UK: Refusal of Documents under Letters of Credit

In the case of Credit Industriel et Commercial -v-China Merchants Bank [2002] EWHC 973 (Comm), Mr Justice David Steel revisited two recent decisions of the Court of Appeal concerning the issue of originality and the requirements of Article 20(b) of UCP 500, in relation to documentary letters of credit. In doing so, he has provided helpful guidance to issuing banks in determining whether documents are discrepant for lack of originality, in the face of two decisions which had previously "sent sequential ripples of unease through the banking community".

The claimant French bank ("CIC") sought payment under an irrevocable documentary letter of credit ("the L/C") issued by the defendant ("CMB"). The L/C, covering a shipment of logs on board a vessel which subsequently sank, had been negotiated in favour of CIC by the seller. The L/C and relevant documents, including a packing list and certificates of quantity and quality, were accepted by CIC on presentation and forwarded to CMB. CMB refused the documents on the ground that they were discrepant because CMB claimed that, among other things:

At a subsequent meeting between CMB and CIC, CMB refused to hand over the relevant documents to CIC's representatives, insisting they should be returned by courier.

The claim gave rise to the need to determine three principal issues:

The most important issue addressed by the claim, and accordingly the issue with which this Briefing Note is mainly concerned, was the issue of discrepancy, and in particular originality.

Mr Justice Steel, applying articles 13(a) and 21, held that the obligation on CMB when checking the documents for discrepancies, was to exercise reasonable care, as determined in accordance with international standard banking practice. He stated that the obligation was a passive one, in the sense of using reasonable care to assess the absence of any apparent inconsistency on the face of the documents, as opposed to an active obligation to establish the existence of complete consistency on the basis of the material contained on the face of the documents.

Accordingly, CMB was not required to calculate the exact percentage grades from the packing list and to cross-check those with the invoice. This was reinforced by the opinion of the ICC dated 6 September 1999, to the effect that banks do not have to carry out mathematical calculations or compute lists of individual items, weights or measurements to ensure consistency with other documents.

In any event, the difference between the two was within the tolerance allowed for by the L/C (i.e. plus/minus 10%). Furthermore, it was common ground between the parties that, absent the calculations, there was no inconsistency between the packing list, the commercial invoice and the L/C.

A further objection taken by CMB was that the L/C drafts were partly in French, contrary to the terms of the L/C. The judge rejected this argument on the basis that the drafts were not within the commercial documents required for negotiation by virtue of Field 46A in the L/C, which documents had to be in English (Field 47A). This did not include the drafts themselves, which were drawn on CMB as issuing bank for the exclusive benefit of the negotiating bank, which under the terms of the L/C could be "any bank in France". It was therefore not surprising that the drafts were drawn on a standard French form.

The principal area of dispute between the parties in relation to the issue of discrepancy, concerned the question of originality. The packing list, certificate of quantity and certificate of quality tendered by CIC contained the seller's name, address and telephone number, which appeared to have been stamped on the document and underneath which an ink signature had been applied. There was no evidence as to the manner in which the documents had been prepared prior to stamping and signature. Mr Justice Steel found that whilst the documents did not appear to have been produced on a conventional typewriter, they may have been photocopied or produced by a computer controlled printer. He also found that the documents may not have been wholly produced at one time and that the body of the documents could have been inserted on a document already containing the details of name, address and telephone number etc.

In deciding the issue of whether CMB was entitled to reject the documents on the ground of lack of originality, it was necessary to apply article 20(b) of UCP 500. Article 20(b) provides:

Two recent Court of Appeal decisions appeared to provide potentially conflicting guidance on the interpretation of article 20(b), which Mr Justice Steel, therefore, had to seek to resolve.

In Glencore -v- Bank of China [1996] 1 Lloyd's Rep, 135, the Court of Appeal held that for a document to be treated as an original, any document which was produced by one of the methods described in article 20(b) must be marked "original", whether original or not.

In the later case of Kredietbank Antwerp -v- Midland Bank plc [1999] 1 Lloyd's Rep 219 (see Banking In Short, Issue No.13), the Court of Appeal held that article 20(b) extended the category of documents which could be treated as originals, beyond those documents which were clearly originals and which therefore should be accepted, to include copies marked as originals. But, there was no requirement that original documents, even if produced by the means specified in article 20(b), had to be marked original.

