5.01  A bank to which a set of documents are presented for honour or negotiation under a letter of credit will typically examine them or set the checking process in motion to determine their regularity on the banking day following the day of presentation. During the short interval between its receipt of the presentation and the commencement of examination of the documents, a variety of factors often come into consideration; and tend to vary according to whether the presentee bank is an issuer, an obligated nominated bank,¹ or a non-obligated nominated bank.² The elements are particularly significant because the conclusion reached by the bank upon its evaluation of them can and normally will determine whether it is indeed worthwhile to embark upon the task of examining the documents.

5.02  Regarding the non-obligated presentee bank, the decisive element is the weighing of the risks of participating in the transaction. It may be that the beneficiary who presented the documents is a relatively little known business entity and has no real subsisting relationship with the bank, or has such a relationship but it is not running smoothly; or that, so far as can be deduced from a cursory look at the text of the credit and the shipping documents, the merchandise financed by the facility and said to be on the high seas to their destination, appear to be a suspicious consignment; or that the credit is unconfirmed and originates from an issuer located in a country notorious for idiosyncratic handling of letter of credit litigations, or which happens to be in the throes of political upheaval.

5.03  In such individual situations, the ultimate outcome of the non-obligated presentee bank’s hard-headed assessment may come down in favour of allowing the business opportunity in hand to go past it and return the documents to the beneficiary, or instead retain them and ask for some explanation of the goods shipped, including the tendered documents attesting to the shipment, by a quick telephone call, or request his (beneficiary’s) authorization to forward the documents to the issuing bank without responsibility (i.e. without having to indicate in the forwarding letter that it has scrutinized them). If the circumstances permit and there are no time constraints, the presentee may suggest to the presenting beneficiary or directly to the issuing bank, to amend the credit so as to enable it to claim reimbursement of the sum potentially negotiated to the beneficiary from a third party bank in a particular financial (p. 125) centre, say, New York, London, or Singapore, rather than that of the issuer, say, Tehran, Hong Kong, or Zhejiang, jurisdictions in which the reliability and vitality of the letter of credit instrument has suffered in the hands the courts lately. Upon resolution of such creases, the inspection of the documents may commence accordingly.

5.04  As to a presentee issuing or confirming bank, its undertaking to honour a conforming presentation is customarily spelt out in the credit. In this context, upon either bank’s receipt of a presentation, no question can arise as to the level of risks involved in dealing with the credit, since it will have evaluated these when it opened or confirmed the facility several months earlier. The solvency of the beneficiary is also of little significance at that stage. Rather, the material issue is normally the standing of the party making the presentation: Is the presenter the beneficiary or a nominated negotiating bank? This may emerge in one of two cases; one is where an obvious fraud on the part of the beneficiary has already come to light when the documents arrived at the hands of the presentee issuer or confirmer, the other is a case in which the documents come in after the expiry of the credit or of the period stipulated for presentation. In cases of the initial type, if the presenting party is the beneficiary, the presentee issuer or confirmer is not obliged to examine the documents for conformity at all: they are worthless papers; but if the presenter is a nominated negotiating bank, the fraud is irrelevant inasmuch as it acted in a bona fide manner when it took up the documents. In that event, the presentee will need to inspect the valueless documents to verify their apparent conformity with the credit.

5.05  In the other category of case, the presentee is under no duty to examine the documents unless there is a clear indication in the accompanying cover letter, schedule, or anything of the kind that the presenting nominated bank purchased (i.e. negotiated) the presentation from the beneficiary. If that information is not so supplied, then the nominated bank, in tendering the documents, acts merely as a collecting agent of the beneficiary. In consequence, the presentation is untimely; and absent a waiver of the untimeliness by the applicant vis-à-vis the issuer, or by the issuer vis-à-vis the confirmer, examining the documents to determine whether they are otherwise in compliance with the requirements of the credit would be unnecessary.

5.06  Presentee banks commonly encounter practical issues in scrutinizing the documents for compliance with the terms of the credit. They involve the procedure for establishing the conformity of the presentation to (i) the terms and conditions of the credit, (ii) the applicable provisions of the UCP 600, and (iii) international standard banking practice. Considering that the last set of practices are not normally incorporated into a credit as contrasted with the UCP, what is their legal standing vis-à-vis the stipulations in a credit in the eye of the law? What weight, if any, may a court attach to local banking practices prevailing at the beneficiary’s location? Does an issuing bank, for example, have a duty to honour a presentation which is non-conforming with a provision in the UCP, but in compliance with a local banking practice in the beneficiary’s or nominated bank’s place of business?

5.07  Second, what standard of care and diligence should a presentee bank exercise in the performance of its examination duty? Article 13 (a) of the UCP 500, as did the corresponding clauses in all the editions of the code adopted by the ICC Banking Commission over the years,³ imposed a duty on a presentee bank to use ‘reasonable care’ in examining the documents tendered to it. But this duty is not mentioned by the related provisions of Article 14 (a) of the UCP 600: as tersely indicated in the official commentary on the (p. 126) Article, the ‘requirement has been removed’. This has brought to the fore important points: Does the omission go to absolve a presentee bank from performing its examination functions in a reasonably careful and competent manner? If not, then to whom is the duty owed and to what extent? Moreover, could it also apply when a non-obligated nominated presentee is forwarding a presentation it has elected not to honour or negotiate to the issuing bank, and if so, in what type of situations?

5.08  The third problem concerns the scope of the issuer’s right to consult its customer, the applicant, during the document checking process. May the bank leave the examination of the documents with him, and then adopt his decision? Fourth and finally, Article 14 (b) stipulates that the presentee bank ‘shall have a maximum of five banking days following the day of presentation to determine’ if the documents are sufficient and in apparent good order. Would it be correct to read this provision as entitling the bank to sit on a presentation comprising, say, a mere draft and less than ten-page documents, that should take a day or two to process?

5.09  This chapter discusses the issues outlined seriatim. We shall therefore start with the sources and legal status of banking practices other than those spelt out in the UCP which the presentee examining may take into account to ascertain the regularity of the documents.

5.10  The concept international standard banking practice originated from Article13 (a) of the 1993 Revision, which provided that compliance of presentment documents with the terms of the credit must be determined in accordance with ‘international standard banking practice as reflected in these Articles’. During the regime of the Revision, criticisms were levelled against the italicized words. It was generally thought that the standard banking practices on the examination of documents presented under credits were too elusive to exhaustively identify and codify in the UCP. At any rate, the subtle nuances of banking practices vary from region to region, and even among banks within a given region. It is a good thing that the UCP has now explicitly recognized in its Article 2 that there are banking practices outside those it sets forth.

5.11  Determining compliance of presentment documents with international banking practice in the individual cases that may arise requires recourse to a variety of different sources. They may be categorized as follows: (i) ICC Banking Commission’s opinions, decisions, and instructional manuals relating to letters of credit; (ii) banking practices documented by regional or national bankers’ associations; (iv) local practice; (v) expert evidence; and (e) treatises on letters of credit. Let us consider each of these in some detail.

