Post by Patric McGonigal on May 29, 2010 9:09:00 GMT 4
United Kingdom: Preclusion under UCP600 - Banks Beware!
28 May 2010
In what we believe to be one of the first reported judgments of the English High Court on the application of UCP600, it was held earlier this year in a dispute between Fortis Bank ("Fortis") and Indian Overseas Bank ("IOB")1 that the preclusion provided for by Article 16(f) of UCP6002 will apply to the conduct of an issuing bank even after it has issued a notice rejecting documents presented under a documentary credit.
Background
Documents were presented by Fortis on behalf of its customer Stemcor UK Limited under five letters of credit. Payment was refused by IOB on the basis of a series of grounds all of which, save for one, were subsequently held by the Court to be invalid. One documentary discrepancy was found to be valid, the "Consolidated Certificate Discrepancy"; however, Fortis argued that IOB was in any event precluded from relying on such a discrepancy because it had waived its right to do so by having failed to act in accordance with the provisions of Article 16 of UCP600.
Article 16 ("Discrepant Documents, Waiver and Notice") sets out the rules surrounding the refusal by a bank of non-compliant documents presented under a letter of credit. Amongst other things, where a bank determines that a presentation does not comply it must send a notice: (i) stating it is refusing to negotiate or honour the credit; (ii) identifying each discrepancy relied upon; and (iii) explaining how it will deal with the documents (i.e. a "disposal notice"). Article 16(f) states that if a bank fails to act in accordance with the provisions of Article 16, it shall be precluded from claiming that the documents do not constitute a complying presentation.
In this case, IOB rejected several drawings under various letters of credit and issued disposal notices indicating that it was returning the documents presented. Fortis responded insisting on payment and demanding that IOB continue to hold the documents at its counter. Subsequently, IOB rejected various further presentations and issued several further disposal notices.indicating that it was holding the documents presented pending Fortis' further instructions. After various exchanges between the two banks, Fortis then instructed IOB to return the documents by urgent courier. All of the documents were eventually returned by IOB but this entailed a delay of between 89 and 104 days in the case of the first set of documents which IOB had indicated initially, it was returning, and a delay of 34 days in the case of the second set of documents which IOB had said would be held and Fortis had later requested to be returned.
Claim
By delaying to such an extent the return of the documents, Fortis claimed that IOB had not complied with its obligations under Article 16 and, by reference to Article 16(f), was therefore precluded from relying on any documentary discrepancies.
Issues
The dispute essentially turned upon one key issue: whether the preclusion in Article 16(f) applied in relation to actions taken (or not taken) subsequent to the issue of a disposal notice. IOB argued that it did not and that it was under no obligation to act upon the statements of intent contained in the disposal notices; there was no express term in Article 16 requiring it to do so. In support, IOB referred to the fact that the previous version of this provision, Article 14 of UCP500, was amended so that the words "...and/or_fails to hold the documents at the disposal of, or return them to the presenter..." were deleted. IOB argued that this indicated the drafters of UCP600 intended to restrict the application of the preclusion in Article 16(f) to acts by a bank made prior to and including the issue of a disposal notice and that acts made following the issue of a disposal notice fell outside the scope of Article 16(f).
Fortis contended that if IOB was correct and it was not obliged to return the documents, this would defeat the purpose of the UCP of introducing certainty, reliability and uniformity. In addition, it would prejudice the beneficiary's ability promptly to protect its own interests, whether by dealing with the documents or re-presenting compliant documents. Amongst other things, it was Fortis' position that each of the disposal notices should be construed as involving an undertaking by IOB to act in accordance with each disposal statement and to do so with reasonable promptness. Alternatively, Fortis argued that such a provision should be implied.
Judgment
In adopting a purposive approach to the construction of Article 16 UCP600, the Court sought to reflect what it described as "the best practice and reasonable expectations of experienced market practitioners".
In this context and having taken into account evidence given by the parties' banking experts, the Court agreed with Fortis that a contractual requirement to state that documents are to be returned or are being held in accordance with or pending instructions necessarily involves an undertaking to comply with those instructions since that is the self evident purpose of being required so to state. As for the changes made to the equivalent provision under UCP500, the Court took the view that there may have been many explanations for the amendment other than a desire to effect a change (for example, a desire to simplify the language used), but no good banking reason had been advanced to explain why such a change as advocated by IOB should be made to what was described as a "long established and recognised requirement".
In reaching this conclusion, the Court was influenced by the "very serious consequences" for a beneficiary's rights and security if a bank failed to deal with the presented documents. On the facts of this case, there were also significant demurrage and storage costs to be taken into account.
