3.01  Issuance of a credit that complies in all material respects with the requirements of the underlying business arrangements is essential for either of the parties to the concluded deal, including their financier. If the credit conforms, no problem arises: the beneficiary has received the instrument he contracted for, and it is now his turn to do what he promised the other contracting party. But a credit may fail to conform for a number of reasons. The applicant’s instructions for its opening can deviate from the terms agreed with the beneficiary. The issuer may neglect to loyally follow the provisions of the application which the applicant had submitted to it, with the result that the credit issued omitted to call for a particular document, e.g. a certificate of inspection or surveyor’s report. A credit may be issued or advised to the beneficiary in an untimely fashion, or inaccurately,¹ or misdirected to a wrong location.

3.02  In situations of that type, it is obvious that the sales or other bargain between the beneficiary and the applicant may not only fall through, but the applicant or the beneficiary, or both of them, can also suffer heavy financial losses because a proper letter of credit is not set up. Without doubt, in some cases the parties are able to rectify the problem by agreeing a fresh date for the opening of the facility or arranging necessary amendments to it. Unfortunately, in a drastically falling market, the applicant sometimes refuses to cooperate; indeed, he will regard the difficulty as a welcome escape route from the transaction which the credit was supposed to finance. Against a background of such circumstances, the object of this chapter is to determine who should be liable for the financial consequences arising from the failure to issue a conforming credit or, alternatively, from the beneficiary’s receipt of the bargained letter of credit. The chapter comprises two sections. It considers first the beneficiary’s responsibility upon receipt of a non-complying credit and then goes on to its core, namely, the ways in which an applicant or a beneficiary may recover financial damage incurred due to carelessness on the part of the bank involved.

3.03  Upon receipt of an advice of credit, it behoves the beneficiary to scrutinize its provisions to ascertain that the documents required to be presented for payment of the sum specified in the credit are such as he can generate. He should equally take care to make certain that (p. 67) they correspond to the terms he negotiated with the applicant, the party whose application brought about the issuance of the facility.² Accordingly, he will prima facie be responsible for failing to discern a material departure of the credit from the stipulations in the underlying bargain. Actual knowledge of the deviation is unnecessary; the notice may be constructive, this being an instance of the rare commercial cases to which the doctrine of constructive notice³ —whereby a person is deemed to have known that which he has the means of knowing⁴ —applies by way of exception.

3.04  If the beneficiary does, however, notice a significant divergence (for example, as to the mode of availability of the credit,⁵ period of its validity,⁶ its description of the requisite documents,⁷ the latest time for negotiation, the deliverable quantity of the merchandise, date of shipment, the sum on the credit and the currency of account⁸), the buyer-applicant will ordinarily be in repudiatory breach of his obligation to open the bargained letter of credit. The breach therefore entitles the beneficiary to treat the underlying contract as repudiated by the applicant and claim damages suffered because of the repudiation.⁹ However, he typically adopts that course only in limited circumstances, as, for instance, where certain disagreements have reached a crisis point, or when faced with a supervening plunge in the market, so that the non-conformity of the credit becomes an opportunity to abandon the contract lawfully. Nevertheless, for the recovery of damages to stand, he will have communicated to the applicant his acceptance of the non-furnishing of the desired credit as terminating the underlying contractual arrangements.¹⁰ An unaccepted repudiation is inoperative to put an end to the contract.¹¹(p. 68)

3.05  Rather than treat the applicant’s breach in the indicated manner, the most common practice is for the beneficiary to notify the applicant of the fault rendering the credit unacceptable and request an amendment to correct it. Usually, the applicant will swiftly inform the issuing bank to carry out the modification, particularly in a string of contracts where his own customers (sub-buyers) in the chain are pressing for the merchandise which the applicant himself expects to finance with the credit. A comparatively less taken route entails the seller-beneficiary waiving the imperfection by signifying that he considers the facility satisfactory and effective.

3.06  Waiver of a material defect in a credit, or of a failure to open the facility in time, generally deprives the beneficiary, in the former case, of the right to rely on the defect to deny conformity of the credit with the underlying contract, and, in the latter case, of the right to complain that the payment instrument was not given to him before the stipulated cut-off date lapsed.¹² In a sale of goods contract, the deprival implies the buyer-applicant’s provisional discharge of the purchase price and performance of the condition precedent to the seller-beneficiary’s obligation to make the agreed shipment.¹³ Hence, showing a failure to comply with the obligation will provide a basis for the buyer to collect damages from the seller.¹⁴

3.07  The burden of establishing waiver rests on the claimant-applicant, the party asserting it.¹⁵ A waiver in the context under focus often manifests itself in the beneficiary’s letter, email, word of mouth, or conduct which induces the applicant to reasonably believe that the beneficiary approves whatever discrepancies there may be in the credit. The approval clearly exists in his omitting to object, or unjustifiable delay in objecting, to an apparently non-conforming credit,¹⁶ by shipping the goods contracted for and tendering documents to a nominated bank for payment pursuant to the credit.¹⁷ The assent also occurs if he obtains an amendment to the credit, for example, by granting an extension of the expiry date and the time stipulated for shipment instead of refusing the issued, albeit defective, credit outright.¹⁸ Additionally, the assent effectively takes place upon his requesting the opening of a credit despite knowing that the latest date for the applicant to do so has passed.¹⁹ In Ian Stach Ltd v Baker Bosley Ltd,²⁰ Diplock J. considered and correctly regarded such a request as a waiver of the date (1 August) at which the credit at the centre of dispute before him should have been established in favour of the seller-beneficiary. Furthermore, a waiver of the time stipulated for the opening of a credit may be implied from the seller’s act of entering into (p. 69) negotiations with the buyer about an amendment to a defective credit, and his express reservation of rights will normally be ineffective to preclude the waiver.²¹

3.08  There is a degree of uncertainty about the legal complexion of the assumed acceptance of the non-conformities in the credit. Some judges refer to it as a variation of the original provision in the underlying contract or estoppel, as opposed to waiver. Admittedly, as McNair J. doubtless thought in Soproma SpA v Marine & Animal By-Products Corp,²² ‘whether the matter is put as waiver, variation or estoppel’ makes no difference to the legal result of the presumed approval of an otherwise defective credit: the buyer-applicant’s obligation to establish a letter of credit to effect payment of the purchase price of the goods stands discharged in any event. However, it does matter greatly.

3.09  Classification of a non-conforming requirement in a credit as proposing a variation of the contract of sale, and the beneficiary’s conduct as acceptance of the proposal, will require the applicant in the individual cases to prove the consideration for such acceptance; should he overcome that hurdle, the variation gives him fresh contractual rights in substitution for the original position of the contract. On the other hand, viewing the approval of the defect in the credit as a waiver, an act of concession or a grant of an indulgence creates no new stipulation in place of the original one; the old term continues to be in force, and the beneficiary can withdraw the indulgence upon giving the applicant a sufficient advance notice, a point covered in the ensuing subsection. Furthermore, characterizing the beneficiary’s act as generating an estoppel would need a claim which alleges the beneficiary’s assent to the departure of a term in a credit from the underlying contract to satisfy the stringent conditions of the doctrine of estoppel,²³ including the requirements²⁴ that the claimant-applicant altered his position in reliance upon a clear and unequivocal representation of the beneficiary.

