2.01  A party who has contracted to furnish his counterparty with a letter of credit as the means of payment of the purchase price under a sales agreement, or as security for the repayment of a contemplated loan pertaining to a defined technical project, will want to fulfil his promise. He would be disposed to fulfil it because provision of the required credit is usually a condition precedent to the obligation of the seller to ship the goods pursuant to the contract of sale¹ or of the finance company² to advance him the funds.³ Prompt delivery of the letter of credit sometimes also goes to underscore the genuineness of his business intentions, in particular that he is serious about progressing the deal and will follow through with his bargain. On the other hand, non-performance of the promise may render him liable for damages at the suit of the seller,⁴ but the opening of the requisite credit via the banking channels, as a rule, conditionally discharges the buyer’s duty to pay the agreed price of the goods.⁵

2.02  Such non-performance frequently stems from the careless act or omission of a party participating in the opening of the credit, and may frustrate the implementation of the underlying contract for which a letter of credit or finance was sought and place either of the parties to the contract in significant difficulties. This chapter and the next, intend to establish the existence, nature, and extent of the parties’ rights and liabilities where the desired credit has been fraudulently induced, or fails to reach the beneficiary correctly, in due time or, at all. The immediate chapter begins with a party’s responsibilities when he sets about making a request for the opening of the credit at a designated local bank,⁶ and then looks at the duty of the bank during its assessment and processing of the request. The third section covers the issuance of a credit upon the bank’s acceptance of the application, while the last section concentrates on the advising of the credit, along with the advising bank’s position where it (p. 29) inaccurately notified the terms of the instrument to the beneficiary. Ascertainment of the party that should bear financial loss arising from non-issuance of a conforming credit is reserved for the succeeding chapter.

2.03  Usually, the party who undertakes to put up a credit will approach his local bank for the issuance of the credit or, alternatively, arrange with a finance company to procure him the opening of the facility at some other bank in the locality. In each case, he would be expected to supply meaningful information about the transaction in respect of which he seeks the opening of the credit. The easiest way he does this is presumably by handing over a copy of the sales contract and any related documents such as a pro forma invoice and an import licence. In return, upon an adequate and positive risk assessment of the proposed business deal, the bank offers him a pre-printed letter of credit application form to complete, along with a letter of indemnity for his signature. The finance company makes a similar evaluation and then executes such indemnity with the party requesting its financing assistance. Following the signing, it proceeds to prepare an application for the stated credit with the information received. By an indemnity of the sort mentioned, the party requesting the credit, or the assistance of the finance company undertakes (using time-honoured language) to ‘hold you harmless from all liabilities, claims, charges, and expenses which you may incur as a consequence of the establishment of the Letter of Credit’.⁷ In essence, it imposes an obligation on the party to reimburse the bank or finance house for the amount and expenses paid out on the credit.

2.04  Completing the form effectively puts the applicant in a position analogous to that of an ordinary customer of a bank, issuing a set of instructions (mandate) to the bank. The applicant should thus exercise reasonable care to avoid inserting in the application any piece of information which he knows, or must have known, to be materially untrue or likely to mislead the bank, as well as the finance house, to its detriment. The data supplied in the form varies according to the specific wishes of the applicant; but he must take care that it conforms strictly to the requirements of his sales contract with the seller, the intended beneficiary, for the most part as to the presentation documents spelt out in the contract for triggering payment of the credit. If the credit sought proposes to secure the repayment of a loan instead of a payment for goods, it would be a standby letter of credit; in that case, the stipulated documents are understandably fewer: the right to the sum on the instrument ordinarily arises upon the beneficiary’s presentation of a single certificate attesting to the occurrence of a specified event of default.⁸

2.05  All the same, the applicant needs to set forth in the application form a full list of the documents he agreed with the beneficiary, including their exact descriptions, the name and address of the beneficiary, the amount and currency of the requested credit, the form of (p. 30) availability of the credit,⁹ and whether the credit requires confirmation. As to the mode of availability, if the applicant prefers to postpone the date when he must put the bank in funds to meet conforming demand for payment on the potential credit until, say, 180 days after re-selling the goods, he will choose to have the credit available by acceptance¹⁰ of a bill of exchange drawn payable at that date from the date of the bank’s receipt of complying documents. If he elects to circumvent the use of the bill, he opts for a credit available by deferred payment.¹¹

2.06  We noted in the previous chapter¹² that the mercantile world designed the letter of credit principally to serve the needs of the person in whose favour it is issued, the beneficiary; in particular, to assure him that he will be paid the sum specified in the credit upon presenting apparently complying documents to the named bank. Emphasis of the condition precedent to payment being on facial conformity of the documents, the device is evidently intended primarily¹³ for the beneficiary’s benefit. The applicant’s primary line of protection of his interests against the possibility of the beneficiary exploiting that traditional emphasis on apparent regularity (as opposed to substantive effectiveness) of documents lies in stipulating for appropriate documents. What counts as ‘appropriate documents’ depends on how much trust he could put in the beneficiary. Documents of that kind may well be certificates of inspection, quality, and quantity issued by a person of sufficient professional integrity in the beneficiary’s locality or anticipated place of shipment, but should not be one issued by the beneficiary himself or a third party under his influence or the applicant’s undoubted control.¹⁴ In the case of a credit planned to be security to guarantee the repayment of a loan, or the faithful discharge of other contractual obligation, the protection may involve stating in the application form that, in order to draw down the amount of the credit, the beneficiary is to obtain from a designated responsible body, a certificate affirming the applicant’s default on his obligation

2.07  An application may neglect to include a stipulation of the type just noted, whereas the nature of the underlying contractual arrangements clearly justified the inclusion. But the experienced bank will consider the silence inadvertent and suggest that the applicant insert the relevant clause accordingly. However, the bank’s omission to make the suggestion in a particular case generally provides no ground to found an action against it. The applicant must be able to point to an explicit contractual undertaking of the bank to give the advice in order to sustain such a claim.¹⁵ Nor is the action potentially maintainable in tort: a general duty on the bank to advise its thousands of applicants as to what documents they should stipulate in their applications will doubtless paralyze the letters of credit business.

2.08  Among the standard provisions in an application for a credit seeking to finance a significant sales contract are a clause expressly incorporating the Uniform Customs and Practice for Documentary Credit, ICC Publication No. 600;¹⁶ an undertaking by the applicant to reimburse the bank on demand for all payments made under the credit, including interest on such payment, and to pay commission, charges, and expenses relating to the opening of the credit; a clause stating that the applicant pledges to the bank the shipping documents representing or relating to the goods shipped pursuant to the sales contract underlying the credit; and specific provisions exempting the bank from any responsibility to the applicant for any error or omissions committed by itself or any bank it may utilize in carrying out the applicant’s instructions by virtue of the credit, and stating that, in the absence of contrary evidence, the good faith of the bank thereunder shall be presumed upon acceptance or negotiation of bills of exchange.¹⁷

2.09  Upon receipt of a completed application, it is common practice for banks to give serious consideration to the general nature of the sales or other transaction with regard to which a credit is requested and the credit standing of the applicant. If the goods involved sound illegal, the policy of certain banks is to refer the whole matter to its legal department for an opinion. As to financial standing, misgivings about the applicant’s credit rating hardly arise where the applicant is an individual or a finance company with capital that considerably outweighs the face value of the requested letter of credit. In such a situation, the applicant’s reimbursement undertaking embodied in the letter of indemnity along with the pledge of the shipping documents relating to the merchandise (the subject of the sales contract), will be an acceptable and sufficient security, inducing the bank to accept the application¹⁸ and issue the requested letter of credit. In most transactions, however, the bank may require the applicant to deposit sufficient funds in advance in its account maintained with the bank to cover the likely engagement under the credit. In others, it usually obtains alternative collateral, as in the case of an ordinary loan, for instance, by taking a floating or fixed charge¹⁹ over the applicant’s assets. The shipping documents, especially the bills of lading which represent the title to the goods, constitute the security for the bank’s liability for payment potentially made on the credit. To perfect the security, the bank frequently proposes and insists during the processing of the application that the bills are to run to it or its order, so that on arrival of the goods at the port of destination, the applicant will need to execute a trust receipt in favour of the bank to get hold of the consignment. In modern banking practice, however, trust receipts (p. 32) are generally not understood in the banking community as reliable and adequate security in large-scale transactions. Banks often decline an application for the issuance of a letter of credit when the applicant puts forward a trust receipt arrangement as the sole security for the opening of the instrument. For one thing, banks deal in money, rather than in goods, and are therefore not ordinarily in a suitable commercial position to properly dispose of the goods in order to recoup possible losses should the applicant be unable to perform his reimbursement obligation under the letter of indemnity. Documents of title thus usually serve as additional security for the bank’s potential letter of credit commitment.

The experienced bank will naturally be minded to bring to the applicant’s attention any stipulation which it considers irregular in the credit application form, or may iron out the irregularity itself, depending on the apparent importance of the provision and urgency of the circumstances. Once it has processed and accepted the application, it conveys the acceptance to the applicant in writing. The terms of the application along with the already executed letter of indemnity then form the contractual basis for the opening of the letter of credit. We shall look more closely at the issuing of the credit to the beneficiary in the next section. In the meantime, it is necessary to evaluate particular aspects of the bank’s appraisal of the application form.

2.11  Devlin J., in Midland Bank Ltd v Seymour,²⁷ recognizes that a limited standard of care attaches to the bank in processing the application. Without, quite understandably, going (p. 33) into detail about it, he mentions²⁸ that the bank is to pass on to the customer, the credit applicant, material information it receives in respect of the solvency or trustworthiness of the seller, the potential beneficiary. It may thus legitimately be asked, does the bank owe a duty to investigate the bona fides of a party claiming to submit an application for the stated applicant? Can the applicant deny liability if he neither signed nor authorized the signing or submission of the application? These apparently overlapping questions are covered in this subsection. A completed application, together with the letter of indemnity adverted to earlier, generally creates a contract between the bank to which it has been submitted and the applicant at the point when the bank accepts it. There being no contract prior to that moment, it might be thought that the bank owes no duty of care in the processing of the application form. Hence, any alleged act of carelessness during the indicated interval may (if at all) only found a cause of action in tort, rather than in contract.

