Parties’ Roles in the Credit Opening Process

PARTIES’ ROLES IN THE CREDIT OPENING PROCESS

A. General

2.01 A party who has contracted to furnish his counterparty with a letter of credit as the means of payment of the purchase price under a sales agreement, or as security for the repayment of a contemplated loan pertaining to a defined technical project, will want to fulfil his promise. He would be disposed to fulfil it because provision of the required credit is usually a condition precedent to the obligation of the seller to ship the goods pursuant to the contract of sale¹ or of the finance company² to advance him the funds.³ Prompt delivery of the letter of credit sometimes also goes to underscore the genuineness of his business intentions, in particular that he is serious about progressing the deal and will follow through with his bargain. On the other hand, non-performance of the promise may render him liable for damages at the suit of the seller,⁴ but the opening of the requisite credit via the banking channels, as a rule, conditionally discharges the buyer’s duty to pay the agreed price of the goods.⁵

2.02 Such non-performance frequently stems from the careless act or omission of a party participating in the opening of the credit, and may frustrate the implementation of the underlying contract for which a letter of credit or finance was sought and place either of the parties to the contract in significant difficulties. This chapter and the next, intend to establish the existence, nature, and extent of the parties’ rights and liabilities where the desired credit has been fraudulently induced, or fails to reach the beneficiary correctly, in due time or, at all. The immediate chapter begins with a party’s responsibilities when he sets about making a request for the opening of the credit at a designated local bank,⁶ and then looks at the duty of the bank during its assessment and processing of the request. The third section covers the issuance of a credit upon the bank’s acceptance of the application, while the last section concentrates on the advising of the credit, along with the advising bank’s position where it inaccurately notified the terms of the instrument to the beneficiary. Ascertainment of the party that should bear financial loss arising from non-issuance of a conforming credit is reserved for the succeeding chapter.

B. Completing an Application for a Credit

2.03 Usually, the party who undertakes to put up a credit will approach his local bank for the issuance of the credit or, alternatively, arrange with a finance company to procure him the opening of the facility at some other bank in the locality. In each case, he would be expected to supply meaningful information about the transaction in respect of which he seeks the opening of the credit. The easiest way he does this is presumably by handing over a copy of the sales contract and any related documents such as a pro forma invoice and an import licence. In return, upon an adequate and positive risk assessment of the proposed business deal, the bank offers him a pre-printed letter of credit application form to complete, along with a letter of indemnity for his signature. The finance company makes a similar evaluation and then executes such indemnity with the party requesting its financing assistance. Following the signing, it proceeds to prepare an application for the stated credit with the information received. By an indemnity of the sort mentioned, the party requesting the credit, or the assistance of the finance company undertakes (using time-honoured language) to ‘hold you harmless from all liabilities, claims, charges, and expenses which you may incur as a consequence of the establishment of the Letter of Credit’.⁷ In essence, it imposes an obligation on the party to reimburse the bank or finance house for the amount and expenses paid out on the credit.

(1) Applicant’s duty in filling out the form

2.04 Completing the form effectively puts the applicant in a position analogous to that of an ordinary customer of a bank, issuing a set of instructions (mandate) to the bank. The applicant should thus exercise reasonable care to avoid inserting in the application any piece of information which he knows, or must have known, to be materially untrue or likely to mislead the bank, as well as the finance house, to its detriment. The data supplied in the form varies according to the specific wishes of the applicant; but he must take care that it conforms strictly to the requirements of his sales contract with the seller, the intended beneficiary, for the most part as to the presentation documents spelt out in the contract for triggering payment of the credit. If the credit sought proposes to secure the repayment of a loan instead of a payment for goods, it would be a standby letter of credit; in that case, the stipulated documents are understandably fewer: the right to the sum on the instrument ordinarily arises upon the beneficiary’s presentation of a single certificate attesting to the occurrence of a specified event of default.⁸

2.05 All the same, the applicant needs to set forth in the application form a full list of the documents he agreed with the beneficiary, including their exact descriptions, the name and address of the beneficiary, the amount and currency of the requested credit, the form of availability of the credit,⁹ and whether the credit requires confirmation. As to the mode of availability, if the applicant prefers to postpone the date when he must put the bank in funds to meet conforming demand for payment on the potential credit until, say, 180 days after re-selling the goods, he will choose to have the credit available by acceptance¹⁰ of a bill of exchange drawn payable at that date from the date of the bank’s receipt of complying documents. If he elects to circumvent the use of the bill, he opts for a credit available by deferred payment.¹¹

