UK: Implied Obligation Under Article 16(F) of UCP 600 to Return Rejected Documents Reasonably Promptly

Last Updated: 12 May 2010
Article by Steven Fox and Reema Shour

Fortis Bank S.A. /NV and Stemcor UK Ltd v Indian Overseas Bank [2010] EWHC 84 (Comm)

In our International Trade and Commodities Legal Update February 2010, we reported that the beneficiaries under five letters of credit (L/Cs) issued by Indian Overseas Bank ("IOB") had succeeded in defeating all save one of IOB's defences based on alleged documentary discrepancies under the L/Cs. The sole discrepancy that was upheld by the court gave rise to a "preclusion point" under Article 16(f) of UCP 600 as incorporated into the L/Cs. The court has now dealt with the preclusion point as a preliminary issue at a subsequent hearing.

Background

The ICC Uniform Customs and Practice for Documentary Credits ("UCP") governs the operation of letters of credit where its provisions have been incorporated into the documentary credit. UCP 600 is the latest revision of the rules and came into effect on 1 July 2007. There is, therefore, little case-law on the interpretation of its provisions.

UCP 600

Article 16 of UCP 600 deals with "discrepant documents, waiver and notice". Where the issuing bank determines that a presentation does not comply with the documentary requirements of the letter of credit, it can refuse to honour or negotiate the presentation. However, Article 16 (c) requires the bank to give formal notice to the presenter, stating each discrepancy in respect of which it is refusing to honour or negotiate. This Article 16 (c) notice must also state inter alia either that the issuing bank is returning the documents (a "return" notice) or that it is holding the documents pending further instructions from the presenter (a "hold" notice). Article 16(d) requires the Article 16 (c) notice to be communicated to the presenter before close of business on the fifth banking day following the day of receipt. Article 16(f), which deals with preclusion, states as follows:

"If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation".

The wording of the equivalent provision in UCP 500, the predecessor to UCP 600, differed in that it contained an express obligation on the issuing bank to act in accordance with its disposal statement by actually returning the documents to the presenter or holding the documents at the presenter's disposal pending further instructions. If it did not do so, it would be precluded from relying on that statement. There is no such express wording in Article 16(f).

Issues in the present case

IOB had rejected a number of drawings under the L/Cs by sending either "return" notices or "hold" notices to F, but it did not return the discrepant documents to F until some weeks later.

The court was invited to consider whether Article 16(f) imposed an implied obligation on IOB as the issuing bank to act in accordance with the disposal statement made in its Article 16 (c) notices to F (i.e. to return the documents to F and / or hold them pending F's instructions) and, if so, how soon it had to do so.

Commercial Court decision

Mr Justice Hamblen found that best practice and the "reasonable expectations of experienced market practitioners" meant that a disposal statement by an issuing bank carried with it an implied obligation to act in accordance with the statement made. This reflected what had been required under UCP for 40 years and was what any bank would be expected to do in such circumstances. In particular, he said, failing to deal with the documents as stated could lead to very serious consequences, for example where documents of title affecting the beneficiary's rights and security were involved (in this case, the documents included bills of lading relating to the merchandise shipped under the sale contracts). If the issuing bank said it was returning the documents but did not do so or did so only after some considerable delay, the beneficiary could lose the opportunity to deal in the documents or even to re-present conforming documents before the L/C expired.

As to the time period within which IOB would have been expected to act on their refusal notices, the judge accepted expert evidence that it was normal and expected international banking practice for documents to be returned and document disposal instructions to be complied with reasonably promptly. Most international banks could rely on speedy methods, such as a courier, to return the documents within one or two banking days.

The judge rejected IOB's argument that they were not in breach of any duty to return the documents with reasonable promptness because F had asked them to retain the documents and not return them. The judge said that this request was no more than a demand by F for payment under the L/Cs and did not undermine IOB's obligation to return the documents that were the subject of the "return" notices.

As regards the "hold" notices, the judge also rejected IOB's argument that F had not given them valid instructions to return the documents because F had insisted on the bills of lading being endorsed to them before being returned, which IOB said F had no right to do under the UCP. The judge held that F had negotiated the documents under the relevant L/C, was their owner and was entitled as a matter of law to request the endorsements. However, even if that were not so, IOB could still have returned the documents unendorsed, as they ultimately did.

Consequently, the judge held that the claimants had made out their case on preclusion and IOB could not rely on the relevant documentary discrepancy because they had not acted on their disposal statement reasonably promptly.

Conclusion

Despite the change in wording, it seems that UCP 600 does not bring with it any real change on the preclusion point. The moral would seem to be that if you are a bank with discrepant documents, you hold on to them at your peril.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.