As Mr Justice Steel stated, the views of the banking community in relation to the two decisions had been "… divided between those concerned that Glencore, in the interests of certainty, required an unduly inflexible routine against the background of modern printing techniques and those concerned that Kredietbank, in the interests of flexibility, established an unworkable distinction between documents produced by electronic means which were obviously original and those which were not."

Mr Justice Steel's sympathies, however, clearly lay with the Court of Appeal in Kredietbank. He made reference to "the uncomfortable but logical conclusion" of the Glencore decision, to the effect that a document which appeared to have been or was in fact produced by a typewriter but not stamped "original" had to be accepted, but such a document which appeared to have been or was in fact produced by a computer had to be rejected. Given that almost all forms of printed documents are now generated by computers, it is perhaps not surprising that Mr Justice Steel favoured the approach in Kredietbank.

In order to enable him to find in line with the later case, Mr Justice Steel concluded that the ratio in Glencore related to "… the treatment of documents appearing or known to be copies or, in some analogous respect, of a class not prior thereto treated as originals". In the present case, however, it was common ground between the parties' respective experts that the documents would have been accepted as originals prior to the introduction of UCP 500. Mr Justice Steel therefore held that because the relevant documents appeared to be originals, they should be accepted as originals and, as such, he accepted the submission of CIC that the relevant documents were not discrepant.

Mr Justice Steel also referred to the ICC policy statement/decision issued on 12 July 1999, which he considered to be a legitimate attempt by the ICC to seek to resolve any ambiguities in, or difficulties of interpretation of, UCP 500 (albeit the policy statement could not vary the provisions of UCP 500), "in a field crying out for international consistency".

The policy statement reinforced the approach adopted in Kredietbank such that banks could treat as original any document which appeared to be signed by the issuer of the document and should only require a document to be specifically marked "original" where it was clearly a copy. It was common ground between the parties that if the policy statement was properly to be applied to the documents at issue in this case, those documents would not be considered to be discrepant on the ground of lack of originality. The policy statement was also accepted as determinative in the United States District Court for the 5th Circuit in Voest-Alpine Trading US Corpns. v. Bank of China (2000).

Having decided that CMB was not entitled to refuse payment under the letter of credit by reason of any of the alleged discrepancies, Mr Justice Steel went on to consider whether the terms of the notice of rejection and/or the subsequent refusal to hand over the documents would, nevertheless, have prevented CMB from relying on the discrepancies, if they had been found so to be.

The notice of rejection was expressed by CMB as follows:

The Judge held that article 14(c) of UCP 500, which allows an issuing bank in its sole judgment to approach the applicant for a waiver of any identified discrepancies, means that the issuing bank may only approach the applicant before reaching its decision on whether to accept or reject the relevant documents.

Further, article 14(d)(ii) provides that the issuing bank must state whether it is holding the documents at the disposal of or is returning them to, the presenter. Since the notice of rejection suggested that the documents were not to be returned to CIC or held to its order, but rather to be released to the applicant, within some indefinite period, in the event of the applicant accepting the discrepancies, without any notice to CIC, it was not in accordance with article 14(d) (ii), and prevented CMB from relying on any discrepancies (article 14 (e)).

The judge rejected the argument that the notice was to the effect that the documents would be at the disposal of the presenting bank until an agreement had been reached. The notice amounted to "a continuing threat of conversion of CIC's documents". He was fortified by the paper produced by the ICC Commission on Banking Technique and Practice in November 2000, which states:

In the US case of Voest-Alpine (see above), a notice of rejection in similar form was held to be insufficient to comply with UCP.

Finally, Mr Justice Steel stated that, in the absence of any justification (of which he found there to be none), the refusal to return the documents would have prevented CMB from relying on any discrepancies(article 14(e)).

The Court has provided helpful guidance to issuing banks when considering documents underlying letters of credit for discrepancies, particularly in relation to the issue of originality. It has helped to resolve some of the potential conflicts between the Court of Appeal decisions in Glencore and Kredietbank, and in doing so has approved the approach which appears to fit most satisfactorily with modern practice, as set out in the ICC policy statement of 12 July 1999.