In WJ Alan & Co. v El Nasr Export and Import,³³ negotiated amendments to a confirmed credit expressed in pounds sterling overlooked the necessity of changing that currency to Kenyan shilling, the money of account stated in the underlying contract of sale of coffee. Nevertheless, the sellers shipped the goods and obtained payment in sterling against their documents tendered under the credit; but in consequence of the devaluation of the pound, the amount received was substantially less than the originally contemplated sum. They therefore felt entitled to recover the difference by having the price of the coffee calculated in Kenyan currency. The Court of Appeal disagreed with them and dismissed their action with costs in favour of the buyers. Lord Denning M.R. explained that the sellers ‘waived the right to have payment by means of a letter of credit in Kenyan currency and accepted instead a letter of credit in sterling’³⁴ by operating the credit they could have rejected. He approved Diplock J.’s pronouncements in Enrico, considered Panuotsos, and formed the opinion that waiver in these cases, including the present one before him, is an instance of the application of the principle stated in Hughes v Metropolitan. In his view, all that is required of the buyer is that he ‘acted on the belief induced by the other party’.³⁵ Megaw L.J., in contrast, (p. 71) commented that the credit denominated in sterling was an offer by the confirming bank on the buyers’ instructions to vary the term concerning the currency of account in the sale contract and the seller accepted the offer by conduct.³⁶ He added: ‘If there was no variation of the contract ... the buyer would still be entitled to succeed on the ground of waiver, and the relevant principle is that which was stated by Lord Cairns in Hughes v Metropolitan Railway Co’.³⁷ The third member of the court, Stephenson L.J., preferred to ‘leave open the question whether the action of the other party [i.e. buyer] induced by the party [i.e. seller] who ‘waives’ his contractual rights can be any alteration of his [buyer’s] position’.³⁸

3.12  It is perhaps appropriate to start by remarking that the House of Lords’ decision in Equitable Trust Co. of New York v Dawson Partners Ltd³⁹ is conclusive against the initial facet of Megaw L.J.’s observations. A nominated bank⁴⁰ and the applicant on whose request a credit has been opened are not in a principal and agent relationship. American courts hold the same view.⁴¹ Indeed, were such agency relations recognized, there would be scope for an argument that the confirmer might owe tortious or contractual duty of care to the credit applicant. Accordingly, no offer by the confirmer in Alan on behalf of the buyer to the sellers-beneficiary could possibly exist as a matter of authority and on principle.

3.13  We proceed, then, to the question of reliance by the buyer on the belief induced by the beneficiary. Is it really a requirement of the concept of waiver as the Court of Appeal understood and employed it in Panoutsos? It is submitted that it is not. If otherwise, then what action of the buyers in Alan and in Enrico may legitimately be said to constitute an alteration of their position in reliance on the sellers’ omission to ask for the currency stated in the credit to be changed to make it conform to the sale contract? Alternatively, can we seriously urge the courts to regard the mere silence of the sellers to complain about the non-compliance as a clear and unequivocal representation to the buyers? The principle of Hughes v Metropolitan Railway Co., as Bowen L.J. in Birmingham and District Land case on the one hand, and the House of Lords in Tool Metal Manufacturing⁴² as well as in Woodhouse AC Israel Cocoa⁴³ on the other hand, respectively define and confirm it, is normally associated with the doctrine of promissory estoppel. But the precept of waiver which Panoutsos establishes on the subject under consideration, as will now be discussed, is distinct and separate; its application denies the assumed requirement of reliance, and sets forth the simple rule, uncluttered by the necessity of the buyer’s reliance, that a beneficiary should be considered to have waived a non-complying provision in a credit or relinquished his right to insist on a credit opened at the stipulated time, if, in the events which happened in the particular case, his conduct or communication reasonably conveyed to the buyer the impression that he, the beneficiary, still wanted the credit.

Crucially, it will be observed that the basis on which both the courts put the beneficiary’s waiver pertains to the beneficiary’s election to operate the credit regardless of his knowledge that the credit was not in accordance with the contract. None of the four judges went further to emphasize or even drop the hint that the buyer’s reliance on the beneficiary’s conduct was necessary to found waiver. The Court of Appeal derived support from Bentsen v Taylor Sons & Co (No.2).⁴⁹

(p. 73) The Master of the Rolls and Bowen L.J. concluded that the defendants had failed to live up to their duty in the circumstances, in that no reasonable business person looking at the defendants’ correspondence could doubt that it did lead the shipowner reasonably to suppose that the charter remained operative and binding notwithstanding the protracted interruption in the sailing of the ship. Kay L.J. gave a concurring judgment⁵² to the same effect.

3.16  Erle C.J. adopted a similar approach in Dixon v Heriot.⁵³ Soon after a charterparty had been signed, shipowners undertook execution of extensive repairs to the ship at Liverpool to fit her for the chartered voyage, whereas a clause in the contract warranted that the vessel was ‘ready’ to proceed direct to Cardiff to take on the goods. Upon completion of the repairs, the charterers refused to load the vessel, pointing to non-compliance with the warranty. The shipowners admitted the breach, but argued that the charterers had waived it by their conduct. The Chief Judge in his charge to the jury said: ‘If you think that, after knowing the breach of the warranty, the defendants treated the charter as still subsisting, find for the plaintiffs’. The court ultimately decided in favour of the claimant-shipowners.

3.17  Altogether, the Panoutsos, Bentsen, and Dixon decisions in substance repudiate the proposition enunciated in Alan and Enrico, that the buyer must have acted in reliance on a belief induced by the beneficiary’s conduct in order to prove presumed acceptance by the beneficiary of a non-conforming credit. The indicated trilogy of decisions considers a beneficiary’s omission to reject a credit of that description a waiver, and not a variation of the related term in the underlying contract of sale. Dicta advancing a contrary position in the Alan case seem mistaken. Of course, the buyer can orally, or in writing, propose to the seller (and vice versa) that the contract of sale be varied in some respect;⁵⁴ and the latter party may accept the suggested variation as he thinks compatible with his objectives for entering into the contract. Where a dispute arises as to the enforceability of the acceptance, the buyer-applicant of course has to show the consideration for the assent for him to sustain his cause of action. But the negotiated variation is different from, and controlled by the principle of, waiver applying to the beneficiary’s failure to repudiate a defective letter of credit.