2.12  As a matter of authority, however, the intimated probable line of thinking appears never to have constituted the ground of a judicial decision or an arbitral award. In any event, the applicant and the bank usually maintain a pre-existing banker-customer relation at the time of the bank’s receipt of the completed application for the opening of a credit. From a practical business point of view, an effective bill of exchange such as a duly drawn cheque, is as much a mandate of the customer to his bank in favour of the payee as is a duly executed application form for a credit in favour of the named beneficiary a valid mandate of the applicant to his bank to honour the credit in specified circumstances up to the stated amount. Subject to a contrary agreement governing the particular relationship in the individual case, therefore, the ordinary standard of care and reasonable banking practice which controls the bank’s handling of its customer’s instructions in a bill, equally apply to the processing of the customer’s request for the establishing of a defined credit. Practical business sense requires resort to basic principles underlying the banker-customer relation under a bill of exchange in the analogous context of banker-applicant in the processing of a credit application. With regard to the possible instance devoid of a pre-existing contractual relationship, it is suggested that the issuance of a pre-printed application to the applicant and its subsequent receipt in a completed form, generates so close a relationship between the parties as it could possibly be, to justify the imposition on the bank of the standard of care and diligence that a reasonably careful banker would follow in assessing the application form.

2.13  The parties’ relation prior to the bank’s acceptance of the application being as defined above, the general rule must be that an application with the essential information requires the applicant’s signature to be effective in the hands of the recipient bank to set up a credit for the benefit of the specified beneficiary, in the same way that a drawer needs to have signed a cheque to represent a valid mandate to his bank.²⁹ If the signature is forged, the application confers no rights on the bank to act upon it and does not bind the applicant.³⁰ The burden of proving the forgery, or unauthorized submission of an apparently valid application, rests on the applicant, the party alleging it, and is to be discharged at a higher degree of probability (p. 34) than that obtaining in ordinary civil cases,³¹ though not so high as the criminal law standard of beyond reasonable doubt.³²

2.14  A forged or unauthorized application will nevertheless bind the applicant in a specific case involving two elements: first, the bank fulfilled its obligation to assess the application with reasonable care before accepting it; and second, evidence establishing negligence or an estoppel against the applicant. The consequence of being bound, as we shall see shortly, may be that the applicant, or the bank, or both of them, will bear the loss arising from a payment potentially effected on the credit opened pursuant to the otherwise improper application.

2.15  To safeguard its interests and those of its customer, the applicant, the bank often retains a specimen signature of the applicant or of its selected senior employees as the authorized signature on potential credit request forms. It is the bank’s obligation to examine the signature on an application for a credit to ensure that it exactly corresponds to the specimen signature. General banking practice expects restriction of the examination to those documents, and to a run-of-the-mill identification of the person submitting the application. But the parties may contract out of that practice and impose a higher duty on the bank. This implicitly occurs, for instance, when a customer, at the time of filing the specimen signature, instruct that credit applications professing to come from his hands must be cleared with him before the bank opens the credit. The instructions will normally be in writing to obviate future wrangling over their existence; nevertheless, a court may safely deduce them from a course of dealing between the parties. An omission to adhere to the directions in respect of an application relieves the supposed applicant of liability to the bank for the application, inasmuch as nothing in the particular circumstances suggests waiver of the requirement for clearance.

His Honour then concluded that the bank ‘was entitled to receive and approve the applications’ in dispute.(p. 35)

2.17  The question which arises is as to the party who carries the duty to adduce evidence showing that the differences between the authorized signature and forged signatures were of the sort which a reasonably careful and diligent banker would have detected, as well as the further question of the consequence of non-adduction of the evidence. The court itself supplied the answer when it said in a separate passage that ‘the defendant (bank) must show that it had discharged its duty of care when it approved the applications’.³⁵ Now, the issue of failure to exercise reasonable care would typically materialize following a finding that the signatures on the application were forged. Having so found, the general rule swings into action with the presumption of unenforceability of the application against the supposed applicant. It then behoves the bank to satisfy the judge that under ordinary banking practice a reasonably careful banker in its position during the assessment of the unauthorized requests for the opening of the credits would have omitted to detect the irregularities in the signatures. Taken in that light, the identified lack of evidence (which the court noted) therefore clearly meant absence of evidence rebutting the presumption of invalidity of the fake credit applications, warranting judgment for the supposed applicant. The material on which the court will act to displace the general rule should come from the bank, not the party alleged to have sanctioned the establishment of the credit.

An equally important point concerns the yardstick for determining whether a bank’s conduct is wrongful in failing to notice a material difference between the specimen signature and the signature on the submitted application. The standard, as has been noted, is that of a reasonably diligent banker. Usually, the judge hearing the particular case mirrors the reasonable banker.³⁶ As a result, when his Honour, in reference to the irregularities on the application, says ‘I can see the differences’, logically it ought to follow that a reasonable bank officer would have detected the forgery.

2.18  or unauthorized signature on an application is wholly inoperative unless the party whose signature it purports to be is precluded from setting up the forgery or want of authority.³⁷ The party will not be estopped simply because he was negligent in the conduct of his business affairs; but a remarkable difference exists in the approach to the kind of negligence that will do so. In the UK,³⁸ Canadian,³⁹ Australian,⁴⁰ New Zealand,⁴¹ and Hong Kong⁴² courts, the (p. 36) negligence of the supposed applicant for the credit will have to be in the manner of completion of the application to warrant a judge in holding that the want of care created an estoppel for the bank’s benefit. Consequently, the mere fact the applicant carelessly left the credit application forms with the person that forged his signature, or unreasonably kept his seal in the custody of the unauthorized draftsman of the forms, or was negligent in permitting the false application to reach the bank, will not succeed as estoppel against the applicant.

2.19  It bears highlighting that, on the principle established in Greenwood v Martin’s Bank Ltd,⁴³ an applicant should notify to the bank any forgery or unauthorized dealing with his credit application form of which he has knowledge with due promptness. If he unjustifiably delayed communicating the information, thereby causing the bank to lose the opportunity to discover the dishonesty in time, the principle operates to allocate the loss arising from the fraud to him; the delay will preclude his claiming that the bank had not his mandate to issue a credit in compliance with the otherwise bogus application.

2.20  In the US⁴⁴ and Singapore,⁴⁵ to set up preclusion, it would likely be sufficient for the bank to prove that the applicant’s failure to exercise ordinary care in the management of his business documents ‘substantially contributed’ to the forgery of the signature on or material alteration of a credit application. The words ‘substantially contributed’ are ‘liberally construed’.⁴⁶ Thus, an omission of the supposed applicant to put his specimen signature or the credit application forms in a safe place would count as negligence depriving him of reliance on the general rule, so long as the bank can prove by preponderance of evidence that the negligence substantially enabled forgery of the application to occur.⁴⁷ The matter does not rest there, however. If the bank is shown to have nevertheless negligently contributed materially to the forger’s ability to use the false application to open the credit and make away with the proceeds of the facility, the resulting loss will be shared between the bank and the supposed applicant according to their respective degree of fault⁴⁸ evidenced by the material before the court.

2.21  It seems reasonably clear that the bank will face a lesser hurdle in the US than in the other indicated jurisdictions to make out its case setting up negligence of the supposed applicant of a forged, unauthorized, or materially altered credit application form to displace application of the general rule which characterizes such application as ‘wholly ineffective’.

2.22  Another class of case where the general rule may not apply concerns situations in which the supposed applicant held out his employee to the bank as having authority to submit the application to open a credit. In the First Commercial Bank case, as found by the court,⁴⁹ the applications (p. 37) did not purport to be signed by the employee in question, Doreen Ong. Her deception was that she knowingly submitted completed applications with forged signatures to carry out a fraud. It was undisputed that, on well-established principles, the company would be liable for the fraud of its employee committed while the employee was acting within the scope of his or her authority.⁵⁰ It was successfully argued that the deceitful employee had apparent authority to make the delivery of the applications, on behalf of the supposed applicant, on the ground that, several months before the very first of the thirteen credits was issued, the company had issued a letter of authority to the bank which bore the signature of the employee against a stamp indicating her capacity as a director. The success of the argument clearly demonstrates that the submission of a forged or unauthorized credit application can estop the supposed applicant from denying liability if the fraudulent employee acted within his ostensible or apparent authority in delivering the false application forms to the bank. No such estoppel, of course, arises, if the bank knew, or ought reasonably to have appreciated from the circumstances of the submission, that the delivery was made without the supposed applicant’s authorization.

2.23  We come now to the third stage of the credit opening process, having looked at the applicant’s completion and bank’s assessment of the application phases. After introductory observations, the main portion of this section starts with a discussion of the possibility of a contract between a bank and an anticipated beneficiary to issue a credit and then examines the effect of fraudulently issued tested telex or SWIFT credit, followed by a discussion of the possible defences to a claim endeavouring to enforce the credit despite the fraud. The next matter considered pertains to the relatively controversial question as to the moment when a credit is to be treated as issued to the beneficiary. The section closes by focusing attention upon the proper time at which an applicant, of course through his bankers, should open the credit to the beneficiary. Salient features of the advising of the credit which the issuing bank has opened, ordinarily forms an integral part of this section, but it seems convenient to allocate the succeeding section to the topic.

2.24  Acceptance of the application typically establishes an engagement on the part of the bank to issue a credit of the character and description stipulated in the request for the facility. Notably, however, where the envisaged letter of credit is to be confirmed, the engagement generally involves no absolute promise to procure the anticipated confirmation abroad; because it is not within the bank’s power to compel its overseas correspondent, let alone a non-correspondent entity, to confirm a credit. At the very least, however, it has to use reasonable diligence to obtain the confirmation. A similar position prevails in respect of contracts for the sale of goods. The buyer and the seller may each assume a responsibility to secure the necessary import and export licences, respectively. Unless either party makes an absolute contractual promise to obtain the licence, the one will be free from liability to the other for damages under the doctrine of frustration if a supervening regulation thwarts their mutual (p. 38) plans.⁵¹ Excuse from the liability nevertheless requires the party claiming it to have acted reasonably in the particular circumstances.⁵²

2.25  An initial step in performing the obligation to issue the letter of credit will be to prepare its text for communication to the specified beneficiary. As a matter of standard practice, banks universally add their own terms to the applicant’s requirements in the accepted application form and assign a special transaction control number to the credit. Such terms, which need not have been agreed with the applicant, tend to specifically require that the number be mentioned in the beneficiary’s draft, give specific directions as to how the nominated bank is to claim reimbursement for the sum it pays to the beneficiary, and the mode via which the stipulated documents are to be forwarded to the issuer of the credit. The prepared text of the credit usually ends with two clauses. One is the bank’s undertaking, the customary wording of which has been discussed earlier;⁵³ the other is a clause making the credit subject to the Uniform Customs and Practice for Documentary Credits, the UCP 600.

