Unavailable Stipulated Document


8.01 Applicable international banking practice and settled set of principles running through the preceding chapters put emphasis on presentation of the documents required in a letter of credit as the condition for realizing the credit. When an intended beneficiary, properly bearing in mind the indicated condition, accepts a credit expressly or by implication of law, common sense and mercantile practice generally presume that he fully appreciates the import of the entire terms of the credit and considers the stipulated documents obtainable to draw on the credit. By the acceptance, he takes upon himself the risk of one or more of the documents failing to come to hand for presentation, resulting in the credit being unavailable to him. The same applies to the issuer: in opening the instrument it satisfied itself that the stated requirements are such as it could fulfil by tendering proper documents to the credit applicant for reimbursement. Usually, the beneficiary will be able to acquire the necessary documents before the expiry of the credit; and where he cannot reach a particular certificate within that period owing to a supervening circumstance, the applicant and the issuer will cooperate with him and extend the lifespan of the credit. The cooperation may involve their assisting with the procurement of the document, especially in a seller’s market.

8.02 Occasionally, however, the beneficiary may find it impossible to obtain a given document because of the occurrence of an event beyond his control; or because the party who ought to issue it omits to do so; or because a clause in the credit specifies a document evidencing performance of a certain requirement and it is now too late in the day for the presenting party to provide documentary proof of satisfaction of the stipulation. What remedies may be available to the presenting beneficiary or nominated bank proceeding in such situations? Would a court order payment of the credit to him without presentation of the stipulated document? If it finds the bank’s undertaking spelt out in the credit unaffected by the supervening non-presentation of the document, may the presenter-claimant recover against the applicant? This chapter endeavours to locate the existing or potential safe routes for the concerned presenting party when faced with such points in the ill-fated contexts of unobtainable stipulated documents.

A. Supervening Events Rendering a Document Unobtainable

8.03 Supervening events over which none of the parties involved in the transaction have control, for example, an unanticipated government prohibition of export licences, rendering shipment impossible, invokes the doctrine of frustration. Frustration predominantly refers to some event occurring without the fault of the parties, which neither of them could reasonably be expected to foresee and take into account at the time of concluding their contract.1 Related to the instant subject, it discharges the bank from its payment undertaking under the credit. Since the documents that are unavailable to operate a credit will equally be unavailable to perform the underlying sales contract and contractual arrangements for the issuance of the credit, these latter contracts will be frustrated as well, discharging both the seller-beneficiary from his liability to the buyer-applicant for non-delivery of the goods sold and the applicant from any accrued obligation to the issuer. No honest and reasonable party will demand payment, negotiation, or reimbursement when he does not have the requisite shipping documents, because the goods were never shipped owing to the supervention of an unforeseeable event.

8.04 But he might legitimately wish to insist on an incomplete presentation in contexts devoid of frustration. In cases of this class, the presenting party (typically the beneficiary-seller) fails to guard against the event which caused the unavailability of the related document by permitting the inclusion in the credit of a stipulation for a document from a party over whom either the applicant or the issuing bank exercises considerable influence. Clauses of the intimated kind are of two types, one requiring a draft drawn on the applicant, and the other stipulating for a prescribed certificate of inspection or quality from a named person. A slightly different case concerns a clause that neglects to state the document to be tendered to evidence its fulfilment. The mentioned three cases entail different considerations. It will be convenient to discuss them separately in this chapter.

B. Draft Drawn on Credit Applicant

8.05 By virtue of Article 6 (c) of the UCP 600, ‘A credit must not be issued available by a draft drawn on the applicant’. The provision employs a peremptory language presumably in an attempt to bring home to the issuer and other banks participating in the opening of a credit avoidable incompatibility of a credit issued in that form with the basic engagement of the issuer (and confirmer, if any) of a credit to honour a complying delivery of documents. Yet, it is common for certain inexperienced banks to open credits subject to the code with the words: ‘We hereby issue in your favour this irrevocable documentary credit which is available by your drafts … drawn on the above applicant for [the full] invoice value’.2 A variant wording reads: ‘We hereby issue in your favour this Irrevocable Documentary Credit … available by acceptance of your drafts at 90 days sight drawn on the [credit openers]’.3

8.06 The prevailing UCP is silent on the consequences attaching to a clause of the excerpted sort in contravention of the extracted sub-article 6 (c). However, the corresponding provision in the UCP 500—namely, Article 9 (a) (ii)—went further to enunciate that a draft required to be drawn on the applicant was to be ‘treated as an additional document’. Why Article 6 (c) dropped those supplementary words is hard to puzzle out. But it would be reasonable to understand a credit issued available by a bill of exchange (draft) drawn on the applicant at sight as calling for a draft which answers that description.