5.12  As a matter of general proposition, the English and American courts have long accepted that the opinions⁴ and decisions⁵ of the ICC Banking Commission on banking practices (p. 127) relating to letters of credit are entitled to be given considerable weight.⁶ Of course, if upon construction of the practice spelt out in the UCP, the court considers the Commission’s position on the point in issue wrong, it will be accordingly rejected.⁷

5.13  When the notion of international standard banking practice was introduced in the 1993 Revision as a test for determining compliance of the documents presented under a credit, the letters of credit community’s immediate reaction was to mount a vigorous campaign for an elucidation of or, more accurately, guidance on the practical application of the standard to the documents examination operation. In January 2003, the ICC Banking Commission obliged the community, though somewhat belatedly, with the publication of the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP).⁸

5.14  According to the Introduction to the brochure, the ISBP does not amend the UCP. The essential purpose of the international standard banking practices documented in some 200 paragraphs in ‘this publication ... explain[s] how the practices articulated in the UCP are to be applied by documentary [credit] practitioners’. As such, express incorporation of the ISBP into credits was not required. Moreover, the banking practices of which it is comprised were already sufficiently incorporated into practices mentioned in Article 13 (a) of the UCP 500.

5.15  Importantly, the ISBP also acknowledged⁹ its limitations. In the first place, the law in some countries may compel a practice radically different from that stated in the brochure.¹⁰ Second, the banking practices formulated in the ISBP were not based on a comprehensive survey of the practices prevailing in a substantial number of jurisdictions, a fact which the Foreword noted by pointing out that the ‘object of the exercise resulting in the publication was not to (p. 128) report on individual country practices’.¹¹ Indeed, the task force charged with drafting the code received feedback from only thirty-nine national committees and individual member banks of the ICC Banking Commission. The publication also concedes that it is impossible to anticipate all the various types of terms or documents that may be stipulated in letters of credit, and emphasized that its efforts must be seen as modest, namely ‘to cover terms commonly seen on a day-to-to-day basis and the documents most often presented under documentary credits’.¹²

5.16  The limitations notwithstanding, the ISBP is widely acclaimed by letter of credit practitioners around the world because it furnishes an enlightening and informative checklist of items document checkers could refer to in determining how the rules and practices in the UCP should be applied in daily practice. It has been similarly found to have significant educative value for beneficiaries whose documents are dishonoured under credits and advised to cure the identified discrepancies and make a re-tender.

5.17  For reasons such as these, the ICC Banking Commission has had to revise the ISBP¹³ to bring it into line with the UCP 600. Its philosophy, however, remains principally the same, though it is about twenty paragraphs shorter, some of the paragraphs having been included in the new UCP Revision. The ISBP has, quite plausibly, evolved into a ‘necessary companion’ to the UCP 600¹⁴ in relation to determining compliance of documents with credit requirements. It is to be expected that when an issue involving documentary compliance with standard banking practice is litigated the relevant practices enumerated in the ISBP will be accorded due attention by the judge adjudicating on the action. Not that it should be regarded as a dispositive statement of banking practice,¹⁵ but as an essential guide to a just and proper resolution of the matter brought before him.

5.18  Banking associations in a number of countries are wont to identify, collect, and document their standard practices in the form of checklists, instructional manuals, and rules which they use during the document examination process under credits. Usually, the various brochures will be distributed to their foreign correspondents or principals. A well-known example of such resource material is the Standard Banking Practices for the Examination of Letter of Credit Documents (SBPED) published in 1996 by the International Financial Services Association (IFSA)¹⁶ to document the various banking practices in the US and Mexico. The practices set forth therein were subsequently incorporated into the ISBP.

5.19  A statement of regional banking practices of the SBPED type is not legislation, but it certainly carries significant legal weight as a source of international standard banking (p. 129) practice. This will be particularly so in the US. Section 5–108 (e) of the Uniform Commercial Code Revised Article 5 directs that, in examining a presentation for compliance, the examining bank should ‘observe standard practice of financial institutions that regularly issue letters of credit’. The ‘standard practice’ to which reference is made includes rules published by associations of financial institutions and local banking practice.¹⁷

5.20  Apart from documented national or regional practices, there currently exists a great body of banking practices in individual localities around the world. For example, in Hong Kong, the local banking practice requires a beneficiary under a credit to tender his documents to the nominated bank through a third party bank,¹⁸ regardless of the stipulations in the credit in question. The nominated bank will not accept a direct tender from the beneficiary unless it is acquainted with him. The validity of this local requirement is untested as yet, but it appears that its central objective is to inject some measure of integrity and efficiency into the letter of credit operation in that financial centre, Hong Kong: for instance, where a discrepancy is discovered in the documents it would be easier for the bank known to the beneficiary to contact him. Similarly, where fraud is involved in a tender that has been honoured or negotiated, the bank that is familiar with the beneficiary will be in a fairly good position to sort out why or how it happened. Nevertheless, it has been suggested¹⁹ that the local practice is too firmly entrenched to be refused recognition by the courts.

5.21  But such a local practice as the one in Hong Kong can cause problems. For example, where the documents are tendered on the last day of the period specified for presentation or negotiation, a refusal by the presentee confirming bank to receive the documents in adherence to the local practice may leave the beneficiary with no time to comply with the deadline for submitting a presentation under the credit. In such a case, it seems reasonably clear that the liability of the confirming bank will be engaged. Otherwise, one will be confronted with the quite undesirable spectacle of upholding the effectiveness of a local practice at the expense of the beneficiary’s contractual right against the confirming bank. In any event, as a matter of general principles of contract law, usages of trade, including local banking practice, are subordinate to the express terms of a contract.²⁰ Indeed, in Grunwald v Wells Fargo Bank N.A.,²¹ which involved a refusal to honour on the basis that the original letter of credit was not included in the presentment documents as required in the credit, the Court of Appeals of Iowa determined that the local banking practice which regarded as acceptable a sworn affidavit in place of a lost original could not displace the express requirement of the credit.

5.22  A slightly different problem may arise where a presentation made to an issuing bank is conforming in the eye of the local practice in the nominated bank’s place of business but (p. 130) non-conforming in relation to a particular requirement in the credit. Can the issuing bank dishonour the presentation? At present, it seems there is no authority in point. However, it is suggested that the issuing bank will be acting within its right to deny payment. In general banking practice all over the world, the issuing bank is not regarded as bound by the local practice of the nominated bank or of the beneficiary. Consequently, a nominated bank cannot claim to be justified in taking up documents by alleging its adherence to an existing local banking precept, as opposed to complying with the terms of the credit.²²

5.23  Naturally, as standard banking practice in its finer details inherently varies from locality to locality, so too is its infinite dynamism and adaptability. So, when compliance with a particular banking practice is disputed, regardless of whether the practice is expressed in the UCP or the ISBP, documented by a bankers’ association, or local and undocumented, a question may arise as to the currency of the claimed standard practice. Of course this is a question of fact, and expert evidence will normally enter into the inquiry. Notably, the admissibility of the evidence is entirely within the court’s discretion,²⁴ but the discretion must be exercised judiciously and not capriciously. In particular, the judge should be extremely loath to reject the evidence where it is unchallenged.²⁵

5.24  Regrettably, however, the difficulty in this area is that there is considerable scope for judges to abuse their discretion. In the United States, the decision of the New York Appellate Division in Blonder & Co Inc v Citibank²⁶ is a case in point. There, the defendant issuing bank opened a letter of credit covering a shipment of nickel scrap from Nicaragua to the Netherlands. The credit expressly incorporated the UCP 500. After the issuing bank had paid against the documents presented by the seller, the buyer discovered that the purported shipment never took place, so the documents were forgeries. He then denied his reimbursement liability on the basis that the bill of lading was discrepant because it contained no consignee. An expert testified for the buyer that in his thirty years of experience in the field he had never seen a bill of lading without a designated consignee and that the document at issue did not constitute a ‘Bill of Lading’ as that term is understood in international standard banking practice. This was uncontroverted by the expert witnesses called by the bank.

