Letters of Credit PDF

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Lecture 3 - Letters of Credit 3.1. What is a Letter of Credit? – Letter from a bank guaranteeing a buyer’s payment to a seller will be received on time and for correct amount. Buyer agrees to pay the seller using a reliable paymaster who pays against the presentation of stipulated documents that comply with the terms of the credit. Offer’s seller greater security. – ‘Banker’s assurance of payment against presentment of specified documents (UCP 600 Art 2). RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146 

Methods of paying for goods  Cash  Bills of Exchange 

What does Seller/buyer want? Seller wants assurance he will be paid by bank. Doesn’t want to lose control of goods until payment received. Buyer can raise funds from bank on strength of documents, alleviating need to have sufficient funds to pay the seller.

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Methods of payment agreed in Sale Contract  Letter of Credit  Documentary Credit – banker’s assurance of payment against presentment of specified documents. Defined by UCP 600 as – any arrangement…that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

– Look at Sale Contract to see:  Type of Credit required  Amount of Credit required  Documents required 

Opening of L/C usually a Condition Precedent - If shipment is in January, letter of credit needs to be in place before earliest date of shipment. – Arrangements for opening a documentary credit are made by the buyer who gives instructions about the documents that need to be tendered by the seller. – Opening of letter of credit generally regarded as a condition precedent to the delivery of goods by the seller. Thus seller not under an obligation to perform their side of bargain until LOC is opened Garcia v Page (1936).  Establissements Chainbaux SARL v Harbourmaster [1955] 1 Lloyd’s Rep 303 – credit to be “opened in London within a few weeks” – too ambiguous a term regarding time. Reasonable time for opening credit.  Kronos Worldwide Ltd v Sempra Oil Trading S.a.r.l [2004] EWCA Civ 3, [2004] 1 Lloyd’s Rep 260 – opening of a letter of credit may be a condition precedent for the loading of the goods.  Timing of opening of L/C  Express term – COS may stipulate fixed date for opening LOC. In this case, it must be opened by this date. Where SC provides the credit should be opened ‘immediately’, according to Garcia v Page, it must be opened ‘within such time as is required for a person of reasonable diligence to get the credit established’  Implied term – where contract doesn’t expressly provide a date for opening the credit, but provides for fixed date of shipment, buyer must open the credit at a reasonable time before shipment date (Plasticmoda SpA v Davidsons (Manchester) Ltd)  CIF  FOB Pavia & Co SpA v Thurmann-Nielson [1952] 2 QB 84 Sinaison-Teicher Inter-American Grain Corp v Oilcakes and Oilseeds Trading Co Ltd [1954] 1 WLR 935 NV Handel My J Smits Import-Export v English Exporters (London) Ltd [1957] 1 Lloyd’s Rep 517 Ian Stach Ltd v Baker Bosley Ltd [1958] 2 QB 130 Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 2 Lloyd’s Rep 386 Bunge Corp v Vegetable Vitamin Foods (Pte) Ltd [1985] 1 Lloyd’s Rep 613  3.2. The relationship between the parties – Buyer (applicant)

– Issuing Bank – one that issues letter of credit. – Advising – accepts and notifies beneficiary LOC has been opened. – Nominated - nominated to accept the documents that are tendered by the seller. Role is to check documents and if they confirm they will pass money to beneficiary. Then dominated bank forward them to issuing bank. – Confirming Bank – financial institution that agrees to honour payment of the LOC to the beneficiary and receives – Seller (beneficiary) - also takes in documents, checks if they are conforming and if they are they pay seller and transfers documents to issuing bank. In addition it gives its own undertaking to the seller.

 3.3. The different kinds of letter of credit – Irrevocable – Issuing Bank undertaking - once its in place, it can’t be altered without beneficiaries agreement. – Confirmed - Confirming Bank undertaking –seller receives undertaking from the confirming bank (situated in his country), in addition to that of the issuing bank, that he will be paid on presentation of the stipulated documents. Gives maximum security to seller: if confirming bank is a reputable bank, he is certain of receiving payment. if banks are conforming, we will pay you – Revocable/Unconfirmed – may be amended or cancelled by issuing bank at any moment and without prior notice to the beneficiary (Art. 8(a)UCP 500) – Irrevocable/Unconfirmed - Under Arts 2 and 7(a) of the UCP, the issuing bank assumes the legal responsibility of paying the beneficiary should he present the documents in accordance with the credit. Once the credit has been communicated to the seller, it cannot be amended or cancelled without the agreement of the issuing bank, confirming bank (if any) and the seller (beneficiary), according to Art 10(a) of the UCP. Payment normally arranged in buyer’s country through an advising bank. Advising bank acts as an agent of the issuing bank and doesn’t give independent undertaking to pay the seller. The undertaking comes from issuing bank. Beneficiary is in far better position in terms of risk as credit cannot be withdrawn or cancelled. However, should the issuing bank reject the documents, litigation will take place in foreign country. – Irrevocable/Confirmed – a definitive undertaking of the confirming bank in addition to issuing bank, to honour or negotiate a complying presentation (UCP 600, Art. 2). if conforming documents are presented, we will pay you. Can go to bank in your country you can . two undertakings, one is in your country. – Revocable/Confirmed? – Sellers bank is guaranteeing payment but buyer is not 3.4. The UCP – Uniform Customs and Practice for Documentary Credits (UCP), No. 600 (latest version)  ICC  Came into effect 1st July 2007 – Application - If letter of credit says they don’t apply, they won’t. Bank’s usually insist UCP applies otherwise they will not issue a letter of credit. UCP Article 1 – In English law the UCP do not have the force of law16 or the status of a trade custom and, in accordance with art.1, apply only if the parties have incorporated them into their contract. – Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631 – “Letter of Credit” UCP Article 2 – Interpretation