8.07 However, Gutteridge and Megrah’s Law of Bankers’ Commercial Credits4 said that, as between the issuing bank and the applicant, the issuer’s non-inclusion of the sight draft in its presentation to the applicant, or to it put another way, the issuer’s honouring of documents that omitted to contain the draft, constitutes no breach of the credit opening agreement. Effectively, the tender is complying despite its being short of the document. The book rested the view, an observation also proffered in the sixth and seventh editions of the work,5 on the premise that the bill of exchange served the applicant no useful commercial purpose and need not be presented to him. Parker J. in The Lena considered that that opinion does ‘not correctly state the law’.6 Whether or not a sight draft and indeed any document required under a credit serves a useful commercial function or possesses any legal effect7 is generally no concern of the bank. Its contract with the applicant is to honour a conforming presentation, and reject the documents if they do not include the sight bill.8 GP Selvam J. in Computer Place Services Pte Ltd v Malayan Banking Bhd,9 a case in which the issuer paid against a set of documents without receiving the stipulated sight draft in the credit, agreed with Parker J. and commented: ‘The defendants (issuing bank) raised an argument that the absence of the sight draft was not a material breach because it served no purpose … I cannot accept this argument because materiality is not a factor to be taken into consideration in ascertaining whether all the terms and conditions of a banker’s documentary credit are complied with. As the credit was available by a draft, the defendants could have rejected the tender by the beneficiary if a draft was not presented. The position cannot be different vis-à-vis the plaintiffs (applicant) and the defendants’.10

8.08 Parker and GP Selvam JJ.’s language should not be read literally as meaning that the purpose intended to be served by a required document can never be relevant in considering whether an issuer is justified in honouring a presentation. If the court is able to identify the reasonable purpose of a specified sight draft, and conclude from the documents presented read as a whole that they satisfy the ascertained object, it ought to uphold the tender as complying. Insofar as the intent of requiring the sight bill drawn on the applicant was not reasonably apparent, the presumption must be that the credit, together with the underlying agreement for the issuance of the instrument, wanted it.

8.09 The authorities evaluated are consonant with the stance taken by the erstwhile Article 9 (a) (ii),11 adverted to earlier at 8.06, but reticent on a credit available by acceptance of time drafts drawn on the applicant. What is the fate of such a stipulation under the UCP 600? The beneficiary presents the necessary documents, along with the requisite drafts on the applicant, to the issuer under the credit, expecting the bank to send back the bills with the applicant’s acceptance. Unfortunately, the drawee credit opener declines to accept them. What is, or should be, the status of the presentation with the unaccepted drafts under the UCP 600? This problem has yet to arise since the commencement of the current edition of the code; but it can occur in a credit before the time ripens for revision and replacement of the latest regime.

8.10 UCP 400 apparently contemplated the possibility of the difficulty presented and articulates a solution in Article 10 (a) (iii) by defining the obligation of the issuer thus: if the credit stipulates that drafts are to be drawn on the applicant for the credit or any other drawee stipulated in the credit, the issuer shall ‘be responsible for their acceptance and payment at maturity’. The equivalent sub-article (iii) (b) of Article 10 relating to the confirmer enabled Sir John Megaw in the Court of Appeal, also comprising of Croom-Johnson and Balcombe L.JJ., in Forestal Mimosa Ltd v Oriental Credit Ltd12 to surmount an obstacle of the sort at hand. The credit before the court was available by acceptance of the beneficiary’s draft drawn on the applicant, expressed subject to the then prevailing edition of the code of banking practice, and carried the words: ‘We hereby engage with drawers and/or bona fide holders that drafts accepted within the terms of this credit will be duly honoured at maturity’. The issuer relied heavily on these words as spelling out its undertaking embodied in the credit, in particular to guarantee that ‘drafts accepted … will be duly honoured’ when they mature, so that the duty is not engaged unless and until the applicant accepts the bill, which acceptance had been denied. The reliance failed, regard being had primarily to sub-article (iii) (b) of Article 10.13

