Introduction
This case highlights the importance of strict compliance of the terms of a letter of credit (“LC”) and how an issuing bank may not be liable to make payment upon fundamental discrepancy of the nature of the documents presented under a LC.
Background Facts
Punjab National Bank had issued a LC in favour of the beneficiary, SIMS Copper Sdn Bhd (“Beneficiary”) at the request of the buyer, Sara International Limited (“Applicant”). The terms of the LC expressly stated that, inter alia:
- The LC was governed by the provisions of Uniform Customs and Practice for Documentary Credits (“UCP 600”);
- A full set signed clean on-board ocean bills of lading was to be presented to obtain payment under the LC; and
- A freight forwarder or house of bill of lading was not acceptable.
Malayan Banking Bhd had agreed to act as one of the advising banks in the transaction relating to the LC. Subsequently, the Beneficiary presented the documents which were not acceptable under the terms of the LC, in that freight forwarders bills of lading were presented instead of the ocean bills of lading. Malayan Banking Bhd however paid the Beneficiary and subsequently commenced a claim for the recovery of the sum of the LC against Punjab National Bank.
Malayan Banking Bhd contended that they were entitled to be reimbursed as they had negotiated and complied with the documents required under the LC. Malayan Banking Bhd claim was allowed at the High Court and the Punjab National Bank sought an appeal on the same.
Claim allowed by the High Court
The High Court in this case allowed Malayan Banking Bhd’s claim against Punjab National Bank. The basis of the High Court’s decision was that:
- the LC was governed by UCP 600;
- as such, the freight forwarder bills of lading presented by Malayan Banking Bhd complied with the requirements of a compliant bills of lading under Article 20 of the UCP 600; and
- Punjab National Bank failed to exclude the operation of Article 20 and did not specifically state what form of bills of lading should take or its signing requirements.
As such, it was held that Punjab National Bank had to honour the undertaking to reimburse Malayan Banking Bhd as Malayan Banking Bhd had negotiated a complying presentation and forwarded the required documents under the LC to Punjab National Bank.
It is noteworthy that the High Court condoned the presentation of the freight forwarder bills of lading despite firstly, there being an express exclusion of the same and secondly, a term requiring an oceans bill of lading. Effectively, this renders any express exclusion in a LC redundant and also means that documents of a similar nature (i.e. bills of lading) are accepted so long as compliance with UCP 600 is fulfilled. In essence, this defeats the need for strict compliance to the terms in a LC.
Court of Appeal: The Return
On appeal to the Court of Appeal, it was held that the terms of the LC needed to be strictly complied. The Court of Appeal delved into the importance of strict compliance of the LC, nature of the different bills of lading and effect between non-production of a document versus discrepancies in a document presented.
Strict compliance of the LC
The Court of Appeal reiterated the importance of strict compliance of the terms of the LC. While it is accepted that discrepancies in contents of documents can be condoned under the UCP 600, the Court of Appeal was of the opinion that this was not the case for discrepancies in documents which was fundamental in nature. Because payment obligations under the LC is based on documents and not goods, it was therefore important for there to be strict compliance of terms in the LC since it may lead to a chain reaction of disputes. As such, Although Article 1 of UCP 600 governed the LC, it did not impinge on the fundamental terms of the LC itself, inclusive of the express exclusionary clause related to freight forwarders bills. Article 20 in this instant case ought to have been read with Article 1 of UCP 600.
Nature of bills of lading
The Court of Appeal undertook a crucial study of the differences between a freight forwarders bills of lading and an oceans bill of lading. It was explained that a freight forwarders bills of lading may be a lesser form of security as it is more of a domestic bill and does not ensure goods have been loaded to the ship as opposed to an ocean bill of lading issued by the owner of the ship or charterer of the ship which will ensure the goods have been loaded on the ship. Flowing from that, it can therefore be understood why the Defendant had expressly excluded freight forwarders bills to be one of the accepted documents as a strict requirement of the LC. Since the LC requirement was not met, the Malayan Banking Bhd’s claim was therefore rejected.
Non-production versus discrepancies
UCP 600 permits the buyer/issuing bank to condone discrepancies in documents under Article 16 of UCP 600. However, the Court of Appeal was of the view that the issue at hand was not one of discrepancy but of non-production of an ocean bill of lading as per the terms in the LC. The non-production of documents results in a fundamental breach and a need for notice of refusal is not applicable.
Mode of negotiation
An important point to note for financial institutions is that the Court of Appeal commented that negotiation of documents should not be based on fax copies (as Malayan Banking Bhd had claimed to negotiate for documents on this basis). This is to ensure that professional banks do not encourage fraud and collision.
Comment
The effect of this decision brings us back to three points, namely:
- compliance of UCP 600 is required where the LC is governed by the same;
- compliance of the LC is however strictly required, even where the LC contains modification and exclusionary clauses as allowed under Article 1 of UCP 600; and
- the non-production of documents in presentation by a presenter pursuant to the terms stipulated in the LC consist of a fundamental breach of the LC and as a result of which, the issuing bank is not obliged to make payment under the LC.
This serves as a cautionary tale for financial institutions to remain vigilant in strictly complying with terms in a LC even in presentation of documents and to be aware of instances where they may not be obliged to make payments under a LC when they act on the other end as an issuer. A failure to comply with such terms in a LC can cause detrimental financial repercussions to a financial institution, since they may not be able to recover sums which has been paid out under a LC.
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