Whiteman Knapp J. treated the issuing bank’s letter as constituting a contract with the beneficiary, Mutual Export Corporation, to open a credit in consonance with the stated (p. 39) form, rejecting the bank’s submission that the letter was at best a letter of comfort, providing information about future intent. In taking that view, he relied on English⁵⁶ and Australian⁵⁷ decisions, emphasizing the duty of the court to construe such documents in which the parties apparently do not desire to specify many details ‘fairly and broadly without being too astute or subtle in finding defects’.⁵⁸ A majority of the Second Circuit⁵⁹ considered it unnecessary to decide whether a letter could obligate the issuer to the beneficiary to open a credit, perhaps because at all events ‘Westpac met th[e] alleged obligation’.⁶⁰ The minority opinion, however, felt that the contract was broken in the instant case, but that the beneficiary had impliedly waived the breach by neglecting to call it to the bank’s attention in a timely fashion.

2.27  Nothing in banking practice, however, prevents an issuing bank from providing a preliminary advice of the draft of a credit to the beneficiary with the clear statement that the text is for information only and without responsibility. This was, in fact, the stance of the old provision in the previous two editions of the UCP,⁶¹ now superseded by the new Article 11 (b) mentioned in the previous paragraph. Without such express statement, the advice may nevertheless have that informational effect. In the nature of things, the actual wording of the communication in the individual case, read fairly and broadly as their business sense permits, will determine whether it is merely informational or represents an obligation to the intended beneficiary to issue a specified letter of credit.

2.28  As has just been seen, Article 11 (b) materially endorses Mutual Export in recognizing that an ‘issuing bank that sends a pre-advice is irrevocably committed to issue the operative credit or amendment, without delay, in terms not inconsistent with the pre-advice’. What should a beneficiary establish in order to recover for non-fulfilment of the obligation? In principle and under English law,⁶² ‘without delay’ is to be read as meaning ‘without unreasonable delay’ or alternatively ‘with reasonable dispatch’. Of course, if the issuer neglects to issue the promised credit at all, the subsidiary question of an omission to carry it through without unreasonable delay will be irrelevant. As to the principal point, a plausible conclusion is that the beneficiary needs to prove that, had the issuer discharged its commitment, he would have been able to present complying documents to the issuer to trigger payment of the credit.⁶³ Without such proof, the alleged non-fulfilment gives rise to no recoverable damage and accordingly no cause of action against the bank.

2.29  The issuer of the credit (alternatively ‘issuing bank’) may send the credit to the beneficiary by registered post or courier, especially where they both operate within the same country, but will normally transmit it to him using a tested telex or SWIFT in cross-border contexts. Shorn of its finer technicalities, such ‘tested telexes’ are financial messages sent, received, and authenticated by means of codes or tests that are secret between the sender and the recipient. A tested telex message counts as a manually signed communication of the sending (p. 40) party to the designated telex addressee. SWIFT (the Society for Worldwide Interbank Financial Telecommunications), headquartered in Belgium, is a more advanced method of communicating financial messages than tested telexes in terms of speed, security, and reliability. As with telex, upon subscribing to the SWIFT, the network operator supplies unique computer-generated codes to the bank, which then entrusts it to its selected employees. The bank is charged with the task of protecting the security of the codes at all times. The modus operandi of SWIFT codes may help in comprehending what legal weight attaches to tested telex and SWIFT communications.

2.30  To send a SWIFT message to another financial institution, the sending bank enters its code on the message into a dedicated computer system and dispatches it to the SWIFT address (bic code⁶⁴) of the designated recipient bank. The communication goes directly to the SWIFT information switching centre in Brussels, which the computer at the centre reviews for authenticity. If identified as emanating from the sending bank, the system adds an authentication by means of a code known exclusively to SWIFT and the named addressee bank. The authenticated message then passes on to the addressee via its assigned bic code. Only the members of staff entrusted with the SWIFT codes at the receiving bank can gain access to, print out, or forward to some other person the incoming correspondence. The recipient bank, and indeed the banking world, treats such messages as equivalent to a document carrying an original signature of the sending bank.

2.31  Against that background practice, the courts have so far had substantial opportunity to consider the effect of a tested telex and authenticated SWIFT communication where some fraudsters managed to dispatch the message, or tricked some employees into carrying out the transmission, in respect of the opening of a letter of credit. The earliest English case on the subject is Standard Bank London Ltd v Bank of Tokyo Ltd,⁶⁵ but Qatar National Navigation & Transport Co Ltd v Citibank NA,⁶⁶ tried before Haight J. in the United States Court for the Southern District of New York, provides a convenient starting point.

2.32  In Qatar National, a contract for the sale of 300,000 metric tons (MT) of marine diesel oil, deliverable into the buyer’s nominated vessels at Doha for US$75 million per 25,000 MT on a monthly basis for twelve months, required payment ‘by means of an irrevocable revolving letter of credit (L/C), covering the full value of each load’. At the request of its customers, the buyers, Citibank in New York, probably due to want of adequate surveillance over the internal security controls, permitted the sending of a tested telex signed by its vice president (Flocco) through Qatar National Bank to the Qatari seller. The telex reads in relevant part:

On behalf of our client (buyer) we inform that our client is ready for the purchase of the 25,000 metric tons ... as specified in contract ... Our client will proceed to issue the necessary letter of credit revolving for each shipment, to the bank account of your designation upon receipt by this bank of verifiable documentation guaranteeing ownership of the above product and [a] performance bond of 2% (two) percent of the value of one shipment, revolving for each shipment.

(p. 41) First Chicago International Bank at the instance of the seller’s Qatari bank issued the requested performance bond in the amount of US$1,400,000; but the seller waited in vain for the letter of credit mentioned in the Citibank’s telex despite repeated assurances from the vice president that the instrument would be issued shortly. Whereupon the seller terminated the underlying oil sale contract and brought an action seeking damages against Citibank for breach of the warranties in the telex and Flocco’s representations that the bank would open ‘the necessary letter of credit’.⁶⁷ Haight J. rejected the claim for damages on grounds not material for present purposes, but gave effect to the tested telex. His decision met the approval of the Second Circuit.⁶⁸

2.33  Critical to the resolution of the seller’s claim was the legal effect of the excerpted Citibank’s tested telex. Was it binding upon the bank? The proper answer, the judge noted rightly, hinged on Flocco’s authority to send the telex on behalf of Citibank to the seller. Notably, he possessed no actual authority: the material events indicated that the sending occurred as part of a well-concocted scheme to purchase diesel oil in a rising market and resell to third parties at a staggering profit and to withhold the issuance of the credit should the market for the product fall significantly—which in fact happened. The matter then narrowed to the scope of Flocco’s apparent authority qua agent of his principal, Citibank. As a rule,⁶⁹ an agent’s apparent authority must come from a representation of the principal to a third party, the seller in the instant action; the agent cannot confer it upon himself by his own conduct.

2.34  The alleged assurances he received are, therefore, immaterial in considering what act of Citibank represented Flocco as possessing authority to make the assertions. The single relevant contact which the court recognized as constituting the representation was the tested telex. A vital piece of undisputed international banking expert evidence, on which the court ‘placed special emphasis’ established that a bank customarily uses a tested telex when it wishes to commit itself to the substance of the telex. Likewise, where a bank requests that its message be replied to by a tested telex, it desires to be confident that the anticipated reply, upon receipt, truly emanates from the authorized staff member of the sending bank. Furthermore, the test on a telex is an electronic signature carrying the same weight in banking practice as a manual signature would bind the signer of a paper document. The preponderating character of the evidence enabled the judge to rule that: ‘The test on the telex permits the recipient of the telex to regard [it] as Citibank speaking’ and the ‘promises’ in the message as ‘promises made by Citibank’. It also clothed the employee with the appearance of authority to deal with the Qatari seller after the transmission of the telex. Such promisee can claim damages for a refusal to discharge the promise or for damage suffered because of his reliance on the dealings.

2.35  The test on a telex generally serves a twofold objective. It instructs the receiving party both to treat the communication as authentic and to consider its contents authorized. The same applies to authenticated SWIFT messages: the recipient is ordinarily required to act on it without questioning its authenticity or authorization. However, limited defences are open (p. 42) to the supposed sending bank, such as Citibank in the Qatar National case, to a claim aimed at realizing the credit communicated via the tested telex medium or authenticated SWIFT system, or to recover financial losses incurred as a result of the recipient party’s reliance on the sending bank’s officer’s assertions.

2.36  A discussion in an earlier paragraph⁷⁰ suggests that the beneficiary will, in general, be unable to recover for an issuer’s omission to deliver a promised credit unless he can establish his capacity to make a complying presentation had the promise been fulfilled. That suggestion applies here as well. A fraudulently generated tested telex or SWIFT credit, like an ordinary credit, imposes only a conditional obligation on the issuer. The beneficiary seeking enforcement of the facility may fail if he cannot prove the possibility of his obtaining the stipulated documents.⁷¹

2.38  Considering the internal security machineries of the ordinary banks in letter of credit operations, it seems highly improbable that a fraudster can use the complex computer network of a bank to generate a tested telex or authenticated SWIFT credit without the culpable involvement of an employee of that bank. In other words, it takes an in-house crook to practice a fraud on an issuing bank in generating a credit.

Buckley L.J.’s pronouncement had the agreement of the other members of the court, Orr and Goff L.JJ.,⁷⁹ with the latter judge remarking ‘it is not possible to impute to the company the knowledge of the [directors]’. An employee’s knowledge of the fraudulent purpose of a credit opened through a tested telex or an authenticated SWIFT communication would, therefore, be attributed to his employer who received the credit as beneficiary insofar as the recipient bank was itself not a victim of the fraud. If it was a prime target, ascription of its employee’s notice of the fraud to the bank would, in the trenchant words of Buckley L.J., be ‘irrational’.

2.40  As already noted,⁸⁰ a tested telex or authenticated SWIFT message that establishes a credit functions as a mechanism for eliminating the necessity of the recipient to investigate its authenticity or actual authority of the sending bank’s officer who signed it. The great importance of the element of automatic authentication distinguishes the message from manually signed letters of credit, handed to the beneficiary personally or by registered post or courier; the distinctive feature makes the communication prohibitively costly but extremely advantageous to international bankers. The beneficiary recipient of a credit bearing a manual signature must either take the trouble to verify the genuineness of the document by whatever means he thinks fit and to confirm the actual authority of the concerned issuing bank’s officer or suffer the consequences of his inaction.⁸¹ While the recipient beneficiary of a tested telex or SWIFT credit need not undertake such a verification exercise, he comes under a duty to make a reasonable inquiry when the facts and circumstances of his receipt of the telex or SWIFT are so extraordinary as to put a reasonable banker in his position on inquiry;⁸² or where the peculiarity of the telex or SWIFT communication would alert a reasonable person to the possibility of a (p. 44) fraud being afoot. In that sense, then, the duty of inquiry amounts to an alternative way of asking, in the circumstances of the particular case, whether the credit recipient beneficiary reasonably⁸³ acted upon the presumed authenticity and authorization of the facility notwithstanding the actual oddity of the transaction. Similarly, reliance on the representations of the sending bank’s official held out by the tested telex or authenticated SWIFT as the authorized contact person in the organization must be reasonable.

