Presentee Bank’s Document Examination Duties

PRESENTEE BANK’S DOCUMENT EXAMINATION DUTIES

A. Preliminary Matters of Concern to a Reasonably Prudent Presentee Bank

5.01 A bank to which a set of documents are presented for honour or negotiation under a letter of credit will typically examine them or set the checking process in motion to determine their regularity on the banking day following the day of presentation. During the short interval between its receipt of the presentation and the commencement of examination of the documents, a variety of factors often come into consideration; and tend to vary according to whether the presentee bank is an issuer, an obligated nominated bank,¹ or a non-obligated nominated bank.² The elements are particularly significant because the conclusion reached by the bank upon its evaluation of them can and normally will determine whether it is indeed worthwhile to embark upon the task of examining the documents.

5.02 Regarding the non-obligated presentee bank, the decisive element is the weighing of the risks of participating in the transaction. It may be that the beneficiary who presented the documents is a relatively little known business entity and has no real subsisting relationship with the bank, or has such a relationship but it is not running smoothly; or that, so far as can be deduced from a cursory look at the text of the credit and the shipping documents, the merchandise financed by the facility and said to be on the high seas to their destination, appear to be a suspicious consignment; or that the credit is unconfirmed and originates from an issuer located in a country notorious for idiosyncratic handling of letter of credit litigations, or which happens to be in the throes of political upheaval.

5.03 In such individual situations, the ultimate outcome of the non-obligated presentee bank’s hard-headed assessment may come down in favour of allowing the business opportunity in hand to go past it and return the documents to the beneficiary, or instead retain them and ask for some explanation of the goods shipped, including the tendered documents attesting to the shipment, by a quick telephone call, or request his (beneficiary’s) authorization to forward the documents to the issuing bank without responsibility (i.e. without having to indicate in the forwarding letter that it has scrutinized them). If the circumstances permit and there are no time constraints, the presentee may suggest to the presenting beneficiary or directly to the issuing bank, to amend the credit so as to enable it to claim reimbursement of the sum potentially negotiated to the beneficiary from a third party bank in a particular financial centre, say, New York, London, or Singapore, rather than that of the issuer, say, Tehran, Hong Kong, or Zhejiang, jurisdictions in which the reliability and vitality of the letter of credit instrument has suffered in the hands the courts lately. Upon resolution of such creases, the inspection of the documents may commence accordingly.

5.04 As to a presentee issuing or confirming bank, its undertaking to honour a conforming presentation is customarily spelt out in the credit. In this context, upon either bank’s receipt of a presentation, no question can arise as to the level of risks involved in dealing with the credit, since it will have evaluated these when it opened or confirmed the facility several months earlier. The solvency of the beneficiary is also of little significance at that stage. Rather, the material issue is normally the standing of the party making the presentation: Is the presenter the beneficiary or a nominated negotiating bank? This may emerge in one of two cases; one is where an obvious fraud on the part of the beneficiary has already come to light when the documents arrived at the hands of the presentee issuer or confirmer, the other is a case in which the documents come in after the expiry of the credit or of the period stipulated for presentation. In cases of the initial type, if the presenting party is the beneficiary, the presentee issuer or confirmer is not obliged to examine the documents for conformity at all: they are worthless papers; but if the presenter is a nominated negotiating bank, the fraud is irrelevant inasmuch as it acted in a bona fide manner when it took up the documents. In that event, the presentee will need to inspect the valueless documents to verify their apparent conformity with the credit.

5.05 In the other category of case, the presentee is under no duty to examine the documents unless there is a clear indication in the accompanying cover letter, schedule, or anything of the kind that the presenting nominated bank purchased (i.e. negotiated) the presentation from the beneficiary. If that information is not so supplied, then the nominated bank, in tendering the documents, acts merely as a collecting agent of the beneficiary. In consequence, the presentation is untimely; and absent a waiver of the untimeliness by the applicant vis-à-vis the issuer, or by the issuer vis-à-vis the confirmer, examining the documents to determine whether they are otherwise in compliance with the requirements of the credit would be unnecessary.

5.06 Presentee banks commonly encounter practical issues in scrutinizing the documents for compliance with the terms of the credit. They involve the procedure for establishing the conformity of the presentation to (i) the terms and conditions of the credit, (ii) the applicable provisions of the UCP 600, and (iii) international standard banking practice. Considering that the last set of practices are not normally incorporated into a credit as contrasted with the UCP, what is their legal standing vis-à-vis the stipulations in a credit in the eye of the law? What weight, if any, may a court attach to local banking practices prevailing at the beneficiary’s location? Does an issuing bank, for example, have a duty to honour a presentation which is non-conforming with a provision in the UCP, but in compliance with a local banking practice in the beneficiary’s or nominated bank’s place of business?

5.07 Second, what standard of care and diligence should a presentee bank exercise in the performance of its examination duty? Article 13 (a) of the UCP 500, as did the corresponding clauses in all the editions of the code adopted by the ICC Banking Commission over the years,³ imposed a duty on a presentee bank to use ‘reasonable care’ in examining the documents tendered to it. But this duty is not mentioned by the related provisions of Article 14 (a) of the UCP 600: as tersely indicated in the official commentary on the Article, the ‘requirement has been removed’. This has brought to the fore important points: Does the omission go to absolve a presentee bank from performing its examination functions in a reasonably careful and competent manner? If not, then to whom is the duty owed and to what extent? Moreover, could it also apply when a non-obligated nominated presentee is forwarding a presentation it has elected not to honour or negotiate to the issuing bank, and if so, in what type of situations?

5.08 The third problem concerns the scope of the issuer’s right to consult its customer, the applicant, during the document checking process. May the bank leave the examination of the documents with him, and then adopt his decision? Fourth and finally, Article 14 (b) stipulates that the presentee bank ‘shall have a maximum of five banking days following the day of presentation to determine’ if the documents are sufficient and in apparent good order. Would it be correct to read this provision as entitling the bank to sit on a presentation comprising, say, a mere draft and less than ten-page documents, that should take a day or two to process?

5.09 This chapter discusses the issues outlined seriatim. We shall therefore start with the sources and legal status of banking practices other than those spelt out in the UCP which the presentee examining may take into account to ascertain the regularity of the documents.

B. Sources of Banking Practice Involved in Document Examination

5.10 The concept international standard banking practice originated from Article13 (a) of the 1993 Revision, which provided that compliance of presentment documents with the terms of the credit must be determined in accordance with ‘international standard banking practice as reflected in these Articles’. During the regime of the Revision, criticisms were levelled against the italicized words. It was generally thought that the standard banking practices on the examination of documents presented under credits were too elusive to exhaustively identify and codify in the UCP. At any rate, the subtle nuances of banking practices vary from region to region, and even among banks within a given region. It is a good thing that the UCP has now explicitly recognized in its Article 2 that there are banking practices outside those it sets forth.

5.11 Determining compliance of presentment documents with international banking practice in the individual cases that may arise requires recourse to a variety of different sources. They may be categorized as follows: (i) ICC Banking Commission’s opinions, decisions, and instructional manuals relating to letters of credit; (ii) banking practices documented by regional or national bankers’ associations; (iv) local practice; (v) expert evidence; and (e) treatises on letters of credit. Let us consider each of these in some detail.

(1) Non-UCP ICC publications expressing standard banking practice

5.12 As a matter of general proposition, the English and American courts have long accepted that the opinions⁴ and decisions⁵ of the ICC Banking Commission on banking practices relating to letters of credit are entitled to be given considerable weight.⁶ Of course, if upon construction of the practice spelt out in the UCP, the court considers the Commission’s position on the point in issue wrong, it will be accordingly rejected.⁷

5.13 When the notion of international standard banking practice was introduced in the 1993 Revision as a test for determining compliance of the documents presented under a credit, the letters of credit community’s immediate reaction was to mount a vigorous campaign for an elucidation of or, more accurately, guidance on the practical application of the standard to the documents examination operation. In January 2003, the ICC Banking Commission obliged the community, though somewhat belatedly, with the publication of the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP).⁸

5.14 According to the Introduction to the brochure, the ISBP does not amend the UCP. The essential purpose of the international standard banking practices documented in some 200 paragraphs in ‘this publication … explain[s] how the practices articulated in the UCP are to be applied by documentary [credit] practitioners’. As such, express incorporation of the ISBP into credits was not required. Moreover, the banking practices of which it is comprised were already sufficiently incorporated into practices mentioned in Article 13 (a) of the UCP 500.

