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The ICC Uniforms Custom and Practice for Documentary Credits
(currently UCP 600) is a set of contractual rules frequently
included by express agreement into a documentary credit
transaction. One particular point of interest to banks is Article 7
(Issuing Bank Undertaking).
Article 7(c) provides that the issuing bank must reimburse the
nominated or confirming bank at maturity when that bank has
accepted a draft or incurred a deferred payment obligation whether
or not that bank has prepaid or purchased that accepted draft or
deferred payment undertaking before maturity.
The construction of this provision and Article 15 was considered in
Societe Generale SA v Saad Trading and another [2011] EWHC
2424, with regard to the terms of a letter of credit and a
facility agreement between the applicant for the credit and the
issuing bank. This case is of interest as it highlights the
possible consequences of common banking practices moving away from
the strict requirements of UCP 600.
The High Court ruled that Articles 7(c) and 15 put a duty on the
confirming bank to forward to the issuing bank all of the documents
presented to it under the terms of a letter of credit, without
exception. In the present case, however, despite the issuing bank
not having received all necessary documents from the confirming
bank, it was held that the applicant was bound to reimburse the
issuing bank for its liability to indemnify the confirming
bank.
In this case, it is important to note the "good faith"
condition in the related facility agreement. Due to the forgiving
nature of the provision, the Judge found that even if Societe
Generale had been of the mistaken belief that it was obliged to
reimburse the confirming bank (as it had not received all the
documents), the fact it decided to do so in good faith, meant the
applicant was liable under the indemnity in the facility
agreement.
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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