Presenting Documents to Draw on the Credit

PRESENTING DOCUMENTS TO DRAW ON THE CREDIT

A. An Overview of the Process

4.01 Operation of a letter of credit often involves three independent but interlocking stages. Typically, it begins when the beneficiary presents a set of documents to the bank with which the credit is expressed to be available for honour¹ or negotiation.² Then, a nominated bank, having acted on its nomination and taken up the beneficiary’s presentation, tenders the documents to the issuing bank for reimbursement of the sum it has paid under the credit. The last phase of the process entails the issuing bank’s delivery of the documents, usually against a trust receipt, or on the basis of a security arrangement executed in its favour to its customer, to the applicant on whose instructions the facility has been established.

4.02 At each of the initial two stages, it is common general knowledge among bankers and merchants routinely involved in letter of credit transactions that it is normally the presenting beneficiary’s or nominated bank’s responsibility to put the documents before the presentee bank to enable it to examine them to determine if they qualify as a complying presentation³ entitling the beneficiary or nominated bank to the amount of the credit. Methods of determining whether the documents thereby tendered, both in terms of their form and contents, are what the credit calls for will be discussed in later chapters; as will the documents handed by the issuing bank to the applicant.⁴

4.03 As a prelude to the discussion, it is intended in this chapter to consider the circumstances in which the beneficiary or nominated bank can legitimately be treated as having fulfilled its responsibility to make a presentation requiring examination for conformity. Notably, a bank is ordinarily under no obligation to examine documents not properly placed in its hands to verify if they are prepared in accordance with the stipulations in the credit.⁵ If the documents have been delivered neither to the bank nor its branch or an intermediary bank acting as its agent, they are in principle not regarded as having come home to the bank; they are deemed not tendered at all.⁶ In the event that a presentee issuing or nominated bank honours a presentation, for instance, outside the period of time prescribed in the credit, its right to claim reimbursement from, respectively, the applicant or nominating bank for the sum it advanced against the tender will almost invariably not arise.

4.04 Essentially, then, under a credit, the requirements for tendering documents are distinct from those as to the manner in which the documents presented need to be drawn up. More specifically, whether a presenting beneficiary⁷ or nominated bank⁸ has duly handed documents to the presentee bank pursuant to the individual letters of credit, involves ascertaining (i) the bank to which documents are to be presented, (ii) the delivery of documents through specified channels, and (iii) the time within which the documents must be tendered under the credit. These have variously featured in litigation in the Anglo-American courts in recent times, leaving serious legal problems in their wake.

4.05 The issues outlined. In banking practice, as articulated in the successive editions of the UCP, branches of a bank in different countries are considered separate banks in the same way that Standard Chartered Bank is separate from Bank of India, Sonali Bank, or Zenith Bank; but can a presentation of documents to a branch of an issuing bank properly be taken as a tender to the issuer when both those banks are in the same country? If it is not, what are the beneficiary’s rights when the branch holds on to the documents until the validity period of the credit runs out? Some commentators⁹ are of the opinion that a beneficiary is within his right to bypass a nominated bank and present documents directly to the issuer. To what extent can he do so? May a presenter personally make a presentation to the issuer under a credit which stipulates submission by airmail? Is a set of documents tendered within time if received at the mailroom of the presentee bank on the last day of the period for presentation but after banking hours? In addition, fierce debate about the position of the parties when documents are lost in transit to the issuing bank or confirming bank, especially in situations where the presenting party is a nominated bank rather than the beneficiary, keeps recurring in letter of credit seminars and training or educational programmes for bankers¹⁰ and in practitioner literature in the field.¹¹ To facilitate the ensuing discussion in this chapter, we shall examine the issues presented in turn in their respective classes of contexts.

B. Who is to Present Documents for Honour or Negotiation?

4.06 It is perhaps necessary to point out at the outset that, in general, only the beneficiary of a credit or his agent can tender documents for honour or negotiation under a credit. In cases where a credit specifies two or more persons as the ‘Beneficiary’, either of the named persons may make the presentation.¹² But, if the expression ‘Beneficiaries’ is used rather than ‘Beneficiary’, the presentation has to indicate on its face that it is being made jointly by the designated beneficiaries; if it does not so indicate, the presentee bank is within its right to decline it as being non-complying with the credit.¹³

