Coastline newsletter / 2010 edition

ISSUE 35 Oct2010

Overview of the DOCDEX issues and Opinions discussed at the September 2010 ICC Banking Commission (Part 1)

By Gary Collyer

The ICC Banking Commission met in Orlando on 22 and 23 September. Once again, the DOCDEX cases and Opinions for review were quite varied in topic and length. Though before we look at these Decisions and Opinions, first a brief update on the ISBP revision.

ICC national committees had been offered three options for the scope of the revision (1) to merely update, revise and expand the number of documents that are covered in the current publication No. 681; (2) to carry out (1) but also incorporate practices relating to the handling of documentary credits; or (3) to complete (2) but in two separate exercises and publications i.e., one publication covering practices for examination of documents and the other covering the practices for handling documentary credits such as those relating to issuance, advising, confirmation, amendments, honour, negotiation, transfer, etc.

By 21 country votes to 13, the vote was in favour of option 2. There was no country indicating a preference for option 3. Based on the ICC's voting system, this equates to a 59.7% to 40.3% preference for option 2.

It will now be for ICC national committees to provide their input to the Drafting Group of what they expect to see in respect of practices relating to the handling of documentary credits. ICC national committees in attendance at the meeting were requested to make their (single) nomination for an individual to be considered as a member of the ISBP consulting group. This group will be created later this year. Given the additional scope of the revision, it is difficult to put a timeline on the completion of this exercise but it is expected to be at least 3 years. 

For this month's newsletter, we will look at the topics covered in the DOCDEX cases considered since the last ICC Banking Commission meeting (which was November 2009, given the postponement of the meeting planned for Beijing in April) and an outline of the issues contained in some of the Opinions that were approved. The December edition of this newsletter will cover the Opinions not included herein.

There have been eight DOCDEX cases decided since November 2009. The issues that generated a request for a DOCDEX decision can be summarised as follows:

1. A credit required that documents be sent by the nominated bank directly to the issuing bank. Another bank, who was not nominated to honour or negotiate but authorized to confirm, added their confirmation merely stating "This L/C bears our confirmation". Compliant documents were sent by the nominated bank to the issuing bank and the issuing bank confirmed that the documents complied. At the maturity date, 360 days after acceptance by the nominated bank, the issuing bank failed to reimburse the nominated bank and the nominated bank sought reimbursement from the confirming bank. The confirming bank refused to reimburse stating that the documents should have been sent to them and/or that the nominated bank was required to advise the confirming bank of the acceptance of the draft and due date prior to the expiry date of the credit (conditions that were not stated in the credit).

The panel of experts found in favour of the nominated bank due to the confirming bank not imposing any specific requirements in respect of the effect or scope of their confirmation. The message in the decision is clear for confirming banks to ensure that the wording of their confirmation adequately reflects the scope and extent to which their confirmation is to be applicable.

2. Whether discrepancies in the documents were valid and whether the refusal message reflected one of the 4 status referred to in sub-article 16 (c) (iii) (a-d).

The panel of experts found that the two identified discrepancies were valid. As to the refusal message itself, the question was whether "Meantime, documents are held with us at your disposal" equates to one of the 4 status. The panel decided that the wording reflected the intent of sub-article 16 (c) (iii) (a) and that the refusal message was in a correct form.

3. A URDG 458 transaction and whether the demand and refusal message was complying.

The panel determined that the claim of the beneficiary was not compliant as there was no evidence of the respect in which the applicant was in breach of the underlying agreement. The guarantor had also refused the demand due to the legal form of the company that appeared on the document. The panel decided that this was irrelevant to the determination of compliance. The panel also found the refusal message to comply with the requirements of URDG 458.

4. Whether an advising bank or confirming bank were liable to the beneficiary when the issuing bank allowed the release of the goods to the applicant, despite the issuing bank holding the documents due to discrepancies.

This was the second DOCDEX case taken out by the beneficiary under this particular credit. The first DOCDEX decision did not agree with their position and therefore the beneficiary instigated a new case asking two different but related questions as to the responsibility of the advising or confirming bank. In addition to the fact that the documents were discrepant, the panel of experts found that the two banks had acted correctly. The decision re-iterated the position taken in the original decision i.e., that the issuing bank was liable to pay as it had facilitated the release of the goods via the issuance of a bank guarantee in favour of the shipping line, but the beneficiary had no case against either the advising or confirming bank who had acted in compliance with UCP.

5. Whether an MT734 message must make reference to "we refuse the documents" or contain similar wording.

A refusal message was sent by MT734 but without any mention of 'we refuse' or similar. The panel of experts declared that an MT734 message is an 'Advice of Refusal' and that the SWIFT handbook declares that the message advises the refusal of documents that are not in accordance with the terms and conditions of a documentary credit. The panel found that the message type and content was in compliance with article 16, without the need to state that the sender refuses or refused the documents.

6. Whether discrepancies identified by the issuing bank were correct.

The issuing bank refused documents citing 4 discrepancies. The panel found that none of the discrepancies were justified, that the documents were compliant, and that the issuing bank should honour.

7. Credit containing split payment conditions (40% against shipping documents, 55% against certificate of applicant acceptance and 5% against applicant certificate of completion of training) and whether a bank could confirm the full value and whether they were entitled to confirmation fees based on the amount of the confirmation added.

The panel of experts found, based on the complete structure of the credit, that the bank was entitled to confirm the full value and receive/levy the commensurate confirmation fees.

8. Contractual dispute between the applicant and the first beneficiary, leading to the issuance of a court injunction, and the effect on a second beneficiary that has presented complying documents.