5.25  Andrias J., speaking for the majority of the Appellate Division, rejected this evidence and affirmed the summary judgment granted by the lower court in favour of the bank. His Lordship said: ‘Interpretation of letter of credit in context of Uniform Customs and Practice for Documentary Credits (UCP) ... [is] for court rather than factual issue, and thus consideration of expert testimony as to what constituted international standard banking practice (p. 131) was not appropriate’. The judge accepted that the existence and scope of a standard practice ordinarily present factual issues, but argued that where such a practice is embodied in a trade code such as the UCP or other publication, its interpretation is for the court. He accordingly concluded that ‘any interpretation of the UCP was properly made by the trial court, which refused to allow the expert to usurp its function as the sole determiner of law’.

5.26  It would appear that Professor Byrne²⁷ in 1997 had Andrias J. in mind when he protested that ‘judges deceive themselves if they think that their legal training qualifies them to understand the UCP without resort to expert guidance’. The majority’s substitution of its own understanding of banking practice for that of the expert witness is fraught with difficulty and unsupported by authority.

5.27  Under the prevailing American law, the starting point is section 5–108 (e) of the Revised UCC Article 5, which in pertinent part imposes on an examining bank the obligation to observe standard practice in performing its documents examination function. It articulates that the determination of whether the bank has observed the standard practice ‘is a matter of interpretation for the court’, but adds this all-important clause: ‘The court shall offer the parties a reasonable opportunity to present evidence of the standard practice’. These provisions recognize that the evidence of standard practice that may be provided by the parties and their experts will have great significance in the court’s determination: evaluating the bank’s compliance with the practice is necessarily a practical issue which, on authority reaching back to the ancient origins of the law merchant, is better answered by bankers, mercantile persons, and other witnesses adjudged sufficiently qualified to testify as experts, than by a court. The majority erroneously overlooked this time-honoured judicial precept when it refused to give sufficient weight to the unchallenged evidence of the expert with over thirty years’ experience in the banking field and thus ignored the express provisions of section 5–108 (e) of the Revised UCC Article 5. Effectively, it arrogated to itself the power to do what the subsection has implicitly forbidden.

5.28  That the majority acted in error is underpinned by the fact that its opinion made no mention of Revised UCC Article 5 at all. Yet, the letter of credit before the Appellate Division was subject to it,²⁸ so that subsection 5–108 (e) needed to have been given effect insofar as it was not in conflict with the UCP 500. On this basis, it is hard to regard the decision in Blonder as good law in New York. Nor is it likely to find acceptance elsewhere in the United States.

5.29  While it is clear that the courts should allow expert evidence demonstrating that an examining bank has or has not failed to carry out its duty in accordance with a given standard banking practice of bankers, it must be conceded that the exercise can easily turn into a battle of experts, involving heated and possibly lengthy and costly debate. At the end of the day, although the weighing of the different views expressed by the experts is for the judge, there is no good commercial reason why a court should reject offhandedly uncontroverted evidence of standard practice.(p. 132)

5.30  Discussions on various questions relating to banking practices on letter of credit operations are contained in textbooks and articles in legal periodicals. Many of the authors of the treatises²⁹ are well recognized and highly regarded by the courts. Accordingly, the views of such legal writers as to whether a given practice remains the prevailing practice among bankers weigh heavily with judges.

5.31  An examining bank under a credit has a duty to ascertain that a presentation complies with the terms of the credit and the banking practices articulated in the UCP insofar as the practices are not irreconcilably at variance with the credit. In carrying out that task, the bank is entitled to take account of any banking practices (be it precepts settled by a local banking centre or published as official opinions by the ICC’s Banking Commission or academic commentaries) to the extent that the particular practice found is not in conflict with the related provision of the UCP. Where there is a conflict between them, the latter of course has to be given precedence.

5.33  To a substantial extent, the nature of an examining bank’s duty of care when performing its functions is clear-cut. To start with, the bank is only concerned with the presentation made to it, and not the goods, services, or performance to which the documents may relate.³⁷ Its task is entirely a ministerial rather than an investigative one.³⁸ It need not function as a detective agency and is under no obligation to verify the genuineness of the tendered documents, nor liable in failing to notice that the documents are a forgery.³⁹ Visual inspection of a presentation is all that is required. At the same time, however, the bank is not expected to ignore anything on the face of the documents that reasonably serves as a red flag suggesting that, although the documents are otherwise in apparent good order, they could not possibly be telling the truth about the picture of the transaction they purport to represent.

5.34  Thus, if an examining issuing or nominated bank negligently or inadvertently ignores reasonably suspicious features⁴⁰ in a document and makes payment against the presentation, it may be unable to claim reimbursement from the party⁴¹ which employed it. However, Messrs Isaac and Barnett hold the view⁴² that ‘if reasonable care is exercised but discrepant documents are accepted, the paying (accepting) bank should be entitled to debit its customer (the applicant), as it has not breached its duty’. This opinion cannot be right, and is contrary to authority. An issuing bank’s, indeed any bank’s, right to claim reimbursement in letter of credit operations essentially depends upon its furnishing the party from whom it seeks recoupment with strictly conforming documents; exercise of the duty of reasonable (p. 134) care plays no role in the matter.⁴³ But what is the position where the negligent failure of a presentee bank to properly handle a tender of documents causes loss to a presenting beneficiary? Put another way, does a presentee bank owe a beneficiary a duty to process presentment documents with reasonable care and diligence?

5.36  Certainly, these stances are not directed at a situation in which a beneficiary could not realize a credit prior to the expiry of the facility because the bank to whom it made a presentation neglected to give sufficient care and attention to the documents. In cases of this type, the question involved is whether the beneficiary can claim against the bank for its failure to act properly. Typically, this issue is unlikely to arise in situations where the presentee bank concerned is an issuing or confirming bank, the reason being that a negligent delay on its part in examining the presented documents could found a claim by the presenting beneficiary for breach of the issuing or confirming bank’s contractual obligation spelt out in the UCP.⁴⁸

5.37  But the problem can occur where the presentee bank in question is other than an issuing or confirming bank, for example, a bank authorized to negotiate under a credit in circumstances where it has not engaged to perform its mandate. As between such a presentee bank and a presenting beneficiary, there is no privity of contract.⁴⁹ In consequence, the primary basis on which the beneficiary may recover damages for the loss suffered is by showing that (p. 135) the bank owed it a tortious duty of care. Is the beneficiary entitled to succeed on a claim of this sort?

