The historic court cases that affected rules and customs, practices and practioners


Many LC bankers have strong feelings against judges and courts interfering with the UCP 500 and the practice surrounding the LC.  It is, however, a given fact – that in some cases this is the result – and in some of those the decisions taken by the courts have a direct impact on the rules and practice of LC’s.

In the following I will focus on some “famous” LC cases, and how they have – or perhaps will – change(d) LC rules and practice.

Original documents

This case – also know as “The Original Documents Controversy”[i] – actually emerged from two court cases:

Glencore International AG v. bank of China

(Court of Appeal (civil Division) [1996] 1 Lloyd’s Rep 135)

Kreditbank Antwerp v. Midland Bank PLC

1997 Nos. 609 & 123 (31 July 1997) UK

The problem was what constitutes an original document in the context of UCP 500. In that respect UCP 500 sub-article 20(b) are relevant:

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.

So the good question was whether a document should be marked original – in order to be “original”.

In the “Glencore Case” the court supported a refusal of documents based on the fact that the invoice was not marked “original”, even though it otherwise appeared to be original – and was signed by the beneficiary in blue ink.

In the “Midland Case” however the outcome was that since a document (in this case an insurance policy) was signed in blue ink – it was “marked as original” – and therefore in compliance with sub-article 20(b).

The problem emerged from the wording of sub-article 20(b): “…provided that it is marked as original and, where necessary, appears to be signed…”

To some extent one can not blame “non-LC-persons” to interpret this so that a document must be marked with the word “original” in order to be original. This was however not the intention at all.

These court cases lead to massive discussions within the LC community – and not least within the ICC Banking Commission.  These discussions lead to the ICC Policy statement: “The determination of an "Original" document in the context of UCP 500 sub-Article 20(b)[ii]. This is a very thorough document that clearly spells out the difference between copies and originals in the context of UCP 500.

This ICC Decision was a remarkable success for the LC society – and of course for the ICC Banking Commission – as it completely solved the problem.

After that the same principles were applied in the ISBP paragraph 31 – 35 – and it seems they will also be adopted in the UCP 600 (article 17 of the March 2006 Draft).

Should you want to dig deeper into this case I highly recommend the book “The Original Documents Controversy – From Glencore to the ICC Decision” by Professor James E. Byrne.  It is issued by the “Institute of International Banking Law & Practice, Inc” 1999. This book comprises all relevant material regarding the case – and the two court cases in question.

Refusals v. holding documents at the disposal of ..

The LC is a payment instrument – but in some cases it is unfortunately necessary to refuse documents.

How and when to do this is described in UCP 500 article 14. The key features are:

A single notice of refusal should be given. This notice must:

  1. be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.
  2. state all discrepancies.
  3. state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
  4. be given within a reasonable time, not to exceed seven banking days following the day of receipt of the documents.

The bank is allowed to contact the applicant for a waiver – this will however not extent the period mentioned above.

Practice of how to do this is different between the banks. In the region that I come from, the general practice is that:

 In other regions however, the practice is different:

As such – there is nothing wrong with any these, but for the latter, there is a practical obstacle: When refusing documents you should either “hold the documents at the disposal or the presenter” or “return them”.  This means that once you have refused the documents, they rightfully belong to the presenter, so if the documents are subsequently delivered to the applicant – without approval from the presenter, the risk exist that the presenter has disposed of the documents otherwise.

In order to address this issue the ICC Banking Commission released a “recommendation” called “Discrepant Documents, Waiver and Notice[iii].

Banks have been trying to come around this in a number of ways. A couple of those have ended up in court:

Voest Alpine Trading USA Corp. v. Bank of China, 2002 U.S. App. LEXIS 7412 (5th Cir. 2002).

In this case the issuing bank tried to enforce their “refusal routine” within the notice of refusal; adding that:’

 

"We are contacting the applicant for acceptance of the relative discrepancy. Holding documents at your risk and disposal."

 

Crédit Industriel et Commercial v. China Merchants Bank, Queen Bench (Commercial Court) [2002] EWHC] 973 (Comm). [2002] 2 All ER (Comm) 427

Similar in this case, the “problem” was addressed via a wording in the notice of refusal:

 

"We refuse the documents according to Article 14 UCP no. 500. Should the [discrepancies] being accepted by the applicant, we shall release the [documents] to them without further notice to you unless [your] instructions to the contrary received prior to our payment. Documents held at [your] risk for [your] disposal."

In bout cases the courts found, that such wording was contradicting the UCP 500 – especially sub-article 14(d)(ii)  (point 3 above) whether it is holding or returning the documents. The result was that the documents was deemed to be credit compliant; or more precise as stated in UCP 500 sub-article 14(e):

 If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.

These court cases have given rise to a new solution to the “problem”; namely inserting a text into the credit itself – effectively changing the content of Article 14. These are texts like:

“In the event that documents presented are determined to be discrepant we may seek a waiver of such discrepancies from the applicant. Should such waiver be obtained we may release the documents and effect settlement, notwithstanding any prior communication to the presenter that we are holding documents at the presenters disposal, unless we have been instructed otherwise by the presenter prior to the release of documents”

This wording – and similar – appears to have “solved” the problem. It now seems that such practice will be endorsed by the UCP 600 (Article 16 of the March 2006 Draft)

 You may seek additional information regarding this issue as follows:

Bill of lading clauses

The “case of clauses within bills of lading allowing for release of the goods without the surrender of the original document” is perhaps one of the most controversial in recent times within the LC community.