8.11 The absence of such a provision in the UCP 600 accentuates the difficulty involved in a credit expressed available by acceptance of drafts drawn on the applicant. A stipulation of this nature differs markedly from and is more troublesome than the sight bill which was the subject of the pronouncements of Parker J.14 and GP Selvam J.15 we have already extracted, in that it necessitates the applicant’s acceptance of the anticipated draft, thus potentially bringing him into the process of operating the credit. We are to assign the clause a reasonable meaning in accordance with the approach identified and adopted at the outset of this book as generally appropriate for the construction of commercial contracts. The reasonable international banker will notice that the credit incorporates the UCP and by the incorporation treat the instrument as the issuing bank’s ‘definite undertaking to honour a complying presentation’. Independently of the incorporation, however, the facility by its description must mean the letter of credit as understood among bankers engaged in this branch of banking business. In consequence, it obviously intends to impose on the issuer a payment obligation that customarily falls to be performed once the party on whom the credit requires a draft to be drawn refuses or neglects to accept it, or having accepted it, fails to pay the sum due and owing on the credit at the maturity date.16 The party nominated to undertake the role of the drawee is usually a bank; but may well be an applicant if the issuing bank (including confirmer) and the beneficiary so desire by the terms of their contract. Regarded in that sense, a credit available by acceptance of drafts drawn on the applicant in substance spells out no lesser engagement on the part of the issuer than a credit stipulating for drafts drawn on a designated bank. No doubt, a nominated bank’s acceptance is in practice readily discountable in the forfait market, unlike that of the applicant; but it should not be forgotten that the latter’s acceptance could possess comparable or greater worth. Under a credit in each case, however, dishonour of the draft by non-acceptance or non-payment directly engages the liability of the issuer to the same degree.

C. Certificate from a Named Party

8.12 As we noted previously,17 credits usually include stipulations for documents certifying the actuality of particular matters. The most familiar subjects of the clauses are a certificate attesting to the condition, quantity, and quality of the goods upon completion of their manufacture or at the point of loading, or, in respect of standby credit, to a party’s failure to carry out a specified contractual obligation. Any such certificate continues to function as part of the primary means by which the applicant for the opening of the credit seeks to significantly diminish, perhaps eliminate, the possibility of the beneficiary or some third party practising a fraud on him. Additionally, it is frequently the main mercantile medium of his acquiring transmittable documentation of the occurrence of a given event. These unquestionably noble objectives apart, the rule of strict compliance requires treatment of the absence of a given stipulated certificate in a tendered set of documents as an unacceptable deviation from the credit, sufficient to deprive the presenting beneficiary or nominated bank of payment.

8.13 We shall examine how the strict rule operates under four heads of cases, namely, credit transactions in which the certificate is to be issued by the (i) beneficiary or nominated bank; (ii) applicant or its representative in the beneficiary’s locality; (iii) issuing bank; or (iv) a party outside the credit scene.

(1) Presentation deficient in beneficiary’s or nominated bank’s certificate

8.14 New York Appellate Division’s decision of Bank of New York & Trust Co v Atterbury Bros Inc18 is instructive as to the mode of applying the strict documentary compliance precept to a presentation bereft of a certificate that ought to have been issued by the beneficiary. The claim brought before the court in Atterbury was by an issuing bank under a credit agreement for reimbursement from the applicant of the sum it had inadvertently paid against documents that were forgeries. He put up the defence that the credit stipulated for a certificate stating that ‘the necessary documents have been sent direct to the Bank of New York & Trust Company (the issuing bank-claimant)’, whereas the documents which that very issuer honoured lacked any such documentary certification. Proskauer J., with the concurrence of all his three colleagues, accepted that the document was indeed not among the presentation, but noted that ‘there was something which rendered its absence utterly nugatory’, namely: ‘All the documents called for by the letter of credit were physically attached to the drafts’.19 His Honour then expatiated on that view: ‘Mr. Howard’s (a senior staff member of the applicant-defendant) affidavit on behalf of the defendant says the purpose of having a certificate of documents accompanying the drafts is to show what disposition has been made of all the various sets of documents. That disposition was here shown by the actual presence of the required documents in the hands of the contemplated presentee party itself.20

8.15 In sum, the absence of a certificate required to be issued by the beneficiary would not render an otherwise complete presentation insufficient if its identified ostensible object appears plausibly satisfied by the presented documents read as a whole, or is superseded by a circumstance reasonably obvious to the presentee issuer or applicant.

