit who reasonably considers himself to be entitled to have his conforming presentation of documents honoured by the issuing bank and wishes to sue in the United States would be well-advised to enforce the credit in the courts of an appropriate jurisdiction, i.e. a US state where Chuidian is not binding. This is not advocating forum shopping, but a legitimate pragmatic technique for surmounting a practical problem.

10.38  The point being advanced warrants examination of the Averbach case at some length. Averbach, the claimant in the litigation and a resident of California, was the beneficiary of an unconfirmed letter of credit established by the defendant bank in Moscow, Russia at the request of a buyer in Kiev to cover the purchase price of a consignment of zippers. The credit named Bank of America in San Francisco as the paying bank. Averbach effected the (p. 287) shipment to the buyer and delivered the documents enumerated in the credit first to Bank of America and later to the defendant issuing bank in Russia for payment on 30 January 1992. Thenceforward, until June 2001, by intrigues and subterfuge, the issuing bank lulled Averbach into believing that payment would be made once funds were released by the Central Bank of Russia. Finally, in November 2001, sensing that the game was up, the bank informed Averbach that the documents submitted in January 1992 did not comply with the terms of the credit and were, accordingly, rejected! Averbach then brought an action for breach of the bank’s contractual obligation under the credit. Chen J. held⁴⁶ that ‘Chuidian mandate[s] the application of Russian law to [Averbach’s] breach of contract claim’; Russia, in the court’s view, being the place both of issuance and of performance of the credit.

10.39  Under Russian law a three-year limitation period prevailed, so the cause of action was statute-barred as of 1995. But unfortunately for Averbach, unlike the comparable position under Californian law, such an action could not be regarded as validly revived by an acknowledgement after the expiry of the limitation period unless supported by fresh consideration. In the event, his claim failed, and the goods shipped valued at nearly US$1,000,000 were never recovered. With such unfortunate result in mind, a beneficiary circumstanced as Averbach would be making a prudent business decision should he choose to litigate in a US state in which Chuidian only has a persuasive, as opposed to a binding, status.

10.40  When a Hong Kong or Singapore court at common law, for instance, has to ascertain the law governing a beneficiary’s claim of wrongful dishonour of a tender of documents under a letter of credit, long-standing precedents⁴⁷ are clear about the choice of law principles the judge should employ. Shortly stated, their application involves an initial inquiry as to whether the credit effectively provides for the applicable law,⁴⁸ either expressly or in terms which can be inferred, within the given credit. If so, that would normally be an end of the search. Since, as previously noted, a credit does not usually stipulate for its governing law (albeit a matter of vital importance), let alone an effective choice of the governing law, the judge would typically skip that threshold evaluation to determine the ‘legal system which has the closest and most real connection’ with the contract the performance of which under a credit the beneficiary wishes the court to order.

10.41  An English court typically pursues substantially the same line of inquiry. With the modernization and simplification of the erstwhile choice of law regime for contracts by the Rome (p. 288) I Regulation, which it should be remembered applies to contracts made after 17 December 2009,⁴⁹ an English judge confronted with the task at hand is ultimately likely to dispose of the matter with practically the same test by having to ‘determine the law that is most closely connected with’⁵⁰ the beneficiary’s claim. That such is the course of action open to him or her needs careful explanation.

10.42  According to the Regulation,⁵¹ if the law to be applied to a contract is not ‘expressly or clearly demonstrated by the terms of [the] contract or the circumstances of the case’, so that Article 3 (1), requiring effect to be given to the parties’ chosen governing law, is inapplicable, then, in order to establish the law to be applied, one should first decide whether the contract in question is of the types specified in Article 4 (1) (a)–(h) or in Articles 5–8. If it does, the applicable law should be determined in accordance with the rule there articulated. Significantly, the contract which a beneficiary seeks to enforce under a letter of credit is the promise by an issuing bank or a confirming bank to make payment upon the beneficiary’s tender of complying documents and cannot be characterized as being one of the enumerated types. Such being the case, Article 4 (2) directs that ‘the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence’.⁵² Article 4 (3) nevertheless provides: ‘Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country⁵³ other than that indicated’ by application of Article 4 (2), ‘the law of that other country shall apply’.

10.43  In essence, to the extent that the Regulation does not lay down any precondition for the application of Article 4 (3), determination of the applicable law under the Article in the absence of a law chosen by the parties is in all probability a two-stage process.⁵⁴ The first step is to identify the performance which is characteristic of the contract and the country in which the party who is to carry out the performance is located. The second stage of the analysis has a radically wider scope and involves consideration of whether there is any factor bearing upon the claim at issue which shows that the contract is more closely connected with a particular jurisdiction than that in which the characteristic performer is located.