Although the issuing bank determined that the documents, as substituted, complied with the original credit, the applicant determined that one of the items in the invoice of the first beneficiary was invoiced for a greater value than that stated in the contract. A dispute ensued and a court order was placed on the issuing bank refraining them from honouring under the credit. Subject to the injunction being lifted, the panel of experts determined that the issuing bank is liable to honour the drawing and settlement to be made to the first and second beneficiary’s respectively.

The Opinions that were discussed, and agreed, include the following:

TA690rev4 - This query focuses on the interpretation of UCP 600 sub-article 12 (b) when a nominated bank does not act on its nomination at the time of presentation of documents, but prepays after receipt of a notice of acceptance from the issuing bank.

The questions of the initiator focused on two situations (a) if the nominated bank, after express agreement with the beneficiary, prepays upon receipt of the issuing bank's advice of acceptance; and (b) if the nominated bank, after receipt of the issuing bank’s advice of acceptance, sends an acceptance advice to the beneficiary and then prepays; and whether the nominated bank, for want of a better word, is 'protected' under UCP 600.

The analysis and conclusion to (a) states that it was not clear as to the form of the express agreement between the nominated bank and the beneficiary. The response therefore included two alternatives, (1) if the nominated bank incurred their deferred payment undertaking then any prepayment was effected in accordance with sub-articles 7 (c) and 12 (b); (2) if the nominated bank did not incur their deferred payment undertaking then the prepayment was not effected in accordance with the referenced sub-articles.

The authorisation in sub-article 12 (b) to prepay or purchase extends to a nominated bank that has accepted a draft drawn on it or where they have incurred their own deferred payment undertaking. The authorisation to prepay does not extend to a nominated bank that prepays another bank’s deferred payment undertaking i.e., from an issuing or confirming bank. However, it is recognised in the opinion that a bank may agree to provide finance to a beneficiary outside the scope of UCP 600, subject to terms and conditions as may be agreed between the bank and the beneficiary.

The analysis and conclusion to (b) states that although the nominated bank did not act on its nomination at the time of presentation of documents, this does not stop that bank from doing so at any time prior to the maturity date. For this example, it is stated that the bank sent an acceptance advice to the beneficiary (deferred payment undertaking) and therefore the authorisation in sub-article 12 (b) materialised.

The opinion also offers some practical advice as to what constitutes a deferred payment undertaking i.e., a written communication from the nominated bank to the beneficiary, wherein it is indicated that the bank undertakes to pay a certain amount of money on a specified date. Such communication may be given, and a prepayment may be effected, at any time before the specified due date.

See opinion TA690rev4 for the full transcript of the above opinion.

TA706rev3 - This query focuses on a disputed claim under a standby letter of credit issued subject to UCP 600. The credit was issued and then the terms were completely changed by an amendment that provided a new text.

The wording of the standby letter of credit appears not to have been drafted in a manner that adequately reflected the underlying transaction and left open the form in which required supporting documents (unpaid invoices) could be presented.

The standby credit, as amended, did not provide details as to the basis for the content of the unpaid invoices that were to be presented in support of any demand. The beneficiary presented an unpaid invoice which referred to goods supplied to the applicant by another entity and that the value of the unpaid invoices (each of which were referred to therein) had been assigned to them. The issuing bank refused on the basis that the unpaid invoice of the beneficiary referred to invoices issued by another company that remained unpaid.

The conclusion to this opinion stated that based on the wording of the standby, there were no grounds for refusal as the standby did not provide an indication of the underlying transaction or prohibit an invoice being issued in the manner made by the beneficiary.

See opinion TA706rev3 for the full transcript of the above opinion.

TA708rev - Unusually, this opinion represented a joint submission on behalf of both parties involved in a dispute.

A bank issued 3 letters of credit which were available with them. Under each credit, the issuing bank found discrepancies. Three discrepancies were the same under each LC, and two of the LCs contained one and two more additional discrepancies.

One discrepancy, consistent across all three LCs, was whether the port of discharge stated in the credit "Tallinn Port, Estonia" was to be stated in full in the respective field of the bill of lading i.e., Tallinn Port, Estonia. The bills of lading under all three LCs only stated Tallinn. The conclusion was that there is no requirement for the country name to appear and that the bills of lading are not discrepant in this respect.

Another discrepancy consistent across the LCs related to the seal numbers on the bills of lading when compared to those stated on the invoices and packing lists. The numbers were exactly the same but the invoices and packing lists showed a prefix of MSC or APL (MSC and APL being the shipping lines that were used). Again, the conclusion reflected that there was no conflict of data. The last discrepancy for all 3 LCs related to the name of the beneficiary on the Certificate of Origin. It was shown as ABC Ltd on the document, but in the LC it was shown as "ABC Ltd, International Business". The conclusion reflected that the reference to 'International Business' was not part of the name of the beneficiary, merely an expression of the division or unit of the company. Again, the conclusion was that the document was not discrepant in this respect.

An additional discrepancy in one of the other LCs included the contract number being shown twice on the commercial invoice (once incorrectly). This was seen by the Banking Commission as being a typographical error and not a discrepancy. Another discrepancy under the same LC was that the notify party address contained an error "At" instead of "St" and a country code instead of the full name of the country. Again, these discrepancies were not found to be valid.

The remaining LC contained a discrepancy that the DHL receipt, evidencing dispatch of an original invoice and bill of lading, was addressed to the wrong party (but at the same address as given in the LC). The conclusion stated that this was a discrepancy. Therefore, of the three LCs, the conclusion was that the issuing bank must honour under two of them and they were correct to refuse under the other, but only in respect of the discrepancy relating to the DHL receipt.

See opinion TA708rev for the full transcript of the above opinion.

The next newsletter will contain the remaining opinions that were discussed and approved at the September 2010 ICC Banking Commission meeting.

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