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UCP Article 3 – if you don’t mention the type of LOC you have, it will be irrevocable. If it says nothing it is assumed to be irrevocable. – Amendments – cannot amend letter of credit without agreement of issuing bank and agreement of the beneficiary. Can’t amend letter of credit once in place. Irrevocable - once it is in place, can’t change without benefiiary’s agreement  UCP Article 10 3.5. Obligations on the banks – 3.5.1. Separate contract – 3.5.2. Issuing Bank undertaking – 3.5.3. Nominated Bank – 3.5.4. Confirming Bank undertaking – 3.5.5. Obligations – 3.5.6. Complying presentation – 3.5.7. Non-Complying presentation – 3.5.1. Separate contract 

3.5.1 Separate contract – Separate from Sale/Other Contracts  UCP Article 4 – LCs are standalone contract, separate from the sale contract, and banks a re concerned only with the LC contract, not the sale contract. – Documents v Goods  UCP Article 5 – Money is raised on the documents, not on delivery of the goods.

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3.5.2. Issuing Bank undertaking – Complying Documents  Must Honour  UCP Article 7(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  Yuchai Dongte Special Purpose Automobile Company Limited v Suisse Credit Capital (2009) Limited [2018] EWHC 2580 (Comm) - The preconditions for the issuing bank's obligations to come into effect under the UCP art.7 had been satisfied. There was no question of exclusion of the UCP's terms. It was a matter of what those terms, as incorporated, meant. The terms concerning instructions to the paying/accepting negotiating bank and those for sender-to-receiver information were entirely consistent with the defendant being the issuing bank.  When Bound? o UCP Article 7(b) - An issuing bank is irrevocably bound to honour as of the time it issues the credit.  Must Reimburse  UCP Article 7(c) - An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. 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. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary.  Deutsche Bank AG v CIMB Bank Berhad [2017] EWHC 1264 (Comm)- confirming bank required to prove payment if requesting by issuing bank. the obligation is, If they have paid, they must be reimbursed but they have to prove they paid.

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3.5.3. Nominated Bank – Complying Documents  No obligation to honour  UCP Article 12 (a) - Unless a nominated bank is the confirming bank, an authorization 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. 3.5.4. Confirming Bank undertaking – Complying Documents

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Must Honour  UCP Article 8(a) – Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must honour. If documents comply, we will honour and pay you. Separate obligation is binding on them once they have notified the beneficiary of confirmation.  When Bound? o UCP Article 8(b) - A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit. Once seller advised about opening of credit, must arrange shipment and tender of document.

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3.5.5. Obligations – On Issuing Bank, Nominated Bank and Confirming Bank  Each Bank must decide on its own  Whether to accept/reject documents and  Inform Beneficiary/Presenter If they accept documents, they will forward to issuing bank. If rejected, on what grounds. – Time Limit  UCP Article 14(b) – nominated bank has max of 5 banking days following day of presentation to determine if presentation complying. – Failure to decide in time  UCP Article 16(f) - If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation. If bank holds on to documents beyond time period, deemed to accept them even if there is a problem.  3.5.6. Complying presentation – Effect  Issuing Bank – (a) When IB determines that a presentation is complying, it must honour.  Confirming Bank – (b) When CB determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.  Nominated Bank – (c) When a NB determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.  UCP Article 15 

3.5.7 Non-Complying presentation - Effect  UCP Article 16 (a) When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.  (c) When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state….  i) that the bank is refusing to honour or negotiate; and  ii) each discrepancy in respect of which the bank refuses to honour or negotiate; and  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. – Documents  Return  UCP Article 16(e) - A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.  When?

o Fortis Bank SA v Indian Overseas Bank [2011] EWCA Civ 58 –obligation to return the documents to presenter with reasonable promptness and without delay. This is not an obligation to act immediately and imports a degree of flexibility that acknowledges the severe consequence of non compliance. It has however been held a bank that failed to dispatch docs within 3 banking days of giving notice of refusal would have failed to act with reasonable promptness. – Waiver  Issuing Bank  UCP Article 16(b)- When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. 3.6. Conforming documents  3.6.1. General Rules  3.6.2. The rule of Strict Compliance  3.6.3. Documents  3.6.4. Timing  3.6.5. The Exception 

3.6.1 General Rules – Definition  “Complying presentation”  UCP Article 2 - presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. – Conform on their face  UCP Article 14(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. – Inconsistent Documents  Not identical, Not conflict  UCP Article 14(d) - Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.