2.41  Somewhat comparable instances imposing a duty of inquiry are cases in which a bank collects the proceeds of a cheque for a customer that has no title to the money. The banker will not incur any liability to the true owner of the cheque by reason only of having received the payment,⁸⁴ provided it acted ‘without want of reasonable care in reference to the interests of the true owner’.⁸⁵ ‘If there is in the appearance and details of the cheque, the nature of the persons dealing with it ... anything unusual or suspicious, and suggesting the necessity for inquiry in the interests of the true owner, then it is for the Bank to exercise due care for the protection of those interests’.⁸⁶ The collecting bank merely has to live up to the ordinary standard of a prudent banker to enjoy the protection afforded it. The question in all such cases would be whether the bank acted without negligence. The burden of proving affirmatively that it did so act lies on the bank.⁸⁷

2.42  In the present context, however, to succeed on an alleged failure of the recipient beneficiary of a tested telex of authenticated SWIFT credit to fulfil his duty of inquiry, it is not enough to establish the beneficiary’s negligent omission to make an inquiry. Instead, there must be shown some unusual facts to which he wilfully turned a blind eye because he suspected that fraudsters were at work. In Standard Bank London Ltd v Bank of Tokyo Ltd,⁸⁸ the defendant bank purportedly issued tested telex credits with a face value totalling US$19.8 million in consideration of loan facilities the claimant banks granted a certain Singapore company. The letters of credit were forgeries, perpetrated by crooks in the employ of the supposed issuing bank. Waller J. upheld the claimant bank’s submission that nothing in the events that occurred were to put the claimants on any inquiry that the tested telexes might be the product of criminal infiltrators in the banking channels; and all the material telex exchanges between the supposed issuing bank and the claimants on the credits evinced perfect regularity. The supposed telex sending bank would therefore have prevailed had it made the duty of inquiry defence.

2.43  A recipient of a tested telex or authenticated credit may carry out investigations in relation to the underlying transaction or even go behind the telex or SWIFT to confirm the integrity of the communication. Standard Bank and Banco Ambrosiano decisions, however, enunciate⁸⁹ (p. 45) that the recipient bank is not fulfilling any obligation towards the supposed sending bank in making the inquiries. But, if in the course of those inquires, the recipient bank’s officer in question discovered or suspected that the tested telex or SWIFT message conveying a credit apparently coming from the sending bank was, in fact, a product of fraudsters, or wilfully turned a blind eye to facts that reasonably pointed in that direction, the recipient beneficiary bank would be incapable of relying on the presumed authenticity or authorization of the communication. The inability results in the credit being unenforceable at the suit of the recipient bank.⁹⁰

2.44  In the preceding chapter, we saw that a letter of credit is an irrevocable undertaking of the issuing bank (and of the confirming bank, if any) to honour a complying presentation.⁹¹ At what moment does the undertaking(s) start to exist? The outcome of this question will provide a means of appreciating the time a credit may be regarded as issued, because until that point the unquestionably solvent and reliable paymaster, the applicant, undertakes to provide for the prospective beneficiary remains a mythical individual. Early attempts to resolve the question diverged markedly. For Kozolchyk,⁹² relying on section 5–106 (a) of UCC Article 5,⁹³ a credit (unless otherwise stated therein) is established upon the beneficiary’s receipt of it or an authorized written advice of its issuance. Frans de Rooy, in contrast, considers that view ‘not acceptable’, and suggested instead that the critical time was ‘when the bank dispatches the advice of issuance of the credit because it is the moment at which the bank loses the power to make any [unilateral] amendments to the contents of the credit’.⁹⁴ Section 5–106 (a) of the UCC Revised Article 5 provides: ‘A letter of credit is issued and becomes enforceable according to its terms against the issuer when the issuer sends or otherwise transmits it to the person requested to advise or to the beneficiary’. That clause confronts a major difficulty: Suppose a sales contract calls for the opening of a credit by 20 July 2013 at the latest, a given credit gets to the adviser on 19 July, but for one reason or another only reaches the beneficiary on 25 July. Which of the dates would section 5–106 (a) regard as the date of issue of the credit? It is uncertain why the subsection frames the solution in the alternative, and even harder to understand why a credit can possibly be treated as issued if communicated to the advising bank. The previous provision used clearer words in section 5–106 (a), which reads: ‘Unless otherwise agreed, a credit is established ... as regards the beneficiary, when he receives [the] letter of credit or an authorised written advice of its issuance’.

2.45  Apparently in a bid to deal with the topic in hand for the first time in the history of the UCP, sub-article 7 (b) of the latest edition⁹⁵ of the code provides that: ‘An issuing bank is irrevocably bound to honour as of the time it issues the credit’; A confirming bank’s undertaking to honour or negotiate a complying presentation takes effect ‘as of the time it adds its confirmation to the credit’.⁹⁶ Both the provisions are no more helpful than section 5–106 (p. 46) (a) of the UCC Revised Article 5. When would the issuance or addition of the confirmation, contemplated in the italicized expression, be taken as having occurred in the ordinary course of setting up a letter of credit?

2.46  A clearly passing remark in the decision of Urquhart Lindsay & Co Ltd v Eastern Bank Ltd⁹⁷ intimates that it occurs ‘upon the beneficiary acting upon the undertaking contained in [the] letter of credit’. Again, considerable doubts remain as to the conduct which will constitute ‘acting’ upon the terms of the credit. With the Urquhart dicta may be contrasted Greer J.’s observation in Dexter Ltd v Schenker & Co,⁹⁸ namely, that an irrevocable credit becomes a binding undertaking once it gets to the beneficiary, a position shared by Halpern J.’s pronouncements in Bril v Suomen Pankki Finlands Bank.⁹⁹ The Suomen Finlands Bank case merits discussion at some length. At the instance of Finnish Ministry of Supply, Suomen Bank instructed Hambros Bank in London to ‘open a letter of credit’ covering a consignment of Cuban raw sugar, which named Bril as the beneficiary. Upon effecting transmission of the instructions, Suomen advised the Ministry: ‘We confirm the opening of the above mentioned credit’. In due course, Hambros applied to the Bank of England for ‘permission to establish an irrevocable banker’s credit’ on behalf of Suomen, but the exchange control authorities refused the application. Suomen then revoked its instructions to Hambros. Bril regarded the revocation as an anticipatory breach of contract and claimed damages on the theory that Suomen’s communication with Hambros opened a letter of credit, unequivocally admitted by the advice to the Ministry. Halpern J., however, dismissed the claim: the averred contract never existed at all.

2.47  His Honour’s view is consonant with negotiable instruments law. Letters of credit and negotiable instruments, as indicated previously in this chapter, are fundamentally different things. Care must always be taken not to conflate them. Nevertheless, an acceptor’s engagement in a draft constituted by his acceptance of the bill closely resembles an issuing bank’s undertaking in a credit, inasmuch as neither commitment can be revoked absent vitiating elements, including fraud, illegality, or mistake. Under the UK Bills of Exchange Act 1882, the acceptor’s acceptance creates no binding contract and is revocable ‘until’ its ‘delivery’ or ‘notification’ by him or his agent to the party entitled to the bill or according to that party’s directions.¹⁰⁰ Related to the credit context, the principle advanced in the passage from Halpern J.’s decision clearly rests on solid ground.

2.48  Although the judge was concerned with unconfirmed credit, the rule of the decision applies mutatis mutandis to a confirmed credit. Thus, the nominated bank’s addition to the instrument of its own irrevocable undertaking to honour a complying presentation, (an act known (p. 47) in shorthand as ‘confirmation’) only becomes effective when the beneficiary receives notice of it. Since the credit thereby delivered to him traditionally contains the issuer’s and confirmer’s undertakings, both of these engagements commence simultaneously.

The judge said: ‘I hold that a letter of credit in this form did not comply with the contract. It was not an irrevocable letter of credit opened in London and payable in London’.¹⁰³ He therefore held that the buyers had broken their obligation to set up a conforming credit. Appropriate application of the principles analysed in the preceding paragraph compels the conclusion that the view which Diplock J. takes is questionable. Undoubtedly, the credit before him was issued in London, as the beneficiary received notification of its opening in that city. The court nevertheless thought that the facility was not payable in London because Westminster Bank assumed no responsibility to honour it. But the correct position is that a credit does not need to carry the engagement of a nominated bank for the credit to be payable at that bank’s counters.¹⁰⁴ Moreover, the credit explicitly stated London as its place of availability for payment, since it called for sight draft drawn on ‘us’; the word ‘us’ being evidently Westminster Bank in London. Enrico goes to highlight the importance of identifying the place of issuance of a credit with accuracy.

2.50  It is desirable to add that, just as a credit vis-à-vis the beneficiary is generally not considered issued or confirmed until it reaches his hands, the credit vis-à-vis the nominated bank is opened following the latter’s receipt of it from the issuer. Between the issuer and the applicant, the establishment of the instrument, and thus the issuer-applicant contractual relationship, occurs upon the applicant being so notified, or once the issuing bank’s issuance of the credit to the beneficiary in compliance with the instructions of the applicant has taken place; so that in the Suomen Finland Bank case, for instance, while the credit was opened in relation to the Finish Ministry, the opening of it to Bril, the designated beneficiary, was rendered impossible by events beyond the parties’ control. Whether the supervening impossibility amounts to frustration of the contract between the issuer and the applicant for the issuance of the credit will be determined by the relevant principles of contract law under the governing law¹⁰⁵ of the contract.

2.51  A contract for the sale of goods which requires the buyer to put up a credit, or the instructions requesting a bank to open the credit, hardly ever expressly sets a deadline for the issuance of the credit to the prospective beneficiary, the seller. Yet, the buyer or instructed banker cannot ordinarily take his time carrying out what is required or asked of him: promptness in complying with the duty is of vital importance to the economic health of the business deal that called for the facility. Serious disagreement between the parties over whether performance as to the opening of the credit has occurred without delay or not, occasionally arises in practice. Since the parties themselves often omit to prescribe the time to establish the facility, resolving the dispute tends to be an extremely troublesome exercise for the judge or panel of arbitrators. Over the years, however, general rules have developed to simplify the task in respect of cases with a stipulated shipping date and those where the potential beneficiary requests the buyer to set up the credit.