10.44  As is apparent, in the present scheme of things, sub-article (2) which looks to the location of the characteristic performer is a general rule, with the ‘closest connection’ text laid down in sub-article (3) serving as an escape clause⁵⁵ and thereby enjoying overriding status once the requisite connecting factor is seen to exist in the individual case.⁵⁶ So viewed, the sub-articles (p. 289) do not purport to make real substantive departure from their predecessors;⁵⁷ hence a great deal of the cases in which these earlier versions received some judicial attention in the particular context of disputes involving letters of credit, will continue to have relevance today as highly helpful and valuable precedents.⁵⁸

10.45  Effectively, then, sub-article (3) aims to inject flexibility into the whole process of ascertaining the applicable law by enabling the judge to disregard the law of the performer’s country in favour of that of the country which has been established to his satisfaction⁵⁹ by the party urging that the general rule be disapplied to have the prescribed connection with the contract before him.

10.46  Applying the initial step of the two-stage analysis, there seems little doubt that the performance which characterizes the beneficiary’s relations with the issuing bank is payment of the sum named in the credit upon the beneficiary’s making of a complying presentation.⁶⁰ The same applies mutatis mutandis to his contractual relations with the confirming bank under a confirmed credit. Application of the sub-article (2) general rule would therefore inevitably result in the beneficiary’s claim being governed by the law of the issuing bank’s country; if the credit is confirmed, the law at the confirmer’s location controls the confirmer’s obligation to him.

10.47  Immediately following that threshold finding is the decisive question that the judge adjudicating the case has to tackle, and comes into being by virtue of sub-article (3). Framed in context, it is this: Looking at the character of the particular defendant bank’s undertaking as spelt out in the credit, the nature and the whole circumstances of the contract, is the obligation which the beneficiary wants the court to enforce manifestly more closely connected with a country other than the one pinpointed by sub-article (2)?

10.48  Certainly, that echoes the same question a court at common law usually wrestles with when deciding what law governs the beneficiary’s claim. In order to properly meet that challenge, the judge is unlikely to find any assistance in the bare ‘closest and most real connection’ test or the wording of sub-article (3) itself. Instead, his ‘only certain guide is to be found in applying sound ideas of business, convenience, and sense to the language of the contract itself’.⁶¹(p. 290)

10.49  The upshot is that the determination by the judge wholly consists in ascertaining the country which a reasonable business person in the position of the litigants at the time of issuance of the credit would regard as having the most substantial association with the contract in dispute. On various occasions, several judges in the House of Lords⁶²have taken great pains to explain that the primary justification for this business common sense approach is that, compared with whatever alternative approaches, it is more likely to yield the best practical results and comport with the justified expectations of the contracting parties in the individual cases; in the final analysis, it serves the ends of justice, which is the essential objective of the choice of law rules, be they of common law or of the Regulation.

10.50  Thus, in ascertaining the law applicable to the beneficiary’s claim at common law,⁶³ followed by cases involving application of the old Article 4 (5)⁶⁴ and in turn likely to be employed in applying sub-article (3) of the Regulation, the courts have adopted the place of performance test. The adoption is in apparent preference to the competing criterion of place of contracting⁶⁵ or locus of the parties’ business or subject matter of the transaction and consistently insisted that the place at which a credit is available to the beneficiary is where the payment undertaking in the credit is to be performed against complying documents; therefore leading to the inference that that place has the closest connection with the credit contract sought to be enforced by the beneficiary. In consequence, under a confirmed credit under which the beneficiary has the separate undertakings of the issuing and confirming banks to honour his conforming presentation, the same law will govern his claim against either bank.⁶⁶

10.51  Sadly, however, the rationale behind the courts’ choice of the place of performance test is largely unexplained in the various judicial rulings in point, and little explored in the existing literature in the field; but much of the argument we made in the preceding section which enabled us to view as open to question and commercially unacceptable the notion that the place of opening an unconfirmed credit designated for payment in a foreign country has the most substantial association with the payment obligation under the credit, is sufficient to fill the gap just identified and need not be rehearsed here.

10.52  What we have now to consider in the remainder of this section is an issue causing great problems in current practice in England, Singapore, and Hong Kong, namely, the manner of determining the ‘place of performance of a payment obligation to the beneficiary under credits’, or put differently, ‘place of availability of credits’,⁶⁷ in three types of case: first, a credit stated to be available to the beneficiary with a nominated bank; second, a credit that (p. 291) does not involve such a nominated paying bank; and, lastly, a credit purportedly ambiguous or containing no stipulation as to the place of its availability to the beneficiary. Because the law governing the beneficiary’s claim cannot be determined precisely unless the place of availability of the credit is established, and since incorrect decisions as to the latter will almost invariably cause the claim to fail and, what is worse, ultimately diminish the beneficiary’s reliance on the usefulness of letters of credit as a payment instrument, the matter for consideration is of crucial importance.