5.38  It is suggested that the beneficiary should be allowed to recover the financial loss incurred in consequence of the presentee bank’s carelessness. In this connection, the approach adopted by the United States Court of Appeals for the First Circuit in Flagship Cruises Ltd v New England Merchants⁵⁰ is instructive. Chemical Bank of New York (CB), a nominated negotiating bank under a credit which stated 3 November as the expiry date for negotiation, mailed drafts and documents to the issuing bank on 6 November for payment. In making the presentation, CB inadvertently left behind an attestation letter, which was one of the documents stipulated in the credit and duly furnished by the beneficiary. Upon noticing the error, CB forwarded it on 13 November. On the same day the issuing bank wired back that the statement had come ‘too late’ and that payment would not be made. In the resulting application for summary judgment filed against both the issuing bank and the nominated negotiating bank, it was held that whether or not the tender made by CB was timely involved an issue of fact precluding a summary judgment. The court, however, stated that if in the subsequent proceedings it was found that the presentation was untimely and thus relieved the issuing bank of liability on the credit, the nominated bank would have to pay the beneficiary if its failure to remit all the documents was the result of negligence on the bank’s part.⁵¹

5.39  Five years later in General Cable Ceat S.A. v Futura Trading Inc⁵² Carter J. handed down a decision along the lines adopted in Flagship. There, Bank of America (BA), a nominated bank under a letter of credit covering a shipment of power cables to the National Iranian Oil Company, took delivery of the beneficiary’s documents on 29 October 1979, but its letter of credit department did not begin inspection of the documents until Friday 9 November. As fate would have it, on Thursday 14 November, when the checking was still to be completed, President Carter issued an executive order freezing all Iranian assets in the United States. With payment on the credit thus rendered legally impossible, the beneficiary brought an action, claiming that he was unable to realize the credit before the freeze order supervened and thus suffered a financial loss because of the nominated bank’s negligent handling of the documents, in particular the bank’s eleven-day delay between the receipt and commencement of the examination of the documents.

5.40  Rejecting the bank’s contention that it was merely nominated to make payment under the credit and had assumed no liability to the beneficiary to do so, Carter J. reasoned that this does not in any way, shape, or form ‘limit BA’s duty of due care owed the beneficiary in processing its documents’.⁵³ His Lordship then dismissed the nominated bank’s application for judgment, but nevertheless concluded that the beneficiary’s allegations presented factual questions deserving of further exploration at a trial on the merits. In reaching that conclusion, the court underscored the point that the bank would be liable to pay the sums claimed if the negligent mishandling of the beneficiary’s documents was established at the hearing.(p. 136)

5.41  Flagship and General Cable were, admittedly, not decisions on the merits, but this does not diminish their wider significance, which is the recognition that a presentee issuing or nominated bank owes a duty to a presenting beneficiary to exercise reasonable care in handling the documents tendered to it. What is perhaps most important about those cases is that on the basis of the current state of English authorities regarding the circumstances when a duty of care may be imposed on a party in favour of another person with whom that party is in close proximity, an English court would be inclined to follow the American courts’ lead in a relevant future case.

5.42  The question is as to the approach an English court would adopt in determining the existence of a tortious duty of care in the context under focus. The issue does not seem to have been judicially addressed in the UK, nor seriously considered in the literature. In the ordinary case, as we have seen above, the loss suffered by a beneficiary by reason of a presentee bank’s negligence will be pure financial loss. The test for ascertaining whether a duty of care not to cause such loss exists in particular circumstances has been considered by the courts in a series of decisions⁵⁴ handed down by the House of Lords and the Court of Appeal in recent years. So far, the authorities have established no single overarching touchstone for making that determination,⁵⁵ but, as succinctly indicated by Lord Bingham in the Barclays Bank case,⁵⁶ three types of approach can be discerned therein. They are: (i) the voluntary assumption of responsibility test; (ii) the three-fold Caparo guideline;⁵⁷ and (iii) the incrementalism cross-check.

5.43  Of these tests, as Lord Hope of Craighead suggests in his concurring judgment in Mitchell v Glasgow City Council, the second is ‘currently the most favoured’.⁵⁸ Perhaps a more convenient way of stating it is that the first, compared with the second, is only applied in a much narrower category of cases, i.e. those involving a fiduciary relationship between a claimant and a defendant, and those where a defendant voluntarily answered a question or tendered skilled advice or services in circumstances in which he knows, or ought to know, that an identified claimant will rely on his answers or advice. On the other hand, the incremental test is used in combination with either of the other two approaches which identifies the legally significant features of a given situation. Generally, it requires that novel cases of negligence should be developed incrementally and by analogy with established categories. Thus, the closer the facts at issue in a particular litigation to those of a case in which a duty of care has been held to exist, the readier a court will be to find that there has been an assumption of responsibility or that the three conditions of the Caparo test are satisfied.⁵⁹(p. 137)

5.44  With the foregoing in mind, it would seem that the determination of whether a presentee bank in dealing with a tender of documents owes a presenting beneficiary a duty of care, calls for the application of the Caparo approach. Basically, the approach involves a three-stage inquiry: first, is the loss suffered by the beneficiary a reasonably foreseeable consequence of what the presentee did or failed to do? Second, does there exist between the parties a relationship of sufficient proximity? And third, having regard to the legal and factual context in which documents are tendered under a credit, is it fair, just, and reasonable that the law should impose a duty of a given scope on the presentee bank in favour of a presenting beneficiary? Let us turn now to pursue the inquiry in a little more detail.

5.45  Respecting the first limb of the Caparo precept, there can be no doubt that a reasonable bank in the shoes of a particular presentee of documents under a particular letter of credit would appreciate that there was a real risk that a neglect of ordinary care on its part to properly handle the documents could result in the presenting beneficiary being unable to realize the credit. Of course, presentment documents constitute the very essence of credit operations. It is the primary means by which a beneficiary triggers payment on the instrument.

5.46  By the same token, there is a close relationship between the parties. The requisite degree of proximity was established at the time when the beneficiary tendered the documents to the bank. It may be argued that where that bank is an issuing or confirming bank, the nexus came into being upon the opening of the credit vis-à-vis the beneficiary. But it is worth noting that until the beneficiary makes a presentation, the question of careful handling of documents by the bank does not arise. It is thus submitted that it is the furnishing of documents that creates proximity between the parties under focus. Once the documents are in the bank’s hands pursuant to the terms of the credit, the presenting beneficiary is thereby constituted the bank’s ‘neighbour’. In that regard, the classic words of Lord Atkin expressed in Donoghue v Stevenson⁶⁰ would appear to have direct application. In particular, in dealing with the documents the bank must take care to avoid acts or omissions which it could reasonably foresee would be likely to injure the presenting beneficiary.

5.47  The presenting beneficiary being the presentee bank’s neighbour, is their relationship such that it is fair, just, and reasonable that the law should impose liability on the latter for the benefit of the former in the event of its careless mishandling of tendered documents? The question is essentially whether there are sound policy and commercial reasons why liability should attach. It is submitted that there are a number of factors which can help to tip the scale in favour of the injured beneficiary.

