Commodities Bulletin April 2010 – Volcanic ash: what next for original documents?
By Damian Honey, Partner

The recent eruption of the Eyjafjallajokull volcano has provided a useful reminder of the continued reliance of international trade on the ability to send original documents around the world by courier. In the 21st century, it seems an oddity that original documents are still relied upon by business, when letters and telexes were long ago replaced by email. Why do we need to send original documents around the world to present under letters of credit, or to obtain delivery from a ship at a discharge port? One positive effect of the eruption may well prove to be a renewed drive towards using electronic documentation. But what is the immediate impact on bills of lading and letters of credit?

The letter of indemnity has developed to deal with the absence of original bills of lading at the disport. However, the banking market has no mechanism for dealing with widespread disruption to air transport such as resulted from the volcano. The grounding of aircraft led to delays in presentation of documents by beneficiaries and by banks to nominated banks. One possibility is that a letter of credit could expire before the documents could arrive, because they were delayed in transit. Article 35 of UCP 600 places the risk of this delay on the beneficiary, as it expressly states that "A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit ... in the transmission of documents." It seems unlikely that the force majeure rules in Article 36 would assist a beneficiary arguing for a suspension of the letter of credit for the duration of the suspension of flights. In such a situation, where the beneficiary may be unable to extend the validity of the letter of credit, it could be left with an expired credit. This is not satisfactory and it is a consequence of the continued reliance in the industry on original documents.

Commodities Bulletin April 2010 – UCP 600: a saga continues
By Guy Hardaker, Partner and Andrew Williams, Associate

The November 2009 edition of this Bulletin reported on the summary judgment in Fortis Bank and Stemcor UK Limited v Indian Overseas Bank (25 September 2009). The case returned to the High Court in January 2010 for a preliminary issue hearing, and a further judgment has been delivered providing guidance on the interpretation of Article 16 of UCP 600.

Indian Overseas Bank ("IOB") had opened five letters of credit in favour of Stemcor under contracts for the sale of containerised scrap metal. The letters of credit were expressly subject to UCP 600. IOB rejected some documents as discrepant and gave notice of their return to Fortis/Stemcor under UCP 600 Article 16(c)(iii). After further correspondence, Fortis/Stemcor gave a notice to hold ("HOLD") the documents then later requested their return ("RETURN"). They did not receive the documents immediately and informed IOB that its failure to return them constituted an affirmation of the presentations as compliant under Article 16(f) of UCP 600. IOB returned the documents several months later.

Fortis/Stemcor obtained summary judgment in respect of all five letters of credit. However, one of IOB's defences required the Court to consider as a preliminary issue (i) whether IOB had complied with its obligations under Article 16 of UCP 600 in respect of the RETURN and HOLD Notices and (ii) if it had not complied, whether IOB was precluded by Article 16(f) from relying on the discrepancies to reject the documents.

Fortis/Stemcor argued that, whilst not explicitly set out in UCP 600, Article 16 requires that documents be returned to the presenter reasonably promptly when a bank issues a RETURN Notice following a discrepant presentation (or when a bank receives instructions from the presenter to return documents following a HOLD notice). They further argued that Article 16(c)(iii) should be construed as involving an undertaking by the bank to act in accordance with the relevant notice and Article 16(f) of UCP 600 should apply where a bank does not do so.

IOB argued that, unlike the wording of UCP 500, UCP 600 does not expressly require a bank to act in accordance with a RETURN or HOLD Notice. Such a requirement could therefore only be implicit, and that would not be a proper interpretation of Article 16.

The Court gave judgment for Fortis/Stemcor, holding that it should generally seek to construe UCP 600 as incorporated into the contract so as to reflect "the best practice and reasonable expectations of experienced market practitioners".

An issuing bank must therefore act with reasonable promptness in relation to a RETURN or HOLD notice.

Applying these principles to the facts of the case, IOB's delay was found to be unreasonable, with the result that it was precluded from relying upon discrepancies to reject the documents.

This decision offers a useful clarification of the obligations of banks in receipt of discrepant documents under UCP 600. If a bank states that it will return documents but does not return them, or does so only after an unreasonable delay, it may be precluded from relying on relevant discrepancies. To avoid such a risk, banks should ensure that documents are returned promptly.

Commodities Bulletin April 2010 – European Directive on sulphur content of marine fuels becomes law in the UK
By Anthony Woolich, Partner

European Council Directive 1999/32/EC, on a reduction in the sulphur content of certain liquid fuels, should have been implemented in full by all EU Member States by 1 January 2010. There was a delay in implementing the Directive in the United Kingdom, but by the Merchant Shipping (Prevention of Air Pollution from Ships) (Amendment) Regulations 2010 the Directive came into force in the UK on 20 April 2010.

Vessels calling at UK ports will now be required to comply with the Directive which requires that they do not use marine fuels with a sulphur content exceeding 0.1% by mass. Engines must therefore be capable of burning the bunkers complying with this limit, and the need to use low sulphur fuel will inevitably push up bunker costs.

The Directive raises a number of issues for the time charterers of vessels which may call at UK ports. Time charterers will need to ensure that charter documents stipulate which party is to bear the lost time and costs of any necessary vessel alterations and the higher cost of purchasing compliant bunkers. Charterers will also almost certainly be obliged to notify owners in good time of any planned calls at UK ports and should consult with owners' technical departments on the practical measures made necessary by the Directive.

A fuller briefing note on the Directive will be available for clients shortly. Readers wishing to receive a copy should inform mailings@hfw.com.

Commodities Bulletin April 2010 – Conferences & Events

Lloyds Maritime Academy: Bills of Lading
Bonhill House, London
(17-19 May 2010)
Damian Honey

16th Coaltrans Asia
BICC, Bali, Indonesia
(30 May – 2 June 2010)
Simon Davidson and Alistair Duffield

GAFTA Annual Dinner & Reception
Park Lane Hilton, London
(8 June 2010)
Chris Swart , Mark Morrison , Damian Honey , Brian Perrott , Robert Wilson , Judith Prior , John Rollason , Katie Pritchard and Matthew East

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.