10.53  A letter of credit opened abroad in favour of an English, Singapore, or Hong Kong beneficiary is usually made available to him at the counters of a nominated local bank in one of three modes. It may be available by sight payment, by deferred payment, or by acceptance of a bill of exchange⁶⁸ drawn in a prescribed form, against the beneficiary’s conforming presentation of the documents called for in the credit; any of these modes may additionally be expressed to be available by negotiation, particularly when the parties intend to enhance the fluidity of the credit.

10.54  A credit which on its face is so available, is normally viewed as putting the bank that established the credit, i.e. the issuing bank, and also the confirming bank if any, under an obligation to discharge its payment engagement to the beneficiary in the nominated bank’s jurisdiction.⁶⁹ In purely contractual terms, then, this jurisdiction is the place of availability of the credit, not the place where the issuing or confirming bank merely happens to be located. Accordingly, the law at that place of availability is taken to have the closest connection with the payment undertaking in the credit.

10.55  Under the UCP 600, however, a credit made ‘available with the nominated bank is also available with the issuing bank’.⁷⁰ In effect, the beneficiary can ‘always’ choose to tender conforming documents for payment to the nominated bank or directly to the issuing bank.⁷¹ The notion that the beneficiary can bypass the named bank is untenable, because the presentation to the issuing bank would necessarily be non-compliant with the credit and, therefore, could be dishonoured on that ground.⁷² More importantly for present purposes, it must be emphasized that the UCP 600 clause should not be taken literally; otherwise, it would lead to a legally impossible result and conflicts with business common sense, i.e. the countries of the banks would individually have the requisite essential connection with the beneficiary’s claim under the credit, most especially if the nominated bank in question has a responsibility to perform its nomination.

10.56  It is submitted that what the drafters of the code appear to be saying is, in substance, consistent with the position we advanced earlier, in particular that the locality of the nominated bank is, in general, the place of payment of the credit to the beneficiary; the issuing bank’s (p. 292) counter is only a fall back option in any event, and this fact does not affect the position that as a matter of contract the beneficiary, having delivered apparently regular documents in the specified way, has the right to demand that the issuing bank should effect payment to him in the nominated bank’s country expressly designated in the credit for payment.

10.57  On that contractual basis, apart from other overarching considerations, it is reasonably clear that so far as relates to performance of the payment obligation to the beneficiary, the location of the issuing bank compared with the place of availability of the credit has very little significance as a connecting factor in determining what law governs the obligation.

10.58  In Kredietbank NV v Sinotani Pacific Pte Ltd,⁷³ however, Chan Seng Onn J.C. adopted a radically different approach. The dispute brought before him for decision centred on the liability of an issuing bank for failure to honour its payment obligation under an unconfirmed credit opened in China, naming a Singapore exporter as the beneficiary. The bank’s defence was mainly that Chinese law governed the beneficiary’s claim and, in accordance with that law, a Chinese court had prohibited the enforcement of the credit.

10.59  It was undisputed that the governing law of the credit contract would be the legal system of the place with which the issuing bank’s obligation to the beneficiary was most closely connected.⁷⁴ The judge noted, quite rightly, that the ‘most important factor’ in determining the applicable law would be the place where the issuing bank’s undertaking under the credit was to be honoured.⁷⁵ Focusing attention upon the terms and nature of the credit at issue, his Honour found that by Field 42 the facility was available by acceptance with the issuing bank, the Agricultural Bank of China (ABC), Dalian Branch,⁷⁶ so there was no question of any bank in Singapore being required to act as drawee of the beneficiary’s drafts.

10.60  Furthermore, the claimant’s counsel had contended that the credit was not freely available but was restricted for negotiation to Royal Bank of Canada (RBC), Singapore branch such that Kredietbank in Singapore was not authorized to negotiate the beneficiary’s drafts and conforming documents. On the evidence, however, the credit was in fact unavailable for negotiation at all; RBC was nominated to function as a mere conduit through which the beneficiary had to convey his documents to ABC in China for acceptance.⁷⁷ In these circumstances, the judge ruled that the obligation of the issuing bank, ABC, under the credit ‘was clearly to be performed in China’,⁷⁸ and therefore had the closest and most real connection with Chinese, not Singapore, law.⁷⁹ As a result the beneficiary lost his claim.

10.61  Chan Seng Onn J.C. alternatively held that even if the credit had been successfully shown to be available to the beneficiary with the nominated bank in Singapore at sight, or by acceptance of drafts or negotiation, the claim would still be governed by the law of the issuing bank’s place of business⁸⁰ unless and ‘until the nominated bank agrees to negotiate, accept (p. 293) or pay’ pursuant to its nomination.⁸¹ ‘Once the nominated bank agrees to [carry out its mandate]’, said the judge, ‘that [agreement] shifts the “centre of gravity” such as to displace the [law] of the issuing bank in favour of the law at the nominated bank’s location. This [is] in line with the authorities⁸² cited earlier. The lex situs of the nominated bank will then govern the credit’.⁸³

10.62  The Court of Appeal affirmed⁸⁴ Chan Seng Onn J.C.’s principal decision, but apparently chose to express no view on the validity of the alternative ruling. Special attention will be given to the apex court’s decision when we are dealing with cases⁸⁵ in which a credit is thought to be ambiguous in respect of the place of performance of the issuing bank’s promise. With respect to the alternative finding, it is important to examine why the Kredietbank court took the view it did, so we can determine if the approach is a positive new development in Singapore’s jurisprudence on this aspect of letters of credit law.

