UK: Preclusion under UCP600 - Banks Beware!

Last Updated: 28 May 2010
Article by Patric McGonigal

In what we believe to be one of the first reported judgments of the English High Court on the application of UCP600, it was held earlier this year in a dispute between Fortis Bank ("Fortis") and Indian Overseas Bank ("IOB")1 that the preclusion provided for by Article 16(f) of UCP6002 will apply to the conduct of an issuing bank even after it has issued a notice rejecting documents presented under a documentary credit.

Background

Documents were presented by Fortis on behalf of its customer Stemcor UK Limited under five letters of credit. Payment was refused by IOB on the basis of a series of grounds all of which, save for one, were subsequently held by the Court to be invalid. One documentary discrepancy was found to be valid, the "Consolidated Certificate Discrepancy"; however, Fortis argued that IOB was in any event precluded from relying on such a discrepancy because it had waived its right to do so by having failed to act in accordance with the provisions of Article 16 of UCP600.

Article 16 ("Discrepant Documents, Waiver and Notice") sets out the rules surrounding the refusal by a bank of non-compliant documents presented under a letter of credit. Amongst other things, where a bank determines that a presentation does not comply it must send a notice: (i) stating it is refusing to negotiate or honour the credit; (ii) identifying each discrepancy relied upon; and (iii) explaining how it will deal with the documents (i.e. a "disposal notice"). Article 16(f) states that if a bank fails to act in accordance with the provisions of Article 16, it shall be precluded from claiming that the documents do not constitute a complying presentation.

In this case, IOB rejected several drawings under various letters of credit and issued disposal notices indicating that it was returning the documents presented. Fortis responded insisting on payment and demanding that IOB continue to hold the documents at its counter. Subsequently, IOB rejected various further presentations and issued several further disposal notices.indicating that it was holding the documents presented pending Fortis' further instructions. After various exchanges between the two banks, Fortis then instructed IOB to return the documents by urgent courier. All of the documents were eventually returned by IOB but this entailed a delay of between 89 and 104 days in the case of the first set of documents which IOB had indicated initially, it was returning, and a delay of 34 days in the case of the second set of documents which IOB had said would be held and Fortis had later requested to be returned.

Claim

By delaying to such an extent the return of the documents, Fortis claimed that IOB had not complied with its obligations under Article 16 and, by reference to Article 16(f), was therefore precluded from relying on any documentary discrepancies.

Issues

The dispute essentially turned upon one key issue: whether the preclusion in Article 16(f) applied in relation to actions taken (or not taken) subsequent to the issue of a disposal notice. IOB argued that it did not and that it was under no obligation to act upon the statements of intent contained in the disposal notices; there was no express term in Article 16 requiring it to do so. In support, IOB referred to the fact that the previous version of this provision, Article 14 of UCP500, was amended so that the words "...and/or_fails to hold the documents at the disposal of, or return them to the presenter..." were deleted. IOB argued that this indicated the drafters of UCP600 intended to restrict the application of the preclusion in Article 16(f) to acts by a bank made prior to and including the issue of a disposal notice and that acts made following the issue of a disposal notice fell outside the scope of Article 16(f).

Fortis contended that if IOB was correct and it was not obliged to return the documents, this would defeat the purpose of the UCP of introducing certainty, reliability and uniformity. In addition, it would prejudice the beneficiary's ability promptly to protect its own interests, whether by dealing with the documents or re-presenting compliant documents. Amongst other things, it was Fortis' position that each of the disposal notices should be construed as involving an undertaking by IOB to act in accordance with each disposal statement and to do so with reasonable promptness. Alternatively, Fortis argued that such a provision should be implied.

Judgment

In adopting a purposive approach to the construction of Article 16 UCP600, the Court sought to reflect what it described as "the best practice and reasonable expectations of experienced market practitioners".

In this context and having taken into account evidence given by the parties' banking experts, the Court agreed with Fortis that a contractual requirement to state that documents are to be returned or are being held in accordance with or pending instructions necessarily involves an undertaking to comply with those instructions since that is the self evident purpose of being required so to state. As for the changes made to the equivalent provision under UCP500, the Court took the view that there may have been many explanations for the amendment other than a desire to effect a change (for example, a desire to simplify the language used), but no good banking reason had been advanced to explain why such a change as advocated by IOB should be made to what was described as a "long established and recognised requirement".

In reaching this conclusion, the Court was influenced by the "very serious consequences" for a beneficiary's rights and security if a bank failed to deal with the presented documents. On the facts of this case, there were also significant demurrage and storage costs to be taken into account.

Moreover, the Court was willing to reach the same result by implying a term into UCP600 that a bank is obliged to act in accordance with the disposal statement it has made in its Article 16 notice. Applying the considerations set down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings3, the Court found that:

  1. it is both reasonable and equitable to require a bank to act in accordance with the mandatory disposal statement it has 3 (1977) 180 CLR 266, 282-283 made under contract;
  2. this is necessary to give business efficacy to the contract as there is otherwise no contractual means of ensuring compliance;
  3. it is so obvious, "it goes without saying", that if a bank makes a disposal statement it must actually do what it says it will do;
  4. this is clearly expressed by adding the following words to the end of Article 16(c)(iii): "and the bank must act in accordance with such statement"; and
  5. there is no contradiction between this implied wording and the express wording of the contract.

No specific time period was set out by the Court within which the actions stated in a disposal notice should be taken, although it was noted that one would expect most banks to be able to courier documents within one or two days. As such, the Court held that where documents were to be returned or instructions from the presenter complied with, the bank should do so with "reasonable promptness" – the bank is not making a decision in this regard, all that is required is for the return of the documents to be arranged. Implicit in this is the fact that actual circumstances facing the bank which might hinder the return of discrepant documents can of course be taken into account, although the presenter should nevertheless be informed of any such delays.

On the facts, the Court held that IOB's delay in returning the documents to Fortis precluded it from relying on any documentary discrepancies and obliged it to honour each discrepant presentation in full.

Conclusion

This judgment serves to underline a bank's obligations in circumstances where it has received non-compliant documents under a letter of credit: it must issue an Article 16 disposal notice; it must comply with the statements set out in such a notice; and it must do so reasonably promptly. A failure to do so may result in the bank having to honour a presentation even though the presentation may not comply with the terms of the credit and even though the presenting party may have replied to a "return" disposal notice demanding that the documents be retained (and payment made) rather than be returned.

In short, although the Court dismissed, on the facts, an argument by Fortis that a disposal notice must be true to be valid, the reality is that banks must take care to do what they have undertaken to do and to do so reasonably promptly. While this may have been a relatively straightforward conclusion to reach on the facts of this case (i.e. there was a delay by IOB of at least five weeks to return documents) a more difficult scenario might be one involving an alleged delay of say just a few days or one week. The bottom line is that banks must ensure that once documents are determined to be discrepant and a disposal notice is issued, they act as promptly as is reasonably practicable in the circumstances so as to avoid any claim of preclusion on the basis of Article 16(f).

Footnotes

1 Fortis Bank SA v Indian Overseas Bank [2010] EWHC 84 (Comm)

2 UCP600 is the latest in a series of six revisions of a set of rules governing the use of documentary credits in international commerce. They do not have the force of law but will be binding if incorporated into a particular credit. UCP600 came into force on 1 July 2007.

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.