(2) Applicant’s main line of self-protection

2.06 We noted in the previous chapter¹² that the mercantile world designed the letter of credit principally to serve the needs of the person in whose favour it is issued, the beneficiary; in particular, to assure him that he will be paid the sum specified in the credit upon presenting apparently complying documents to the named bank. Emphasis of the condition precedent to payment being on facial conformity of the documents, the device is evidently intended primarily¹³ for the beneficiary’s benefit. The applicant’s primary line of protection of his interests against the possibility of the beneficiary exploiting that traditional emphasis on apparent regularity (as opposed to substantive effectiveness) of documents lies in stipulating for appropriate documents. What counts as ‘appropriate documents’ depends on how much trust he could put in the beneficiary. Documents of that kind may well be certificates of inspection, quality, and quantity issued by a person of sufficient professional integrity in the beneficiary’s locality or anticipated place of shipment, but should not be one issued by the beneficiary himself or a third party under his influence or the applicant’s undoubted control.¹⁴ In the case of a credit planned to be security to guarantee the repayment of a loan, or the faithful discharge of other contractual obligation, the protection may involve stating in the application form that, in order to draw down the amount of the credit, the beneficiary is to obtain from a designated responsible body, a certificate affirming the applicant’s default on his obligation

2.07 Applicant’s silence on appropriate document. An application may neglect to include a stipulation of the type just noted, whereas the nature of the underlying contractual arrangements clearly justified the inclusion. But the experienced bank will consider the silence inadvertent and suggest that the applicant insert the relevant clause accordingly. However, the bank’s omission to make the suggestion in a particular case generally provides no ground to found an action against it. The applicant must be able to point to an explicit contractual undertaking of the bank to give the advice in order to sustain such a claim.¹⁵ Nor is the action potentially maintainable in tort: a general duty on the bank to advise its thousands of applicants as to what documents they should stipulate in their applications will doubtless paralyze the letters of credit business.

(3) Some standard clauses in the application form

2.08 Among the standard provisions in an application for a credit seeking to finance a significant sales contract are a clause expressly incorporating the Uniform Customs and Practice for Documentary Credit, ICC Publication No. 600;¹⁶ an undertaking by the applicant to reimburse the bank on demand for all payments made under the credit, including interest on such payment, and to pay commission, charges, and expenses relating to the opening of the credit; a clause stating that the applicant pledges to the bank the shipping documents representing or relating to the goods shipped pursuant to the sales contract underlying the credit; and specific provisions exempting the bank from any responsibility to the applicant for any error or omissions committed by itself or any bank it may utilize in carrying out the applicant’s instructions by virtue of the credit, and stating that, in the absence of contrary evidence, the good faith of the bank thereunder shall be presumed upon acceptance or negotiation of bills of exchange.¹⁷

C. Assessing the Completed Application for Credit

(1) Commonplace considerations

2.09 Upon receipt of a completed application, it is common practice for banks to give serious consideration to the general nature of the sales or other transaction with regard to which a credit is requested and the credit standing of the applicant. If the goods involved sound illegal, the policy of certain banks is to refer the whole matter to its legal department for an opinion. As to financial standing, misgivings about the applicant’s credit rating hardly arise where the applicant is an individual or a finance company with capital that considerably outweighs the face value of the requested letter of credit. In such a situation, the applicant’s reimbursement undertaking embodied in the letter of indemnity along with the pledge of the shipping documents relating to the merchandise (the subject of the sales contract), will be an acceptable and sufficient security, inducing the bank to accept the application¹⁸ and issue the requested letter of credit. In most transactions, however, the bank may require the applicant to deposit sufficient funds in advance in its account maintained with the bank to cover the likely engagement under the credit. In others, it usually obtains alternative collateral, as in the case of an ordinary loan, for instance, by taking a floating or fixed charge¹⁹ over the applicant’s assets. The shipping documents, especially the bills of lading which represent the title to the goods, constitute the security for the bank’s liability for payment potentially made on the credit. To perfect the security, the bank frequently proposes and insists during the processing of the application that the bills are to run to it or its order, so that on arrival of the goods at the port of destination, the applicant will need to execute a trust receipt in favour of the bank to get hold of the consignment. In modern banking practice, however, trust receipts are generally not understood in the banking community as reliable and adequate security in large-scale transactions. Banks often decline an application for the issuance of a letter of credit when the applicant puts forward a trust receipt arrangement as the sole security for the opening of the instrument. For one thing, banks deal in money, rather than in goods, and are therefore not ordinarily in a suitable commercial position to properly dispose of the goods in order to recoup possible losses should the applicant be unable to perform his reimbursement obligation under the letter of indemnity. Documents of title thus usually serve as additional security for the bank’s potential letter of credit commitment.

