6 July, 2016
In its recent judgment in Grains and Industrial Products Trading Pte Ltd v Bank of India and another [2016] SGCA 32, the Singapore Court of Appeal implied terms into the Uniform Customs and Practice for Documentary Credits 600 (“UCP 600”) in relation to the obligation for a nominated bank to forward documents presented to it by a beneficiary under a letter of credit.
Facts
Grains and Industrial Products Trading Pte Ltd (“GRIPT”) sold a quantity of soya beans to Varun Industries Limited (“Varun”) on 6 February 2012. Varun approached a number of banks to open a letter of credit in favour of GRIPT. GRIPT and Varun agreed between themselves that payment under the letter of credit would be made only 180 days after its issuance.
GRIPT wanted to receive payment before the maturity of the credit. It therefore tried to sell the credit to a bank other than the issuing bank for advance payment. This process is described as “negotiation” under Art 2 of UCP 600. GRIPT approached Bank of India to negotiate the draft.
The letter of credit, which incorporated UCP 600, was issued by the Mumbai Fort branch of Indian Bank on 24 February 2012. It provided that Bank of India was the nominated bank in accordance with UCP 600. A nominated bank under UCP 600 has the authority to effect payment to the beneficiary upon acceptance of documents presented to it.
The letter of credit also appointed Bank of India to advise GRIPT of the terms of the credit and any amendments and was stated to expire on 26 March 2012. Payment in accordance with its terms would fall due on 22 August 2012.
Bank of India wrote to GRIPT on 27 February 2012, notifying it of the opening of the letter of credit. In its letter, Bank of India stated that it was doing so “without any engagement and responsibility on [its] part” and that it “shall be glad to consider”and was “prepared, at [its] option, to negotiate/discount”documents/drafts drawn in compliance with the terms and conditions of the letter of credit.
GRIPT submitted the documents to Bank of India on 16 March 2012 through its agent, Standard Chartered Bank of Singapore. Thereafter, GRIPT sent a number of emails of Bank of India to check on the status of the transaction and to seek to negotiate the letter of credit. However, Bank of India refused to negotiate the letter of credit unless GRIPT opened a current account with it.
The discussions between GRIPT and Bank of India continued into April 2012. However, Bank of India did not transmit to Indian Bank the documents presented to it by GRIPT until 18 April 2012. On 19 April 2012, Indian Bank informed Bank of India that the Letter of Credit had already expired and it would not be honouring the credit.
GRIPT subsequently commenced proceedings against both Indian Bank and Bank of India for payment on the Letter of Credit. Indian Bank made a counterclaim against Bank of India for an indemnity of the amount in the event that it was found liable to GRIPT.
The Singapore High Court dismissed GRIPT’s claim against Bank of India, but allowed its claim against Indian Bank. It also dismissed Indian Bank’s claim against Bank of India for an indemnity.
Indian Bank appealed against the decision awarding GRIPT damages and the decision to dismiss its counterclaim in the event that was found to be liable to GRIPT. GRIPT appealed against the decision dismissing its claim against
Bank of India, amongst others.
Judgment
The Court of Appeal affirmed the High Court’s decision and upheld GRIPT’s claim against Indian Bank; it also dismissed Indian Bank’s counterclaim against Bank of India and GRIPT’s appeal against Bank of India.
The majority of the Court of Appeal, comprising their Honours Chief Justice Sundaresh Menon and Justice of Appeal Andrew Phang (the “Majority”), came to their decision on slightly different grounds from the third member of the Court of Appeal, his Honour Senior Judge Chan Sek Keong (“Chan SJ”).
The Majority decision
The Majority found that under a letter of credit, an issuing bank undertakes liability to the beneficiary under the terms of the letter of credit. Where the issuing bank nominates a bank in accordance with UCP 600, then as between the beneficiary and the issuing bank, Art 7(a) of UCP 600 provides that the latter’s liability is engaged as long as the beneficiary makes a valid and complying presentation to the nominated bank. For this purpose, it is immaterial whether the nominated bank has expressly agreed to honour the credit or to act on its nomination. However, this is separate from the relationship between the issuing bank and the nominated bank.
In the premises, the presentation by GRIPT to Bank of India was a valid presentation pursuant to the articles of UCP 600, and the late submission of documents by Bank of India did not absolve Indian Bank of the obligation to make payment pursuant to the letter of credit.
In this respect, the Majority found that while GRIPT wanted Bank of India to negotiate the letter of credit, that was in itself insufficient to preclude the conclusion that the documents were also presented to Bank of India as a nominated bank.
In respect to Indian Bank’s counterclaim, the Majority analysed the relationship between an issuing bank and a nominated bank and held that under UCP 600, a nominated bank authorised to accept a presentation of documents becomes the issuing bank’s agent for that purpose when it acts on the nomination or otherwise accepts the appointment. The Majority therefore held that, by accepting the documents presented by GRIPT, Bank of India had by its conduct accepted its appointment as a nominated bank, and was therefore Indian Bank’s agent for the purposes of receiving the documents.