Moreover, the Court was willing to reach the same result by implying a term into UCP600 that a bank is obliged to act in accordance with the disposal statement it has made in its Article 16 notice. Applying the considerations set down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings3, the Court found that:
1. it is both reasonable and equitable to require a bank to act in accordance with the mandatory disposal statement it has 3 (1977) 180 CLR 266, 282-283 made under contract;
2. this is necessary to give business efficacy to the contract as there is otherwise no contractual means of ensuring compliance;
3. it is so obvious, "it goes without saying", that if a bank makes a disposal statement it must actually do what it says it will do;
4. this is clearly expressed by adding the following words to the end of Article 16(c)(iii): "and the bank must act in accordance with such statement"; and
5. there is no contradiction between this implied wording and the express wording of the contract.
No specific time period was set out by the Court within which the actions stated in a disposal notice should be taken, although it was noted that one would expect most banks to be able to courier documents within one or two days. As such, the Court held that where documents were to be returned or instructions from the presenter complied with, the bank should do so with "reasonable promptness" – the bank is not making a decision in this regard, all that is required is for the return of the documents to be arranged. Implicit in this is the fact that actual circumstances facing the bank which might hinder the return of discrepant documents can of course be taken into account, although the presenter should nevertheless be informed of any such delays.
On the facts, the Court held that IOB's delay in returning the documents to Fortis precluded it from relying on any documentary discrepancies and obliged it to honour each discrepant presentation in full.
Conclusion
This judgment serves to underline a bank's obligations in circumstances where it has received non-compliant documents under a letter of credit: it must issue an Article 16 disposal notice; it must comply with the statements set out in such a notice; and it must do so reasonably promptly. A failure to do so may result in the bank having to honour a presentation even though the presentation may not comply with the terms of the credit and even though the presenting party may have replied to a "return" disposal notice demanding that the documents be retained (and payment made) rather than be returned.
In short, although the Court dismissed, on the facts, an argument by Fortis that a disposal notice must be true to be valid, the reality is that banks must take care to do what they have undertaken to do and to do so reasonably promptly. While this may have been a relatively straightforward conclusion to reach on the facts of this case (i.e. there was a delay by IOB of at least five weeks to return documents) a more difficult scenario might be one involving an alleged delay of say just a few days or one week. The bottom line is that banks must ensure that once documents are determined to be discrepant and a disposal notice is issued, they act as promptly as is reasonably practicable in the circumstances so as to avoid any claim of preclusion on the basis of Article 16(f).
Footnotes
1 Fortis Bank SA v Indian Overseas Bank [2010] EWHC 84 (Comm)
2 UCP600 is the latest in a series of six revisions of a set of rules governing the use of documentary credits in international commerce. They do not have the force of law but will be binding if incorporated into a particular credit. UCP600 came into force on 1 July 2007.
28 May 2010
In what we believe to be one of the first reported judgments of the English High Court on the application of UCP600, it was held earlier this year in a dispute between Fortis Bank ("Fortis") and Indian Overseas Bank ("IOB")1 that the preclusion provided for by Article 16(f) of UCP6002 will apply to the conduct of an issuing bank even after it has issued a notice rejecting documents presented under a documentary credit.
Background
Documents were presented by Fortis on behalf of its customer Stemcor UK Limited under five letters of credit. Payment was refused by IOB on the basis of a series of grounds all of which, save for one, were subsequently held by the Court to be invalid. One documentary discrepancy was found to be valid, the "Consolidated Certificate Discrepancy"; however, Fortis argued that IOB was in any event precluded from relying on such a discrepancy because it had waived its right to do so by having failed to act in accordance with the provisions of Article 16 of UCP600.
Article 16 ("Discrepant Documents, Waiver and Notice") sets out the rules surrounding the refusal by a bank of non-compliant documents presented under a letter of credit. Amongst other things, where a bank determines that a presentation does not comply it must send a notice: (i) stating it is refusing to negotiate or honour the credit; (ii) identifying each discrepancy relied upon; and (iii) explaining how it will deal with the documents (i.e. a "disposal notice"). Article 16(f) states that if a bank fails to act in accordance with the provisions of Article 16, it shall be precluded from claiming that the documents do not constitute a complying presentation.
In this case, IOB rejected several drawings under various letters of credit and issued disposal notices indicating that it was returning the documents presented. Fortis responded insisting on payment and demanding that IOB continue to hold the documents at its counter. Subsequently, IOB rejected various further presentations and issued several further disposal notices.indicating that it was holding the documents presented pending Fortis' further instructions. After various exchanges between the two banks, Fortis then instructed IOB to return the documents by urgent courier. All of the documents were eventually returned by IOB but this entailed a delay of between 89 and 104 days in the case of the first set of documents which IOB had indicated initially, it was returning, and a delay of 34 days in the case of the second set of documents which IOB had said would be held and Fortis had later requested to be returned.
Claim
By delaying to such an extent the return of the documents, Fortis claimed that IOB had not complied with its obligations under Article 16 and, by reference to Article 16(f), was therefore precluded from relying on any documentary discrepancies.
Issues
The dispute essentially turned upon one key issue: whether the preclusion in Article 16(f) applied in relation to actions taken (or not taken) subsequent to the issue of a disposal notice. IOB argued that it did not and that it was under no obligation to act upon the statements of intent contained in the disposal notices; there was no express term in Article 16 requiring it to do so. In support, IOB referred to the fact that the previous version of this provision, Article 14 of UCP500, was amended so that the words "...and/or_fails to hold the documents at the disposal of, or return them to the presenter..." were deleted. IOB argued that this indicated the drafters of UCP600 intended to restrict the application of the preclusion in Article 16(f) to acts by a bank made prior to and including the issue of a disposal notice and that acts made following the issue of a disposal notice fell outside the scope of Article 16(f).
Fortis contended that if IOB was correct and it was not obliged to return the documents, this would defeat the purpose of the UCP of introducing certainty, reliability and uniformity. In addition, it would prejudice the beneficiary's ability promptly to protect its own interests, whether by dealing with the documents or re-presenting compliant documents. Amongst other things, it was Fortis' position that each of the disposal notices should be construed as involving an undertaking by IOB to act in accordance with each disposal statement and to do so with reasonable promptness. Alternatively, Fortis argued that such a provision should be implied.
Judgment
In adopting a purposive approach to the construction of Article 16 UCP600, the Court sought to reflect what it described as "the best practice and reasonable expectations of experienced market practitioners".
In this context and having taken into account evidence given by the parties' banking experts, the Court agreed with Fortis that a contractual requirement to state that documents are to be returned or are being held in accordance with or pending instructions necessarily involves an undertaking to comply with those instructions since that is the self evident purpose of being required so to state. As for the changes made to the equivalent provision under UCP500, the Court took the view that there may have been many explanations for the amendment other than a desire to effect a change (for example, a desire to simplify the language used), but no good banking reason had been advanced to explain why such a change as advocated by IOB should be made to what was described as a "long established and recognised requirement".
In reaching this conclusion, the Court was influenced by the "very serious consequences" for a beneficiary's rights and security if a bank failed to deal with the presented documents. On the facts of this case, there were also significant demurrage and storage costs to be taken into account.
Moreover, the Court was willing to reach the same result by implying a term into UCP600 that a bank is obliged to act in accordance with the disposal statement it has made in its Article 16 notice. Applying the considerations set down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings3, the Court found that:
1. it is both reasonable and equitable to require a bank to act in accordance with the mandatory disposal statement it has 3 (1977) 180 CLR 266, 282-283 made under contract;
2. this is necessary to give business efficacy to the contract as there is otherwise no contractual means of ensuring compliance;
3. it is so obvious, "it goes without saying", that if a bank makes a disposal statement it must actually do what it says it will do;
4. this is clearly expressed by adding the following words to the end of Article 16(c)(iii): "and the bank must act in accordance with such statement"; and
5. there is no contradiction between this implied wording and the express wording of the contract.
No specific time period was set out by the Court within which the actions stated in a disposal notice should be taken, although it was noted that one would expect most banks to be able to courier documents within one or two days. As such, the Court held that where documents were to be returned or instructions from the presenter complied with, the bank should do so with "reasonable promptness" – the bank is not making a decision in this regard, all that is required is for the return of the documents to be arranged. Implicit in this is the fact that actual circumstances facing the bank which might hinder the return of discrepant documents can of course be taken into account, although the presenter should nevertheless be informed of any such delays.
On the facts, the Court held that IOB's delay in returning the documents to Fortis precluded it from relying on any documentary discrepancies and obliged it to honour each discrepant presentation in full.
Conclusion
This judgment serves to underline a bank's obligations in circumstances where it has received non-compliant documents under a letter of credit: it must issue an Article 16 disposal notice; it must comply with the statements set out in such a notice; and it must do so reasonably promptly. A failure to do so may result in the bank having to honour a presentation even though the presentation may not comply with the terms of the credit and even though the presenting party may have replied to a "return" disposal notice demanding that the documents be retained (and payment made) rather than be returned.
In short, although the Court dismissed, on the facts, an argument by Fortis that a disposal notice must be true to be valid, the reality is that banks must take care to do what they have undertaken to do and to do so reasonably promptly. While this may have been a relatively straightforward conclusion to reach on the facts of this case (i.e. there was a delay by IOB of at least five weeks to return documents) a more difficult scenario might be one involving an alleged delay of say just a few days or one week. The bottom line is that banks must ensure that once documents are determined to be discrepant and a disposal notice is issued, they act as promptly as is reasonably practicable in the circumstances so as to avoid any claim of preclusion on the basis of Article 16(f).
Footnotes
1 Fortis Bank SA v Indian Overseas Bank [2010] EWHC 84 (Comm)
2 UCP600 is the latest in a series of six revisions of a set of rules governing the use of documentary credits in international commerce. They do not have the force of law but will be binding if incorporated into a particular credit. UCP600 came into force on 1 July 2007.