UK: Letters Of Credit – Strict Compliance And The Use Of Banking "Shorthand"

Last Updated: 25 September 2013
Article by Stuart Shepherd and Carl Walker

Bulgrains & Co Limited v. Shinhan Bank [2013] EWHC 2498

A fundamental principle underlining the use of a letter of credit ("LC") as a means of payment security is that the documents presented under the LC must strictly comply with the requirements of the LC in order for the issuing bank to make payment. In this case, the Commercial Court considers the doctrine of strict compliance and the extent to which so called "trivial" discrepancies will justify a refusal to pay under the LC. The Court goes on to consider what is required under UCP 600 for a bank to give valid notification of a refusal to pay.

The background to the dispute

The Claimant sellers entered a contract to sell a cargo of wheat bran pellets to buyers in China. Pursuant to the contract, the buyers procured the issue of a LC by the Defendant, Shinhan Bank ("the Bank"), under which the Claimant was the beneficiary.

The LC provided for payment against the presentation of certain documents, including a signed commercial invoice. It named the beneficiary as "Bulgrains Co Limited" and the goods were described as follows:

"1. Wheat bran pellets in bulk. Moisture max 13.5PCT – Protein Min 12.0PCT – Ash Max 7.0PCT – Fiber Max 12.0PCT – Free from alive and dead insects – Pellet's diameter 6-12 mm – Pellet's length 20 –30MM. 2. Quantity: 3,000 M/T (10% M/L)".

The Bank rejected the presentation of documents made by the Claimant on the basis of two alleged discrepancies. The first discrepancy was that the name of the beneficiary in the commercial invoice submitted by the Claimant was stated as "Bulgrains & Co Limited", not "Bulgrains Co Limited". The second discrepancy was that the commercial invoice did not conform with the description in the LC, in that the commercial invoice described the goods as "Bulgarian wheat grain pellets".

The Bank notified the Claimant that the LC would not be honoured by two freeform SWIFT messages sent directly to the Claimant on 6 May 2013 and a third SWIFT message bearing the code "MT734" sent via a relaying bank on 7 May 2013. The initial notification of refusal was in the following terms:

"Pls regard this msg as MT734. 77J discrepancies: beneficiary's name on the document is different from LC. Description of goods on invoice is not correspond with the description in the credit. 77B disposal of documents notify/as per UCP 600 Article 16(c)(iii)(b)".

The Claimant contested that the rejection was invalid on the grounds that the addition of the ampersand between "Bulgrains" and "Co Ltd" was not a material discrepancy and, while it was accepted that the mis-description of the goods was a material discrepancy, the Bank was precluded from relying on it because the notification of refusal failed to conform with the requirements of UCP 600.

The issues

Accordingly, the Court had to determine the following issues:

  1. Whether the misspelling of the Claimant's name in the commercial invoice as "Bulgrains & Co Limited" rather than "Bulgrains Co Limited" was a material discrepancy;
  2. Whether the notification issued by the Defendant complied with article 16 of the UCP;

Was the invoice discrepant?

The Bank argued that the only exception to the doctrine of strict compliance may be where the discrepancy is insignificant or trivial such that it cannot be regarded as material. It was suggested that the test to be applied is best summarised in the textbook Jack: Documentary Credits which states the position thus:

"It is suggested that the correct approach is that a document containing an error with a name or similar should be rejected unless the nature of the error is such that it is unmistakably typographical and the document could not reasonably be referring to a person or organisation different from the ones specified in the credit. In assessing this, the bank should look only at the context in which the name appears in the document, but not judge it against the facts of the underlying transaction."

The Judge agreed and, following the approach adopted by the Singapore Courts in United Bank Ltd v. Banque National de Paris [1992] 2 SLR 64, concluded that any discrepancy other than obviously typographical errors will entitle the negotiating or issuing bank to reject the documents. When it comes to errors in the name of the beneficiary, the only way that a bank can be certain of the position is by making a search at the relevant company registry – which is plainly more than is required of a bank when reviewing the documents.

The Judge therefore concluded that the addition of the ampersand between "Bulgrains" and "Co Limited" was a material discrepancy, thus giving the Bank the right to reject the documents.

Did the Bank's notice of refusal comply with UCP 600?

Article 16 of UCP 600 provides, in relevant part, as follows:

"(c) When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.

The notice must state:

(i) That the bank is refusing to honour or negotiate; and

(ii) Each discrepancy in respect of which the bank refuses to honour or negotiate; and

(iii ) (a) that the bank is holding the documents pending further instructions from the presenter; or

(b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instruction from the presenter prior to agreeing to accept a waiver; or

(c) that the bank is returning the documents; or

(d) that the bank is acting in accordance with instructions previously received from the presenter.

(e) The notice required in sub-article 16(c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the 5th banking day following the day of presentation".

The Claimant's first argument was that the word "given" in article 16(d) means that the beneficiary must actually have received the notice. The Judge had little difficulty in rejecting this argument, holding that a complete answer is to be found in article 35 of UCP 600, which confirms that a bank assumes no liability or responsibility for loss in transit of messages or errors in their transmission.

The Claimant's second argument was that the Bank could rely only on the first notice of refusal it gives. The Judge held that that in circumstances where a bank's position and reasons remain unchanged, there is no reason in principle why it could not correct an earlier defective refusal by serving a later correct refusal, so long as it does so in time and adopts the same substantive reasons. In any event, the Judge decided that the first notice of refusal was sufficient, with the result that the Bank did not need to rely on the second and third messages.

As regards the contents of the notification of refusal, the Claimant raised three points. First, it was argued that the notification did not contain a separate specific statement that the Bank is refusing to honour or negotiate the documents, as required under article 16(c)(i). Again, this argument failed. The Judge accepted that it was implicit from the reference to SWIFT code "MT734" – an industry term of art that would be clearly understood by those receiving it - that the Bank was refusing to honour or negotiate the credit. There was no need to spell this out.

Secondly, the Claimant argued that the notices were defective on the basis that they did not explain how the beneficiary's name or the description of the goods differed between the commercial invoice and the LC. In this regard, the Judge noted that the purpose of setting out with clarity the alleged discrepancies is to provide the beneficiary with an opportunity to rectify them. In this case, however, there was only one document naming the beneficiary and only one document describing the goods (namely the commercial invoice) to compare with the LC. The Judge dismissed the Claimant's argument that the notices must tell the presenter what he has to do in order to rectify the discrepancies. In his view, the answer was simple; the names and the descriptions in the documents presented must conform with those in the LC.

The final argument with regard to the content of the notifications was that they failed expressly to state what the Bank was proposing to do with the documents, as required by article 16(c)(iii) of UCP 600. While the Bank's notice of refusal did not say in terms what was to be done with the documents, the Judge held that the use of the word "notify" was sufficient. This is an industry term of art clearly and unequivocally understood to mean that the Bank was holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instruction from the presenter prior to agreeing to accept a waiver, in accordance with article 16(c)(iii)(b).

Comment

This decision serves as a reminder to traders of the importance of ensuring that documents presented under a LC precisely conform with the requirements of the credit. Even minor discrepancies, which may seem to the presenter to be trivial or insignificant, may entitle the issuing or confirming bank to refuse to honour the presentation, potentially leaving the presenter with no payment security if he is unable to re-present conforming documents before the expiry of the credit.

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.

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