3.18  The theory which underlies the trilogy of cases just examined, Lord Wright points out in Tankeexpress (A/S) v Compagnie Financiere Belge De Petroles SA,⁵⁵ is an equitable principle of ‘fair dealing and justice’ rooted in reason and practical business experience.⁵⁶ As such, the precept should be operated equitably. Thus, the beneficiary ought not to be perceived as having waived his right to demand a conforming credit if it would be inequitable to so view him in the particular circumstances of the parties. An instructive situation is a contract of sale involving instalment shipments over a given period, with the credit intended to revolve for each shipment. The seller’s waiver in respect of the letter of credit for a particular delivery of (p. 74) the cargo will as a rule not prevent him from insisting on a complying credit for a subsequent load,⁵⁷ provided he gives the buyer-applicant a reasonable notice to the effect that he wishes to resume his strict rights under the sale contract. A notice of that sort tends to afford the buyer the opportunity to rearrange his business affairs and ask the issuing bank to amend or issue the credit as appropriate.

3.19  On the other hand, we have previously noted that the entry by a seller into negotiations with a view to amending a non-conforming credit will count as a waiver of his right to refuse the credit. However, once the discussion ends, and he remains interested in having the credit originally spelt out in the contract, he is under an obligation to fix a reasonable time for the buyer to provide the facility.⁵⁸ An unreasonable deadline usually lacks the capacity to bind the buyer.

3.20  Consideration of liability for financial loss caused by the act of a bank engaged in the credit opening process may conveniently commence with the claim of a beneficiary that has lost a possibly lucrative sales contract on account of his inability to have the desired credit before treatment of the potential claim of the applicant.

3.21  The relations between an advising bank and the beneficiary during the setting up of a credit are of two kinds, namely, contractual and non-contractual. In the former, the beneficiary’s claim will typically be determined with reference to the standard of conduct set by the contractual relationship; in regard to the latter, the action has to proceed in tort.

3.22  In most cases, the bank will have already been in a relationship with the beneficiary at the time of its receipt of issuer’s instructions, requesting advice of the credit or amendment to the beneficiary. It seems accepted⁵⁹ that the obligation of the bank to act with reasonable care, skill, and diligence, generally recognized by implication of law as necessary incidents of the pre-existing banker-customer contract, flows into the advising bank-beneficiary relationship. With the grafting, a contract to take care to see that it notifies the credit and information bearing on the facility is thus implied as a matter of principle. A breach of the obligation prima facie gives a cause of action to the beneficiary. Whether an alleged misperformance in respect of the advising of the instrument or communication received amounts to non-compliance with the obligation will inevitably depend on the facts of the case in question. But, while a failure to deliver it timeously can found an action in implied contract, it is suggested that the bank owes the beneficiary no duty to clarify ambiguities in a message which it received from the issuer and forwarded to the beneficiary as such. The bank should be liable for the ambiguities it creates, and not for those of the issuing bank.(p. 75)

3.23  Where no prior banker-customer relationship exists between the advising bank and the beneficiary, and nothing in the individual circumstances evinces the bank’s promise to the beneficiary to transmit a credit before the expiry of a stated deadline, is the adviser obligated to the beneficiary to promptly notify the issuance and terms of the credit to him? When a credit is communicated via the post, does the adviser owe a duty to exercise reasonable diligence in mailing the credit, such that its liability will be engaged if the mail is, for example, addressed to the wrong destination? These points have been given surprisingly little attention in academic literature,⁶⁰ and have yet to receive judicial consideration, except in the American cases of Sound of Market Street Inc. v Continental Bank International⁶¹ and Bank One Texas, NA v Little.⁶²

3.24  In Sound of Market Street, a Cyprus bank opened a letter of credit and transmitted it to its American correspondent with a request to advise the credit to the beneficiary. One of the terms of the credit required shipment to be made on or before 31 August. Although the correspondent/advising bank had received the letter of credit on 9 August, it did not send it to the beneficiary until 25 August, when it was too late for the beneficiary to comply with the 31 August deadline for shipment. In consequence, the transaction which the credit was supposed to finance collapsed and the beneficiary suffered substantial losses, whereupon the beneficiary sued, claiming that he was entitled to recover against the advising bank’s failure to notify him of the issuance of the credit in a timely fashion. The adviser counterargued that he did not have a legal obligation to promptly convey the credit to the beneficiary.

3.25  The trial judge accepted⁶³ that under section 5–107 (a) of the then applicable Uniform Commercial Code Article 5,⁶⁴ the advising bank only assumes an obligation for the accuracy of the information it transmits to the beneficiary. Apparently seeking to press this into service, the defendant advising bank contended that since it accurately notified the credit, its untimely notification did not violate any obligation it had towards the beneficiary. Nevertheless, the judge pointed out that UCC Article 5 did not purport to cover all contingencies arising out of letters of credit transactions. Hence, simply because only one form of obligation is explicitly imposed on the advising bank does not imply that obligations which promote the purposes and policies underlying the Code may not be imposed when fact patterns unforeseen by the Code’s drafters are brought before the court.⁶⁵ But on the other hand, taken to its logical conclusion, the advising bank’s submission would mean that if an advising bank completely fails to notify the beneficiary that the letter of credit has been issued, it will not be liable. Similarly, if the advising bank holds on to a letter of credit until it expires, it again will not be liable. In neither instance has it transmitted inaccurate information to the beneficiary.⁶⁶(p. 76)

3.26  His honour considered the argument ‘obviously untenable’ because ‘a beneficiary can suffer the same types of harm regardless of whether he gets inaccurate information about the letter of credit, untimely information or no information at all’.⁶⁷ Moreover, in any such situations, not only can the transaction intended to be facilitated by the letter of credit fail, but the beneficiary must either look to the foreign applicant or to the negligent advising bank for the benefit of its bargain. According to the judge, since the former is what the letter of credit device is principally designed to avoid, it becomes compelling to permit recovery against the latter party. The judge then concluded: ‘If advising banks are liable for inaccurate statements regarding letters of credit, they should be liable for untimely statements as well’.⁶⁸

3.27  The United Court of Appeals for the Third Circuit reversed⁶⁹ the trial judge. It was of course appreciated, as did the trial judge, that UCC Article 5 ‘deals with some but not all of the rules and concepts of letters of credit’ and authorizes courts to extend Code duties by analogy to parties upon whom they are not expressly imposed, but observed that: ‘Nowhere does the UCC [or the UCP] suggest a duty to timely transmit an advice’.⁷⁰ But the principal reasons for the reversal were that the beneficiary was not a third party intended to be benefited by the contract for the advising of the credit; and second, the beneficiary had no cause of action in tort against the advising bank. The reasons are worth discussing in some detail.

3.29  As a matter of principle, and also based on the facts, the court concluded that the essential purpose of the employment of the advising bank is to enable the issuing bank to fulfil its contract with the applicant. Accordingly, if any third party was intended by the issuer-advising bank contract to benefit, that party was surely the applicant, not the beneficiary. Even assuming (p. 77) that the beneficiary is able to claim as a third-party beneficiary of the agency obligation owed by the adviser to the issuing bank, he cannot recover unless he establishes the assumption by the contracting parties of a duty to compensate him if the obligation is not duly executed.