5.15 Importantly, the ISBP also acknowledged⁹ its limitations. In the first place, the law in some countries may compel a practice radically different from that stated in the brochure.¹⁰ Second, the banking practices formulated in the ISBP were not based on a comprehensive survey of the practices prevailing in a substantial number of jurisdictions, a fact which the Foreword noted by pointing out that the ‘object of the exercise resulting in the publication was not to report on individual country practices’.¹¹ Indeed, the task force charged with drafting the code received feedback from only thirty-nine national committees and individual member banks of the ICC Banking Commission. The publication also concedes that it is impossible to anticipate all the various types of terms or documents that may be stipulated in letters of credit, and emphasized that its efforts must be seen as modest, namely ‘to cover terms commonly seen on a day-to-to-day basis and the documents most often presented under documentary credits’.¹²

5.16 The limitations notwithstanding, the ISBP is widely acclaimed by letter of credit practitioners around the world because it furnishes an enlightening and informative checklist of items document checkers could refer to in determining how the rules and practices in the UCP should be applied in daily practice. It has been similarly found to have significant educative value for beneficiaries whose documents are dishonoured under credits and advised to cure the identified discrepancies and make a re-tender.

5.17 For reasons such as these, the ICC Banking Commission has had to revise the ISBP¹³ to bring it into line with the UCP 600. Its philosophy, however, remains principally the same, though it is about twenty paragraphs shorter, some of the paragraphs having been included in the new UCP Revision. The ISBP has, quite plausibly, evolved into a ‘necessary companion’ to the UCP 600¹⁴ in relation to determining compliance of documents with credit requirements. It is to be expected that when an issue involving documentary compliance with standard banking practice is litigated the relevant practices enumerated in the ISBP will be accorded due attention by the judge adjudicating on the action. Not that it should be regarded as a dispositive statement of banking practice,¹⁵ but as an essential guide to a just and proper resolution of the matter brought before him.

(2) Banking practices documented by regional bankers’ associations

5.18 Banking associations in a number of countries are wont to identify, collect, and document their standard practices in the form of checklists, instructional manuals, and rules which they use during the document examination process under credits. Usually, the various brochures will be distributed to their foreign correspondents or principals. A well-known example of such resource material is the Standard Banking Practices for the Examination of Letter of Credit Documents (SBPED) published in 1996 by the International Financial Services Association (IFSA)¹⁶ to document the various banking practices in the US and Mexico. The practices set forth therein were subsequently incorporated into the ISBP.

5.19 A statement of regional banking practices of the SBPED type is not legislation, but it certainly carries significant legal weight as a source of international standard banking practice. This will be particularly so in the US. Section 5–108 (e) of the Uniform Commercial Code Revised Article 5 directs that, in examining a presentation for compliance, the examining bank should ‘observe standard practice of financial institutions that regularly issue letters of credit’. The ‘standard practice’ to which reference is made includes rules published by associations of financial institutions and local banking practice.¹⁷

(3) Local banking practices

5.20 Apart from documented national or regional practices, there currently exists a great body of banking practices in individual localities around the world. For example, in Hong Kong, the local banking practice requires a beneficiary under a credit to tender his documents to the nominated bank through a third party bank,¹⁸ regardless of the stipulations in the credit in question. The nominated bank will not accept a direct tender from the beneficiary unless it is acquainted with him. The validity of this local requirement is untested as yet, but it appears that its central objective is to inject some measure of integrity and efficiency into the letter of credit operation in that financial centre, Hong Kong: for instance, where a discrepancy is discovered in the documents it would be easier for the bank known to the beneficiary to contact him. Similarly, where fraud is involved in a tender that has been honoured or negotiated, the bank that is familiar with the beneficiary will be in a fairly good position to sort out why or how it happened. Nevertheless, it has been suggested¹⁹ that the local practice is too firmly entrenched to be refused recognition by the courts.