10.63  It will, moreover, be observed that the ruling parallels a slender line of American authorities (examined previously⁸⁶) holding that the place of performance of the issuing bank’s payment obligation is its location, and that if the credit is designated for payment, acceptance, or negotiation at a nominated bank’s place of business in the beneficiary’s country, it must nevertheless be treated as a credit for payment in the issuing bank’s jurisdiction unless the credit is confirmed or the nominated bank under the credit has a responsibility for honouring the beneficiary’s complying presentation. Analysed in their individual contexts above, we saw that the American cases failed to take cognizance of the essential considerations underlying letters of credit, more specifically the parties’ reasonable expectations we identified and evaluated earlier. In this instance, the Kredietbank court’s approach is not only burdened with that shortcoming, but also hard to harmonize with the established Singapore and English authorities it purports to follow. It will be seen that the subsidiary conclusion in Kredietbank is fraught with considerable conceptual difficulties, and unworkable in practice; ‘unworkable’ because it will often be very difficult, probably impossible for the parties and their legal advisers to apply by simply looking at the face of the individual credits.

10.64  As to authority, our first port of call is Offshore International SA v Banco Central SA.⁸⁷ This case concerned an unconfirmed letter of credit opened by Banco in Spain and available in New York by payment at sight of the beneficiary’s drafts drawn on Chase Manhattan Bank of New York, the nominated bank, upon presentation to Chase of the specified documents. The credit did not provide for the law by which it was governed, and Ackner J. decided that it was with New York law and not Spanish law that the issuing bank’s obligation to the beneficiary had its closest and most real connection.

10.65  Ackner J.’s decision was primarily predicated on the ground that ‘all matters of performance’⁸⁸ under the credit were to occur in New York, because ‘payment was to be made against (p. 294) documents presented’ there.⁸⁹ And this was despite the fact that Chase, the nominated paying bank, only served as an ‘advising bank’, with nothing on the face of the credit suggesting that it (to employ the words used in Kredietbank) ‘agreed with the beneficiary that it would perform its mandate’. In this respect, it is worthwhile to point out that the indication in the headnote of the case’s report that ‘[u]nder the terms of the letter of credit Chase undertook that drafts would be duly honoured if presented’ to it within the stipulated time must be questionable, since it is clear from Ackner J.’s judgment that Chase assumed no such undertaking.⁹⁰ So, the ‘agreement’ which was thought necessary to ‘shift the centre of gravity’ in Kredietbank was non-existent in the Offshore case. To that extent, therefore, the court’s conclusion was not ‘in line with’ Offshore. If anything, it actually departs from the decision.

10.67  Because the place for presentation of the documents for negotiation stipulated in the credit was Hong Kong, the judge concluded that the governing law was that of Hong Kong, not Chinese law.⁹⁴ The italicized words in the passage just quoted strongly suggest that once it is clear that a credit on its face provides for negotiation in a particular country, the law of that (p. 295) country controls the promise spelt out in the credit, be it the undertaking of the issuing or confirming bank, or the liability of a nominated bank that has agreed with the beneficiary to honour or negotiate conforming presentation under the credit.

10.68  The Kredietbank court, however, disapproved of this position, and considered that Agritrade is ‘entirely distinguishable on the facts, the most fundamental being that the credit there was available by negotiation and the nominated negotiating bank did negotiate a portion (70%, leaving a balance of 30%) of the credit without recourse’.⁹⁵ In other words, the payment undertaking of the issuing bank under the negotiation credit in Agritrade was governed by Hong Kong law not on account of the fact that the credit contemplated negotiation of documents in Hong Kong, but because the nominated negotiating bank expressed its agreement to negotiate by advancing money to the beneficiary. On this basis, Power Curber⁹⁶ would be Agritrade’s neighbour and similarly distinguishable from Kredietbank,⁹⁷ since in Power Curber the credit involved was expressed to be available against documents tendered in North Carolina, and the nominated bank actually paid 25% of the invoice value upon its receipt of the conforming documents there, with the remaining 75% to be realized by the beneficiary by usance drafts drawn on a party in Kuwait, the issuing bank’s place of business.