3.30  In England and Singapore, the courts are unlikely to reach a different result. Of crucial relevance is the Contracts (Rights of Third Parties) Act 1999,⁷² hereinafter Contracts Act 1999, which has introduced far-reaching exceptions to the common law doctrine of privity of contract that a person (i.e. a third party) cannot enforce a contract to which he is not a party. Under section 1 (1) (b) of the Contracts Act 1999, a person who is not a party to a contract (i.e. a third party) may enforce a term of the contract if ‘the contract purports to confer a benefit on him’.⁷³ However, s. 1 (2) stipulates that that provision is ineffective ‘if on a proper construction of the contract it appears that the parties did not intend the contract to be enforceable by the third party’.⁷⁴ Once the third party is adjudged entitled to enforce the contract, he would acquire the right to any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract.⁷⁵ As between the negligent adviser and the beneficiary, any such remedy would of course be damages for the loss suffered by the exporter on account of the adviser’s breach of his duty.

3.31  Nevertheless, to acquire that right, the third party has to overcome the threshold questions of whether (a) he is expressly identified in the contract by name, as answering a particular description; and (b) the contract ‘purports to confer a benefit on him’. In the situation under consideration, the beneficiary would have no difficulty in satisfying the first criterion, since the contract between the issuer and the adviser for the advice of the letter of credit will necessarily identify him. But, as to the second, ‘benefit’ is believed to include the performance of a service due under the contract and it is improbable that he can successfully convince the court that the creation of the adviser’s obligation to advise the credit was mutually intended by the adviser and the issuer to benefit him. This hurdle is not surmounted if all that he can show is that he would happen to benefit from the due performance of the duty. To the extent that the enlistment of the adviser’s services by the issuer is to facilitate the implementation of the applicant’s instructions and it is he, and not the beneficiary that paid for the services, there can be no doubt that a claim by the beneficiary against the adviser under the Contracts (Rights of Third Parties) Act 1999 is unavailing.

3.32  The Third Circuit in Sound of Market denied the beneficiary’s argument that the advising bank owed him a duty in tort to transmit the credit in a timely manner on the basis that, in relation to the beneficiary, a letter of credit is only established when the beneficiary receives it. Prior to the establishment of the credit, as fundamentally structured by the general letters of credit law and practice, neither the issuing bank nor the advising bank owes any duty to the prospective beneficiary. In consequence, an imposition of a tortious duty of (p. 78) timely communication of a credit on the adviser vis-à-vis the beneficiary would undermine this settled position.

3.33  Eleven years after the Third Circuit decision in Sound of Market, the Court of Appeals of Texas in Bank One, Texas, NA v Little⁷⁶ was confronted with the related but more complex problem of whether a beneficiary is entitled to recover in tort against an advising bank that had misdirected the credit to an incorrect destination. Recovery will be allowed if the adviser had a duty to refrain from mishandling the mailing of the credit to the beneficiary.⁷⁷ Noting that this was ‘an issue of first impression in Texas’, the court considered the Third Circuit’s decision in Sound of Market and concluded that the beneficiary’s claim must fail on the grounds of policy considerations there enunciated. Without doubt, the policy reasons advanced by the Third Circuit in Sound of Market and embraced by the court in Bank One for refusing to impose liability on the advising bank towards the beneficiary for untimely advising or misdirection of a credit are justified. But it is not immediately clear whether the adviser would nevertheless be immune from liability to the issuing bank with which it has a contract. Presumably, it would not, depending on whether the relevant disclaimer clauses in the UCP are effective to exclude its liability, discussed a little later.

3.34  Given the current state of the English law of negligence, the question whether an adviser is liable in tort to the beneficiary for the financial loss suffered by reason of the adviser’s negligent performance of its advising function, is somewhat complicated. Ever since the landmark decision of the House of Lords in Hedley Byrne & Co. v Heller & Partners Ltd,⁷⁸ it has been established that a person in a professional or commercial context may owe a duty to take reasonable care to avoid causing financial loss to another person with whom he is not in a fiduciary or contractual relationship. Over the years, the courts have continued to grapple with articulating a single general test that may be applied in all cases to determine whether a defendant, alleged to have caused pure economic loss to a claimant, owed him a duty of care in tort. Nevertheless, Lord Bridge of Harwich has expressed the view that the search for a formulated universal test for a duty of care is like crying for the moon.⁷⁹ So has Lord Roskill.⁸⁰ And in the comparatively recent case of Customs and Excise Commissioners v Barclays Bank (p. 79) plc,⁸¹ Lord Rodger of Earlsferry expressed views to the same effect. Thus far, however, three tests have been developed by the House of Lords in a series of cases.⁸²

3.35  The first is commonly referred to as the Caparo test or threefold test⁸³ which entails the questions whether (i) the loss suffered by the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; (ii) there is a sufficiently proximate relationship between the claimant and the defendant; and (iii) having regard to all the circumstances of the case it is fair, just, and reasonable to impose a duty of care on the defendant towards the claimant (sometimes referred to as policy considerations). The second is the ‘assumption of responsibility test’,⁸⁴ under which the key question to ask is whether the defendant assumed responsibility for the task he entered upon vis-à-vis the claimant. If he is to be regarded as having done so, he thereby creates a special relationship between himself and the claimant in relation to which a duty arises by implication of law to perform the task assumed in a reasonably diligent manner. The third is the ‘incremental test’,⁸⁵ which requires the recognition of a duty of care under a new set of facts by analogy with established categories.

3.36  None of the tests has been spared from strident criticisms.⁸⁶ However, it has been strongly suggested that the various approaches should be applied in turn to a given set of novel facts, and that if the facts are properly analysed and the policy considerations correctly evaluated, they will all yield the same result.⁸⁷ A contrary position is that if the first test is applied, and a duty of care is found to exist, i.e. that the defendant is liable to the claimant for the loss incurred, then the need to continue the inquiry about the existence of liability is unwarranted.⁸⁸ We now proceed to apply the threefold test to the problem in hand, and will have recourse to the other tests only if it is necessary to do so.(p. 80)

3.37  Application of the Caparo test would require looking closely into the situation so as to identify the factors that may indicate whether or not the advising bank owes a duty of care to the beneficiary to safeguard him from the financial loss he suffered. Starting with the first limb of the test, it is quite clear that an advising bank must foresee that if it does not convey the credit in a timely fashion or if it misdirects the credit to an erroneous location, the beneficiary will be unable to utilize the credit. Financial loss thereby incurred by the beneficiary is thus a foreseeable damage. As to the second limb, the advising bank and the beneficiary are in sufficient proximity and the relationship came into being the moment the advising bank received the credit from the issuing bank and elected to act on the accompanying instruction specifically requesting him to advise the credit to the beneficiary.