5.48  As to policy, the overriding objective of every rational system of law is to provide an effective remedy against a wrongdoer for the benefit of the person injured by the wrongdoing. Indeed, it is often said by judges that the public policy consideration which has first claim on the loyalty of the law is that wrongs should be remedied and that only potent counter considerations can displace that policy.⁶¹ In the context under consideration, the beneficiary cannot found (p. 138) its claim for damages in contract because in the nature of things it is not in a contractual relationship with the negligent presentee bank, since the entity is not an issuing or a confirming bank. The proper route by which the courts can furnish it with an adequate remedy is by permitting it to recover damages in the tort of negligence. If this is not accepted, the result would be a grave defect in our law: a presenting beneficiary who is manifestly shown to have been wronged by the carelessness of a presentee bank would be left without compensation. It would also mean that in England such a presentee bank as we have seen in Flagship and General Cable could breach its duty with impunity, since the issuing bank who could sue it can only recover nominal damages on the ground that it has suffered no loss on account of the breach.

5.49  Yet another policy consideration requiring our courts in an appropriate case to recognize a duty of care of the scope here advocated, is that doing so would be incremental to the lead taken in the United States; the incrementalism test surely points towards adopting the development in the law which has been accomplished in that jurisdiction. From a commercial standpoint, imposing liability will not undermine the UCP scheme. On the contrary, it will assist the code to ensure good practice among the banks involved in credit transactions, regardless of whether the presentee nominated bank undertook no obligation to honour or negotiate the beneficiary’s tender. Furthermore, a beneficiary that tenders documents to a bank pursuant to the terms of a credit is entitled to anticipate that the bank will adhere strictly to the basic standards of professional competence prevailing among banks involved in letter of credit operations. These are legitimate expectations; if they are disappointed by the bank, the beneficiary should be entitled to redress against it.

5.50  An important issue related to the foregoing concerns the situation where an examining issuing or nominated bank finds in a presentation a document that is not stipulated in the credit. What should the presentee bank do in circumstances of this sort? Simply throw the excess document in the wastepaper basket? We have seen that, as a rule, an examining bank should take reasonable care in performing its duty. From this general rule it can be logically inferred that a document checker, upon confronting an unstipulated document, has a duty to refrain from acting in a manner that may injure the person who enlisted its services or tendered the documents to it. In other words, the bank should not eliminate a document from a presentation by reason only that the credit at hand does not expressly call for it. In substance, an important exception to this principle originated in the UCP via the second paragraph of Article 13 of the 1993 edition of the code. It is reproduced with significant modification under the new Article 14 (g) and says that a presented but unstipulated document ‘will be regarded’ by an examining bank; the change introduced is that the return of the document to the presenter is left to the absolute discretion of the examining bank.⁶²

5.51  In theory, pursuant to the sub-clause, a checker will take no account of any data in an additional document in determining whether a tender lives up to the terms of a credit. In practice, (p. 139) however, experienced presentee banks usually eschew that course of action. They do not make a knee-jerk reaction upon seeing an unstipulated document and shut their eyes to information contained in it. On the contrary, they are acutely aware that in that event they have to act reasonably and carefully, and that an examining bank may well be courting a needless lawsuit from a concerned party if it fails to so act. What this means is that, whether or not an extra document is to be disregarded crucially depends on the character of the information it provides, read together with all the accompanying stipulated documents as a whole.⁶³

5.52  Upon such a combined reading, if the additional document is considered to be significantly inconsistent with a representation made in another document, the presentee bank can ignore the former and take up the latter to the extent that it is in compliance with the credit.⁶⁴ In two types of situation, however, a reasonably careful examining bank would attach importance to the excess document. The first arises when it is found to materially complement the expressly stipulated documents. In that regard, the bank treats it as impliedly called for by the credit and therefore acceptable. The position is well illustrated by a considerable line of American and Singapore decisions. A brief evaluation of a few of the cases will suffice for present purposes.

5.53  The leading authority is Kumagai-Zenecon Construction Pte Ltd v Arab Bank plc.⁶⁵ In this case, the defendant issuing bank under a standby letter of credit undertook to make payment of the purchase price of certain shares which the applicant of the credit would be obligated to pay pursuant to a then pending Court of Appeal decision. As it happened, the judgment was duly released and it was ordered that the sum payable by the applicant judgment debtor was to be fixed by independent valuers of the shares. A day before the expiry of the credit, the claimant liquidators of the beneficiary presented to the issuing bank the two documents named in the credit (i.e. the sealed copies of the High Court and Court of Appeal judgments) and demanded payment, but the bank dishonoured the tender on the basis that it was not accompanied by the valuers’ report. Relying on the second paragraph of Article 13 (a),⁶⁶ the claimants argued that they were under no obligation to deliver the report to the bank, and that even if they had tendered it on their own volition, the presentee issuing bank would have been bound not to examine it. Judith Prakash J., giving judgment for the bank, pointed out (p. 140) that the presentation of the report was ‘clearly contemplated’ by the parties because without it the payable amount could not be ascertained by the bank and the credit would thus be inoperable.⁶⁷ The Court of Appeal affirmed principally on the basis that in order to give effect to the credit, the second paragraph of Article 13 (a) had to be ignored.

5.54  Another way of putting the matter is that the sub-article has a limited scope in the sense that it is only targeted at cases where there is an inconsistency between an additional document and a required document in a particular presentation. It has no application whatever to cases such as the instant one where the latter variety of document is positively supplemented by the former. In particular, had the claimants presented the contemplated but unstipulated valuation report, the court would have ordered the presentee issuing bank to perform its payment obligation under the credit, which is a different way of saying that a presentee bank faced with an unstipulated document should tread carefully in rejecting it.

The First Circuit decision in Flagship Cruises was discussed and applied by the Court of Appeals of Georgia in First National Bank of Atlanta v Wynne.⁷¹ In this case, the draft tendered under the letter of credit omitted to indicate on its face the requisite legend, but the covering (p. 141) statement correctly identified the draft as being drawn in connection with the credit. In finding for the beneficiary, the court determined that ‘if, from all the documents presented to the issuer by the beneficiary there is no possibility’ that a discrepancy in the stipulated documents could possibly mislead the document checker, then the tender is strictly compliant with the credit.⁷²

5.56  The letter of credit at issue in Braunfels National Bank v Odiorne⁷³ only called for a sight draft with the legend: ‘Draft drawn under irrevocable Letter of Credit No. 86-122-S’. The inscription on the tendered draft was in the requisite terms, except that the letter ‘S’ was transposed as ‘5’. In reversing the trial court’s decision, the Court of Appeals of Texas noted that the examining bank had no doubt about the credit under which the draft was drawn because ‘the draft in question was accompanied by and attached to the original letter of credit, which naturally had the correct credit number prominently displayed’. Although the original credit was not a stipulated document, the court emphasized that such an accompanying document was nevertheless to be given consideration in determining whether the presentation made by the beneficiary strictly complied with the requirements of the credit.⁷⁴

5.57  The second situation in which an examining bank is not entitled to disregard an unstipulated document occurs when the information it carries unmistakably indicates that the beneficiary is practicing a fraud in relation to the underlying sales transaction. An example is where the goods are described in an unrequired invoice as second hand, but reflected in a required, albeit possibly forged, stipulated document as new. In cases of this type, the examining bank is within its rights to take cognizance of the information furnished in the invoice and deny payment to the presenting beneficiary. But if the presenter is other than the beneficiary, e.g. an issuing bank vis-à-vis the applicant, or a nominated bank vis-à-vis the issuing bank, the presentee obligor has to reimburse that presenter, provided the required documents are in sufficiently good order; the irregularity in the tender will, of course, not matter, provided the presenter exercised good faith when it accepted the presentation for value from the fraudulent beneficiary.⁷⁵

5.58  The subtext to the foregoing cases is that, in performing its duty, the best guidance a presentee examining bank can count on is its professional expertise. Much of its experience is, in the very nature of things, forged by the regular application of the standard practices laid down in the UCP and other sources examined previously. One such practice entitles a presentee issuing bank to involve its customer, the applicant on whose instructions a credit is established, in the document examination process. The ways in which this right may be exercised without infringing the principles governing it will now be considered.