2.52  The credit must get to the beneficiary or his pre-nominated bankers in conformity to the time stipulated in the underlying contract. Under a sale of goods agreement, judges generally determine the time (since the contractual document explicitly prescribes none) by reference to the date named for shipment. In most of such bargains, the parties thereto will expect the shipment to happen during a specified period, rather than on a particular day. For instance, a contract for the sale of 3,000 tons of shelled Brazilian groundnuts, with payment through a confirmed credit, in Pavia & Co SpA v Thurmann-Nielsen¹⁰⁶ stated that half of the quantity was for shipment in February/March/April and the second in March/April/May. The Court of Appeal, affirming McNair J.’s judgment,¹⁰⁷ laid down that: ‘If ... the buyer is to fulfil his obligation [to furnish a letter of credit] he must make the credit available to the seller at the very first day’ of each of the respective shipment periods, namely, 1 February and 1 March.¹⁰⁸ In other words, the opening of the credit to him should be no later than the pertinent date. Similarly, an f.o.b. sale contract for a shipment of Turkish soft milling wheat during April was held in The Lorico¹⁰⁹ as obligating the buyer to provide the stipulated confirmed credit ‘by April 1 at the latest’.

2.53  What considerations necessitate ascertaining the date for the issuance of the credit by reference to time of shipment? This can be examined by looking at the idea that a buyer must ensure the opening of a credit to the beneficiary by the date fixed for shipment (or by the earliest shipping date in a period of shipment) against alternative theories contending for acceptance. In one view, the buyer’s obligation is to bring about the establishment of the instrument within a reasonable time after the start of the shipment period. Another is that the seller’s delivery of the merchandise, (which in c.i.f., c. & f., and f.o.b. sale contracts involves the presentation of the shipping documents to the buyer or his banker) should be in exchange for the buyer’s provision of a letter of credit, which provision entails payment of the price.(p. 49)

2.54  In essence, either proposition wants to permit the buyer to defer opening the credit to a future time that neither he nor the seller is able to calculate with precision. It is virtually impossible to imagine a reasonably diligent commercial person allowing him to put off that which he can perform at a definite earlier date. A sale transaction with a shipment period generally entitles the seller and buyer to respectively ship and call for shipment at any time during the period.¹¹⁰ If the seller, therefore, chooses to exercise his right to ship on the very first day, how will he proceed further without a firm promise of payment of the price from a financially sound banker? In any event, the business implications of the suggestions are mainly that the seller has to procure or manufacture the goods, freight them to the port, and effect their loading on board in order to get the documents by which to operate the credit opened for his benefit by the buyer. As he usually lacks the financial capacity to enter into such sundry commitments involving large-scale sales, the envisaged shipment leading to exchange of documents for payment under the credit will, in all probability, fail to happen, putting the implementation of the sale agreement in jeopardy. But time-honoured mercantile and banking practice (discussed previously¹¹¹) shows that an important function and fundamental feature of the letter of credit device is to assure the seller of payment against a complying presentation of documents. Under the practice, he should have that assurance by the specified shipping date or the first day of the stated shipment period. Judges recognize¹¹² the promise of payment embodied in the credit, when received, as a chose in action. This element of the instrument is considered an extremely valuable piece of property, which the seller often utilizes to secure an advance from his bank to enable him to obtain and deliver the goods to the buyer. The requirement that the credit be issued to the beneficiary by the alternative dates mentioned above, is plainly to cater for the common needs of the parties comprising the seller and buyer.

Devlin J. at the trial court in the same case¹¹⁵ said that he did not think that ‘the Pavia case really determines the question of whether the first date of the shipment period is the last date by which the credit has to be opened’.¹¹⁶ The Sinason-Teicher dicta conflict with Pavia, a decision in which Denning L.J. himself participated and expressed a concurring opinion at some length. Pavia, together with Diplock J.’s dictum in Ian Stach, represents the preferred (p. 50) position of the law today; if it be objected that it would mean that the buyer can defer the opening of the credit until the shipping date, a proper answer to the objection is that such will be the result if the contract stipulates the time for the furnishing of the credit to the beneficiary; after all, in contexts of this sort the law merely aims to fill up the obvious gap in the sales contract with material which neither of the parties can reasonably criticize.

2.56  If the shipping or earliest shipping date passes, and the seller nevertheless requests that the letter of credit be opened, his right is to have it within a reasonable time following the communication of the request to the buyer. Pavia itself affords some illustration. While the contract of sale c.i.f. fixed shipment of the initial 1,500 tons for the period between 1 February and 30 April, it also anticipated that the buyer could not procure the issuance of the credit without receiving from the seller ‘necessary particulars’ of the seller’s export licence pertaining to the merchandise. The seller advised him on 9 February of the particulars, along with a demand for the opening of the credit. McNair J. said that, ‘on well-recognised principles’, the buyer’s obligation to set up the facility only became engaged as of 9 February. In other words, the date of receipt of the advice, rather than the first day of the shipment period, determined the time for the buyer to open the credit. Similarly, in Ian Stach Ltd v Baker Bosley Ltd,¹¹⁷ an f.o.b. contract intended to be financed by a confirmed credit required delivery of ship plates in August/September. The buyers failed to establish the credit by 1 August, and ex hypothesi committed a breach of their obligation within the ‘well-recognised principles’ adverted to in Pavia. However, a letter of the seller, dated 8 August, requested the buyers ‘to open immediately your letter of credit’. Diplock J. quite properly construed the communication, especially the word ‘immediately’, as allowing the buyers a reasonable time from 8 August to provide the credit, but that the reasonable time elapsed by 14 August when the seller finally treated the non-opening of the credit as a repudiation of the contract.

2.57  A distinction appears to be warranted between the Pavia and Ian Stach type of cases involving no stipulated time limit for the buyer to furnish the credit, (the word ‘immediately’ being inherently ambiguous) and those where he defaults on his obligation to comply with the date originally prescribed in the contract of sale, and the seller, instead of exercising his stringent legal rights by treating the non-compliance as a repudiatory breach and suing for damages, extends the date to a particular day for the buyer to perform the engagement. In the Pavia and Ian Stach class of context, the buyer needs only to use reasonable diligence to comply with the seller’s request.¹¹⁸ But with regard to the latter situation, the extension granted is merely an indulgence to the buyer;¹¹⁹ he has to make the credit available before the expiry of the new date.¹²⁰ If he fails to do so, proof of having acted with reasonable diligence would ordinarily not excuse the failure.

2.58  Most issuers open their credits to the beneficiary through the agency of another bank located in the beneficiary’s location. The bank, called the ‘advising bank’ in banking practice, or ‘adviser’ under the UCC Revised Article 5, may be a correspondent of the issuer, or the beneficiary’s banker, the party with whom the beneficiary arranges an advance, repayable from the proceeds of the credit in due course. By Article 2 of the UCP 600: ‘Advising bank means the bank that advises the credit at the request of the issuing bank’. Section 5–102 (a) (1) of Revised Article 5’s understanding of the concept is probably more comprehensive and illuminating: ‘Adviser refers to a person who, at the request of the issuer, a confirmer, or another adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been issued, confirmed, or amended’. Pursuant to Article 9 (c), an ‘advising bank may utilise the services of another bank (“second advising bank”) to advise the credit and any amendment to the beneficiary’. It will be noticed that while a second advising bank falls within the contemplation of section 5–102 (a) (1), the definition in Article 2 does not embrace it.

2.59  Advising functions of the bank are found in sub-articles (a)–(f) of Article 9 in the UCP 600. An adviser’s advice of a credit or an amendment to the beneficiary carries no undertaking on its part to honour or negotiate a complying presentation¹²¹ unless the advice states otherwise. In banking practice, the communication will usually make it clear with such words as, ‘This advice is sent to you without any engagement on our part’. Nevertheless, an advising bank primarily acts as a conveyor of the credit and information about the credit between the issuer and the beneficiary.

2.60  An advising bank generally serves as the agent of the issuer or the particular bank (‘the principal’) at whose request it passes a credit or a proposed amendment to another bank or the beneficiary.¹²² However, sub-article 9 (b) creates a twofold presumption against the advising bank in terms that bind the issuing or confirming bank. It provides: ‘By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received’. The sub-article contrasts markedly with the corresponding sub-article 7 (a) of the UCP 500¹²³ in two important respects, namely, deemed ostensible genuineness of the message passed on to the beneficiary and the accurate advising of the information.

2.61  While the previous clause required the advising bank to ‘take reasonable care to check the apparent authenticity of the Credit ... it advises’, the current provision presumes performance of that duty upon transmission to the beneficiary of the credit or an amendment to the credit. The changes introduced doubtless seek to increase the beneficiary’s confidence in communications from the advising bank. In the case of a credit intended to finance a sale (p. 52) of goods contract, the presumption works as additional, perhaps a slight inducement to the seller beneficiary to set in motion the arrangements¹²⁴ towards meeting his obligations, secure in the knowledge that the instrument truly emanated from the financially sound paymaster he bargained for, and not a product of the buyer’s possible trickery.

2.62  More importantly, the fact that an advising bank is presumed in sub-article 9 (b) to have satisfied itself as to the apparent authenticity of the credit it has advised, should not be understood as saying that if the credit turns out to be a sham, the adviser will be answerable. What sub-article 9 (b) does is to estop the issuing bank, which passes the credit to the advising bank, from denying its apparent genuineness. Of course, the issuer can attempt to fend off the beneficiary’s action to enforce the instrument by utilizing certain of the defences discussed earlier in respect of credit fraudulently opened by a tested telex or the SWIFT system.

2.63  The provision in sub-article 9 (b) that the terms of an advice are presumed to be the same as those of the credit or amendment received, is new in the UCP and echoes the viewpoint of UCC Revised Article 5 and also the common law position articulated in the British Columbia Court of Appeal decision of Michael Doyle & Associates Ltd v Bank of Montreal.¹²⁵ Section 5–107 (c) of the Article provides: ‘An adviser undertakes to the issuer and to the beneficiary to accurately advise the terms of the letter of credit ... [or] amendment ... received ... [I]f the advice is inaccurate, the letter of credit ... or amendment is enforceable as issued’. The phrase ‘enforceable as issued’ means enforceable in the form in which the credit gets to the beneficiary. Logically, therefore, where he is unable to obtain payment from the issuing bank on the ground that his documents comply with the credit advised to him, but not with the credit on the issuer’s file, the adviser would be in breach of section 5–107 (c) and sub-article 9 (b) of the code of standard banking practice (UCP 600), and liable to the beneficiary.