10.69  If the Kredietbank court’s view of both those decisions is correct, it would mean that in the absence of such expression of agreement to negotiate by actual payment the place of performance of the issuing bank’s payment obligation would be China in Agritrade and Kuwait in Power Curber. Again, as in Offshore and the passage from GP Selvam J.’s judgment, that view appears directly contradicted by what the Court of Appeal said in Power Curber while approving and applying Offshore. Lord Denning M.R. with the concurrence of the other members of the court, pointed out that by allowing in the credit for honouring of the beneficiary’s documents in North Carolina, the issuing bank impliedly contracted to discharge its payment obligation in North Carolina;⁹⁸ whether or not the bank nominated to honour the presentation agreed to do so is irrelevant.

10.70  Finally, the Kredietbank court’s alternative ruling under review also faces a variety of conceptual difficulties. The court’s opinion seems to be that the system of law at the nominated bank’s location becomes the governing law of the issuing bank’s obligation not at the time when (p. 296) the credit was issued to the beneficiary, but when the nominated paying or negotiating bank performed its mandate by advancing a portion of the sums in the credit to him. The view clearly amounts to saying that the proper law of the issuing bank-beneficiary contract can be altered after the contract has been formed by the act of a third party.

10.71  It is of course settled that the governing law of a contract could change from one country to another by a subsequent agreement of the contracting parties or by a party’s conduct giving rise to an estoppel.⁹⁹ But the idea that the variation could be brought about by the entirely uncertain future act of a third party¹⁰⁰ independently of the contracting parties’ agreement is doubtless a novel doctrine. Moreover, the principle that in ascertaining the applicable law of a contract an event which happened subsequent to the formation of the contract is generally to be disregarded¹⁰¹ was restated by the Singapore Court of Appeal in Sinotani. The court emphasized in that case that the determination of the system of law which governs the issuing bank’s obligation to the beneficiary depends ‘on the terms of the letter of credit at the time’ the contractual relations between the issuing bank and the beneficiary ‘came into existence’.¹⁰² Potter L.J. made much the same point when he said in Marconi Communications v PT Pan Indonesia Bank¹⁰³ that ‘the correct approach for the purpose of identifying the governing law is to look at how the contract was intended by its terms to operate at the time it was made, rather than to look at what in fact occurred’.¹⁰⁴

10.72  Upon the issuance of the credit, its presumptive applicable law is fixed, and incapable of being altered by the supervening act of a third party such as a non-obligated nominated bank, unless it has the power by the clear terms of the credit to bring about the change.

10.73  Ordinarily, ascertaining the place of performance of a credit in which a nominated paying bank is not involved is comparatively much easier to dispose of. The engagement clause¹⁰⁵ customarily contained in credits might be thought to constitute an express declaration on the matter, but the reality is that the clause only says what the bank will do if the beneficiary presents proper documents to it; where the payment will be effected is typically not expressly mentioned. Over the years, however, the courts have been able to help the parties with a supply of the missing ingredient by creating the presumption that, in the absence of a stipulation in the credit or valid evidence such as a previous course of dealing to the contrary, the issuing (p. 297) bank’s payment obligation is to be discharged at its place of business against conforming documents properly tendered to it.¹⁰⁶

10.74  The courts have arrived at the same conclusion in the context of letters of guarantee,¹⁰⁷ performance bonds,¹⁰⁸ and demand or on-demand guarantees (as opposed to the so-called ‘true’ guarantees¹⁰⁹ under which the obligation to pay is triggered not by presentation of a complying document, but on proof of the occurrence of the contemplated event, e.g. default). Judges have treated those specialized bank financing devices as ‘equivalent to letters of credit’.¹¹⁰ With regard to these instruments, they hold that, failing any contractual stipulation as to the place of payment, the place of performance of the payment obligation arising under the individual device is that of the issuing bank or of the particular financial entity, where the beneficiary has to make a complying demand for the amount promised in the instrument.

10.75  It can be inferred from the presumption just noted that the traditional understanding of the place of performance of a credit which does not involve a nominated paying bank assumes that the delivery of the required documents and discharge of the payment obligation in the credit would occur at the same place, i.e. the issuing bank’s counter.¹¹¹ What, then, is the place of performance of a credit with material terms of this type: ‘This L/C is available by payment at sight against presentation of the following documents ... Upon receipt at our counters of the documents in strict compliance with the terms and conditions of this L/C, (p. 298) we shall pay you as per your instructions’?¹¹² Let us suppose that the beneficiary, in pursuance of his contractual rights, tenders documents to the issuing bank in China with instructions that payment be remitted to his bank account in Hong Kong. The place of performance of the issuing bank’s obligation is either China or Hong Kong: which of them is more closely associated with the obligation? Is it China, where the documents were to be tendered by the beneficiary for the issuing bank’s acceptance, or Hong Kong, the beneficiary’s jurisdiction?¹¹³

10.76  Arguably, the conventional place of payment against documents test cannot provide an effective solution to a credit of the instant type because, as a contractual matter, the presence of the clause ‘we shall pay you as per your instructions’ materially differentiates it from any credit in which the test has ever been applied in a dispute between an issuing bank and a beneficiary for the purpose of ascertaining the legal system of the jurisdiction having the most intimate relationship with the credit.