The case started 26 August 2003. The reason that I can be so precise is that it started at the DC-Pro forum on that day.

The background was a new clause introduced by Maersk line. The wording of that clause was:

  1. Where the bill of lading is non-negotiable the Carrier may give delivery of the goods to the named consignee upon reasonable proof of identity and without requiring surrender of an original bill of lading.
  2. Where the bill of lading is negotiable, surrender of an original bill of lading will generally be required before delivery is given, but the Carrier has the option to deliver the Goods to a person whom he reasonably believes to be entitled to take delivery of the Goods without requiring surrender of an original bill of lading.
  3. The Carrier will also be entitled to give delivery of the goods against what he reasonably believes to be a genuine original bill of lading. Delivery as aforesaid is authorized and shall constitute due delivery hereunder and the merchant shall have no claim for loss or non-delivery.
    [Numbers added for easy reference]

You may ask why this case is included here – and it is because one of the “triggers” that made Maersk change their wording was actually a court case – which concerned point 3 above.

The case was that a bill of lading was presented to Maersk Line requesting release of the goods. Maersk denied releasing the goods on the grounds that this was clearly a fraudulent document. In court Maersk lost the case, because the holder of the document was able to convince the judge that he was a third party holder in good faith. Hence was included the wording “what he reasonably believes to be a genuine original bill of lading”.

In also seems that the “USA Patriot Act” played a role in these clauses being changed. This means that the US authorities may require goods released if they expect it to be tied up to terrorist activity. In such a case the shipping line would in theory be in breach of the transport agreement.

This case started massive discussions – the primary focus was of course the potential risk that goods could be released without the original bill of lading. The case summary will only be highlighted briefly here:

When drafting the UCP 600 it has been discussed if this should be solved via a new provision in the rules. A number of national committees have suggested this, but the ICC Commission on Transport and Logistics has been consulted, and their response has been that this should not be dealt with in the UCP 600. 

It has been said that the case has been solved – but it is a fact that this still causes much trouble for shipping lines and LC beneficiaries. As such the Maersk bills of lading has been changed to be accepted under an LC – but the ones issued by a number of other shipping lines contains a clause like: 

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

Where the bill of lading is negotiable, this is considered a discrepancy by many banks all over the world.

You may seek additional information regarding this issue as follows: 

  

Deferred payment credits

The Deferred Payment Credits has by no means been solved – and it is doubtful if it ever will, as it involves a great deal of “local law”.

It includes the famous “Banco Santander Case”: Banco Santander SA v. Banque Paribas.

In short a credit was issued available by deferred payment. Documents were presented, and accepted by the issuing bank. The nominated bank paid the beneficiary before maturity. Between this point in time – and time of maturity it was found that the documents were fraudulent, and a court injunction was issued preventing the issuing bank from paying the nominated bank.

In the case it was determined that the payment to the beneficiary – was done outside the credit, therefore at the sole risk of the nominated bank. Therefore that bank was not reimbursed.

First of all this case shocked a number of LC specialist, as they would have thought (most would not have been in doubt) – that a nominated bank – acting upon its nomination (i.e. having paid) would be protected in case of fraud.

Secondly the court indicated that the case would have been different, had there been drafts involved. This also shocked a number of LC specialists – as this would in effect mean that an LC available by acceptance is “stronger” than one available by deferred payment.

Thirdly many LC specialists could not understand that such “payment” could be considered “outside” the credit.

Actually there have been more cases like this one. A recent one is cited in DCInsight Vol. 12 No. 2 April - June 2006; Dr. George Affaki: “French Supreme Court on discounting L/C acceptances”, which discusses the case: “The case of Crédit Lyonnais v. Canara Bank International Division1”.

(There seems to be many issues in this case – but in general it goes one step further than the Banco Santander Case, in saying that (in some cases) even the discounting of an LC available by acceptance is outside the LC).

The UCP Drafting group is trying to solve this matter in the UCP 600. This attempt is described in DCInsight Vol. 12 No. 2 April - June 2006; Jim Barnes: “Reimbursement rights of a "discounting" nominated bank

You may seek additional information regarding this issue as follows:

  

Conclusion

There are of course many other LC cases – where a decision in a court affects the practice in the LC world; but I think that we should think the other way around – focussing on the case of the “Original Documents”: It is possible to solve these cases; if there is only a firm, clear and precise view flowing from the ICC Banking Commission. This is why I think that it is so important to address the nominated banks right to “discount” in the UCP 600you can nitty-gritty about the wordings all that you like – but if it is totally clear what the intention of a certain provision is, then I think (hope) that any court would think twice – before going in another direction.

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.


 

                                                REFERENCES


 

[i] Professor James E. Byrne “The Original Documents Controversy – From Glencore to the ICC Decision”. Issued by the “Institute of International Banking Law & Practice, Inc” 1999.

[ii] This is available on the ICC website on http://www.iccwbo.org/id415/index.html

[iii] This is available on the ICC website on http://www.iccwbo.org/home/banking/952rev2%20Intranet-Internet%20version%20of%20Examination%20and%20Waiver.pdf


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