5.59  During the course of checking the documents tendered for honour or negotiation under a credit, an examining issuing bank may refer any discrepancy discovered to its customer, the applicant who instructed the opening of the credit or, if, in the particular case, the examining (p. 142) bank is a nominated bank, the nominating issuing bank, who will in turn communicate the matter to the applicant, to consider waiving the irregularity.⁷⁶ The examining bank has the absolute discretion to dishonour the presentation on the ground of the faulty documents without consulting with the applicant (or the nominating issuing bank), but it will usually not settle on rejection until it has approached that party.⁷⁷

5.60  Typically, the discovery of a discrepancy implies that the presentation does not conform to the credit and imposes an obligation on the examining bank to notify the defects entailing the non-conformity to the presenting beneficiary or nominated bank ‘no later than the close of the fifth banking day following the day’ the presentation was made to it.⁷⁸ If it fails to do so, the otherwise discrepant documents will be deemed accepted, accordingly obliging the examining issuing or conforming bank to pay the presenting beneficiary or nominated bank the sum on the credit, save that where the examining bank is other than the issuer or confirmer, it will be liable for damages in that sum (plus interest and probably costs of litigation) insofar as it omitted to act with reasonable diligence.⁷⁹ On this basis, if the examining bank is unable presumably at least an hour prior to expiration of the five-day deadline to receive a response from the applicant or the nominating bank as to whether he is prepared to waive the discrepancies referred to him, the safest course to take there and then should be to inform the presenting party that it (i.e. the examining bank) has refused the documents on account of their deficiencies (the defects must of course be set forth sufficiently clearly⁸⁰), but that the applicant is still to make up his mind to waive them.⁸¹

5.61  Nevertheless, the receipt of the applicant’s waiver of a discrepancy does not alter the issuing bank’s right to require the presenting beneficiary or nominated bank to present conforming documents;⁸² however, in certain circumstances (elaborated at length in Chapter 9 of this work), the court may deny this right, for example, where the issuing bank, by letters, telephone conversation, or words uttered face-to-face (inter praesentes, if Latin is preferred), lead the beneficiary reasonably to suppose that it will honour the documents if the defect in question is waived.⁸³

5.63  Third and last, the consultation process injects a considerable degree of efficiency into letter of credit operations. Barring unanticipated supervening events such as a sudden dramatic drop in the purchase price of the goods a credit had been established to finance, loss of the shipment owing to shipwreck, or government’s denial of an import licence, the applicant always waives discrepancies directed to him. Moreover, conflicting information is extremely common in documents submitted for payment; various statistics currently available show that over 70% of first time presentations often contain at least one material discrepancy.⁸⁵ If these were to be rejected and returned to the presenter without reference to the applicant, it will subsequently put this party, as well as the rejecting bank itself, in the unenviable position of having to expend time, money, and effort to chase after the documents, and of the presenting beneficiary or nominated bank having to make another presentation. So, the practice of consultation is in the interests of all the parties involved in the given credit transaction.⁸⁶

5.64  Notwithstanding the advantages of the practice, there seems to be uncertainty about what acts of an examining issuing bank are allowed while consulting the applicant. There is no doubt that the bank may transmit to him a list of the discrepancies together with the specific documents implicated. Indeed, in many cases, for example, those in which the disparities involve numerical figures, percentages, and other technical details in respect of which a bare enumeration would supply very little information on the actual nature of the relative problem, it would often be inevitable to include the documents concerned. But can the bank simply forward the documents to the applicant without itself having examined or indicated any fault in them, and, in reliance on the customer’s ultimate decision, dishonour the documents?

5.65  Dicta on this point are found in the judgment of GP Selvam J.C. in Amixco Asia (Pte) Ltd v Bank Bumiputra Malaysia Bhd,⁸⁷ and of Mance J. in Bayerische Vereinsbank v National Bank of Pakistan.⁸⁸ In Amixco, the judge said that Article 16 of UCP 400 (materially equivalent to Article 16, UCP 600) ‘does not preclude the issuing bank from referring the documents (p. 144) to the customer to look for discrepancies and adopt the discrepancies as its own if it agrees with them, as long as the bank does it within’ the timeframe for examining the documents.

5.66  Similarly, in Bayerische, the claimant presenter, an unreimbursed confirming Bavarian bank that had honoured its payment obligation to the beneficiary of a negotiation credit expressed to be subject to UCP 500 against documents it considered complying, argued, inter alia, that the defendant presentee, a Pakistani issuing bank, had ignored its duty under Article 14 (b) to determine itself whether there was any discrepancy in the documents and only if there was, to approach the applicant for a waiver. Despite finding that the issuing bank acted effectively as no more than a post office, both when it received the documents and passed them on to the applicant and when it received the applicant’s letter insisting on rejection of the presentation and passed it on to the claimant,⁸⁹ Mance J. ruled: ‘I would be inclined to accept that, if an issuing bank, without unreasonable delay, gives notice of a decision to refuse the documents, it is irrelevant whether the process by which it has reached such a decision complies with article 14 (b)’.⁹⁰

5.67  With these pronouncements may be contrasted Hirst J.’s conclusion in Bankers Trust Co v State Bank of India,⁹¹ affirmed by a majority of the Court of Appeal,⁹² that ‘Article 16⁹³ (for present purposes the equivalent of Article 16 (b) of UCP 600; and of Article 14 (b), UCP 500) places the responsibility for examination of documents and for deciding whether or not to reject them upon the issuing bank itself, as part of its contractual duty to ... the presenting bank’.

5.68  Which of the approaches, GP Selvam and Mance JJ.’s or Hirst J.’s (expressly upheld by the Court of Appeal⁹⁴), is correct? The answer must be gathered from Article 16 (b). According to the sub-article: ‘When an issuing bank determines that a presentation does not comply, it may in its sole judgment approach the applicant for a waiver of the discrepancies’. Read together with the well-known strict preclusive rule in Article 16 (f), the sub-article is saying, ‘if the issuing bank fails to make the determination, but leaves it for the applicant, it will be precluded from claiming that the documents are discrepant’. In particular, the issuer’s duty to examine a presentation is fundamental to the proper functioning of the letter of credit mechanism. Relevant clauses⁹⁵ in the UCP clearly disallow performance of the task of examination by proxy, not least because the duty is non-delegable. A presentee issuing bank’s entrustment of the responsibility to its customer, the applicant, is a breach which goes directly to the root of the issuing bank’s contract with the presenting beneficiary or nominated bank in much the same manner as a nominated bank’s negotiation or a beneficiary’s tendering of documents he knows, or should know, are infected with materially false data.⁹⁶(p. 145)