10.77  As such, the answer to the matter at hand hinges on how the clause has to be correctly regarded. There appears to be no direct authority in point. However, in a number of analogous cases of high authority, it has been invariably held that where a contractual term expressly or by implication gives an option to a party as to the place at which payment should be made under the contract, once the option is exercised and communicated to the counterparty the place so chosen becomes the contractual place of payment. Applying that principle to the present case, it is suggested that Hong Kong is the place of performance¹¹⁴ of the issuing bank’s obligation; its law rather than Chinese law was accordingly controlling under the credit.

10.78  It will be recalled that the place of performance of the payment undertaking to the beneficiary in a credit designated for payment at a nominated bank’s place of business is the locality of that bank, with the consequence that the law there, being the law of the place most closely connected with the undertaking, will, in general, govern the beneficiary’s claim for wrongful denial of payment under the credit. Where sufficiently experienced issuing and nominated banks are involved in a credit, the place of availability of the credit is explicitly stipulated. On occasion, however, a credit that has apparently not benefited from the participation of such veteran banks may contain clauses stating, on the one hand, that the credit is available with the issuing bank and, on the other hand, contemplating that the credit is available for (p. 299) negotiation, which taken literally under certain credits might well mean available with any bank located anywhere in the world. Examples of such credits are those which came before the Singapore Court of Appeal in Sinotani Pacific Pte Ltd v Agricultural Bank of China,¹¹⁵ David Steel J.¹¹⁶ in the English Court of Appeal¹¹⁷ in Marconi Communications International Ltd v PT Pan Indonesia Bank Ltd., and the High Court of Hong Kong in Cooperatieve Centrale Raiffeisen-Boerenleenbank BA (Rabobank) v Bank of China.¹¹⁸

10.79  Sinotani was an appeal from Chan Seng Onn J.C.’s main decision in Kredietbank, the facts have already been discussed in connection with another point. However, the credit in dispute, in addition to stating in Field 42 that it was available by acceptance of the beneficiary’s drafts drawn on the issuing bank in China, also provided in Field 47A.5: ‘Each drawing under the LC must be presented to Royal Bank of Canada Singapore branch, which holds special arrangement for negotiation, reimbursement and document forwarding’. In Marconi, the credit issued and confirmed in Indonesia in favour of a London-based beneficiary was expressed to be ‘available by negotiation’, but the place where it was so available was not expressly indicated, therefore literally giving the impression it was payable in any country in the world.

10.80  Now, in each of these cases, at what place is the credit available to the beneficiary for the purposes of applying the closest connection test? Importantly, both the Sinotani and Marconi courts agree that ascertaining the proper answer primarily entails looking at the provisions of the credit and the circumstances of the case as a whole;¹¹⁹ the particular place where the beneficiary elected to attempt to realize the credit is irrelevant;¹²⁰ of great importance is the jurisdiction in which the credit on its face entitles him to do so.

10.82  A little later, the judge took the view that Field 47A.5 required the presentation of documents in Singapore for one of three possible purposes, namely negotiation, reimbursement, or forwarding to the issuing bank in China for acceptance.¹²⁷ His Honour ‘ruled out’ negotiation, and ‘treated as otiose’ the reference to RBC as having special arrangements for reimbursement.¹²⁸ That reasoning led the court to the conclusion that China instead of Singapore was the place of availability of the credit.

10.83  The Court of Appeal’s reasoning and conclusion, as well as Hare’s disapproval of Marconi, merit thorough analysis. As a threshold matter, we need to recall the point noted earlier about the basic approach to the determination of the place of availability of a credit. This is particularly necessary because in the course of his judgment in Sinotani, Goh Joon Seng J. remarked that ‘If the words used in a letter of credit are unclear, the courts are generally reluctant to treat it as a negotiation credit’.¹²⁹

10.84  The proposition in the passage just quoted cited with approval Coomaraswamy J.’s dictum in Southern Ocean Shipbuilding Co Pte Ltd v Deutsche Bank AG.¹³⁰ The dictum itself referenced the decisions of the House of Lords in Sassoon (MA) & Sons Ltd v International Banking Corporation¹³¹ and of the Court of Appeal in European Asian Bank AG v Punjab & Sind Bank (No. 2).¹³² Furthermore, Benjamin’s Sale of Goods¹³³ says: ‘It is ... to be presumed that, in the (p. 301) absence of clear language to the contrary, the promise in a credit is meant to be confined to the beneficiary’. It is submitted that neither Sassoon nor Punjab & Sind Bank appears to support the observation in Southern Ocean; and the presumption which Benjamin suggests is at variance with the Court of Appeal case of In re Agra and Masterman’s Bank.¹³⁴ The material ratio in the Sassoon and European Bank cases (including Ireland v Livingston,¹³⁵ to make the list comprehensive) seems to be this: If the terms of a credit are ambiguous, the party claiming to have relied upon his own interpretation of them will be denied recovery unless he is able to prove that he acted reasonably in the circumstances of the particular case.¹³⁶

10.86  To the same effect is the decision in In re Barber & Co.¹³⁸ However, Matthew J. in Chartered Bank of India, Australia and China v Macfayden & Co¹³⁹ distinguished the cases of Barber and Masterman’s Bank from the case before him on the ground that the instant letter of credit did not intend any person to negotiate bills under it.