8.16 An instance in which a presenting beneficiary might, however, be hard put to press Atterbury into service, concerns a stipulation for his certificate certifying that one set of the shipping documents has been sent to the credit applicant within five days from the bill of lading date. Non-inclusion of such a certificate in the documents presented for payment would be a failure to comply with a condition of availability of the credit. Atterbury will hardly apply to obligate the presentee applicant, issuer, or confirmer to honour the deficient presentation. The clear object of the instanced stipulation is to enable the applicant to have and transact business with the shipping documents in advance of arrival of the alternative set through the banking channels at the issuing bank’s counter.

8.17 What about a requirement for the nominated bank to furnish a certificate stating that it received complying documents prior to the expiry of the letter of credit? The bank usually honours the stipulation via a standard transmittal or covering letter, even when not expressly required of it, during the forwarding of the documents to the issuer; and an action for the tort of deceit, according to Derry v Peek,21 will lie in respect of false information wilfully or recklessly given in the note if the issuing bank relies upon the communication and incurs loss because of the reliance. Where it omits to provide the statement, its position resembles that of a nominated bank that accepts or negotiates the beneficiary’s documents within the extended time for presentation permitted by Article 29 (a) of the UCP 600: the bank is to send off the certificate reasonably swiftly following its receipt of a notice from the presentee issuer or other party.22

(2) Applicant’s non-issuance of the required document

8.18 A stipulated certificate rendered inaccessible for presentation owing to the applicant’s failure to issue it, tends to be among the most difficult brand of unavailable documents to deal with in letter of credit operations. Take the applicant in Montrod Ltd v Grundkötter Fleischvertriebs GmbH,23 an English financier of a Moscow-based importer of frozen pork. Under their financing arrangements, it would release the required document (or waive the requirement) on condition that the buyer provides the funds to cover its (applicant-financier’s) liability to the issuing bank for any payment potentially made under the credit. Accordingly, the applicant-financier caused to be included in the credit a stipulation, which it openly described during argument as ‘a locking clause’, for a ‘certificate signed and issued by the credit applicant at his discretion on the goods’ quality and quantity … before shipment’. Its covert reason behind the inclusion of the provision throws insignificant light on the determination of the construction to put on those words.

8.19 What, then, should be the beneficiary’s right in the event of non-issuance of such a certificate? Certainly, only sheer imprudence can explain why a seller of that character would take a credit which places the issuance of the document he needs to receive payment of the credit at the discretion of the applicant, a party that is known to stand habitually on any little fault in the shipped goods or seller’s performance of the sales contract to re-bargain the purchase price afresh. But contractual words may be absolute on the surface, but different in their reasonably ascertainable effect, the result that the justice of the particular contract invariably demands.24 Despite the beneficiary’s probable personal carelessness, however, we are to discover his contractual right against the applicant under the sales transaction and against the issuing bank in the meaning of the quoted clause read with the credit as a whole. Admittedly, the material clause contemplates the applicant’s furnishing of the document, but it does not go to make him a party to the issuer-beneficiary contract created in the credit. Construction of the stipulation in relation to the supervening applicant’s non-issuance of the certificate controls the parties’ obligations to each other.

8.20 The matter presented for discussion was not before the court in Montrod. Upon shipping twenty lorry loads of the goods, an employee of the beneficiary executed a document answering the stipulation with the supposed permission of the credit applicant, the financier of the importer; and being complying with the clause, the issuing bank accepted it upon presentation by the beneficiary and effected payment, though after initial hesitation. But the problem did occur in Morgan v Larivière;25 and might very well have arisen in Montrod had the beneficiary sought the document from the applicant, because the importer disappeared with the shipped pork without honouring the condition for the financier to issue the stipulated certificate of quality to operate the credit. The Morgan case is of considerable importance in respect of a certificate which is unavailable by reason of the applicant’s or his agent’s neglect to issue the document. Its discussion in the literature appears painfully scant.