However, the credit which the advising bank received, contained no such undertaking, nor required it (the advising bank) to honour documents by acceptance of drafts or to negotiate presentation. Instead, it stated that ‘Credit is available for presentation for payment at ... your counters’. The court held¹²⁶ that the advising bank ‘owed an obligation’ to the beneficiary to make certain that both the beneficiary and the Dutch issuing bank ‘had the same (p. 53) understanding of the terms of the credit’. Accordingly, the inconsistency between the credit advised and the original credit constituted a violation of the obligation; and the conventional words ‘no engagement or responsibility on our part’ in the advice, did not deflect the Court of Appeal from holding that the adviser was in breach.

2.65  A proposition put forward in Jack: Documentary Credits,¹²⁷ in addressing this question, argues that the beneficiary should enforce the credit against the foreign issuing bank rather than the advising bank, because the credit, as advised, is valid and binding on the issuer. The authors make the alternative point that if the issuing bank is ‘in some way not bound by the credit, under English law the advising bank would be liable to the beneficiary for damages for breach of warranty of authority, that is, for breach of the warranty which English law implies that every agent gives that he has the authority of his principal to act as he does’.¹²⁸

2.66  Jack’s argument is difficult to comprehend. No doubt, it has been the law since the seminal Exchequer Chamber decision of Collen v Wright¹²⁹ in 1857 that a person who represents himself to another as an agent impliedly contracts that he has the authority of his alleged principal, and would therefore be liable in damages to the representee for breach of contract if it turns out that he never possessed the authority. However, the crucial question which an inaccurate advice of a credit raises, pertains not to the effectuality of the credit to bind the issuer or whether the adviser, in advising the instrument, warranted that it has the authority of its principal, the issuing bank. Rather, it is whether the advising bank owes the beneficiary a duty to exercise reasonable care in notifying him of the credit. All three authorities just evaluated, i.e. sub-article 9 (b) of the code of standard banking practice, section 5–107 (c) of the UCC Revised Article 5 and the Bank of Montreal decision, expressly answer the question in the affirmative: they each impose on the advising bank an obligation to take care that it accurately passes on to the beneficiary the terms of a credit or an amendment. In the events which happened in the Bank of Montreal case, the Dutch issuing bank refused to honour the Bank of Montreal’s presentation for reimbursement, citing a sufficient and compelling discrepancy, whereas the latter had accepted it from the beneficiary without discovering the irregularity in the documents. The important point requiring emphasis here is that, in contradistinction to the view entertained by Jack: Documentary Credits, an issuer in the circumstance of the Dutch bank could justifiably base the refusal on the Montreal advising bank’s non-compliance with its instructions in the advising of the credit. In a situation where the issuer so rejects a presentation, the beneficiary, insofar as his documents comply with the inaccurate credit in his hands, should be allowed to recover against the careless advising bank; and it will not be heard to complain that it merely acted as an adviser with no engagement to honour or negotiate under the defective credit.

2.67  It may be sought to inquire about the essential foundation of a claim for breach of the duty, seeing that no privity of contract exists between the parties. The inquiry need not detain us. Both parties stand in a special relation to each other and are ‘neighbours’ within the doctrine (p. 54) of Donoghue v Stevenson,¹³⁰ as expounded upon, interpreted, and applied by the House of Lords in Hedley Byrne & Co v Heller & Partners Ltd¹³¹ to careless statements causing financial loss. The direct dealings between the adviser and the beneficiary fall into the category of cases (illuminated in the various judgments of the Hedley Byrne¹³² case) in which one person gives to another, certain information or advice forming the result of an exercise of care and skill required of him in his profession, and where he knows or ought to know that the accuracy of the information or advice will be relied upon by the other person.

2.68  In this class of case related to the present context, three options are open to a bank when advising a credit or amendment to the beneficiary. He may include in it a clear, legible qualification that he undertakes no responsibility for compliance of its advice with the text of the credit or amendment it received; or attempt to achieve the same target through the backdoor, namely, by a clause in small, barely readable print stating that its advice is not subject to sub-article 9 (b) (and section 5–107 (c) of Revised Article 5 if the advising bank’s jurisdiction happens to be in the US). No doubt, such a caveat will lose the bank potential beneficiaries and issuers alike and ultimately drive it out of the letters of credit business. Nevertheless, it has the right to insert it. The third option is to do according to the usual practice of bankers, namely, pass on the advice without exercising its right. It is legitimate to suppose that by the non-inclusion of such a proviso, the advising bank voluntarily accepts or assumes responsibility towards the beneficiary who relies on the credit or amendment as advised, and undertakes to make good any loss suffered owing to its omission to live up to the obligation it has assumed.

2.69  An advising bank occupies a highly significant position in the opening of a credit to a named beneficiary. Its participation helps to ensure that the issuing bank and the beneficiary are on the same page with regard to the terms of the credit and any amendment to the credit. Naturally, in many transactions the beneficiary would find it hard, probably impossible, to proceed with complete confidence if he has to deal with the issuing bank directly. A substantial number of prospective beneficiaries are not tested telex or SWIFT subscribers, unlike the banks who operate the letter of credit machinery, and might have to use courier or registered post in their dealings with foreign issuers. Some applicants for a credit determined to reap where they have not sown, can very easily manipulate these ordinary means of communication to practice a fraud on the beneficiary. The involvement of the bank in the advising of a credit or amendment with sophisticated financial messaging systems spares him that risk.

2.70  The bank’s advising of a credit is not a wholly altruistic undertaking. Very often, the adviser will have provided finance to the beneficiary, and the intended facility offers the principal source of recouping the advance. It then becomes as much, perhaps more interested in taking care to see that the credit properly opens, than the beneficiary himself. On this ground, the duties imposed on the advising bank, discussed above, simply reproduce, in express terms, a portion of the course the adviser would adopt for its own benefit in particular transactions. Hence, it cannot reasonably complain about the imposition. But what about cases that fall (p. 55) outside the duties, such as a careless act on the part of the advising bank resulting in the non-delivery of a credit to the beneficiary in a timely manner or at all? To whom should the liability for the non-delivery attach? Chapter 3 will consider these and related matters.

2.71  We saw in section D¹³³ that judges generally regard a letter of credit as issued to the beneficiary only upon his receipt of the credit. This section (as does Part II) assumes that the facility thus established complies with the requirements of the underlying contract. With the conformity, the buyer-applicant has performed his contractual obligation to set up a credit in favour of the beneficiary. But what is the effect of the opening of the agreed credit on the (i) duty of the applicant to pay the purchase price of the goods or professional services which the beneficiary undertakes to supply, or in the case of a standby credit, to repay the loan given to him; and (ii) the applicant’s promise to put the issuing bank in funds to meet the sum due, or becoming due, pursuant to the credit?

2.72  There are two different approaches to the effect of the issuance of a conforming credit on the buyer’s contractual liability for the price. One derives from the pronouncements of McNair J. in Soproma SpA v Marine & Animal By-Product Corporation;¹³⁴ the other takes the shape of an overarching general rule and has deeper commercial roots.

2.73  Dealing with a contract for the purchase of Chilean steam dried fish intended to be financed by a confirmed letter of credit, McNair J. said that ‘the buyer performs his obligation as to payment if he provides for the seller a reliable and solvent paymaster from whom he can obtain payment—if necessary by suit’. Should the banker fail to pay by reason of his insolvency, the buyer would be liable to pay the price of the merchandise. The ground of the liability, the judge points out, lies in the buyer’s failure to give the seller a proper letter of credit. These observations conceptually represent, it is submitted, an acceptable angle to the fundamental elements of a conforming credit. Upon furnishing a credit to the seller, the buyer promises that the credit will: (a) become money against the seller-beneficiary’s complying delivery of documents; or (b) generate an absolute irrevocable commitment from the issuer or an obligated nominated bank in exchange for the presentation, and be paid on the due date. Dishonour of the credit owing to the insolvency of the issuer is a breach by the buyer of his promise. An action to recover damages for non-fulfilment of the promise would therefore be a claim for breach of contract, a claim for the buyer’s neglect of his duty to establish a dependable instrument of payment; and the damages will of course principally consist of the amount originally due from him to the seller.

2.74  McNair J.’s view has the support of Ackner J. in Maran Road Saw Mill v Austin Taylor¹³⁵ and of Stephenson L.J. in WJ Alan & Co v El Nasr Export and Import.¹³⁶ As we have suggested, they only proffer a theoretical perspective on the effect of a credit duly opened (p. 56) to the intended beneficiary. Their stance seems to ignore entirely the practical business side of the equation, namely, the way a reasonable international trader would ascertain what the opening of the credit means in relation to the obligation of the buyer as to payment of the purchase price, the governing yardstick emphasized throughout this book for determining the meaning of contractual requirements. It is to that practical manner of looking at the picture we now turn.

2.75  Under a sale transaction involving no extension of credit, for example, by way of sale on open account terms,¹³⁷ the buyer pays the price in cash once the seller delivers the goods or provides the agreed professional services. However, for practical financial reasons explained in the initial segments of the preceding chapter, it often makes better commercial sense to the buyer to arrange with his banker to issue to the seller an acceptance or deferred payment letter of credit covering the price, instead of effecting the payment immediately by means of a sight credit. He prefers to obtain delivery of the goods on credit, resell the merchandise, and afterwards remit a portion of the proceeds of the resale to his banker, the issuer, to meet the amount paid or falling due on the letter of credit. The remittance fulfils his reimbursement promise to the issuer, a promise typically detailed in a trust receipt.

2.76  Lawyers for the buyer in a great number of early letter of credit litigations¹³⁸ in the courts of as many states of the US frequently argued that the buyer’s opening of a credit meant payment of the purchase price. But the seller countered that he accepted the credit for the invoiced sum rather than insisted on banknotes mostly as a favour to the buyer, to allow him room to transact business on credit terms; after all, cash payment for the goods or services would have been of more value to the seller than a letter of credit promising to pay the money at a specified future date. Yet, slim support for the buyer’s argument might be found in the occasional supposition that a letter of credit upon issuance equals cash in the beneficiary’s hands,¹³⁹ considering that the bank’s establishment of the letter substitutes the financial strength of that bank for the unreliable or unknown creditworthiness of the buyer, imposing an absolute undertaking on the bank to pay the stipulated amount against a complying tender of documents.