10.87  Taken together, the ostensible intention of the credit determines whether the credit is available by negotiation to a party claiming to have negotiated documents under it. The critical words in the credit in Agra and Masterman’s Bank were literally admittedly unclear as to the intention of the credit; but in substance there was little doubt as to what they meant. The Court of Appeal in Sinotani therefore ought to have given decisive consideration to its finding that a clause in the credit in the litigation before it ‘suggested that the parties did intend negotiation to be available under the credit, albeit only with RBC (in Singapore)’. We shall comment on the effect of that finding afterwards. One point, however, merits stressing here: The approach which the authorities validate is that in ascertaining the place of availability of a credit, the law generally favours a commercially reasonable examination of the words used in the credit. The terms must be looked at in the way in which a reasonable beneficiary or nominated (p. 302) bank would construe them. And that standard abhors undue accent on niceties of wordings, especially detailed semantic and syntactical analysis of the language employed in the credit.

10.88  In cases of the run-of-the-mill variety, of which the Sinotani credit is obviously an instance, the crucial question the court should resolve is: Having regard to the surrounding circumstances such as that the drafting of the credit was not by a lawyer but by an issuing bank whose day-to-day business language is other than English, is it plain on the face of the credit that a reasonable beneficiary or nominated bank could not possibly be under any illusion that the credit authorized negotiation in his locality?¹⁴⁰

10.89  In settling this question, barring exceptional elements pointing to a contrary conclusion in the given case, it can be safely assumed that the application form completed by the issuing bank’s customer for the issuance of the credit will not be part of the surrounding circumstances, since the reasonable beneficiary or nominated banker himself would typically not have access to it; whatever information might be contained in the application form is thus to be disregarded.

10.90  Again, the reasonable beneficiary or nominated banker would not require that there should be in the credit an express clause stating ‘this credit is available by negotiation’ or ‘available by negotiation with any bank’ for him to appreciate that the credit is indeed available as such. Moreover, in the latter case he would doubtless know without a shadow of a doubt that the wording essentially means ‘any bank in the beneficiary’s locality’. In view of that knowledge, not ‘any bank in any country’—with that, the criticism levelled by Hare at Marconi rests on tenuous grounds.

10.91  Additionally, a reasonable person in possession of a credit would not consider that the credit which, on its face, clearly contemplates negotiation¹⁴¹ is nevertheless not available for negotiation simply because the engagement clause in the credit is other than that typically borne by a negotiation credit; as far as he is concerned, it is enough if in the credit there is a promise to reimburse him if he negotiates the beneficiary’s draft and documents in compliance with the terms of the credit. He would doubly be reassured if the credit such as the one in Sinotani is made subject to the UCP,¹⁴² for it is almost impossible to conceive of an express engagement provision better couched than what is already laid down in the code.¹⁴³

10.92  That such is the ordinary course of business may be illuminated by the wording of the issuing bank’s undertaking in the credit opened in Cooperatieve Centrale Raiffeisen-Boerenleenbank (p. 303) BA v Bank of China¹⁴⁴ by the Zhenjiang branch of the defendant Chinese issuing bank, naming as beneficiary a Hong Kong exporter, and explicitly stating that it was ‘available by negotiation’. The relevant clause reads: ‘We hereby undertake that all drafts drawn under and in compliance with the terms of this L/C will be duly accepted on presentation at this office and paid at maturity’.¹⁴⁵

10.93  Virtually the same clause was used in the credit opened by a Kuwaiti bank in the Power Curber case.¹⁴⁶ What is principally instructive in the latter case, unlike the credit in the Cooperatieve case in which is to be found the unequivocal expression ‘available by negotiation’, is that the only factor indicating that the credit allowed for negotiation comprised the words: ‘In reimbursement of your negotiations under this credit, please draw on our account with Bank of America, New York in respect of sight payment ... provided you forward the [stipulated] documents to us first by Registered Airmail’.¹⁴⁷ In substance, only a minor difference appears between the just cited provision (including that of the credits in the Czarnikow-Rionda Sugar Trading Inc v Standard Chartered Bank case¹⁴⁸) and the clause in Sinotani which required the beneficiary to present ‘each drawing under the credit to Royal Bank of Canada, Singapore branch, which holds special arrangements for negotiation and reimbursement’.