2.10 A further consideration which comes into play in the processing of the completed application centres on the bank’s experience and professionalism. Part of its function is to determine whether the provisions of the application as drafted are sufficiently precise, uncluttered by excessive details, and workable letter of credit stipulations in terms of standard banking practice. A suitably experienced bank will wish to satisfy itself that the application is free of non-documentary requirements²⁰ or of a requirement for a draft drawn on the applicant;²¹ clear as to the period for presentation of the stipulated documents²² and, if relevant, the nominated bank to whom the presentation should be made for payment;²³ unambiguous about the mode of availability of the envisaged credit;²⁴ and proposes for inclusion in the credit a clause stating the governing law and the courts of the country which have jurisdiction over disputes arising out of the²⁵ facility. An example of the clause is found in Petrologic Capital SA v Cantonale de Genève;²⁶ it reads:

The experienced bank will naturally be minded to bring to the applicant’s attention any stipulation which it considers irregular in the credit application form, or may iron out the irregularity itself, depending on the apparent importance of the provision and urgency of the circumstances. Once it has processed and accepted the application, it conveys the acceptance to the applicant in writing. The terms of the application along with the already executed letter of indemnity then form the contractual basis for the opening of the letter of credit. We shall look more closely at the issuing of the credit to the beneficiary in the next section. In the meantime, it is necessary to evaluate particular aspects of the bank’s appraisal of the application form.

(2) Bank’s obligation during its evaluation of the application

2.11 Devlin J., in Midland Bank Ltd v Seymour,²⁷ recognizes that a limited standard of care attaches to the bank in processing the application. Without, quite understandably, going into detail about it, he mentions²⁸ that the bank is to pass on to the customer, the credit applicant, material information it receives in respect of the solvency or trustworthiness of the seller, the potential beneficiary. It may thus legitimately be asked, does the bank owe a duty to investigate the bona fides of a party claiming to submit an application for the stated applicant? Can the applicant deny liability if he neither signed nor authorized the signing or submission of the application? These apparently overlapping questions are covered in this subsection. A completed application, together with the letter of indemnity adverted to earlier, generally creates a contract between the bank to which it has been submitted and the applicant at the point when the bank accepts it. There being no contract prior to that moment, it might be thought that the bank owes no duty of care in the processing of the application form. Hence, any alleged act of carelessness during the indicated interval may (if at all) only found a cause of action in tort, rather than in contract.

(a) Source of obligation

2.12 As a matter of authority, however, the intimated probable line of thinking appears never to have constituted the ground of a judicial decision or an arbitral award. In any event, the applicant and the bank usually maintain a pre-existing banker-customer relation at the time of the bank’s receipt of the completed application for the opening of a credit. From a practical business point of view, an effective bill of exchange such as a duly drawn cheque, is as much a mandate of the customer to his bank in favour of the payee as is a duly executed application form for a credit in favour of the named beneficiary a valid mandate of the applicant to his bank to honour the credit in specified circumstances up to the stated amount. Subject to a contrary agreement governing the particular relationship in the individual case, therefore, the ordinary standard of care and reasonable banking practice which controls the bank’s handling of its customer’s instructions in a bill, equally apply to the processing of the customer’s request for the establishing of a defined credit. Practical business sense requires resort to basic principles underlying the banker-customer relation under a bill of exchange in the analogous context of banker-applicant in the processing of a credit application. With regard to the possible instance devoid of a pre-existing contractual relationship, it is suggested that the issuance of a pre-printed application to the applicant and its subsequent receipt in a completed form, generates so close a relationship between the parties as it could possibly be, to justify the imposition on the bank of the standard of care and diligence that a reasonably careful banker would follow in assessing the application form.

