Historic court cases revisited

[January 2008]

Submitted as a Single Window Question I received a somewhat unusual question:

I have read your article on LC in court room. Certainly it was very useful. I will highly appreciate if you could please discuss the cases in the light of 600.

[Submitted by Sajib]

I accepted the challenge, and the below is an attempt to do exactly that. It goes without saying that the mentioned court cases will not be changed even where a new version of the UCP is implemented – but it may well be that a 100% identical case would in fact reach a different result. One should also acknowledge that once the LC steps into the court room it is a totally different ball game – and a vast complex of elements may in fact affect the final verdict. 

Original documents

Comparing the provisions on what constitutes an original document it is evident that the controversies about this have indeed affected the wording of the UCP 600:

UCP 500 sub-article 20(b)

Unless otherwise stipulated in the Credit, banks will also accept as an original document(s), a document(s) produced or appearing to have been produced:

i. by reprographic, automated or computerized systems, 

ii. as carbon copies, 

provided that it is marked as original and, where necessary, appears to be signed.

A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication.

UCP 600 article 17
(Original Documents and Copies)

a. At least one original of each document stipulated in the credit must be presented. 

b. A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original.

c. Unless a document indicates otherwise, a bank will also accept a document as original if it:

i. appears to be written, typed, perforated or stamped by the document issuer’s hand; or

ii. appears to be on the document issuer’s original stationery; or

iii. states that it is original, unless the statement appears not to apply to the document presented.

d. If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.

e. If a credit requires presentation of multiple documents by using terms such as “in duplicate”, “in two fold” or “in two copies”, this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise.

UCP 600 clearly addresses the issue discussed in the two court cases – namely what constitutes an original document.  Reading through article 14 it is evident that “originality” can be achieved in a number of ways – not limited to the documents being “marked original”.

One must expect however that UCP 600 article 14 does not change the current practice (year 2007/2008) – it merely supports it. The reason for this is that this issue has been addressed in official ICC publications a number of times. First in the ICC Policy statement: “The determination of an "Original" document in the context of UCP 500 sub-Article 20(b)” – later in ISBP (2003) §§ 31-35 – and then again in ISBP (2007) §§ 28-33.

As such the ICC Policy statement mentioned above effectively solved the case – and the new wording in UCP 600 merely supports this solution.

Refusals v. holding documents at the disposal of ..

The background for the cases related to the above was a (at that time) new practice that had emerged namely that when refusing documents the issuing bank would state that they would contact the applicant for a waiver – and if such was received would effect payment and release document to the applicant without further notice.

This practice was not in line with the UCP 500 provisions and would constitute a problem (risk) for the issuing bank unless this was integrated into the specific LC – effectively modifying the UCP 500 provisions.

While drafting the UCP 600 the drafting group acknowledged this practice, and did in fact build it into article 16. A comparison of how to dispose of refused documents looks as follows:

UCP 500 sub-article 14(d)(ii)

Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.

[emphasis added]

UCP 600 sub-article 16(c)(iii)

a) that the bank is holding the documents pending further instructions from the presenter; or

b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or

c) that the bank is returning the documents; or

d) that the bank is acting in accordance with instructions previously received from the presenter.

The consequence of the above is that at least the two mentioned court cases would (at the outset) have reached a different result. Under the UCP 500 the acts of the issuing bank was not acceptable – while it would have been under UCP 600 had they used option “b” above.

Bill of lading clauses

In short this issue is still outstanding. There is no established practice in the banking community whether or not a clause in a negotiable B/L presented under an LC worded as follows:

If required by the Carrier one (1) original Bill of Lading must be surrendered duly endorsed in exchange for the goods or delivery order."

Is or is not a valid reason for refusal. The status is that one national ICC committee have asked this question to the ICC Banking Commission asking for their official opinion. The question has been circulated to the other national ICC committees in order to evaluate if it is indeed possible to achieve consensus on this issue. That still remains to be seen.

Deferred payment credits

Behind this headline is one of the most famous and most quoted LC court cases ever, namely the so-called “Banco Santander Case”. The scenario in the case was that a nominated bank had prepaid the beneficiary under a deferred payment LC. This payment was done after the issuing bank had accepted the documents – but before maturity. The issuing bank received a stop payment order before maturity – and the question was if the nominated bank was protected by the UCP 500 – i.e. had the right to be reimbursed by the issuing bank. The judge found this prepayment an agreement outside the LC – at the sole risk of the nominated bank. In other words the nominated bank was not reimbursed.

In order to avoid future cases no less than 3 sub-articles were added to the UCP 600:

Sub-article 12(b):

By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.

Sub article 7(c) (Issuing Bank Undertaking) (excerpt)

… Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity…

Sub article 8(c) (Confirming Bank Undertaking) (excerpt)

… Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity…

The signal in the above quotes is clear: The act of prepaying or purchasing under deferred payment or Acceptance LCs is within the nomination given by the issuing bank. This has (as far as I know) not been tested in a court room – but it is my sincere hope these new wordings will indeed change things – and a case similar to the Banco Santander case would have the exact opposite result. That remains to be seen however.

Conclusion

One may think what one may about the UCP 600 – if does however address all above cases – except for one: The bill of lading clauses. It will be interesting to see the concrete result of the changes made to the UCP in the years to come. This may sound as if I wish for lawsuits. I do not – and will conclude this – the exact same way I did the original article:

As a final remark I should of course say, that the LC is better of – being out of the courtroom. It is simply better to have cases solved between the parties. Lawsuits should be the absolutely last resort.