3.38  Meeting the foreseeability of economic loss and proximity requirements appears to pose no real hurdle to the beneficiary. Certainly, the crucial question is whether it would be fair, just and reasonable to impose a duty of care on the adviser in favour of the beneficiary. Of great relevance for initial consideration is the traditional floodgate argument that no duty should be recognized if the result would be to create an unlimited liability for an indeterminate amount to an indeterminate number of potential claimants. The beneficiary can possibly get over this as well. He, as the claimant, is readily identified by the advising bank, as is the extent of the loss which is the amount of the credit. Accordingly, no issue arises as to the spectre of generating claims in indeterminate amounts to an indeterminate class of possible claimants and the policy considerations favouring a more cautious approach in all cases of consequential financial loss are inapplicable.

3.39  It is now generally accepted, however, that one powerful factor that must enter into a determination whether the third limb of the Caparo test is satisfied by the claimant in any particular case, is the contractual matrix which defines the rights and obligations of the parties. In the present context, the contractual setting would undoubtedly include the applicable banking practice relating to letters of credit transactions. Under this practice exemplified in the UCP, a beneficiary can in no case avail himself of the contractual relationship existing between banks or between the applicant for the credit and the issuing bank.⁸⁹ And the inclusion of the Code in the issuing bank-advising bank contract demonstrates a firm intention by these parties to deny the advising bank’s liability to the beneficiary in the limited context under survey.

3.40  On the other hand, the existence of a duty of care in tort may be negated by the fact that the claimant has an adequate remedy in respect of the loss in question against another potential defendant.⁹⁰ What, then, is the beneficiary’s alternative remedy? It is simply the existence of a breach of contract claim against the applicant. As indicated earlier, the applicant is under a contractual obligation to establish the requisite letter of credit in favour of the beneficiary in a timely manner. If he fails to do so (for example, because the credit does not arrive punctually in the beneficiary’s hands by reason of the advising bank’s failure to duly advise the credit), the applicant is prima facie in breach of contract; the beneficiary is entitled to treat the contract as repudiated and then claim damages from him. It is thus obvious that the beneficiary has an effective breach of contract claim, so that permitting him a remedy in (p. 81) tort against the advising bank rather than asking him to seek enforcement of his contractual rights against the applicant would be unjustified.

3.41  But, Alan Ward and Robert Wight⁹¹ have argued that the decisions of the House of Lords in White v Jones⁹² and of Sir Robert Megarry V-C in Ross v Caunters⁹³ can be used by analogy to attach tortious liability to a negligent advising bank in relation to the beneficiary. Put differently, the beneficiary should be allowed to recover in tort against a negligent advising bank, just as the beneficiaries in respect of a will were able to do in Caunters and in White.

3.42  The proposition is not without difficulty. At issue in each of the cases was the question whether a solicitor that is in breach of his professional duty to exercise reasonable skill and care in carrying out his client’s instructions for the preparation and signing of a will, was liable in negligence to the prospective beneficiary for loss suffered as a result of the breach. In both the cases, their Lordships expressed considerable unease at ‘the extraordinary fact that’ if a duty in tort in favour of the disappointed beneficiary was not imposed, the only person entitled to bring an action against the negligent solicitor was the client (i.e. the deceased testator estate) and could recover only nominal damages because the estate had suffered no loss; but the only person who had suffered a loss would have no valid claim, because the solicitor’s contractual obligation is not to him; rather, it is to his client alone.⁹⁴ As a result, the negligent solicitor would go scot-free despite a glaring breach of his professional duty to his client. It was this feature of the situation that spurred their Lordships to consider it eminently fair, just, and reasonable that the solicitor be liable in damages to the disappointed beneficiary; an inducement described by Lord Goff in White as the court’s ‘strong impulse for practical justice’.⁹⁵

3.43  Now, the same cannot be said of the exporter/beneficiary vis-à-vis the negligent advising bank. Without sustaining the claims of the beneficiaries in Caunters and White, there would be a serious lacuna in the law, whereas this is not the case in the beneficiary-negligent advising bank context, where, as we have seen, he could pursue a breach of contract claim against the applicant.

3.44  Considering that policy considerations and commercial practicality furnish ample bases for the courts’ unwillingness to allow the beneficiary to recover against the advising banker for untimely transmission or mishandling of the mailing of a letter of credit and that his proper remedy is a breach of contract claim against the applicant, it may be asked whether the applicant can raise an action to recover his loss from the issuer for a breach of its contract to issue the letter of credit to the beneficiary in a reasonably prompt and diligent manner. It may further be asked whether the applicant can also recover in tort against it if it considers that the issuer was negligent in selecting the incompetent advising bank to carry out the advising function.⁹⁶ What follows is intended to demonstrate that both these claims may be entitled (p. 82) to succeed. And if this is correct, then it would be unnecessary to consider whether the applicant may claim in tort against the adviser for the adviser’s breach of its duty owed to the issuer, or, alternatively claim as a third party intended to be benefited by the performance of the adviser’s obligation under the adviser-issuer contract for the notification of the credit. We turn now to the prospects of the applicant’s causes of action.

3.45  In the preceding chapter, we noted that the applicant-issuing bank contract comes into being upon the bank’s acceptance of the applicant’s application or instructions for the opening of a credit in favour of the specified beneficiary. Usually, the issuer will notify the acceptance to the applicant before issuing the credit to the beneficiary. An essential object of the contract thus constituted is to issue the facility according to the requirements of the application; the relationship between them is primarily that of banker-customer, and carries with it the general obligation on the part of the issuer to use reasonable care, skill, and diligence to comply with the applicant’s instructions, including any amendment to the terms of the application form, in the same way that an advising bank in a pre-existing banker-customer relation with the beneficiary would do. An integral part of the obligation is the issuer’s responsibility to convey the credit or amendment to the beneficiary reasonably promptly. It has been intimated that the issuing bank normally delegates the discharge of the duty to a correspondent bank with which it maintains a banking relationship in the beneficiary’s locality. There is a considerable line of authority⁹⁷ holding that such a correspondent bank is not in privity of contract with the applicant. Rather, its only contract is with the issuer, who is its principal and would be liable to the applicant for a breach of duty by the adviser. It thus seems reasonably clear that the applicant has a breach of contract claim against the issuer for the adviser’s negligence.

3.47  Versions of these disclaimer clauses are to be found in all the previous editions of the Code. Up until now, various opinions have been advanced in academic literature as to the ambit of the liability the clauses can properly be said to exclude. Two strands of the views can be identified. One is that they may serve to prevent the applicant from insisting on strict compliance with his instructions if the advising bank negligently accepts non-conforming documents and then passes them on to the issuing bank, which in turn presents them to the applicant for reimbursement. The other is that, where the beneficiary’s presentation is conforming under an erroneously advised credit but non-conforming under the terms of the credit as originally opened by the issuer, the issuing bank has to honour its payment obligation and would be entitled by virtue of Article 37 (a) to claim reimbursement from the applicant. These positions appear to be predicated on the principle that the adviser only acts as an agent of the issuer to implement the applicant’s instructions. It was therefore thought that, insofar as in pursuance of its duty, the advising bank acted within its apparent or ostensible authority, it acts at the risk of the applicant. On this basis, in Credit Agricole Indosuez v General Bank,⁹⁹ the issuing bank argued that the provision of Article 37 (a) enabled him to seek reimbursement from the applicant against discrepant documents the advising/nominated bank had taken up under the credit.¹⁰⁰ David Steel J. brushed aside this argument and held that ‘[t]he sole effect of [Article 37 (a)] is to prevent an applicant holding an issuing bank liable for damage caused to the applicant by the action of the bank instructed by the issuing bank’.¹⁰¹ In other words, the sub-article only purports to exclude what would otherwise be the issuing bank’s liability for a breach of its contractual duty towards the applicant to issue a conforming credit in favour of the beneficiary. (With that, the first scenario, the possibility of exclusion of liability for non-complying presentation, mentioned earlier, falls away.)

3.48  Surely, no serious objection can be raised to David Steel J.’s conclusion, but the question (the second possibility) remains whether the sub-article would apply to bar the applicant from recovering from the issuing bank financial losses suffered by reason of the adviser’s negligent misperformance as to the advising of the credit or an amendment to the credit. Obviously, (p. 84) the language of the clauses is literally wide enough to cover both the banks’ negligence, and it may thus be tempting to read it as standing in the way of the applicant’s claim against the issuer for a liability arising from the adviser’s negligence.¹⁰²

3.49  Neither the English nor Singapore courts have had an opportunity to determine the precise boundaries or effectiveness of the clauses as contractual terms in a credit or reimbursement agreement incorporating them. However, in the American case of Bank One Texas NA v Little, which it will be recalled involved a letter of credit lost by the advising bank and established by evidence to have expressly incorporated the UCP 400, the Court of Appeals of Texas ruled that the intent of the disclaimer clause¹⁰³ is to exonerate the bank from liability in such situations as the instant case.

3.50  The broad implications of the Court of Appeals’ pronouncement is that by virtue of the provisions under discussion, the advising bank and a fortiori the issuing bank, assume no liability for any loss ensuing from a credit or amendment to the credit negligently misdirected by the advising bank. It would also be immune from liability if it holds onto a credit, or an amendment to the credit, until it expires; nor would it be liable if the message is only conveyed to the beneficiary after an undue length of time has elapsed. It is submitted that their Honours’ opinion faces fundamental difficulties. The important point to emphasize (and analyse shortly) is that the disclaimer provisions are inapplicable where the event mentioned by the sub-article is caused by the negligence of a bank. That this is indeed the spirit of the provisions, calls for a look into the history of their emergence in the UCP.

3.51  The leading case of Equitable Trust Co of New York v Dawson Partners Ltd¹⁰⁴ set the scene for the development of the clauses. The relevant facts of the case were that an issuing bank opened a credit that called for a certificate of quality issued by ‘experts who are sworn brokers’ and transmitted it to its correspondent bank for onward delivery to the beneficiary. Unfortunately, on account of the secret telegraphic code used by the banks, the credit as decoded by the correspondent bank required a certificate issued by an ‘expert who is a sworn broker’. It was proved in evidence that the inaccurate translation was brought about by the prevailing coding system adopted by banks.¹⁰⁵ The issuing bank thus argued that the risk of financial loss arising from any such eventuality did not fall on the banks but on the applicant. Nevertheless the House of Lords, by a majority of four to one, held that the issuing bank was the principal of the correspondent bank and vicariously liable for the coding glitch. But Lord Carson, in his dissenting judgment, was completely convinced that the bank’s submission was not without merit.¹⁰⁶

3.52  In the event, the banking community was understandably unhappy with this decision (which was, of course, impeccable as a matter of strict legal principle) and felt obliged to inaugurate measures one way or another to counteract the potential consequences of the (p. 85) Equitable Trust case decision in banking operations as to transmission of messages relating to letters of credit. Ultimately, some three years after Equitable Trust was handed down, the International Chamber of Commerce, in formulating the Uniform Customs and Practice for Documentary Credits, found it convenient to include provisions¹⁰⁷ exempting the banks from responsibility for specified incidents occurring while a credit and messages about the credit are in transit through the interbank transmission network, and also a clause making it clear that a bank enlisting the services of another bank for the purpose of giving effect to the applicant’s instructions does so for the account and at the risk of the applicant. Since their inclusion in the UCP, the essence of the provisions has remained the same, namely to protect the banks against specified events happening without the fault of the banks.

3.53  Taken in this sense, the plain intention of the disclaimer provisions is nothing but narrow, although they are framed widely and expansively to cover instances of negligence on the part of the banks. It is thus obvious that the clauses require a restrictive construction. It is accordingly submitted that the exemption clauses are not designed to shield the issuing bank and the correspondent bank (to whom the issuer may delegate the task of advising a credit and an amendment to the credit) from liability where the negligence of the bank caused the failure of the message to reach the beneficiary or to reach him in a timely fashion.

3.54  If indeed the object of the exclusion clauses includes the furnishing of protection to the banks despite the banks’ negligence, there are compelling reasons to believe they are in that regard likely to be held unreasonable in the English and Singapore courts. In these jurisdictions, judges have a deep-seated aversion to contractual terms exempting a party from liability for his negligent performance of a duty owed under the contract on the ground that when parties enter into a contract they invariably contemplate proper performance of the obligations created under the contract. Moreover, common-sense recoils at the idea that a party to the contract would intend to absolve the other party from the consequences of the latter’s own negligence in carrying out what he has undertaken to do, although he might have accepted to run the risk of that other’s effective performance.¹⁰⁸

3.55  For this reason, the courts (while recognizing the freedom of the parties to contract on whatever lawful terms they wish and assume commitments they are comfortable with) have evolved rules of construction which articulate that where a party to a contract is in negligent breach of the promise, he has contractually undertaken to perform and alleges that a given contractual clause excuses his liability for the negligence, he has to show that the clause unequivocally covers the breach. Moreover, the clause will be strictly construed; if there is any doubt respecting its meaning and scope, the ambiguity will be resolved against (p. 86) him (i.e. in this context the bank) and in favour of the other party (i.e. the applicant). In point of fact, some courts have occasionally come close to saying that a clause should not be regarded as excluding liability for negligence unless it is in terms that liability for negligence is excluded.¹⁰⁹

3.57  Traditionally, the object of a court’s construction of any excluding or limiting contract term is to ascertain what the term means according to the reasonable expectations of the parties. As advised by the Court of Appeal in The Raphael case, in pursuance of that task, Lord Morton’s guidelines are not to be read and applied as statutory provisions. Rather, they are to be used as an aid to illuminate the path to the correct interpretation of the clause. Bearing that caution in mind, we now turn to the disclaimer clauses, fully reproduced earlier at para 3.46, to see what proper construction to place on them with the assistance of Lord Morton’s guidelines.