5.69  It is therefore submitted that the sub-articles, including the preclusive provision, caught such a presentee issuing bank as that in Bayerische, who Mance J. found to have acted simply as a post office. It is equally suggested that, contrary to the views sometimes entertained in court decisions,⁹⁷ the sub-clause entitling the issuing bank to approach the applicant for a waiver of discrepancies found in a presentation, does not prevent the issuing bank from submitting documents to the applicant, not to be inspected for the purpose of finding additional defects but to aid it in deciding if the irregularities the issuer has already spotted are such as he could waive. It may be added that issuing banks do not release shipping documents to the applicant with enthusiasm: time and again, many an applicant would exploit the opportunity to take delivery of the goods from the ship at the port of destination and quickly dispose of them, placing the issuer in the patently difficult position of having to discharge its payment undertaking to the presenting beneficiary or nominated bank, and seek reimbursement from the applicant (if he is not insolvent), possibly by litigation, or consider the possibility of pursuing recovery against the carrier.⁹⁸

5.70  The discretion conferred by Article 16 (b) on an issuing bank to consult the applicant when examining a presentation surely has a very narrow scope. Other than what has just been mentioned, it should be emphasized that it does not permit the bank to shift onto the applicant the responsibility of determining whether or not the documents presented meet the requirements of the credit; nor adopt as its own a decision by the applicant to refuse the tender or the discrepancies revealed by the applicant’s checking of the documents. The issuing bank is not allowed to do any of these because the applicant, in reaching his decision as to the conformity of the presentation, almost certainly digs into facts extraneous to the documents, e.g. making phone calls to certain shipping companies to verify the exact time of shipment and comparing the outcome of the inquiry with what is stated in the presented bill of lading, facts which the express terms of the issuing bank’s engagement in the credit forbid the bank from going into while performing its examination duty.

5.71  In other words, then, if the dicta by Mance J. and GP Selvam J. were to be accepted, it would mean that a presentee issuing bank has the privilege to exploit its discretion to achieve, by the back door, what it could not do through the front, merely on the ground that the evidently discreditable act is not in breach of the timescale for establishing compliance of the presentation. It is suggested that the issuing bank’s responsibility both to determine the regularity of documents and to comply with the five-day timescale are essentially different requirements; satisfaction of one does not go to satisfy the other. Their Lordships, in all probability, overlooked this aspect of the issue in ruling as they did. And it is also the main reason why the next section is separately devoted to the method of ascertaining adherence in the latter context.

5.72  The provisions respecting the time within which an examining bank must complete the document verification process rank among the major innovations introduced in the UCP 600. Article 14 (b) states that the bank shall have ‘a maximum of five banking days’ following (p. 146) the day of receipt of the documents. Under the second sentence of the sub-article, the fact that the expiry date for presentation stipulated in the credit has almost arrived, will not affect or curtail the five-day period.

5.73  Taking first the latter of the reforming provisions, its object is probably to tackle the difficulty frequently encountered by a beneficiary when it tenders documents to an issuing or a confirming bank within the last few days of the validity of a credit: in practice under the preceding regime many such banks often thought that they had no duty to examine such a tender if it comprises a set of bulky documents and the examination process could not be completed by the time the credit was due to expire. It is now clear that that view is mistaken. Thus, in the worst case scenario involving a tender of a sizable number of documents made on the very day a credit lapses, the bank’s obligation to carry out its examination functions remains. It does not lapse with the credit. A failure to perform may engage the preclusive provisions set out under Article 16 (f).

5.74  With regard to the initial part of Article 14 (b), the five-day timeframe for an examining bank to ascertain the conformity of a presentation supersedes Article13 (b) of the UCP 500, which had stipulated ‘a reasonable time, not exceeding seven banking days’. Evidently, the replacement is borne out of an anxious desire by the UCP 600 Drafting Group to address the controversies that involved the former provision. Professor Debattista summarizes the main arguments as follows:

First, it was commonplace to hear it suggested that the UCP 500 gave banks seven banking days, rather than a reasonable time up to seven banking days, in which to decide whether to accept or reject documents. Secondly, even within any one jurisdiction, there were several factors which might affect whether a particular interval was or was not reasonable. Thirdly, what was reasonable could differ as between different financial centres.⁹⁹

‘These sources of uncertainty surrounding the question as to how many days short of seven constituted a “reasonable time”’, Debattista concludes, ‘led an overwhelming majority of ICC National Committees to recommend the deletion of this phrase and to give each bank involved in the letter of credit chain a fixed maximum number of days in which to examine the documents’. However, as will be shown shortly, the extent to which it has streamlined the document checking process and infused certainty and simplicity into the erstwhile timescale is highly debatable. In particular, it is important to consider whether the new initiative is to be regarded as having entirely substituted a rigid timescale for a flexible one simply because the expression ‘reasonable time’ has been excluded. But before then, let us clear up a few preliminary points.

5.75  ‘Banking days’ as appears in the old sub-article was then unexplained, but it is helpfully stated in the new revision as any day, regardless of whether it is a half or full day, on which a bank is regularly open for letters of credit business.¹⁰⁰ Naturally, such days will vary widely among (p. 147) banks, but in any event it will exclude public holidays. In most banks Sundays are omitted as well, with very few banks also excluding Saturdays. Thus, by way of illustration, where an issuing bank or a nominated bank receives documents on a Friday, the five-day period will run from the next day to Thursday of the following week, depending, as already mentioned, on whether, in the particular bank in question, a Saturday is a banking day.¹⁰¹ Assuming it is, the party that tenders the documents is entitled to have the examination exercise concluded, and be advised of any discrepancy in the documents (if any),¹⁰² by Thursday at the latest.

5.76  As is apparent in the illustration just furnished, the question arises whether the bank has the entire length of time, namely Saturday to Thursday, to conduct the checking of the documents. This is of considerable practical importance particularly in cases where the set of documents tendered is comprised of a mere draft and a certificate.¹⁰³ Now, do the drafters of the Code contemplate that the bank in such a case can sit on the documents for five days, when it can complete the examination process within a few hours and there and then make payment? It must be hard to accept that it is up to the bank to do so for various reasons. First, as a matter of general principle,¹⁰⁴ the obligation of an issuing bank (and a confirming bank, if any) under a credit encapsulates a promise to conduct a reasonably competent and diligent examination of the documents received under the credit. Accordingly, taking an excessive number of days, from whatever perspective it may be viewed, constitutes a violation of that promise, a breach for which the beneficiary can raise a claim for damages.¹⁰⁵

5.77  On the other hand, looking at the wording of Article 14 (b), ‘the bank shall have a maximum of five banking days ... to determine if a presentation is complying’, it is indeed obvious that its drafters do not intend to impose an inflexible time limit in every case of document checking, other than a five-day cap. The actual number of days a bank may spend on the task must inevitably depend on the number of documents tendered under the credit. Under certain credits, as we have already noted, the entire presentation will involve less than five different documents containing between them at most ten pages. In such a case, a reasonably diligent bank will be done with the document verification on the first or second day following the day the presentation was made to it.