4.07 The same is also true of a situation in which the beneficiary of a credit is dead, in liquidation, or receivership. The party who succeeds to the rights and obligations of the beneficiary as executor, liquidator, or receiver by operation of the personal law¹⁴ of the beneficiary, can of course, present documents to realize the facility, but in doing so it has to signify its status by means of, for example, a covering letter or a prior notice in order not to mislead the presentee issuing or nominated bank to its detriment; otherwise, the presentee bank may refuse to recognize the presentation.¹⁵

C. The Bank to Which Documents are To Be Presented

(1) Cases where a credit is silent on the presentee bank

4.08 The bank at whose counter the beneficiary has to tender documents is the one with which the credit, by its terms, is available. That bank,¹⁶ as we saw in Chapter 1, is usually in the beneficiary’s locality and in a pre-existing banking relationship with either the beneficiary or the issuer of the credit. Normally, the credit will state that the bank is authorized to honour or negotiate the presentation, and also indicate if it is restricted to that bank or not. But, occasionally, it may be unclear about the matter, with the result that the beneficiary, or his bank to which the documents are presented, is left in a quandary over whether the availability of the credit is restricted to some other bank or unrestricted.

4.09 There is high authority that in such a case the presenter or presentee bank may adopt what appears to him a reasonable interpretation of the language employed and to hold the issuer of the credit to that interpretation, even though a court upon a proper construction will prefer some other meaning, provided in so doing it acts reasonably in the circumstances,¹⁷ as, for instance, where it is wholly unfeasible to seek clarification on the matter because of serious supervening technical difficulties against a background of a fast approaching credit expiry date.¹⁸ Moreover, in some situations the issuing bank’s conduct vis-à-vis the presenting beneficiary or presentee bank may give rise to an estoppel, precluding it from denying the right of the beneficiary to tender the documents as he did, or the authority of the presentee bank to take them up from him.¹⁹

(2) The position where the presentee bank is specified

4.10 In marked contrast to the foregoing context of an unclear credit as to the bank authorized to receive or honour a tender of documents, is the case of a letter of credit clearly restricted to a given bank at a stated location (e.g. the head office) in the central business district of the beneficiary’s country, but owing to the size of the country it happens that the beneficiary’s residence is hundreds of kilometres (or miles) away from that location. Can the beneficiary present documents for negotiation to a branch of the bank operating in his locality? To put the matter from the converse perspective, suppose this branch in, say, the Malaysian state of Sarawak, as against the head office in Kuala Lumpur (Federal Territory), negotiates the presentation and forwards the documents to the issuing bank in, say, Hong Kong for reimbursement. So far as concerns the subject under consideration, is the issuer entitled to claim that the negotiation under the credit was unauthorized and decline liability to the Sarawak bank?²⁰

4.11 In the two supposed cases, it might be argued that since by virtue of Article 3 of the UCP 600, branches of a bank in different countries are considered to be separate banks, branches of a bank in the same country are separate banks. Moreover, the beneficiary of a credit available in an extremely remote location is normally in a position to request an amendment to the credit so as to substitute the specific branch more accessible to him for the inaccessible head office as the nominated bank. If, prior to effecting shipment of the goods financed by the credit, he has neglected to utilize the opportunity to bargain for terms he can satisfy, the law should accordingly oblige him to face the consequences of his omission.

4.12 Importantly, however, the ICC Banking Commission traditionally eschews such a hard-line approach to letter of credit problems and is firmly of the opinion that, so far as generally accepted international banking practice goes, ‘Branches of the same bank in the same country are considered to be the same bank. If a letter of credit is stated to be available with Bank X, Branch Y in Country Z, then the documents may be negotiated by that particular branch or any other branch of that bank in Country Z’.²¹

4.13 In this practical view of the matter, it would seem to follow that when a credit is issued with the issuing bank, the presenter can tender documents at any branch of the bank so long as the branch and the issuer are in the same country.

(a) Presenter’s rights if the presentee branch sits on documents

4.14 An important question, however, arises as to the parties’ rights against the issuing bank if the branch sits on the documents presented to it until the expiry of the credit, and afterwards advises the presenting beneficiary or nominated bank that it has no intention of honouring the presentation.