The Majority then analysed the duties owed by a nominated bank to an issuing bank. Their Honours accepted the position expressed in the English High Court Fortis Bank SA/NV and another v Indian Overseas Bank [2010] 2 all ER (Comm) 28 and in the English Court of Appeal in Fortis Bank SA/NV and another v Indian Overseas Bank [2011] 2 all ER (Comm) 288 that, in construing UCP 600, a purposive approach is appropriate. In particular, the court ought to bear in mind UCP 600’s underlying aims and purposes reflecting international practice and the expectation of international bankers and traders. The majority noted that the English Court of Appeal in Fortis took the view that the need for an issuing bank to return non-complying documents to the presenter “promptly” could be found by construing Art 16 of UCP 600 bearing in mind its purpose.
The Majority also accepted the analysis of Art 15(c) of UCP 600 in James E Byrne with Vincent M Maulella, Soh Chee Seng and Alexander V Zelenov, UCP 600: An Analytical Commentary(Institute of International Banking Law & Practice, 2001) that documents should be forwarded promptly by a nominated bank once it has assessed whether they comply, which is by the end of the next business day after the determination has been made, unless there are compelling reasons for any delay.
Although Art 15(c) of UCP 600 requires a nominated bank only to forward the documents if it chooses to honour or negotiate, the Majority found that based on a purposive interpretation of Art 15(c) of UCP 600, there was an implied term in UCP 600 that a nominated bank is obliged under UCP 600 to forward documents with reasonable promptness even if it chooses not to honour or negotiate the credit.
However, the Majority made no finding on whether Bank of India breached its duty as their Honours held Indian Bank did not make a claim for general damages, which it was entitled to do, but instead made a claim for an indemnity, which their Honours held was untenable. On the above reasoning, the Majority dismissed Indian Bank’s appeal.
In respect of GRIPT’s appeal, the Majority found that, on the facts, Bank of India had not negotiated the Letter of Credit. Their Honours therefore dismissed GRIPT’s appeal in this respect.
Chan SJ’s decision
Chan SJ disagreed with the Majority’s finding that Bank of India owed Indian Bank a contractual duty under UCP 600. His Honour found that, under UCP 600, there was no relationship of agency between an issuing bank on one hand, and the advising bank or nominated bank on the other.
His Honour also held that, even if there was such an agency relationship, the mere receipt and examination of documents does not amount impose an agency relationship on a nominated bank if it returns the documents or holds on to them on behalf of the beneficiary. In this respect, his Honour relied on Art 12(a) and 12(c) of UCP 600, which state that neither an authorization to honour or negotiate nor the receipt and examination of documents makes the
nominated bank liable to honour or negotiate the credit.
His Honour also found that on the facts, GRIPT had presented the documents to Bank of India for negotiation, as the covering letter sent by Standard Chartered Bank stated “the documents detailed above are enclosed for your negotiation in accordance with the instructions below.” As such, given that Bank of India did not want to entertain any letter of credit transactions with GRIPT until GRIPT had opened a current account with it, it could not be said that Bank of India had acted on the invitation of Indian Bank to accept or discount or honour any draft drawn by GRIPT under the letter of credit. In the circumstances, his Honour found that, even assuming that Bank of India was invited or authorised to perform the acts on behalf of Indian Bank, no agency relationship would have arisen.
Based on the above reasoning, Chan SJ found that since Bank of India did not act on the mandate given by Indian Bank, there was no basis for Indian Bank’s counterclaim against Bank of India.
Chan J also set out his disagreement with the Majority in respect of the “purposive interpretation” that their Honours had adopted. In particular, he disagreed that there was a necessity to imply a term in UCP 600 that a nominated bank is required to forward documents in the event that it chooses not to honour or negotiate, and he likened the Majority opinion to redrafting Art 15(c) of UCP 600. His Honour was of the view that, if there was a lacuna in UCP 600, it should be filled by express contractual terms or by revising UCP 600.
Practical considerations
Pursuant to the Majority’s decision in this judgment, a nominated bank will now have to ensure that it forwards documents presented to it by a beneficiary regardless of whether it accepts the nomination of the issuing bank, unless it immediately returns the documents to the beneficiary.
Failing to do so will leave it open to claims for general damages from the issuing bank, should the documents not be forwarded within one working day of the deadline for the nominated bank to determine if there is a complying presentation of documents.
Issuing banks may also want to check with the nominated bank once the credit expires to ensure there are no documents that were presented by the beneficiary to the nominated bank, but which were not forwarded. This is to potentially mitigate any losses that they may suffer as a result of non-compliance by the nominated bank.
As a final point, while there is a dissenting view in the form of Chan SJ’s judgment that there is no such duty owing on the nominated bank, a prudent course of action may be to act in accordance with the Majority’s decision.
For further information, please contact:
Wei Chern Tham, Director, Duane Morris & Selvam
wctham@selvam.com.sg