8.21 Morgan & Gooch, an English banking entity, at the instance of the French Government, set up a letter of credit to meet the purchase price of 20,000,000 rifle cartridges, with delivery spread over six weeks. The bank promised in the credit to make the payment ‘upon receipt of certificates of reception [of the goods] issued by the French ambassador or M. Joulin [in London]’. The French delegate duly inspected and accepted certain parcels of the ammunition, but declined to furnish the prescribed certificates, alleging untimely delivery. On his instructions, the issuer cancelled the credit. The beneficiary sued for a declaration that funds of the French Government on deposit with the issuer held as security for meeting the amount of the credit were impressed with trust, to be utilized in paying the sum which the court should find due to him under the sales contract. Sir R Malins V-C granted the reliefs sought, directing an inquiry to be made as to the extent of performance of the contract and how much was payable in respect thereof. Lord Hatherley L.C. substantially affirmed his decision on appeal.

(a) Issuer’s right to insist upon presentation of the document

8.22 On further appeal of the Morgan case, the House of Lords, consisting of three members,26 with the third giving no reasoned judgment of his own, viewed the liability of the issuing bank as depending ‘entirely upon the effect’ of the letter of credit. Their Lordships came to the conclusion, the sole, now elementary, proposition for which Morgan is usually cited, that the sum of money expressed available on a credit represents no trust fund, equitable assignment, or special appropriation for the benefit of the beneficiary. Rather, it is simply an undertaking by the bank who issues the credit to pay drafts drawn for the stated amount.27 The House, however, emphasized that the refusal of the applicant to issue the requisite certificates had nothing to do with the issuing bank.28 The issuer’s ‘engagement is to pay, not upon the mere approval and acceptance of the cartridges, but upon receipt of certificates of reception issued by the French Ambassador or by M. Joulin’.29 Both the courts below also made observations along that line, with Vice-Chancellor Malins saying ‘It was true that the beneficiary was entitled to payment of the credit only on the production of the proper certificates by M. Joulin or [his] agents’,30 and Lord Chancellor Hatherley, that the issuer ‘would be perfectly justified in declining to make any payment except upon the evidence (certificates) which they were told to accept’.31 The House of Lords reversed the decisions of the chancery courts primarily as to their view of the credit as establishing a trust fund which the beneficiary has access to in proportion to his performance of the underlying sales contract. We turn now to identify the exact scope of the implications of Morgan as to the remedy of the beneficiary in the event of a stipulated document to be issued by the applicant becoming unavailable.

(b) Issuer’s cancellation of credit following applicant’s non-issuance of document

8.23 The chancery courts’ judgments32 in Morgan were careful to underscore the point that neglect of the credit applicant to release the certificates affords the issuing bank no legitimate excuse to cancel the credit. Modern support for their pronouncements exists in the UCP 600, Article 10 (a). The sub-article provides that, except as otherwise set out in Article 38 dealing with transferable credits, ‘a credit can neither be amended nor cancelled without the agreement of the issuing bank, confirming bank, if any, and the beneficiary’. It is submitted there that the cancellation being wrongful33 carries with it the consequence that the beneficiary was entitled to the sum on the credit as damages, inasmuch as his available documents are in themselves complying. Whether the issuer can claim reimbursement of the amount from the applicant, or not, depends on the legally acceptable meaning of the credit opening contract as supplied by any legitimate inference deducible from the applicant’s conduct.34

(c) Applicant’s non-issuance of the document as a breach of contract

8.24 All three courts35 in Morgan indicated that unwarranted failure of the credit applicant or his agent to supply the required certificate can put him under an obligation to pay the price ascertained due and owing pursuant to the sales contract dehors the letter of credit. Assuming, then, that the credit applicant in the Montrod litigation refuses to issue the certificate of quality of the goods, the refusal is liable to be defeated by the beneficiary’s claim against him for payment of the price. The applicant-financier was, admittedly, not a party to the contract of sale between the beneficiary and the Russian importer. Nevertheless, the financier, by freely inducing the opening of the credit, must be presumed to have desired that he should be treated in law as an ordinary credit applicant. His omission to release to the beneficiary the requisite certificate of quality may therefore subject him to the liability which would attach the run-of-the-mill applicant.

8.25 Returning to the potential defence of the credit applicant in Montrod, he might attempt to oppose the beneficiary’s action by arguing that the release of the document was ‘at his discretion’. Certainly, however, the words do not say ‘his absolute

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