4.15 Ordinarily, in accordance with the banking practice identified by the ICC Banking Commission, the branch may be considered authorized to honour or negotiate the tender. Notably, however, there is no privity of contract between the branch and the presenter; and an authority to perform an act does not usually create an obligation to perform the act. It is therefore suggested that the branch is not to be held liable to accept the documents by reason only of acting in the manner mentioned, save that in a particular case the presentee branch’s conduct may found a claim in tort.²² On the other hand, the issuer can fend off a potential suit by the presenter where the credit specifically requires the presentation to be made to it for honour. Once it is clear on the face of the instrument that the issuer’s address is expressly stipulated as the place of presentation, then any tender to the branch, albeit in the same country, will constitute a failure to strictly comply with the stipulation, relieving it of its obligation to honour the credit. It deserves noting that if an issuer is insolvent, the requirement to tender documents at the issuer’s address may become irrelevant if the liquidator or receiver advises the beneficiary or nominated bank to remit the documents to it at a different location.²³

4.16 Chemical Bank’s decision. A very instructive, but difficult decision is International-Matex Tank Terminals-Illinois v Chemical Bank.²⁴ The credit in dispute had been issued by Chemical Bank in Michigan for the benefit of the Illinois claimant, Matex, as security for certain monthly payments in respect of a fuel storage tank it leased to Torco Race Fuels, and contained an engagement clause which runs: ‘We hereby engage with you that documents drawn in compliance with the terms and conditions of this letter of credit will be duly honoured by us upon presentation at Chemical Bank, 823 Riverview Drive, Benton Harbour, Michigan’. Torco fell into numerous defaults on its rental agreement. Matex became annoyed with its endless excuses and sought to realize the credit by presenting via FedEx courier to Chemical Bank’s branch at Marshall Downtown, Michigan, documents consisting of an unpaid invoice and its statement attesting that the sum is due and owing. No payment being forthcoming and the credit having expired on its terms, Matex launched litigation against the issuing bank.

4.17 Chief Judge Paul Maloney, after expatiating on the rule imposing an obligation on a presenting party under a letter of credit to comply strictly with the requirements of the credit when tendering documents for acceptance, had little difficulty accepting the defendant issuer’s submission that Matex, the presenter, failed to send the documents to the location expressly prescribed in the credit.

4.18 At all events, they could not have disputed it, since the matter is well covered by Revised Article 5.²⁵ But counsel strenuously urged that the tender was handed in at the Marshall branch attentioned to Timothy Walling, a vice-president of Chemical Bank based there as opposed to Benton Harbour stated in the credit, because an employee at the latter office instructed it to do so. Rather than give serious attention to the legal substance of this allegation, the judge said that ‘whether or not Chemical actually made the request was immaterial’ to the unambiguous terms of the issuer’s engagement embodied in the credit, particularly the requirement as to the location of presentation, adding: ‘If Matex wanted a legally enforceable right to present draw requests at the [issuer’s] Marshall Office it could and should have negotiated the inclusion of such a term in the [credit]’.

4.19 The judge’s offhand rejection of the beneficiary’s contentions leaves much to be desired. Crucially, at the heart of the issue before the court for resolution was whether the place of delivery of the documents allegedly proposed by the issuer and implicitly accepted by the beneficiary’s conduct in tendering his documents in compliance with the request, effectively amended the related term of the credit; and if it did not, whether the circumstances are of such a character as to bring the case within the well-known doctrine of estoppel in pais, a substantive rule of justice currently universally applicable in Anglo-American courts, including that of Michigan involved in the instant case.

4.20 Implications of Article 10 (a) of UCP 600. Regarding amendment, Article 9 (a) (i) of the UCP 500²⁶ (now Article 10 (a) of the UCP 600) incorporated into the credit in the Chemical Bank case is very clear on the position: the unconfirmed credit in dispute can only be amended by the ‘agreement of the issuing bank (Chemical Bank) and the beneficiary (Matex)’. Of course, the agreement need not be express to make it binding; it may be implied: a party’s tacit concurrence in an amendment suggested by the counterparty is sufficient. So understood, in International-Matex, assuming that the request averred is legitimately attributable to Chemical Bank, there is no reason why it should not be treated as proposing an amendment, and the submission of the draw documents at Marshall Downtown in compliance with the issuer’s wish as constituting an implicit acceptance of the proposed change. Likewise, a presentation at the original place, Benton Harbour, would be an implied rejection. As a result, performance of the original term is no longer a condition of the issuer’s promise to honour a tender by the presenting beneficiary or nominated bank. This analysis would appear to be a reasonable reading of Article 9 (now Article 10, UCP 600).