(b) General rule

2.13 The parties’ relation prior to the bank’s acceptance of the application being as defined above, the general rule must be that an application with the essential information requires the applicant’s signature to be effective in the hands of the recipient bank to set up a credit for the benefit of the specified beneficiary, in the same way that a drawer needs to have signed a cheque to represent a valid mandate to his bank.²⁹ If the signature is forged, the application confers no rights on the bank to act upon it and does not bind the applicant.³⁰ The burden of proving the forgery, or unauthorized submission of an apparently valid application, rests on the applicant, the party alleging it, and is to be discharged at a higher degree of probability than that obtaining in ordinary civil cases,³¹ though not so high as the criminal law standard of beyond reasonable doubt.³²

(c) Exceptions to the general rule

2.14 A forged or unauthorized application will nevertheless bind the applicant in a specific case involving two elements: first, the bank fulfilled its obligation to assess the application with reasonable care before accepting it; and second, evidence establishing negligence or an estoppel against the applicant. The consequence of being bound, as we shall see shortly, may be that the applicant, or the bank, or both of them, will bear the loss arising from a payment potentially effected on the credit opened pursuant to the otherwise improper application.

2.15 (i) Discharge of duty to inspect application with due care To safeguard its interests and those of its customer, the applicant, the bank often retains a specimen signature of the applicant or of its selected senior employees as the authorized signature on potential credit request forms. It is the bank’s obligation to examine the signature on an application for a credit to ensure that it exactly corresponds to the specimen signature. General banking practice expects restriction of the examination to those documents, and to a run-of-the-mill identification of the person submitting the application. But the parties may contract out of that practice and impose a higher duty on the bank. This implicitly occurs, for instance, when a customer, at the time of filing the specimen signature, instruct that credit applications professing to come from his hands must be cleared with him before the bank opens the credit. The instructions will normally be in writing to obviate future wrangling over their existence; nevertheless, a court may safely deduce them from a course of dealing between the parties. An omission to adhere to the directions in respect of an application relieves the supposed applicant of liability to the bank for the application, inasmuch as nothing in the particular circumstances suggests waiver of the requirement for clearance.

2.16 Onus of proof of due care. Who carries the burden of proving a bank’s compliance with its general duty of care? The bank or the applicant? Lee Feng Steel Pte Ltd v First Commercial Bank³³ offers some valuable guidance, albeit largely by default. The defendant bank opened and paid thirteen negotiation letters of credit in favour of phoney entities covering non-existent goods on the basis of applications purporting to bear the authorized signature of the plaintiff’s director. A Miss Doreen Ong, who submitted the applications allegedly on behalf of the plaintiff, pleaded guilty to five charges of intent to deceive and cheating with the credits. There was an issue as to whether the bank neglected to use ordinary care in processing the applications. The judge said:

His Honour then concluded that the bank ‘was entitled to receive and approve the applications’ in dispute.

2.17 The question which arises is as to the party who carries the duty to adduce evidence showing that the differences between the authorized signature and forged signatures were of the sort which a reasonably careful and diligent banker would have detected, as well as the further question of the consequence of non-adduction of the evidence. The court itself supplied the answer when it said in a separate passage that ‘the defendant (bank) must show that it had discharged its duty of care when it approved the applications’.³⁵ Now, the issue of failure to exercise reasonable care would typically materialize following a finding that the signatures on the application were forged. Having so found, the general rule swings into action with the presumption of unenforceability of the application against the supposed applicant. It then behoves the bank to satisfy the judge that under ordinary banking practice a reasonably careful banker in its position during the assessment of the unauthorized requests for the opening of the credits would have omitted to detect the irregularities in the signatures. Taken in that light, the identified lack of evidence (which the court noted) therefore clearly meant absence of evidence rebutting the presumption of invalidity of the fake credit applications, warranting judgment for the supposed applicant. The material on which the court will act to displace the general rule should come from the bank, not the party alleged to have sanctioned the establishment of the credit.

An equally important point concerns the yardstick for determining whether a bank’s conduct is wrongful in failing to notice a material difference between the specimen signature and the signature on the submitted application. The standard, as has been noted, is that of a reasonably diligent banker. Usually, the judge hearing the particular case mirrors the reasonable banker.³⁶ As a result, when his Honour, in reference to the irregularities on the application, says ‘I can see the differences’, logically it ought to follow that a reasonable bank officer would have detected the forgery.