3.58  Under paragraphs (a) and (b) of Article 37, the issuing bank is not expressly exempted from the consequences of its or its correspondent bank’s negligence. Accordingly, both the (p. 87) paragraphs fall at the first hurdle. To meet the initial test, there should have been a clear and unmistakable reference to negligence or words synonymous with it. As ‘there is no express reference to negligence’, the question arises whether the wording of the paragraphs is nevertheless so all-embracing as to cover negligence on the part of the issuing bank or its agent, the advising bank. An answer in the affirmative has been indicated earlier. The opening words of the first paragraph of Art 35 that ‘A bank assumes no liability or responsibility for the consequences ...’ are sufficiently wide to have the selfsame breadth. That takes us to Lord Morton’s third test.

3.59  This is where the crux of the matter lies. What now has to be ascertained is whether there is some other ground or head of liability to which the parties addressed or must, by necessary implication, be taken to have addressed their minds with a view to its exclusion. In doing so, one has to remember that that other head of liability must not be too fanciful or remote to have been within the contemplation of the parties, but must be reasonably likely to have been expected by the issuing bank as requiring that it should be protected against it. Again, this calls for one to have regard to the facts and realities of the situation as they did or must be deemed to have presented themselves to the issuing bank and the applicant at the time they entered into their contract. If any alternative head of damage can be identified, then the paragraphs will have to be considered as affording the issuing bank protection against liability for losses arising out of that damage and not against claims for damages resulting from its or the correspondent bank’s negligence in performing its obligation.

3.60  What, then, are the possible alternative grounds of liability? Obviously, the place to which we should direct our attention is the first and second paragraphs of Article 35 and the provisions of Article 36, but there can be other candidates as well. First is that the issuing bank or advising bank assumes no liability in the event that the instructions it transmits to another bank are not implemented, except insofar as the failure of that other bank to do so is not the result of the bank’s own negligence.¹¹⁴ The second is the exclusion of the bank’s liability for consequences arising from delay, loss in transit, mutilation, or other errors occurring in the transmission of any messages relating to the credit caused independently of the bank’s professional carelessness, a situation illustrated by the facts in Equitable Trust case. Third, liability for errors in translation or interpretation of technical terms embodied in the applicant’s instructions or messages received by an adviser from the issuing bank is excluded, insofar as such errors occurred despite the bank’s exercise of reasonable diligence and care. The fourth ground of liability excluded relates to damage resulting from interruption of a bank’s business by acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, strikes or lockouts, or any such other events that are beyond the bank’s control.¹¹⁵

3.61  It may be objected that the foregoing is a barefaced rewriting of the parties’ contract masquerading as construction of contractual terms. Objection may also be raised as to whether it is not at least doubtful that the parties intended to exclude the bank’s liability for financial losses resulting from any of the specified events only where the event occurs without the fault of the bank; except that respecting the third head of damage as to which the sub-article itself makes it clear that the indicated event must have been due to ‘causes beyond the bank’s control’. However, having regard to the rationale behind the emergence of the clause in the (p. 88) UCP, which we briefly traced, it is submitted that there can be no doubt as to what liability the parties reasonably intended to exclude under the disclaimer paragraphs. Indeed doubt can only arise if the wordings of the clauses are ingeniously twisted to create protections that cannot have been within the reasonable contemplation of the parties at the time of contracting to open a letter of credit.

3.62  Take, for example, Article 37 (b), according to which an issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out. It is settled that a bank in receipt of a request to advise the issuance of a credit and other information about the credit to a designated beneficiary is under no obligation to do so. But it is equally well established that if it declines the request it must so inform without delay the bank from which the credit or message has been received.¹¹⁶ The rationale for this rule is evidently to be found in the axiom, ‘in commercial transactions time is of the essence’, and is intrinsic to banking practice all over the world, a practice that is steeped in centuries of mercantile and commercial tradition.

3.63  Now, when a bank requested to advise a credit negligently ignored the credit in its file, with the result that it is never received by the named party, this would constitute a serious professional misbehaviour by that bank and also directly result in misperformance by the issuing bank of its obligation to the applicant to ensure that the credit is in the hands of the beneficiary. In such a situation, could it be seriously argued that, on the wording of Article 37 (b), the issuing bank and the applicant contemplated that the applicant would go without a remedy? If the clause intended to exclude liability even if the bank has negligently failed to perform the instructions transmitted to it, it could easily have done so by inserting an express reference to such negligence.¹¹⁷ For that reason, it is by no means difficult to imagine that the parties under Article 37 (b) were applying their minds to the bank’s failure to carry out the instructions it received because of the occurrence of any of the type of events specified in Article 36.

3.64  On the other hand, it is conceded that Article 18 (a) is wide enough to cover liability of the issuing bank for the adviser’s acceptance of non-conforming documents, but aside from the quite robust ruling of David Steel J. in Credit Agricole, it is of course self-evident that this ground of liability can be dismissed as defeating the very purpose of the parties’ obligations under the contract for the issuance of a credit and thus as being at variance with their reasonable expectations. Another head of liability that is clearly too fanciful or remote to have been contemplated by the parties at the time of contracting, is exclusion of liability of the issuing bank for damage arising from its negligence in selecting an adviser of the kind in issue. This derives ample support from a publication of the International Chamber of Commerce,¹¹⁸ which explains that under the sub-articles¹¹⁹ a bank is exonerated from liability for the adviser’s errors, but at the same time stressed that ‘this immunity does not apply where the Issuing Bank is guilty of negligence’.(p. 89)

3.65  Thus far, we have argued that, on a proper construction, the disclaimer clauses are inapplicable to excluding liability for losses arising from the banks’ own negligence, though on the surface the clauses appear to have a wide-ranging goal of protecting the banks even in that eventuality. Their real intention is to exempt the banks’ liability for losses arising from the specified events happening without the banks’ fault. All the same, it is necessary to briefly consider whether the clauses as having this scope of exclusion, fall within the Unfair Contract Terms Act,¹²⁰ and if so, whether the applicant may avail himself of a relevant provision of the Act to urge a court to restrictively construe the clauses.

3.66  The Act does not apply to all contracts but it is widely accepted that the contract of the issuing bank and applicant for the opening of a credit falls within its purview. Moreover, this is rendered inevitable by the fact that the applicant-issuer contract as we have noted earlier is customarily based on the issuer’s standard terms and conditions of business contained in the application form that the applicant completed and executed, and also section 3 of the Act, which articulates that it applies to a contract under which a party deals on the counterparty’s written standard terms of business.

3.67  Section 1 (3) articulates that sections 2 to 7 of the Act apply only to business liability, which it defines as ‘liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business (whether his own business or another’s)’. Section 1 (4) provides that in relation to any breach of duty or obligation, it is immaterial that the breach was inadvertent, or that liability for it arises directly or vicariously. This is particularly significant in relation to the potential liability of the issuing bank for the advising bank’s breach of duty.

