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Letters of Credit incorporating UCP 600: Examining the Relationship of the Banks Involved
Grains and Industrial Products Trading Pte Ltd v Bank of India and another [2016] SGCA 32
In the recent Singapore Court of Appeal decision of Grains and Industrial Products Trading Pte Ltd v Bank of India and another [2016] SGCA 32, the nature of the relationship between the issuing bank and the nominated bank, in a letter of credit arrangement incorporating the Uniform Customs and Practice for Documentary Credits 600 (“UCP 600”), was put under the microscope. In doing so, the Court took the opportunity to opine on the following questions of law:–
1. Under the UCP 600, is the nominated bank an agent of the issuing bank for the purposes of receiving and forwarding documents?
2. If the nominated bank is an agent of the issuing bank, what is the scope of this agency for the purposes of receiving and forwarding documents?
Background Facts
The plaintiff company, Grains and Industrial Products Trading Pte Ltd. (“GRIPT”), was a beneficiary under a letter of credit issued on 24 February 2012 by Indian Bank (the “Letter of Credit”). Payment under the Letter of Credit would fall due 180 days from issuance, i.e. 22 August 2012. The Letter of Credit was stated to expire on 26 March 2012,which meant that a complying presentation of the documents had to be made by this date in order to trigger the issuing bank’s liability to make payment. Bank of India (“BOI”), was named “nominated bank” and “advising bank”* under the Letter of Credit, which incorporated UCP 600. Under UCP 600, the beneficiary may receive payment from both the issuing bank and nominated bank, which is nominated to accept a presentation of documents and to effect payment on behalf of the issuing bank.
GRIPT wished to receive payment before the maturity of the credit. To this end, it sought to enter into negotiations (Please see Glossary for these terms and Articles as provided under UCP 600.) with BOI over the Letter of Credit; this negotiation was however ultimately unsuccessful.
Subsequently, GRIPT sent the required complying documents under the Letter of Credit to BOI on 16March 2012. A key term of the Letter of Credit was for the negotiating bank to send the documents directly to Indian Bank certifying that the documents had been negotiated in conformity with the terms and conditions of the credit, and claim reimbursement in accordance with certain instructions on the Letter of Credit on the due date. BOI forwarded the documents to Indian Bank on 18 April 2012, more than one month after the presentation of documents by GRIPT. Indian Bank refused the presentation on grounds that the Letter of Credit had already expired. GRIPT wrote to Indian Bank and BOI demanding payment, and in the absence of any agreement, filed proceedings.
At High Court, GRIPT’s claim was dismissed against BOI but allowed against Indian Bank, on grounds that, inter alia, GRIPT had failed to prove that BOI orally agreed to confirm, honour or negotiate the Letter of Credit, and it was not a confirming bank and thus it was not required to honour the Letter of Credit. Indian Bank was liable as issuing bank as long as a valid presentation of documents had been made to it or its nominated bank, and in this case, GRIPT had made a timely complying presentation to BOI.
On appeal, GRIPT claimed that BOI orally agreed to confirm and/or honour and/or negotiate the Letter of Credit. Alternatively, it claimed that BOI was a confirming bank as Indian Bank requested BOI to confirm the Letter of Credit, and BOI did not inform Indian Bank that it was not prepared to do so. Indian Bank’s appeal against BOI was based on an indemnity for a breach of its express or implied duty to forward the documents received from GRIPT within a reasonable time.
The Court of Appeal Decision
Please note that this was a 2-1 majority decision at the Court of Appeal (with Chan Sek Keong SJ (“Chan SJ”) dissenting).
1. Agency under UCP600
The majority found that under UCP 600, a nominated bank can be an agent of the issuing bank, to the extent of the issuing bank’s mandate. An agency relationship will arise insofar as the nominated bank accepts the authority granted by the issuing bank for it (the nominated bank) to transact with the beneficiary on the issuing bank’s behalf, because the nominated bank will have the power to affect the issuing bank’s rights and liabilities as against the beneficiary on matters so authorised. This decision is based on first principles of agency law: An agent is granted power or authority to affect its principal’s legal relationships as against third parties. Thus, subject to any agreement to the contrary between the parties (for example, amending the articles of UCP 600), a nominated bank authorised to accept a presentation of document becomes the issuing bank’s agent for that purpose.