2.18 (ii) Negligence or estoppel operating against putative applicant present context, a forged or unauthorized signature on an application is wholly inoperative unless the party whose signature it purports to be is precluded from setting up the forgery or want of authority.³⁷ The party will not be estopped simply because he was negligent in the conduct of his business affairs; but a remarkable difference exists in the approach to the kind of negligence that will do so. In the UK,³⁸ Canadian,³⁹ Australian,⁴⁰ New Zealand,⁴¹ and Hong Kong⁴² courts, the negligence of the supposed applicant for the credit will have to be in the manner of completion of the application to warrant a judge in holding that the want of care created an estoppel for the bank’s benefit. Consequently, the mere fact the applicant carelessly left the credit application forms with the person that forged his signature, or unreasonably kept his seal in the custody of the unauthorized draftsman of the forms, or was negligent in permitting the false application to reach the bank, will not succeed as estoppel against the applicant.

2.19 (iii) Applicant’s knowledge or suspicion of deception It bears highlighting that, on the principle established in Greenwood v Martin’s Bank Ltd,⁴³ an applicant should notify to the bank any forgery or unauthorized dealing with his credit application form of which he has knowledge with due promptness. If he unjustifiably delayed communicating the information, thereby causing the bank to lose the opportunity to discover the dishonesty in time, the principle operates to allocate the loss arising from the fraud to him; the delay will preclude his claiming that the bank had not his mandate to issue a credit in compliance with the otherwise bogus application.

2.20 (iv) Applicant’s substantial contribution to forgery of signature In the US⁴⁴ and Singapore,⁴⁵ to set up preclusion, it would likely be sufficient for the bank to prove that the applicant’s failure to exercise ordinary care in the management of his business documents ‘substantially contributed’ to the forgery of the signature on or material alteration of a credit application. The words ‘substantially contributed’ are ‘liberally construed’.⁴⁶ Thus, an omission of the supposed applicant to put his specimen signature or the credit application forms in a safe place would count as negligence depriving him of reliance on the general rule, so long as the bank can prove by preponderance of evidence that the negligence substantially enabled forgery of the application to occur.⁴⁷ The matter does not rest there, however. If the bank is shown to have nevertheless negligently contributed materially to the forger’s ability to use the false application to open the credit and make away with the proceeds of the facility, the resulting loss will be shared between the bank and the supposed applicant according to their respective degree of fault⁴⁸ evidenced by the material before the court.

2.21 It seems reasonably clear that the bank will face a lesser hurdle in the US than in the other indicated jurisdictions to make out its case setting up negligence of the supposed applicant of a forged, unauthorized, or materially altered credit application form to displace application of the general rule which characterizes such application as ‘wholly ineffective’.

2.22 (v) Fraudulent applicant’s apparent authority to submit application Another class of case where the general rule may not apply concerns situations in which the supposed applicant held out his employee to the bank as having authority to submit the application to open a credit. In the First Commercial Bank case, as found by the court,⁴⁹ the applications did not purport to be signed by the employee in question, Doreen Ong. Her deception was that she knowingly submitted completed applications with forged signatures to carry out a fraud. It was undisputed that, on well-established principles, the company would be liable for the fraud of its employee committed while the employee was acting within the scope of his or her authority.⁵⁰ It was successfully argued that the deceitful employee had apparent authority to make the delivery of the applications, on behalf of the supposed applicant, on the ground that, several months before the very first of the thirteen credits was issued, the company had issued a letter of authority to the bank which bore the signature of the employee against a stamp indicating her capacity as a director. The success of the argument clearly demonstrates that the submission of a forged or unauthorized credit application can estop the supposed applicant from denying liability if the fraudulent employee acted within his ostensible or apparent authority in delivering the false application forms to the bank. No such estoppel, of course, arises, if the bank knew, or ought reasonably to have appreciated from the circumstances of the submission, that the delivery was made without the supposed applicant’s authorization.

D. Issuance of Credit to Beneficiary on an Accepted Application

2.23 We come now to the third stage of the credit opening process, having looked at the applicant’s completion and bank’s assessment of the application phases. After introductory observations, the main portion of this section starts with a discussion of the possibility of a contract between a bank and an anticipated beneficiary to issue a credit and then examines the effect of fraudulently issued tested telex or SWIFT credit, followed by a discussion of the possible defences to a claim endeavouring to enforce the credit despite the fraud. The next matter considered pertains to the relatively controversial question as to the moment when a credit is to be treated as issued to the beneficiary. The section closes by focusing attention upon the proper time at which an applicant, of course through his bankers, should open the credit to the beneficiary. Salient features of the advising of the credit which the issuing bank has opened, ordinarily forms an integral part of this section, but it seems convenient to allocate the succeeding section to the topic.