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3.6.2. The rule of Strict Compliance – Beneficiary will present documents to the issuing, advising or confirming bank as appropriate. Acceptance or rejection of the documents by the bank is dependent on whether the documents conform on their face to the terms of the credit. If, on their face, they are in strict conformity with the terms of the credit, the bank will accept the documents. If not, will reject documents. (doctrine of strict compliance) – The Rule  No room for documents which are almost the same Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 Ll L R 49  Banque de I’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] 1 All ER 1137 – in linking documents, banks must ensure there is xonsistency between the documents in that there must be unequivocal reference to the same goods in all the documents. Held there was no consistency between docs. – One  Credit = “Coromandel groundnuts”  Bill = “machine-shelled groundnuts” enough to reject – Two  Credit = “Certificate signed by experts”  Certificate = “signed by expert” – Three  Credit = “sixty new Chevrolet trucks”  Invoice = “in new condition”  Certificate = “new, good, Chevrolet ... trucks”  Delivery Order = “new-good” Enough to reject as it says new condition. – Four

 Credit = each document had to contain L/C number and buyer’s name  Failure to do so on one document – Five  A trivial defect i.e. a patent typographical error/obvious omission may be allowed e.g. Seller’s telex number. – Six  Credit = “Draft survey report issued by Griffith Inspectorate at port of loading”  Draft Survey Report = signed on behalf of “Daniel C Griffith (Holland) BV” – described as a “member of the worldwide inspectorate group” yes, that’s fine – Seven  Credit = Identified Beneficiary as “Bulgrains Co Ltd”  Invoice = name of beneficiary, “Bulgrains & Co Ltd” 

3.6.3. Documents – Letter of Credit  Bill of Lading  Insurance documents  Invoice  Certificates 11–013 It is common for buyers to require presentation of an invoice, an insurance document and a bill of lading or other transport document under the credit. [Murray, Carole /Holloway, David / Timsen-Hunt, Daren. Schmitthoff: The Law and Practice of International Trade] – UCP  Bill of Lading (UCP Article 26(a), UCP Article 27)  Insurance documents (UCP Article 28(f))  Invoice (UCP Article 18(a))  Description (UCP Article 18(c))  Other documents (UCP Article 14(e)) eg. bill, certificates

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3.6.4. Timing – Tendered in time  Not later than 21 days after shipment and  Before the expiry of the L/C  UCP, Article 14(c) A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.

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3.6.5. The Exception – If documents conform on face must  accept – If accept must  Pay (UCP Article 15(a)) – If documents conform on face accept UNLESS (Exceptions)  Fraud by the Beneficiary and  Bank has knowledge of this.  United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1 AC 168 - where seller for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.”  Nullity?  An innocent seller tenders a document that is a nullity (e.g. forged or executed without authority)? o Montrod Ltd v Grundkötter Fleischvertriebs GmbH [2001] EWCA Civ 1954 – the bank have to accept it, there is no nullity under English law. even if it conforms on its face and there is a nullity,

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bank would have to accept it. Illegality  Illegality in the underlying sale contract? o United City Merchants (Investments) Ltd v Royal Bank of Canada (The American Accord) [1983] 1 AC 168

3.7. Payment under reserve  Bank worried that a deficiency in the documents – Bank pays beneficiary – Condition that Beneficiary repay Bank on demand  Banque de l’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] QB 711  Alternative – Beneficiary provides Bank with a letter of indemnity  Moralice (London) Ltd v ED & F Man [1954] 2 Lloyd’s Rep 526 3.8. Remedies  3.8.1. The Seller – Wrongful rejection by the Bank  1. Claim against the Confirming Bank  2. Claim against the Issuing Bank  National Infrastructure Development Company Limited v Banco Santander [2017] EWCA Civ 27  3. Claim against the Buyer  Alan v El Nasr Import and Export [1972] 2 QB 189 possible defence for bank is fraud Damages for failure to open or pay a credit 11–023 Where the buyer fails to open a credit as stipulated, the seller is entitled to claim damages for breach of that stipulation, which qualifies as a condition.196 The amount of damages recoverable under this heading is sometimes higher than the amount which the seller can recover for breach of the buyer’s obligation to accept delivery of the goods. In the latter case, if the goods have an available market, the presumption of s.50(3) of the Sale of Goods Act 1979 applies. This provides that the measure of damages is prima facie the difference between the contract price and the market price at the date when the goods ought to have been accepted. In a rising market damages for non-acceptance of goods are nominal, but damages for failure to open a commercial credit are not s...