5.78  In such an eventuality, Article 15 will come into play. The article in relevant part articulates that an issuing bank or a confirming bank must honour ‘when ... it determines that a presentation is complying’. Taken together with the length of time under focus, the word ‘when’ must be understood to mean the point in time (e.g. the first or second day) at which a bank performing its document examination duty in a reasonably competent and diligent manner would, in the particular circumstances, have completed checking the documents and arrived at a decision as to their conformity.(p. 148)

5.79  The conclusion is thus inevitable that an issuing bank or a confirming bank shown by the beneficiary to have waited for the fifth day to honour a presentation, despite having determined, or reasonably to be regarded as being in a position to have determined, on the first or second day that the documents are complying, should be considered in breach of its duty to the beneficiary.¹⁰⁶

5.80  In view of the foregoing, it might be asked, where is the innovation Article 14 (b) has introduced into the timescale for carrying out the document examination exercise? At bottom, the only change introduced is the reduction of the erstwhile seven-day upper limit to a five-day ceiling. In all other aspects, the position remains unchanged. As was the case under the old Article 13 (b), the question whether an issuing banker or a confirming banker performed his checking duty with reasonable promptness will continue to be of relevance under the new dispensation, the reason being that by opting for the expression ‘shall have a maximum of five banking days’ rather than, for instance, ‘shall have five banking days’, its drafters implicitly intended to cover situations in which the bank would not need the whole of the five days to discharge its examination duty. Consequently, the various factors¹⁰⁷ to take into account in determining whether a given set of documents has been examined reasonably promptly, which have previously been recognized by the courts,¹⁰⁸ should be considered applicable today.¹⁰⁹

5.81  It may be that some sceptics will regard the arguments just advanced as heresies. But it must be emphasized that whatever position one adopts on the matter ought to accord paramount consideration to the best interests and protection of a present beneficiary and a nominated bank alike, rather than those of potential issuing banks and applicants. By way of illustration, it is not uncommon for a beneficiary to make a presentation less than four days prior to the expiry of a credit. More specifically, suppose a beneficiary presents a draft and a couple of documents to an issuing bank on 13 July 2009 under a credit containing 17 July 2009 as the deadline for presentation, and upon examination of them on 14 July the bank spots a valid discrepancy. Pursuant to the ‘reasonable time, not to exceed seven banking days’ rule stated in the old Article 13 (b), the issuing bank must determine on that same day (or, on account of the type and number of the documents involved, the next day, 15 July, at the latest) whether it would stand on its rights to reject the documents or honour them despite the irregularity. It was not entitled to defer making that decision until 22 July, the seventh banking day following the day it received the documents, otherwise it would violate the then Article 14 (b) and thus incur the sanction set forth in Article 14 (e). As will readily be (p. 149) observed, Article 13 (b) safeguarded the beneficiary’s interests in that the bank’s performance of its obligation would inevitably afford the beneficiary a precious opportunity to revise the documents and, at all events, re-tender them before the close of banking business on Friday 17 July when the life of the credit terminates.

5.82  In contrast, if the new clause is taken as establishing a rigid timeframe, the result in the hypothetical case sketched out above is startling: the issuing bank can keep the discovered discrepancy to itself until Monday 20 July (being the fifth banking day following receipt of the documents) when it is obligated to advise dishonour of the presentation. In that regard, regularizing the faulty documents will be out of the question, as the credit has already expired as of 17 July. The hapless presenting beneficiary or nominated bank will thus be unpaid despite having delivered documents some four days before the credit lapsed. Many an issuing bank will be glad of the opportunity to bring about this result at the urging of an applicant that happens to be a valuable customer or in circumstances where it is anxious about obtaining reimbursement under the underlying agreement for the issuance of the credit on the ground that the applicant who is to put it in funds has run into serious financial difficulties.

5.83  What it all boils down to is that a wooden application of the new timescale will enable unscrupulous examining issuing banks to frustrate otherwise curable defective tenders and considerably undermine the utility of letters of credit. It is to be hoped that if the occasion presents itself the courts will refuse to lend their resources to aid the devices of such a bank, but will instead welcome the position here put forward, namely that the Article 14 (b) timeframe for completing the examination of a presentation does not entitle an examining bank to sit on tendered documents until the fifth banking day following the day the tender is made to it.

5.84  A presentee bank has an obligation to use reasonable care and diligence when examining a presentation under a credit, or transmitting a set of documents it chooses not to honour or negotiate to an issuing or confirming bank. On the surface, ascertaining the nature and precise scope of the duty might appear to be fraught with difficulties. For instance, it may be asked: why should a presentee nominated bank with no contractual obligation to act on its nomination be nevertheless treated as owing a duty in tort to a presenting beneficiary to live up to the standards of a reasonable international banker engaged in letter of credit operations? However, upon a close consideration of the matter, and with the aid of the prevailing principles established in decisions already discussed, it is legitimate to conclude that letter of credit law and banking practice cannot be expected to lend a sympathetic ear to a presentee bank that neglects to handle a presentation with the utmost care. As argued, the duty requires it to refrain from ignoring a tendered but unstipulated document if the unstipulated document materially complements the presented stipulated documents (classically illustrated by the very important Singapore case of Kumagai-Zenecon) or the unstipulated document reasonably shows that the applicant is perpetrating a fraud on the beneficiary (as occurred in Soproma, albeit nothing turned on the issue).

5.85  The presentee examining bank also needs to act carefully and diligently in consulting its customer, the applicant, about a presentation the presentee considers non-complying. Clearly, the presentee would not be justified in handing the documents to the applicant to scrutinize them and then simply passing the applicant’s findings to the presenting beneficiary or (p. 150) nominated bank as its own and withholding payment. Where it nonetheless decides on such a course, it will have failed to act in accordance with Article 16 (b) of the UCP 600 and, in consequence, triggers the preclusive provision of Article 16 (f): it will forfeit the right to dishonour the documents on the basis of their deficiency.

5.86  Similarly, the duty to use reasonable diligence when checking the conformity of the documents received, implies an obligation to avoid sitting on the presentation. This is particularly because the wording of Article 14 (a), that an examining bank ‘shall have a maximum of five banking days ... to determine if a presentation is complying’, should not be read as laying down an invariable five-day rule. If the sub-article had been meant to achieve the contrary of what is here canvassed, then it is not obvious why the word ‘maximum’ should be employed at all. At any rate, the point is as to the proper meaning to be attributed to the clause.

5.87  In this connection, the cardinal rule for construing contractual clauses, a rule emphasized throughout this book, directs that effect must as far as possible be given to the words used in conformity with the meaning which the clause in question would convey to a reasonable banker participating in letter of credit transactions. So informed, the reasonable banker would be very likely to assign to the drafters’ choice of the word ‘maximum’ an intention to leave the allowable minimum time to vary according to the commercial necessities of the individual cases, which necessities the judge before whom the matter comes can determine on the evidence adduced. At all events, a bank which claims to have used five banking days to examine, for example, a presentation consisting of a draft and a mere two-page certificate attesting to an event of default under a standby credit ought to be taken as being prima facie in breach of its duty to exercise reasonable diligence in executing its functions. It will then be its burden to provide a plausible explanation for using several days to scrutinize documents that should ordinarily take no more than an hour or two to dispose of. If an examining bank says it cannot comply with the minimal obligation advanced, it would be well-advised to re-consider its participation in the letter of credit business.