(1) Introduction

2.24 Acceptance of the application typically establishes an engagement on the part of the bank to issue a credit of the character and description stipulated in the request for the facility. Notably, however, where the envisaged letter of credit is to be confirmed, the engagement generally involves no absolute promise to procure the anticipated confirmation abroad; because it is not within the bank’s power to compel its overseas correspondent, let alone a non-correspondent entity, to confirm a credit. At the very least, however, it has to use reasonable diligence to obtain the confirmation. A similar position prevails in respect of contracts for the sale of goods. The buyer and the seller may each assume a responsibility to secure the necessary import and export licences, respectively. Unless either party makes an absolute contractual promise to obtain the licence, the one will be free from liability to the other for damages under the doctrine of frustration if a supervening regulation thwarts their mutual plans.⁵¹ Excuse from the liability nevertheless requires the party claiming it to have acted reasonably in the particular circumstances.⁵²

2.25 An initial step in performing the obligation to issue the letter of credit will be to prepare its text for communication to the specified beneficiary. As a matter of standard practice, banks universally add their own terms to the applicant’s requirements in the accepted application form and assign a special transaction control number to the credit. Such terms, which need not have been agreed with the applicant, tend to specifically require that the number be mentioned in the beneficiary’s draft, give specific directions as to how the nominated bank is to claim reimbursement for the sum it pays to the beneficiary, and the mode via which the stipulated documents are to be forwarded to the issuer of the credit. The prepared text of the credit usually ends with two clauses. One is the bank’s undertaking, the customary wording of which has been discussed earlier;⁵³ the other is a clause making the credit subject to the Uniform Customs and Practice for Documentary Credits, the UCP 600.

(2) Can the bank be obliged to the intended beneficiary to issue credit?

2.26 An application submitted for the issuance of a credit will often be complete because the underlying contract for which the credit is desired has already been concluded. Sometimes, however, negotiation of the final aspects of the contract or of the opening of the instrument may remain outstanding, but so close to a deal as to cause the facility requesting party to instruct its banker to advise the other party that the credit is on the way. In complying with the instructions, much of the advice forwarded to the beneficiary will occasionally be scant, lacking in essential terms which the courts are disposed to fill out, if the justice of the case invites it, by the well-known process of implication.⁵⁴ Would non-performance of the advice constitute a breach of contract at the suit of the party advised, the beneficiary? Pursuant to current standard banking practice embodied newly in Article 11 (b) of the UCP 600, an issuing bank shall send a preliminary text of a credit to the beneficiary only if the issuing bank is prepared to subsequently issue the effective credit, and to effect the issuing reasonably promptly, in terms not inconsistent with the pre-advised text. Pre-advice of a draft credit, though incomplete, binds the issuing bank, enforceable by the designated beneficiary should the issuer renege on it. The banking practice adverted to, agrees with pre-existing judicial thinking on the topic. In Mutual Export Corp v Westpac Banking Corp.,⁵⁵ an issuing bank delivered a letter to a beneficiary, stating:

Whiteman Knapp J. treated the issuing bank’s letter as constituting a contract with the beneficiary, Mutual Export Corporation, to open a credit in consonance with the stated form, rejecting the bank’s submission that the letter was at best a letter of comfort, providing information about future intent. In taking that view, he relied on English⁵⁶ and Australian⁵⁷ decisions, emphasizing the duty of the court to construe such documents in which the parties apparently do not desire to specify many details ‘fairly and broadly without being too astute or subtle in finding defects’.⁵⁸ A majority of the Second Circuit⁵⁹ considered it unnecessary to decide whether a letter could obligate the issuer to the beneficiary to open a credit, perhaps because at all events ‘Westpac met th[e] alleged obligation’.⁶⁰ The minority opinion, however, felt that the contract was broken in the instant case, but that the beneficiary had impliedly waived the breach by neglecting to call it to the bank’s attention in a timely fashion.