The majority held that such a reading is in line with the basic proposition of agency law, viz, it cannot be unilaterally imposed, and the agent’s consent is required before agency duties and rights can arise.
2. Agency by conduct
In this case, the court held that BOI accepted its appointment as nominated bank by conduct, and was an agent of Indian bank for the purposes of receiving the documents. The following reasons were cited for such a finding:
(a) While BOI may have sought to impose conditions as to the terms on which it was prepared to deal with GRIPT, this was not conveyed to Indian Bank, which was its putative principal for this purpose and in this context.
(b) BOI knew it was nominated under the Letter of Credit, at the very latest by the date it advised GRIPT on the opening of the Letter of Credit (in its capacity as advising bank).
(c) BOI was aware of the presentation of documents made by GRIPT subsequently.
BOI’s act of receiving the documents, holding on to them, and then participating in active discussions with GRIPT to negotiate the Letter of Credit meant that BOI had acted on its nomination by conduct, and thus accepted the nomination.
The majority also stated that if BOI did not wish to accept its appointment as nominated bank to receive documents on Indian Bank’s behalf, it was open to it to refuse delivery of the documents. It could inform Indian Bank of this fact, and inform GRIPT to forward the documents directly to Indian Bank on grounds that it was not willing to accept a presentation.
3. Scope of agency: The duty to forward under Article 15 of UCP 600
Where a nominated bank is authorised to accept documents on the issuing bank’s behalf, it would owe the issuing bank a duty to examine the documents with due skill, care and diligence before accepting them. There is a need for expedition in assessing whether a presentation is complying and deciding on the next course of action that should follow such an assessment, to avoid seriously undermining the purpose underlying UCP 600. The majority interpreted Article 15(c)* of UCP 600 purposively, holding that the nominated bank would then be obliged to forward documents with reasonable promptness to the issuing bank whatever course it should decide to take in relation to the credit, by virtue of it having accepted its nomination.
In particular, the majority accepted the formulation in Byrne1 that documents should be forwarded by the nominated bank under Art 15(c) of UCP 600 promptly once it has assessed that the presentation is complying and it honours or negotiates the credit, i.e. by the end of the next business day after the determination has been made, unless there are compelling reasons for any delay. This is also to protect the issuing bank from acting to the nominated bank’s detriment, such as by inadvertently releasing security after enough time had passed following the expiry of the credit.
To that effect, the majority interpreted UCP 600 purposively and implied a term that reasonable promptness is required in forwarding the documents. This was deemed necessary so as to have regard to the expectation of market players on grounds of business efficacy.
The following is a simple timeline illustration on the majority’s interpretation of Article 15(c) read in light of Article 12(a) of UCP 600:
4. BOI not liable
The majority opined that BOI was negligent in not promptly forwarding the documents to Indian Bank. However, it held on a technicality that BOI was ultimately not liable for Indian Bank’s losses to GRIPT.
An Alternative View: The Dissenting Judgement
While Chan SJ also came to the same conclusion as the majority in that there was no liability on the part of BOI, he provided an alternative analysis that BOI was not in breach of any duty to forward the documents to Indian Bank under UCP 600. His dissenting judgment provides the following points of note:–
1. No agency relationship between nominated bank and issuing bank
A commercial letter of credit is merely a convenient mode of payment for goods across different jurisdictions in substitution for direct payment. The bank issuing a letter of credit on behalf of the buyer would not do so on behalf of the buyer as agent, but at the buyer’s request as its banker, i.e. this is merely a financial service. This relationship is purely contractual in nature. Thus, the Letter of Credit is not an agency contract, but merely a commercial one. Even if the relationship between a nominated bank and an issuing bank resembles (or, is analogous to) an agency relationship, it does not equate to one.
Further, since the Letter of Credit was an acceptance credit, Indian Bank was not inviting or authorising BOI only to receive the documents, but to accept the presentation and honour the draft drawn by GRIPT under the Letter of Credit. BOI was required to examine the documents for compliance with the terms of the credit (Article 14(a)* and (b)* of UCP 600) before deciding whether to accept or reject the presentation.