2.77  A general rule ultimately emanated from the sequence of American lawsuits and became part of English law through WJ Alan & Co v El Nasr Export and Import.¹⁴⁰ Under the rule as endorsed by the Court of Appeal in Alan, and reaffirmed in subsequent cases,¹⁴¹ the opening of a conforming letter of credit suspends the engagement of the buyer to pay and the seller’s right to sue for payment of the purchase price of the goods or services under their contract of sale until the maturity date of the credit. Honour of the (p. 57) credit at that date goes to make the suspension permanent, and it is then, strictly speaking, that the buyer absolutely discharges payment of the purchase or repays the loan to the beneficiary; until that time, the duly issued credit only gave him a conditional discharge. On the other hand, dishonour of the instrument arising from the issuer’s default on account of its insolvency or the like, automatically lifts the suspension, triggering the buyer’s original liability for the price. In that event, two alternative remedies enure to the beneficiary. He can seek the amount of the credit plus interest from the buyer, or choose to prove the debt in the issuer’s insolvency and participate in the distribution of the bank’s assets. However, being an unsecured general credit, the participation will in all probability yield no more than a fraction of the claimed sum. The important point, nevertheless, is that the seller has a solid cause of action against the buyer for the price¹⁴² or against the issuer, or an obligated nominated bank (if any), on the dishonoured credit.¹⁴³

2.78  A crucial element stressed throughout this book is the idea that the objectively identified purpose of a requirement in a letter of credit or the underlying contractual arrangements should as a rule receive effect in order to achieve what the parties as reasonable businesspersons must have mutually intended by their bargain. We have seen that a letter of credit is not a substitute for the banknotes which the seller-designated beneficiary would normally prefer, and therefore constitutes no payment of those notes. Primarily, he accepts and the buyer gives the credit as security for the remittance of the purchase price, so that the price remains unpaid until the security is realized at the due date. The general principle set forth in the preceding paragraph came into being in recognition of the essential character of the credit and the parties’ intention in the giving and acceptance of it. It originated in the law superintending negotiable instruments, such as cheques, promissory notes, and drafts, as interpreted in a series of eighteenth and nineteenth century English decisions.¹⁴⁴

2.80  Reading ‘beneficiary’ for ‘creditor’, ‘letter of credit’ for ‘promissory note’, ‘purchase price’ for ‘debt’, Lord Langdale M.R.’s statement affords a clear and comprehensive articulation of the principle we have deduced from the American cases. The first of the questions proposed for consideration at the outset of this section¹⁴⁶ transforms into this: What circumstance may discharge the credit applicant from his original liability to pay the purchase price or repay the loan, though the beneficiary remains unpaid on the credit?

2.81  It appears extremely rare to find (and the writer’s search has been unable to discover) a contract of sale with a clause or words unequivocally spelling out the beneficiary’s agreement that the opening of the required credit shall discharge the buyer’s obligation to effect payment of the price. And even rarer to come across a provision of that sort in a contract underlying a standby letter of credit. Nor is it strange how many prudent and properly advised sellers, providers of professional services, or financiers, will permit the inclusion of such a stipulation in the contract. The existence of an agreement having the indicated character in the individual sales transaction is therefore to be ascertained by perusing the parties’ communication with each other at the time of their bargain, the conduct of the seller following the opening of the credit, and the contractual terms of the sales transaction.

2.82  An agreement to take the credit in total satisfaction of the price would be implied if the buyer can show that he was ready to pay in cash, but the seller requested him to put up a credit instead. Lord Kenyon C.J. made a suggestion along that line in Tapley v Martens,¹⁴⁷ a case in which a bill of exchange taken by the master of a ship from a charterer in payment of freight, turned out to be worthless at maturity. The judge said that an argument that the bill amounted to payment was entitled to succeed if banknotes had been tendered in payment of the freight, but the shipowner opted for the bill. A similar view prevailed in Gibson v Tobey.¹⁴⁸ Gibson concerned the sale of a certain quantity of hogs, cash upon delivery. The seller delivered the goods, and the buyer asked him to decide between banknotes and a draft on a New York bank. He chose the draft. In holding for the defendant buyer, Church C.J. in the Court of Appeals of New York commented that ‘when a creditor has an option to receive money or a draft, and he accepts the latter, it will be presumed that he received it with the same effect as if he had received the money’.

2.83  Subject to countervailing considerations,¹⁴⁹ performance of the engagement by the issuer (and an obligated nominated bank, if any) in favour of the beneficiary is conditional on its receipt of a complying delivery of documents. Of course, the beneficiary incurs no reciprocal liability to the bank if he omits to present documents and allows the credit to expire. Pursuant to the underlying contract of sale or an arrangement for the repayment of a loan, however, he is not competent to bypass the credit and demand payment from the credit applicant. The circumstance of the issuance of the instrument involves an undertaking on his part to (p. 59) operate it according to its terms. Thus, an omission to tender the stipulated documents to the issuer prima facie constitutes a failure to comply with his undertaking to the applicant to utilize the credit as provided for in their contract.¹⁵⁰ So is a presentation of documents directly to the applicant-buyer in disregard of the banking channels contractually set up by means of the credit.¹⁵¹ Either situation relieves the applicant of liability to the beneficiary for the price¹⁵² or repayment of the loan obtained under the underlying bargain.

2.84  In a run-of-the-mill sales contract which stipulates for payment by the buyer’s acceptance of the seller’s drafts, the seller might be supposed to have a right to decline delivery of the cargo to the buyer, or anyone claiming under him for payment, should the buyer file for liquidation after accepting the required bills of exchange. ‘If the purchaser becomes openly insolvent before ... delivery [of the goods] takes place’, says Mellish L.J., ‘then the law does not compel the vendor to deliver to an insolvent purchaser’.¹⁵³ Since the shipping documents represent the merchandise,¹⁵⁴ the right of the seller to refuse delivery denotes a right to retain or re-sell the documents to some other person as he pleases. The Lord Justice is not, however, to be taken as meaning that the declaration of insolvency was equivalent to dishonour of the accepted drafts, because he was concerned with an acceptance which the buyer dishonoured at maturity. It is the dishonour, and not the plain fact of insolvency, that would entitle the seller to refuse the delivery.

2.85  Is the presence of a letter of credit in the sales transaction, with the issuing bank replacing the buyer, able to transform the beneficiary-seller’s position? In particular, would the mere insolvency amount to default on the credit, thereby founding a right to recover directly from the applicant?

2.86  Sir William Page Wood V-C gave a negative answer in Ex Parte Tondeur.¹⁵⁵ The Tondeur action pertained to an issuer of a letter of credit designed to finance the purchase of a large consignment of sugar in Mauritius that went into liquidation and suspended banking operation. Part of the fallout of the cessation of payment was that any bills of exchange accepted by the issuer’s liquidator were certain to attract a very low discount rate in the forfait market. With that undoubted reality in mind, the beneficiary saw the suspension as a declaration by the bank of an inability to honour its credit, rendering delivery of documents to the liquidator unnecessary. Under this belief, he sued for damages, but the Vice-Chancellor threw out the claim. The judge made it clear that the insolvency of the bank is not per se a breach of the letter of credit contract, and provided no proof at all that the liquidator would not have decided to accept the beneficiary’s bills of exchange for the full value of the goods if presented for acceptance with complying documents and pay them at maturity.

2.87  That conclusion must be correct. The issuer was incontestably bankrupt, and may have shut its doors to customers, but that did not absolutely translate to the dishonour of documents that the beneficiary could have delivered to the receiver or liquidator for payment. However, (p. 60) there is the contrary observation of Paull J. in Sale Continuation Ltd Austin Taylor & Co Ltd,¹⁵⁶ that the appointment of the liquidator amounts to a notice to the beneficiary that his bills will be dishonoured.¹⁵⁷ Under the settled authorities of Hochster v De la Tour,¹⁵⁸ Ex Parte Halliday,¹⁵⁹ and Bowes v Howes,¹⁶⁰ a party’s refusal to execute his contractual obligation that has arisen for performance constitutes a breach of the contract. The contract is equally broken if he unequivocally informs the other party to the bargain that he will not carry out the obligation when the time for performance arrives,¹⁶¹ or acts in a manner potentially disabling him from performing the contract at that date.

2.88  Insolvency, appointment of a liquidator, or a winding-up order such as occurred in Tondeur, standing alone, is not a refusal of performance or renunciation by the issuer of its undertaking to the beneficiary, and consequently do not constitute a breach which the Hochster, Bowes, and Halliday decisions recognize. None of the events would, in the nature of things, therefore, be sufficient to revive the applicant’s original liability for the price or repayment of the loan. In cases of which Tondeur is an instance, the insolvent issuer’s dishonour of a complying presentation or an advice from its liquidator, expressly or impliedly¹⁶² proclaiming that it will be unable to pay in full, or at all, the amount of such presentation or draft accepted under the credit, is necessary for the bank’s insolvency to count as a breach triggering the right of the beneficiary to have recourse to the applicant for payment of the purchase price or repayment of the loan. Exceptionally, however, the breach will be implied if the beneficiary can show that his presentation of complying documents, or, of the draft accepted to the issuer, would certainly have been dishonoured.

2.89  The beneficiary has to advise the applicant of the issuer’s default on its payment undertaking reasonably promptly. Failure to give the notice discharges the applicant from performing the suspended obligation to pay the price or repay the advance.¹⁶³ We saw earlier in this section that the beneficiary-seller generally takes a credit with the power to have recourse to the applicant, but on condition that if the credit should fail to provide payment due to the issuer’s default, he is to notify the default to the applicant-buyer. No doubt, the payee or endorsee of a bill of exchange owes a duty to give a notice of dishonour only to a party to the bill, the drawer, or acceptor.¹⁶⁴ In the case of a letter of credit, however, the beneficiary comes under the obligation to the applicant as a matter of implication of law, for the applicant is closely connected with the credit contract between the beneficiary and the issuer to make him for this limited purpose, unaffected by the autonomy doctrine,¹⁶⁵ a virtual party to it.(p. 61)

2.90  But it seems uncertain in judicial decisions whether the non-furnishing of the notice must cause prejudice to the applicant in order to produce that result. But general considerations of reasonableness and fairness evidently compel the conclusion that an applicant who suffers no disadvantage on account of the failure of the beneficiary to communicate the non-payment ought not to be entitled to the instant head of defence. Now, there is abundant authority (discussed in the next section) laying down that the applicant need not supply the issuer with the money to follow through its engagement on a credit if he knows that the issuer is encountering financial difficulty and likely to dishonour the engagement to the beneficiary. It is submitted that an applicant should be considered relieved of his original obligation to the beneficiary if he is able to establish that had he been notified in time of the issuer’s default on the letter of credit he could have exercised his right to withhold funds to the insolvent issuer.

2.91  A contractual arrangement calling for the issuance of a letter of credit normally stops short of naming the bank with which the applicant is to open the credit. It leaves him free to choose the bank he considers financially stable enough to perform the task. However, some of the contracts may use the words ‘first class international bank’ or ‘first class bank’ to describe the financial entity he should approach for the facility. The import of such descriptions may be doubtful, but the UCP 600, a code of standard international banking practice, says that the phrases are surplusage in the contract. In effect, then, bankers and merchants do not understand the words as affecting the applicant’s right to decide on the bank he pleases. The exercise of that right carries with it the possibility of his being called under the general principle we saw above to take the consequences of the bank’s insolvency and inability to honour the credit.