5.21 But such a local practice as the one in Hong Kong can cause problems. For example, where the documents are tendered on the last day of the period specified for presentation or negotiation, a refusal by the presentee confirming bank to receive the documents in adherence to the local practice may leave the beneficiary with no time to comply with the deadline for submitting a presentation under the credit. In such a case, it seems reasonably clear that the liability of the confirming bank will be engaged. Otherwise, one will be confronted with the quite undesirable spectacle of upholding the effectiveness of a local practice at the expense of the beneficiary’s contractual right against the confirming bank. In any event, as a matter of general principles of contract law, usages of trade, including local banking practice, are subordinate to the express terms of a contract.²⁰ Indeed, in Grunwald v Wells Fargo Bank N.A.,²¹ which involved a refusal to honour on the basis that the original letter of credit was not included in the presentment documents as required in the credit, the Court of Appeals of Iowa determined that the local banking practice which regarded as acceptable a sworn affidavit in place of a lost original could not displace the express requirement of the credit.

5.22 A slightly different problem may arise where a presentation made to an issuing bank is conforming in the eye of the local practice in the nominated bank’s place of business but non-conforming in relation to a particular requirement in the credit. Can the issuing bank dishonour the presentation? At present, it seems there is no authority in point. However, it is suggested that the issuing bank will be acting within its right to deny payment. In general banking practice all over the world, the issuing bank is not regarded as bound by the local practice of the nominated bank or of the beneficiary. Consequently, a nominated bank cannot claim to be justified in taking up documents by alleging its adherence to an existing local banking precept, as opposed to complying with the terms of the credit.²²

(4) Standard banking practice derived from expert evidence²³

5.23 Naturally, as standard banking practice in its finer details inherently varies from locality to locality, so too is its infinite dynamism and adaptability. So, when compliance with a particular banking practice is disputed, regardless of whether the practice is expressed in the UCP or the ISBP, documented by a bankers’ association, or local and undocumented, a question may arise as to the currency of the claimed standard practice. Of course this is a question of fact, and expert evidence will normally enter into the inquiry. Notably, the admissibility of the evidence is entirely within the court’s discretion,²⁴ but the discretion must be exercised judiciously and not capriciously. In particular, the judge should be extremely loath to reject the evidence where it is unchallenged.²⁵

5.24 Regrettably, however, the difficulty in this area is that there is considerable scope for judges to abuse their discretion. In the United States, the decision of the New York Appellate Division in Blonder & Co Inc v Citibank²⁶ is a case in point. There, the defendant issuing bank opened a letter of credit covering a shipment of nickel scrap from Nicaragua to the Netherlands. The credit expressly incorporated the UCP 500. After the issuing bank had paid against the documents presented by the seller, the buyer discovered that the purported shipment never took place, so the documents were forgeries. He then denied his reimbursement liability on the basis that the bill of lading was discrepant because it contained no consignee. An expert testified for the buyer that in his thirty years of experience in the field he had never seen a bill of lading without a designated consignee and that the document at issue did not constitute a ‘Bill of Lading’ as that term is understood in international standard banking practice. This was uncontroverted by the expert witnesses called by the bank.

5.25 Andrias J., speaking for the majority of the Appellate Division, rejected this evidence and affirmed the summary judgment granted by the lower court in favour of the bank. His Lordship said: ‘Interpretation of letter of credit in context of Uniform Customs and Practice for Documentary Credits (UCP) … [is] for court rather than factual issue, and thus consideration of expert testimony as to what constituted international standard banking practice was not appropriate’. The judge accepted that the existence and scope of a standard practice ordinarily present factual issues, but argued that where such a practice is embodied in a trade code such as the UCP or other publication, its interpretation is for the court. He accordingly concluded that ‘any interpretation of the UCP was properly made by the trial court, which refused to allow the expert to usurp its function as the sole determiner of law’.