10.94  In the nearly thirty years that have elapsed since the Power Curber decision, no commentator has decidedly argued that the credit there was not available by negotiation against the beneficiary’s complying sight drafts and other documents tendered to his bank in North Carolina. So is Rix J.’s pronouncement in Czarnikow-Rionda, widely regarded by many specialists in the field as correct, recognition of banking practice.¹⁴⁹

10.95  In almost equal measure, expert evidence for the litigants in Sinotani uniformly suggested, as noted¹⁵⁰ by the court itself, that the credit, by its terms, did intend negotiation to be available with Royal Bank of Canada in Singapore. In this connection, it might have profited the Court of Appeal in Sinotani to have recourse to the approach adopted by the House of Lords in MA Sassoon & Sons Ltd v International Banking Corporation.¹⁵¹ In Sassoon, Eastern Bank of Calcutta advised a letter of credit issued by its London branch to the beneficiary in Calcutta in relevant part as follows: ‘Please note that this authority is confirmed credit. When offering drafts for negotiation under this authority, it is imperative that this letter be produced to enable the negotiating bank to note payment on the back hereof’. Lord Sumner, speaking for the Privy Council, was of the opinion¹⁵² that, ‘as far as reported cases go’, only the advising bank, Eastern Bank, was entitled to negotiate the beneficiary’s drafts and shipping documents. But, (p. 304) given the evidence on both sides that by the prevailing ‘banking practice’, the advice ‘meant that the negotiating bank might be the Eastern Bank or any other bank’,¹⁵³ his Lordship thought¹⁵⁴ that the instant case in which a third party bank, such as Banking Corporation, could so negotiate was ‘a novelty’ and ‘one of first impression’. Nevertheless, the asserted practice being what ‘the advice meant to the minds of business men’, his Lordship dealt with the issues in dispute on that footing.

10.96  The intention adverted to in Sinatoni, therefore, carries with it the implication that the appearance in the credit of the word ‘reimbursement’ was far from being ‘otiose’. On the contrary, read in consonance with the issuing bank’s engagement as unambiguously provided for in the UCP expressly incorporated into the instrument, the reasonable beneficiary or nominated banker would surely understand that the credit entitles the beneficiary to make a conforming tender to Royal Bank of Canada Singapore branch and obtain discounted payments there and then; and also that the credit together with the incorporated UCP as a whole comprises the issuing bank’s undertaking to reimburse RBC for the sum paid out upon presentation to the issuing bank in China of the conforming drafts and documents purchased from the beneficiary.

10.97  In the result, the court should have treated Singapore rather than China as as the place of availability of the credit to the beneficiary. If the court had decided the point from the standpoint of the reasonable beneficiary or nominated banker discussed earlier, Singapore, not China, had the closest connection to the issuing bank’s undertaking to the beneficiary under the credit, Singapore being the place of performance of the payment obligation.

10.98  The foregoing survey demonstrates that all is not well with much of the courts’ approach to the ascertainment of the law governing the beneficiary’s claim for payment under credits, though this differs from what obtains in England and Hong Kong. Of particular concern is the manner of determining the place of performance of the issuing bank’s undertaking to the beneficiary embodied in a credit in order to identify the country which has the most substantial connection with the obligation. In a number of American jurisdictions, the stance taken by the judges has been that the place of availability is where the issuing bank is located unless the credit is confirmed, in which case the locality of the confirming bank will be deemed to possess the requisite contact. As argued, practical application of that approach presents no serious difficulty in the context of a letter of credit in which a nominated paying bank is not involved.

10.99  But when the credit on its face confers on the beneficiary the right to negotiate his conforming documents to such a bank in his own locality, and the courts in those jurisdictions insist that the place of availability of the credit is nevertheless the issuing bank’s country, the law is shirking its responsibilities to the users of the letter of credit device, especially its promise to protect and enforce the legitimate expectations of the parties.(p. 305)

10.100  Without doubt, where a credit stipulates for negotiation in a country other than that of the place at which the credit is opened, the stipulation carries with it the contracting parties’ (i.e. the issuing bank and the beneficiary) expectations that their legitimate commercial interests would be protected by the security of the banking and legal system of that country. When disputes arise, and the law of a different locality is applied, the parties’ expectations are negated. And the courts of the forum of the litigation will then be on a slippery slope to incurring the reproach of being the destroyer of bargains.¹⁵⁵ Lord Tomlin had occasion in Hillas & Co Ltd v Arcos Ltd¹⁵⁶ to caution that the courts should endeavour to discern the intention of the parties from the terms of the contract and the surrounding circumstances in order to arrive at a conclusion that promotes rather than nullifies the contractual aim of the business people. That caution remains as valid today in Anglo-American common law as when it was first pronounced over eighty years ago.