2.92  An exceptional position arises, however, where it was the beneficiary, rather than the applicant, who nominated the bank that issued the credit. In Alan,¹⁶⁶ Lord Denning M.R. in substance suggests that it is generally to be inferred from the nomination that the beneficiary agrees to look to the appointed bank to the exclusion of the applicant for payment. Another way of putting it is that by selecting the issuing bank, the beneficiary is to be presumed to have investigated the financial reputation of the bank and found it satisfactory. Since he selected the issuer, there can be no justifiable complaint by him that he, not the applicant, bears the risk of the choice proving imprudent and unproductive.

2.93  A good example of a case warranting the inference contemplated in Lord Denning M.R.’s dictum is the transaction in the Louisiana Supreme Court decision of Vivacqua Irmaos SA v Hickerson¹⁶⁷ involving a sale of coffee in Brazil to a US importer. The sale contract, embodied in a printed form prepared by the seller, stipulated for payment with a letter of credit issued by Interstate Trust & Banking Company, New Orleans. That bank, pursuant to the credit opened with it by the buyer, duly accepted the seller’s documents, with the annexed usance drafts set to attain maturity ninety days later. In the meantime, the buyer remitted to Interstate an amount sufficient to honour the credit. Before the maturity date, however, the bank went bankrupt and refused to pay more than 5% of the amount due and owing on (p. 62) the accepted drafts. Rogers J. upheld the buyer’s defence to the seller’s claim for payment of the original purchase price of the coffee, that payment for the goods ‘was made through the bank and according to the method designated by the seller’. Instructively, the court also said that the buyer ‘discharged its contractual obligations by furnishing the plaintiff (seller) the letter of credit issued ... in the specified manner, and by paying the bank before maturity the amount of the draft drawn by the plaintiff and accepted by the bank under the letter of credit’.¹⁶⁸ The latter part of this pronouncement indicates that, were the buyer yet to put the bank in funds at the time of the bank’s insolvency, the judge might not have regarded the buyer’s obligation to the seller as discharged. Instead, he would be ordered to pay the sum to the beneficiary.

2.94  It is vital to distinguish Vivacqua from Nichimen Corporation v Gatoil Overseas Inc.¹⁶⁹ In Nichimen, payment for an f.o.b. sale of 600,000 barrels of Brent crude oil of a sum in excess of US$13 million was to be ‘by an irrevocable letter of credit ... opened on a form and content acceptable to the seller’. In due course, the seller sent off to the buyer a telex stating: ‘Please find following our irrevocable documentary letter of credit format which shall be opened in our favour through the Sanwa Bank Limited, London branch’. Unfortunately, nothing in the decision of the litigation hinged on the effect of the request for the issuance of the credit via the proposed bank (the establishment of the credit never materialized and the lawsuit proceeded on that basis¹⁷⁰), except that the sellers were contractually entitled to make the request. It deserves pointing out that the telex is not of the kind that should compel the view taken in Vivacqua. The sellers in Nichimen were not proposing issuance of the credit at Sanwa Bank, but that the credit opened in their favour be notified to them ‘through’ that bank in London. The matter is put beyond doubt by a telex message of the sellers, which reads: ‘Under the terms of our contract the letter of credit in payment of this cargo is to be opened by your (buyer’s) bankers no later than Thursday 17th April’.¹⁷¹ What the Nichimen case shows, albeit not the subject of decision in the case, is that the courts should be very slow in interpreting a provision in a credit or related communication as a stipulation for the issuance of a credit with a particular bank. The beneficiary’s choice to rely wholly on the issuer as the source of payment ought not to be inferred unless a careful perusal of the circumstances of the transaction in question clearly justifies the inference.

2.95  The second section of this chapter indicated that the contractual arrangements between the applicant and his bankers for the opening of a letter of credit essentially consist of a threefold promise on the part of the applicant: first, to pay commission,¹⁷² interest,¹⁷³ and other charges mentioned in the application form for the issuance of the credit; second, to provide the bank with funds to meet any sum which it pays or becomes liable to pay by virtue of (p. 63) his taking up a complying presentation under the credit; and third, to remit the funds to the issuer on the day before the issuer makes the payment in the case of a sight credit, or on the last day prior to the date on which the liability it assumes falls due in the case of a deferred payment or an acceptance credit. Materially the same promise is comprised in a trust receipt,¹⁷⁴ which the applicant signs upon collecting from the issuing bank the shipping documents representing the goods. Once the issuer pays a sum against the required documents, the duty of the applicant to honour the undertaking springs into being immediately. Is the applicant similarly obliged to perform his promise upon the bank assuming an absolute liability to effect payment under the credit, despite the fact that the bank is very likely to renege on the liability on account of the bank’s present financial catastrophe? Suppose he fulfilled the promise and paid the funds sufficient to cover the value of the credit before the likelihood of the issuer defaulting on the credit becomes obvious to him, can he reclaim the sum from the bank? For convenience, we shall look at the questions in reverse order.

2.96  A bank customarily takes security such as shares for the opening of a letter of credit, and may still be holding those assets when it runs into serious, perhaps terminal, financial trouble. It thus merits pointing out immediately that a significant number of the cases pertaining to a claim for the money paid to the issuing bank will involve not only that sum, but also the right to demand the release of the security in the bank’s clutches. Moving on now to how the court would deal with the point raised should it be brought before them today, in Prehn v Royal Bank of Liverpool,¹⁷⁵ English importers gave a letter of credit issued by the defendant bank to an Egyptian agent, authorizing the agent to draw drafts on the bank payable at three months after sight. He provided the issuer with funds to apply in payment of the drafts two months prior to their arrival at maturity. Afterwards, the bills were presented for acceptance; but the bank became insolvent and returned them unaccepted and expressed its regret that ‘the money lodged by you ... cannot under present circumstances be so applied, neither can we’ refund the money. The credit applicant-importers made alternative arrangements with another bank, at considerable expense, to pay the dishonoured drafts in favour of the beneficiary and prevailed in claiming a refund of the sum. All three members of the Court of Exchequer who decided the action agreed that the relation of the parties constituted by the credit opening agreement comprised a special contract by the issuing bank to accept drafts drawn in terms of the credit, and by the applicant to keep the bank in cash to meet the bills. Martin B. said¹⁷⁶ that the applicants ‘have fully performed every part of their engagement’, whereas the issuer ‘broke their contract’ in refusing acceptance of the drafts. The issuing bank’s violation of its contract to accept the bills was so plain and unarguable that the main issue for decision centred on the awardable damages in respect of the breach.¹⁷⁷ Plain and unarguable because it stood in the analogous position of a banker deemed¹⁷⁸ liable for declining to honour a cheque without furnishing a legitimate reason, though the relevant account of the concerned customer is in credit.

2.97  Paull J. addressed this issue in Sale Continuation Ltd v Austin Taylor & Co. Ltd¹⁷⁹ with limited success, understandably because it was ‘a test action’ and he thought there was ‘no’ English decision to guide him. However, the pertinent facts in Sale Continuation are largely similar to those in Royal Bank of Liverpool, a decision which was binding on him, but unfortunately not cited in argument nor unearthed by the court’s own research. The issuing bank in the instant case, as happened in Royal, defaulted on a letter of credit following its insolvency, except that the contract for the opening of the facility bore the time-honoured words, ‘In consideration of your opening this credit, we (applicant) engage to provide you with funds to meet ... each draft which you may accept’,¹⁸⁰ that the issuer accepted the draft, and that the applicant for the credit had yet to remit to the issuer the money he promised pursuant to the agreement. In both cases, on the other hand, the applicant paid the amount of the dishonoured drafts to the beneficiary according to mercantile usage and practice (discussed earlier).

2.98  At the trial of the action before Paull J., the issuer urged that the quoted contractual words obligated the applicant to perform his promise, regardless of its dishonour of the drafts by non-payment, an act in respect of which it was only liable to the drawer of the bills, the beneficiary. Rejecting this contention, the judge said that under the contract for the opening of the credit ‘there was an implied term that, provided the [applicant] put the [issuer] in funds to meet any accepted draft, the [issuer] would in fact honour the accepted drafts’.¹⁸¹ Counsel’s submission of course ignored the fact that a contractual obligation to an applicant to accept drafts devoid of the further obligation to honour the acceptance was not commercially possible. A contract to become an acceptor of a set of bills without a commitment to pay the bills can only be a fraudulent agreement to mislead the unsuspecting drawer or a potential endorsee.

2.99  On the other hand, the court’s statement misapprehends a crucial element of the ordinary obligation that an issuing bank undertakes upon opening a credit: the status of the account between the issuer and the applicant is irrelevant to the issuer’s engagement to honour the credit. The italicized language was therefore unnecessary, particularly because it introduced substantial difficulty into the reasoning by making the issuer’s performance of its part of the bargain conditional upon the applicant’s promise. The engagement contained in the letter of credit was considered breached in the Court of Exchequer decision of Royal Bank of Liverpool by non-acceptance of the drafts presented to the issuer, and breached in Sale Continuation by non-payment of the accepted bills of exchange. In terms of the understanding of bankers and mercantile practice, the unjustified acts of dishonour connote non-performance of the credit contract and carry analogous consequences. It entitles the applicant in the former case to recover the sum deposited and damages proved to have been suffered; and, in the latter, to withhold the money if he knows that the issuer will default or has defaulted on its undertaking spelt out in the contract.

2.100  American decisions¹⁸² are in the same direction, and shed more light on the nature and effect of the opening of a credit on the unperformed promise of the applicant to provide the issuer (p. 65) with funds to honour a credit or retire drafts accepted under the credit. The position adopted uniformly sees the issuing bank’s consideration for the applicant’s obligation to do the matters set forth previously,¹⁸³ as comprising a promise on the part of the issuer to issue the requested credit, accept the drafts presented with the documents in the manner described in the credit, and to pay the drafts at sight or upon their arrival at maturity (depending upon the tenor of the credit). After opening a conforming credit, the issuer’s non-performance or conduct evincing an intention not to fulfil either of the subsequent promises, constitutes a failure of consideration for the applicant’s promise to put it in funds, and discharges the applicant from both the credit agreement and the obligation imposed on him in the trust receipt. Accordingly, any proceeds of the sale of the goods already remitted to it under the trust arrangements are to be refunded to the applicant, and those still to be remitted to the issuer retained by him. Until his receipt of the refund, he is a creditor of the insolvent issuer for the amount.