5.26 It would appear that Professor Byrne²⁷ in 1997 had Andrias J. in mind when he protested that ‘judges deceive themselves if they think that their legal training qualifies them to understand the UCP without resort to expert guidance’. The majority’s substitution of its own understanding of banking practice for that of the expert witness is fraught with difficulty and unsupported by authority.

5.27 Under the prevailing American law, the starting point is section 5–108 (e) of the Revised UCC Article 5, which in pertinent part imposes on an examining bank the obligation to observe standard practice in performing its documents examination function. It articulates that the determination of whether the bank has observed the standard practice ‘is a matter of interpretation for the court’, but adds this all-important clause: ‘The court shall offer the parties a reasonable opportunity to present evidence of the standard practice’. These provisions recognize that the evidence of standard practice that may be provided by the parties and their experts will have great significance in the court’s determination: evaluating the bank’s compliance with the practice is necessarily a practical issue which, on authority reaching back to the ancient origins of the law merchant, is better answered by bankers, mercantile persons, and other witnesses adjudged sufficiently qualified to testify as experts, than by a court. The majority erroneously overlooked this time-honoured judicial precept when it refused to give sufficient weight to the unchallenged evidence of the expert with over thirty years’ experience in the banking field and thus ignored the express provisions of section 5–108 (e) of the Revised UCC Article 5. Effectively, it arrogated to itself the power to do what the subsection has implicitly forbidden.

5.28 That the majority acted in error is underpinned by the fact that its opinion made no mention of Revised UCC Article 5 at all. Yet, the letter of credit before the Appellate Division was subject to it,²⁸ so that subsection 5–108 (e) needed to have been given effect insofar as it was not in conflict with the UCP 500. On this basis, it is hard to regard the decision in Blonder as good law in New York. Nor is it likely to find acceptance elsewhere in the United States.

5.29 While it is clear that the courts should allow expert evidence demonstrating that an examining bank has or has not failed to carry out its duty in accordance with a given standard banking practice of bankers, it must be conceded that the exercise can easily turn into a battle of experts, involving heated and possibly lengthy and costly debate. At the end of the day, although the weighing of the different views expressed by the experts is for the judge, there is no good commercial reason why a court should reject offhandedly uncontroverted evidence of standard practice.

(5) Standard banking practice reflected in treatises

5.30 Discussions on various questions relating to banking practices on letter of credit operations are contained in textbooks and articles in legal periodicals. Many of the authors of the treatises²⁹ are well recognized and highly regarded by the courts. Accordingly, the views of such legal writers as to whether a given practice remains the prevailing practice among bankers weigh heavily with judges.

(6) Conclusion

5.31 An examining bank under a credit has a duty to ascertain that a presentation complies with the terms of the credit and the banking practices articulated in the UCP insofar as the practices are not irreconcilably at variance with the credit. In carrying out that task, the bank is entitled to take account of any banking practices (be it precepts settled by a local banking centre or published as official opinions by the ICC’s Banking Commission or academic commentaries) to the extent that the particular practice found is not in conflict with the related provision of the UCP. Where there is a conflict between them, the latter of course has to be given precedence.

C. Standard of Care and Diligence Required of the Presentee Bank

(1) Introduction

5.32 As mentioned in the introductory portion of this chapter, unlike the corresponding clauses in any previous editions of the UCP,³⁰ Article 14 (a) of the current Revision (UCP 600) has ‘removed’³¹ the requirement that a presentee bank is to take reasonable care in examining a presentation. It is worth pointing out that, regardless of the silence of the current Revision on a presentee bank’s duty of care, the bank, in ascertaining the conformity of a presentation, should carry out the task in a professional and diligent manner.³² This is a common law requirement with roots reaching back to 1904 in Basse v Bank of Australasia,³³ and in substance approved in subsequent cases, including the House of Lords decision of Equitable Trust Co of New York v Dawson Partners Ltd.³⁴ With such an impressive pedigree, the courts will be reluctant to regard the indicated duty of care as displaced by the mere fact that it is not expressly stated in the UCP incorporated into the credit, as against previous versions of the code. Wallace J. in Bank of America National Trust v Liberty National Bank & Trust Co of Oklahoma³⁵ sums up the point thus: