UK: Letters Of Credit: What Is An Issuing Bank Entitled To Know Before Paying Out?

Letters of credit (LCs) are very widely used as a secure means of financing international trade. In the last year, there have been several English court judgments¹ about the role and responsibilities of issuing banks in an LC transaction, and in particular their obligation to pay against receipt of conforming documents.

Now, the English High Court has ruled² on an issuing bank's entitlement to require further information as to whether a confirming bank has made payment under an LC before reimbursing it.

Background

HFW represents CIMB Bank Berhad (CIMB) in an action brought against them by Deutsche Bank AG in the English High Court. CIMB was the issuing bank under 10 letters of credit to which Deutsche Bank added its confirmation.

The substantive hearing of this case will take place later this year, but an interesting point of principle arose at the first case management conference, which is of significant interest to issuing and confirming banks under LCs.

Deutsche Bank argued that having made payment to the beneficiary, its client, under the LCs and having passed what it alleged to be compliant documents to CIMB, it was entitled to reimbursement from CIMB. CIMB disagreed.

The issue between them related to the interpretation of Article 7(c) of the UCP 600, which states:

In its pleadings, Deutsche Bank asserted that it had made payment and CIMB had made a formal Request for Further Information as to whether payment had actually been made.

Deutsche Bank refused to comply with this Request, contending that as a matter of principle, an issuing bank must accept on its face a statement from a confirming bank that it has paid the beneficiary – there is no entitlement on the part of an issuing bank to enquire as to whether a confirming bank has actually made payment before reimbursing it. It argued that CIMB's undertaking to reimburse Deutsche Bank arose once Deutsche Bank had sent CIMB the allegedly conforming documents and stated that it had paid the beneficiary. To permit issuing banks a right of enquiry as to whether payment has in fact been made would be "uncommercial, unworkable and plainly not what the parties must be taken to have intended".

CIMB on the other hand argued that its undertaking to reimburse Deutsche Bank under UCP 600 Article 7(c) is contingent on Deutsche Bank having actually made payment to the beneficiary. The question as to whether or not a confirming bank has actually paid is therefore fundamental to this reimbursement undertaking, and an issuing bank must therefore be entitled to enquire as to whether payment has in fact taken place.

The decision

On 25 May 2017, the English High Court found in favour of CIMB and allowed its Request for Further Information.

This judgment is the first conclusive authority to deal with this point, although some existing judicial commentary and practitioners' texts lent support to CIMB's position.

The court agreed with CIMB that whether the presentation of documents has been honoured by payment is a relevant matter for investigation, endorsing previous judicial comment that: "What matters is the fact of honouring or negotiating a complying presentation."³

Deutsche Bank had also argued that the words "states that" should be read in to UCP 600 Article 7(c), so that an issuing bank's reimbursement undertaking would arise when the confirming bank says that it has paid the beneficiary, rather than when it has actually done so.

The court rejected this, holding that it is not correct in principle to construe Article 7(c) of UCP 600 "by writing in words that materially change its sense." The court also pointed out that "UCP is revised periodically, and this is the occasion for introducing changes if thought desirable."

HFW comment

This decision provides a clear interpretation as to the extent of an issuing bank's responsibilities under UCP 600 Article 7(c), which will stand unless and until the decision is overturned by a higher court, or the Article is amended during the periodical revision process.

Whilst it is unlikely in most cases that an issuing bank would have cause to question a confirming or negotiating bank's assertion that it has honoured presentations under LCs, this decision gives them scope to do so if they find it necessary.

It may prove useful in the context of synthetic trades, or where standby LCs are being used as a form of security and where it is often difficult for issuing banks to resist demands for reimbursement from confirming banks.

It will be of particular relevance in the heightened regulatory and compliance environment in which international banks operate, as it opens the possibility for issuing banks to acquire further information from confirming banks about the movement of funds in trade deals in which they are involved.

Footnotes

1. http://www.hfw.com/Commodities-Bulletin-March-2017

2. National Infrastructure Development Co Ltd v Banco Santander [2017] EWCA Civ 27; Petrosaudi Oil Services (Venezuela) Ltd v (1) Novo Banco SA (2) PDVSA Servicos SA (3) PDVSA Services BV [2017] EWCA Civ 9, [2017] All ER (D) 92 (Jan)

3. [2017] EWHC 1264 (Comm)

4. Fortis Bank v Indian Overseas Bank [2009] EWHC 2203 (Comm)

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