2.27 Nothing in banking practice, however, prevents an issuing bank from providing a preliminary advice of the draft of a credit to the beneficiary with the clear statement that the text is for information only and without responsibility. This was, in fact, the stance of the old provision in the previous two editions of the UCP,⁶¹ now superseded by the new Article 11 (b) mentioned in the previous paragraph. Without such express statement, the advice may nevertheless have that informational effect. In the nature of things, the actual wording of the communication in the individual case, read fairly and broadly as their business sense permits, will determine whether it is merely informational or represents an obligation to the intended beneficiary to issue a specified letter of credit.

2.28 Claim for non-fulfilment of the obligation. As has just been seen, Article 11 (b) materially endorses Mutual Export in recognizing that an ‘issuing bank that sends a pre-advice is irrevocably committed to issue the operative credit or amendment, without delay, in terms not inconsistent with the pre-advice’. What should a beneficiary establish in order to recover for non-fulfilment of the obligation? In principle and under English law,⁶² ‘without delay’ is to be read as meaning ‘without unreasonable delay’ or alternatively ‘with reasonable dispatch’. Of course, if the issuer neglects to issue the promised credit at all, the subsidiary question of an omission to carry it through without unreasonable delay will be irrelevant. As to the principal point, a plausible conclusion is that the beneficiary needs to prove that, had the issuer discharged its commitment, he would have been able to present complying documents to the issuer to trigger payment of the credit.⁶³ Without such proof, the alleged non-fulfilment gives rise to no recoverable damage and accordingly no cause of action against the bank.

(3) Fraudulent tested telex or SWIFT credit in beneficiary’s hands

2.29 The issuer of the credit (alternatively ‘issuing bank’) may send the credit to the beneficiary by registered post or courier, especially where they both operate within the same country, but will normally transmit it to him using a tested telex or SWIFT in cross-border contexts. Shorn of its finer technicalities, such ‘tested telexes’ are financial messages sent, received, and authenticated by means of codes or tests that are secret between the sender and the recipient. A tested telex message counts as a manually signed communication of the sending party to the designated telex addressee. SWIFT (the Society for Worldwide Interbank Financial Telecommunications), headquartered in Belgium, is a more advanced method of communicating financial messages than tested telexes in terms of speed, security, and reliability. As with telex, upon subscribing to the SWIFT, the network operator supplies unique computer-generated codes to the bank, which then entrusts it to its selected employees. The bank is charged with the task of protecting the security of the codes at all times. The modus operandi of SWIFT codes may help in comprehending what legal weight attaches to tested telex and SWIFT communications.

2.30 To send a SWIFT message to another financial institution, the sending bank enters its code on the message into a dedicated computer system and dispatches it to the SWIFT address (bic code⁶⁴) of the designated recipient bank. The communication goes directly to the SWIFT information switching centre in Brussels, which the computer at the centre reviews for authenticity. If identified as emanating from the sending bank, the system adds an authentication by means of a code known exclusively to SWIFT and the named addressee bank. The authenticated message then passes on to the addressee via its assigned bic code. Only the members of staff entrusted with the SWIFT codes at the receiving bank can gain access to, print out, or forward to some other person the incoming correspondence. The recipient bank, and indeed the banking world, treats such messages as equivalent to a document carrying an original signature of the sending bank.

2.31 Against that background practice, the courts have so far had substantial opportunity to consider the effect of a tested telex and authenticated SWIFT communication where some fraudsters managed to dispatch the message, or tricked some employees into carrying out the transmission, in respect of the opening of a letter of credit. The earliest English case on the subject is Standard Bank London Ltd v Bank of Tokyo Ltd,⁶⁵ but Qatar National Navigation & Transport Co Ltd v Citibank NA,⁶⁶ tried before Haight J. in the United States Court for the Southern District of New York, provides a convenient starting point.

2.32 In Qatar National, a contract for the sale of 300,000 metric tons (MT) of marine diesel oil, deliverable into the buyer’s nominated vessels at Doha for US$75 million per 25,000 MT on a monthly basis for twelve months, required payment ‘by means of an irrevocable revolving letter of credit (L/C), covering the full value of each load’. At the request of its customers, the buyers, Citibank in New York, probably due to want of adequate surveillance over the internal security controls, permitted the sending of a tested telex signed by its vice president (Flocco) through Qatar National Bank to the Qatari seller. The telex reads in relevant part: