This case highlights the importance of strict compliance of the terms of a letter of credit ("LC") and how an issuing bank may not be liable to make payment upon fundamental discrepancy of the nature of the documents presented under a LC.
Background Facts
a. The LC was governed by the provisions of Uniform Customs and Practice for Documentary Credits ("UCP 600");
b. A full set signed clean on-board ocean bills of lading was to be presented to obtain payment under the LC; and
c. A freight forwarder or house of bill of lading was not acceptable.
Claim allowed by the
a. the LC was governed by UCP 600;
b. as such, the freight forwarder bills of lading presented by
c.
As such, it was held that
It is noteworthy that the
On appeal to the
Strict compliance of the LC
The Court of Appeal reiterated the importance of strict compliance of the terms of the LC. While it is accepted that discrepancies in contents of documents can be condoned under the UCP 600, the
Nature of bills of lading
The Court of Appeal undertook a crucial study of the differences between a freight forwarders bills of lading and an oceans bill of lading. It was explained that a freight forwarders bills of lading may be a lesser form of security as it is more of a domestic bill and does not ensure goods have been loaded to the ship as opposed to an ocean bill of lading issued by the owner of the ship or charterer of the ship which will ensure the goods have been loaded on the ship. Flowing from that, it can therefore be understood why the Defendant had expressly excluded freight forwarders bills to be one of the accepted documents as a strict requirement of the LC. Since the LC requirement was not met, the
Non-production versus discrepancies
UCP 600 permits the buyer/issuing bank to condone discrepancies in documents under Article 16 of UCP 600. However, the
Mode of negotiation
An important point to note for financial institutions is that the
Comment
The effect of this decision brings us back to three points, namely:
a. compliance of UCP 600 is required where the LC is governed by the same;
b. compliance of the LC is however strictly required, even where the LC contains modification and exclusionary clauses as allowed under Article 1 of UCP 600; and
c. the non-production of documents in presentation by a presenter pursuant to the terms stipulated in the LC consist of a fundamental breach of the LC and as a result of which, the issuing bank is not obliged to make payment under the LC.
This serves as a cautionary tale for financial institutions to remain vigilant in strictly complying with terms in a LC even in presentation of documents and to be aware of instances where they may not be obliged to make payments under a LC when they act on the other end as an issuer. A failure to comply with such terms in a LC can cause detrimental financial repercussions to a financial institution, since they may not be able to recover sums which has been paid out under a LC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Ms Annjili Gunendran
SKRINE
Level 8, Wisma UOA Damansara
50, Jalan Dungun,
Tel: 32081 3999
Fax: 32094 3211
E-mail: bdcsupportteam@skrine.com
URL: www.skrine.com
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