Insofar as the disclaimer clauses purport to exclude what would otherwise be a breach of the issuing bank’s common law obligation under the contract with the applicant, they are caught (p. 90) by the Act and, in the eyes of the legislation, are prima facie unreasonable. The issuing bank bears the burden of rebutting this presumption. It may wish to discharge the onus in one of two likely scenarios. One is to show that it is reasonable that the clauses should exempt its liability for losses arising from its or its correspondent banker’s negligent performance; the other is that they exempt it from liability for damage occurring without its want of due care. The two ways are mutually exclusive. As to the former situation, we have already concluded that at common law the clauses are not in terms that exclude the banks’ liability. Having thus collapsed at the initial hurdle, it is unnecessary to consider, in relation to the Act, the question of the reasonableness of exempting that kind of liability.

3.69  A remaining issue is whether the clauses, as meaning the exclusion of liability in the converse type of eventuality, satisfy the test of reasonableness having regard to section 11 (1) of the Act. This can be disposed of quite easily, and the short answer is that they have passed with flying colours. Such eventuality, as occurred in the Equitable Trust case, shows that the issuance and transmission of letters of credit come with their fair share of risks which the reasonable diligence of the banks cannot prevent. The general common law of contract places the liability for the risk on the banks, but the parties through the disclaimer clauses reallocated the risk to the applicant for sound commercial reasons. Without the reallocation the banks would impose high fees for their services in proportion to the considerable risks they take on by implication of law or, even worse, many banks may very well shun requests for the issuance or transmission of credits altogether, a situation that would self-evidently leave the applicant/importer high and dry.

3.70  Thus, the small fees normally charged both by the issuing bank for the service of opening a credit and by the adviser for transmitting the credit and any message relating to the credit is in exchange for the reapportionment of the risks. This result is not any more economically beneficial to the banks than it is to the applicant.¹²¹ If this is an accurate interpretation of the parties’ choice as to the redistribution of the risks entailed in carrying out the instructions of the applicant, it is difficult to see how a reasonable business person in the position of the immediate issuing bank and the applicant at the time of contracting can denounce the disclaimer clauses as unfair and unreasonable under the Act. Indeed, parties are free to apportion the risks as they think fit and there is no good commercial reason why a court should not give effect to their choice, which they made by expressly incorporating the disclaimer clauses into the credit and the reimbursement agreement. However absent such incorporation, the issue of whether the clauses would nevertheless apply to protect the banks against liability for losses arising from damage caused without their negligence will now be considered.

3.71  Cases occasionally occur in which the issuing bank-applicant contract for the opening of a letter of credit and the letter of credit do not incorporate the provisions of the UCP by express reference. By Article 1,¹²² the rules categorically declare that they are inapplicable (p. 91) in such a situation. The SWIFT MT 700 network¹²³ has now been closely aligned with this stance. Under a new mandatory Field 40E, designated for indicating the ‘Applicable Rules’,¹²⁴ a letter of credit issued through the inter-bank system is not presumed to incorporate the UCP.

3.72  Notwithstanding these evidently strong stances, there are arguments to the contrary. One is that, if the parties have had previous dealings that incorporated the UCP, it would be reasonable to assume that the absence of any reference to the code in a subsequent credit transaction was purely inadvertent.¹²⁵ Presumably, too, the later transaction envisaged incorporating the UCP in force rather than the previous edition under which they had conducted their business affairs. Another is that the code has become so famous throughout the commercial world that it should apply by its own motion to letters of credit, even though there is no clause in the credit or reimbursement agreement expressly incorporating it. Significantly, the decision in Harlow & Jones Ltd v American Express Bank Ltd¹²⁶ is considered to support this proposition.¹²⁷ But this might be overstretching Harlow & Jones to breaking point. The particularly pertinent question in that case was whether the defendant bank was obliged to act in accordance with the ICC Uniform Rules for Collection for Commercial Papers.¹²⁸ The defendant argued that the Rules were inapplicable because they had not been expressly incorporated into the collection instructions it received from the remitting bank, which appeared as a third party in the litigation. In rejecting this argument, Gatehouse J. held that express incorporation was unnecessary since all the banks in England subscribed to the Rules.¹²⁹ But, it should be noted that the judge was able to reach that conclusion because the relationship at issue was between a bank and another bank rather than between a customer and a bank.¹³⁰ This distinction is of importance for the simple reason that though the Rules are rightly a household word among the banks, there is little evidence that the same position applies to merchants and their banks, still less newcomer traders participating in credit financed sales transactions.(p. 92)

3.73  All things considered, the UCP as a whole has yet to gain recognition as an autonomous source of customary letter of credit law.¹³¹ True, the courts may have resort to some of the provisions of the code to decide a point at issue even though the credit, or the application for the credit giving rise to the litigation, did not incorporate the UCP by express reference.¹³² It is also true that parties who instruct banks to carry out a specific bank service intend to be bound by the applicable banking practice, so that when a bank on the instructions of a party opens a letter of credit, the transaction is deemed to have adopted the UCP as representing international standard banking practice regarding the operation of letters of credit. But these do not answer the question whether such sweeping presumptive incorporation is to be taken to also incorporate, for instance, the clauses exempting the banks from liability for the specified eventuality. It is submitted that the clauses have no application if the parties without more are simply presumed to have adopted general international banking practice. The liability imposed at common law on the issuing bank in favour of the applicant for such a fact situation as in the Equitable Trust case will then attach.

3.74  It is perhaps appropriate to conclude this discussion on the banks’ liability for losses arising from their own negligence by noting the following points. When a bank has decided to act on an executed application form for the opening of a letter of credit, it thereby assumes an obligation to use due diligence to issue the required credit in favour of the designated beneficiary. A typical feature of that obligation is that the issuing bank may ensure its performance by engaging the services of a correspondent bank. Where such a correspondent bank negligently performs its duty, the issuing bank is in principle, and on authority, liable to the applicant for financial losses caused by the negligence.

3.75  Until now, it has been thought that the effect of the disclaimer clauses such as Article 37 (a) and (b) as well as the first and second paragraphs of Article 35 is to exempt the issuing bank from liability for such losses. Concerned that the applicant would thus be without a remedy against the issuing bank, various attempts in academic literature have explored the possibility of holding the negligent advising bank liable in tort to the applicant. The foregoing analysis demonstrates that the applicant indeed has a solid breach of contract claim against the issuing bank. This renders unnecessary a search for his remedy in the common law tort of negligence, a search that is inherently difficult due to the involvement of a considerable number of policy factors.(p. 93)

3.76  Finally, the somewhat prevailing idea that the issuing bank is exempted from liability for its or the advising bank’s negligence, originates from an improper interpretation of the clauses in question. Both common sense and applicable standard banking practice elucidated in the ICC’s explanatory literature, favour the view that the clauses, albeit widely framed, do not intend to exempt the banks from the legal consequences attaching to their own negligence. The point has also been made that a beneficiary that has suffered financial loss on account of his non-receipt of the advice of a credit timeously, or at all, ought to be relegated to whatever rights it may have against the applicant. He should not be allowed to recover against the negligent adviser, unless he was in a banker-customer relationship with the advising bank at the relevant time, in which case the standard of conduct required of the bank in the relationship will be determinative.