Under Article 12(a)* of UCP 600, unless a nominated bank was the confirming bank, an authorisation to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except where expressly agreed to by the nominated bank and so communicated to the beneficiary. On this analysis, BOI did not act on its nomination (i.e. it did not act on the invitation of Indian Bank to accept or discount or honour any draft drawn by GRIPT under the Letter of Credit, and did not perform any acts mandated by Indian Bank under the Letter of Credit), and therefore there was no agency relationship that would have arisen between BOI and Indian Bank.
2. No agency relationship between advising bank and issuing bank
An advising bank is not an agent of the issuing bank simply because it advised the credit at the request of the issuing bank. There is no reason for the advising bank to be advising the credit as agent when it could do so as principal.
3. Plain reading of UCP600
Chan SJ also strongly cautioned against national courts implying a term into UCP 600, as that meant that the “national court [was acting] as super-drafters”, and rather than “construing the UCP”, it would be
“reconstructing it to meet its own understanding of the purpose of the particular article”. In particular, since UCP 600 is an international set of standards meant to standardise banking practice in the worldwide operation of letters of credit, it should not be subject to a regime change by national courts. Rather, he suggested that the lacuna in UCP 600 should be filled by express contractual terms or by revising UCP 600, rather than through the doctrine of implied terms.
Conclusion
As can be seen from the Court’s decision, this area of law can be very complex and full of conjecture. Commercial norms of an industry should be reviewed to ensure that there are proper legal underpinnings to support such practices should they ever be scrutinised by the courts. Attention should be taken when utilising letters of credit, incorporating UCP 600, that terms be tailored to the specific requirements of parties concerned, in order to prevent uncertainty and future disputes.
To this end, please do not hesitate to get in touch with us should you feel that we can be of any assistance to you or your business at hand.
For more information, please contact:
Liew Kai Zee
Partner, Head of Banking & Finance
T: +65 6439 0768
E: [email protected]
Probin Dass
Partner
T: +65 6439 0612
E: [email protected]
This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue. Shook Lin & Bok LLP does not accept any responsibility for any loss which may arise from reliance on the above information.
Glossary: UCP600 Provisions
Article 2: Definitions
Advising bank means the bank that advises the credit at the request of the issuing bank.
Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.
Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated
bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
Nominated Bank means the bank with which the credit is available or any bank in the case of a credit available
with any bank.
Article 7: Issuing Bank Undertaking
(a) Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that
they constitute a complying presentation, the issuing bank must honour if the credit is available by:
(i) sight payment, deferred payment or acceptance with the issuing bank;
(ii) sight payment with a nominated bank and that nominated bank does not pay;
(iii) deferred payment with a nominated bank and that nominated bank does not incur its deferred
payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
(iv) acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or,
having accepted a draft drawn on it, does not pay at maturity;
(v) negotiation with a nominated bank and that nominated bank does not negotiate.
Article 12: Nomination
(a) Unless a nominated bank is the confirming bank, an authorisation to honour or negotiate does not impose
any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that
nominated bank and so communicated to the beneficiary.
(b) By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorises
that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by
that nominated bank.
(c) Receipt or examination and forwarding of documents by a nominated bank that is not a confirming bank
does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or
negotiation.
Article 14: Standard for Examination of Documents
(a) A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a
presentation to determine, on the basis of the documents alone, whether or not the documents appear on
their face to constitute a complying presentation.
(b) A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a
maximum of five banking days following the day of presentation to determine if a presentation is complying.
This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of
any expiry date or last day for presentation.
Article 15: Complying presentation
(a) When an issuing bank determines that a presentation is complying, it must honour.
(b) When a confirming bank determines that a presentation is complying, it must honour or negotiate and
forward the documents to the issuing bank.
(c) When a nominated bank determines that a presentation is complying and honours or negotiates, it must
forward the documents to the confirming bank or issuing bank.
This article is written by Liew Kai Zee from Shook Lin & Bok LLP.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