4.21 Exceptionally, however, the credit in hand expressly states: ‘This [letter of credit] may be changed or modified without the written consent of the party sought to be bound by such change or modification’.²⁷ A clause of this kind is sometimes inserted in a credit by an issuer who is perhaps unusually anxious that its own customer, the applicant at whose instance it issued the facility, and the beneficiary, might conspire to enlarge its commitment under the credit; or to plug what it considers, rightly or wrongly, a gap in Article 9 of the uniform rules of banking practice. Whatever the motive for its inclusion in the instrument, the court will not, in general, refuse to enforce such a contractual clause prohibiting modification or variation except by written agreement executed by the parties,²⁸ regardless of whether the result of enforcement would be harsh or provide a party to the contract with a means to escape from the transaction on a technicality.²⁹

4.22 Estoppel by representation. At the same time, what should not be ignored is the essential ground of the presenter’s (Matex) argument before the court, albeit in fairness the counsel erroneously and confusedly bundled it up with the fundamentally different and certainly inapplicable concept of ‘good faith and fair dealing obligation’ implied in every American contract.³⁰ It implicates considerations of estoppel by representation. Under this rule, if a person (‘representor’), by words or conduct, makes an unequivocal representation of fact to another (‘representee’) which he intends to affect the relations between them in a certain manner and to be acted on in that sense by that other person, and this person then takes him at his word and acts on it, he will not be allowed to depart from the representation if the departure will unfairly and unjustly place that person in a position of material disadvantage.³¹

4.23 As is obvious, the principle, related to the present context, only applies in exceptional circumstances, namely, where estopping a representor from going back on his representation will prevent unfairness and serve the ends of justice; where it would be inequitable for the representor to insist that his strict legal right to require a presentation at the place stated in the credit has not been properly satisfied; that the documents submitted by the representee never reached his hands before the instrument expired. Essentially, then, the effect of the precept is not to afford the representee beneficiary or nominated bank a right to sue on the issuer’s denial of his representation; nor can the issuer bring an action against the presenter for sending the documents to an address not contemplated by the credit. Instead, the presenter could only use it defensively as a shield and not as a sword, in that it operates to prevent the representor issuer from availing itself of a defence (i.e. the right to insist on submission of the documents to it at the stipulated location) to which, without the representation, it would have been entitled.³²

4.24 Applying the foregoing to the facts of the International-Matex case, was there an estoppel operating against the issuer, Chemical Bank, so as to debar it from asserting that Matex’s delivery of the documents at the Marshall Downtown branch rather than at Benton Harbour was not permitted? With the evidence properly regarded, the only element which could stand in the way of the doctrine coming into play concerns the extent, if any, to which the alleged representation is binding on the issuer. Presumably, the employee (Miss Velvet Smith) lacked actual authority to request the presenter to deliver the draw documents to the issuer’s branch.

4.25 But the matter cannot stop there: what about apparent or ostensible authority? It may well be that she had no such authority initially or that limitations placed on it were known to the present beneficiary, Matex;³³ but later events seem to establish ratification of that probably unauthorized initial act. As appears from the evidence found by Chief Judge Paul Maloney, an email correspondence authored by the issuer’s vice-president advising Matex of the status of the documents tendered read, inter alia, ‘the documents are in [Chemical Bank’s] Letter of Credit department; they are processing them. I’ll check on timing for you’.

4.26 While difference of opinion might occur about the determination of whether this correspondence viewed within its material surrounding circumstances creates an estoppel in favour of the presenter, it seems plain that the judge’s omission to at least consider the matter one way or other is a serious error. It is, therefore, submitted that the omission undermines the Chemical Bank decision as a precedent and ought not to be followed in future cases.

4.27 Further support for this suggestion is provided by the judge’s ultimate ruling. Although the court found that Matex’s presentation was not made at the Benton Harbour address specified in the credit,³⁴ he nevertheless ultimately decided that the issuer, albeit located there, had an obligation by virtue of Article 16 (d) of the UCP 600³⁵ to notify Matex that the tender had not been made at the requisite place; and having neglected to do so, it is deemed under Article 16 (f) to have accepted the documents.³⁶

4.28 This reasoning appears problematic. In any such case as the present, it would seem that the logical consequence of the court’s finding of non-compliance with the credit necessarily implies that the documents have not been handed to the issuer (i.e. there is no presentation offered to it) because the tender to the Marshall branch is not a tender to the issuer at Benton Harbour: the bank branches are distinct from each other; and also because there is nothing in the dealings between the parties preventing the issuer from insisting upon compliance with the stipulation in the credit in respect of where the documents must be tendered. If this analysis is correct, then, why should the issuer be regarded in the instant Chemical Bank case as having accepted documents considered presented to a bank not expressly or impliedly authorized by the issuer to receive them?

4.29 Putting aside, for examination in a later chapter,³⁷