Confirming Bank's Responsibility in Honoring Letter of Credit Payments

The issue in this situation is whether the confirming bank is in breach of its obligation to honour the payment on the letter of credit. The relevant law is contained in the Sale of Goods Act 1979 and the Uniform Customs & Practice for Documentary Credits (UCP 600), both of which are applied to the facts of the case below to arrive at a conclusion as to the liability of the confirming bank.

CIF (Cost, Insurance and Freight) terms contract is a contract for seller to ship the goods at his own expense to the buyer after paying for the shipping and the insurance. CIF contract has been described as a sale through a medium of documents and not a sale of documents. CIF contracts offer protection to both buyer and seller wherein the buyer’s protection is that the seller will undertake shipping and insurance charges and tender shipping documents to the buyer. Seller’s protection is that the buyer pays as against the tender of documents. In Hindley & Co Ltd v East Indian Produce Co Ltd, a cost and freight contract (which is closely aligned with a CIF contract) was held to be a contract for sale of goods to be performed by the delivery of documents. Therefore, in a CIF contract, both buyer and seller are protected.

CIF contracts imbibe dual obligations for the seller, which are described as physical and documentary duties. For the physical aspects of seller duties, the seller has to supply goods as per the terms of the contract. For the documentary aspects of the duties, the seller has to provide the proper documents that are stipulated in the agreement between the buyer and the seller. At the same time, there are duties to provide the goods as per the description, quality, quantity and are of merchantable quality. The documents are also the basis for the payment of the agreed upon price by the buyer; this enables buyer to get property and contractual rights as against the carrier of the goods and the insurer. The seller therefore, receives a payment for the goods prior to the delivery of the same to the buyer.

CIF contracts essentially involve documents like the bill of lading, insurance policy, commercial invoice, and quality certificates (if stipulated in the contract). The seller has to ensure that the documents comply with the contract stipulations. The tender of the bill of lading and insurance give the buyer direct contractual rights against the carrier and the insurer. With the delivery of bill of lading, constructive possession passes with the risk and the interest in the goods. CIF contracts are an exception to the principle contained in Sale of Goods Act 1979, section 20(1), which provides that the goods remain at the seller’s risk until the property in them is transferred to the buyer. In CIF contracts, the presumption is that the property passes to the buyer when the tender of bill of lading is made to the buyer. The general rule regarding the passage of risk to the buyer is on the transfer of property. CIF contracts are an exception to this general rule. Generally, in CIF contract, property passes at the time the buyer pays on the tender of shipping documents, and therefore the goods are deemed to be at the buyer’s risk from the time of shipment.

With regard to the obligations of the confirming bank, the buyer has a protection in that the confirming bank can withhold the payment to the seller if in the opinion or knowledge of the bank, the documents submitted to it are forged. Under UCP 600, article 14(a), provides that a confirming bank has the obligation to examine a presentation to determine whether the documents appear to constitute a complying presentation. Article 14(b) provides that the confirming bank must decide on the presentation within five banking days following presentation. The presentation should be made by the seller within 21 calendar days after the date of shipment (article 4(c)). Article 14(d) provides that the data in a document must not conflict with data in that or another stipulated document. Article 14(i) provides that the document may be dated prior to the issuance date of the credit, but not later than the date of its presentation.

There is a high standard of compliance to be met for the documents to be accepted by the confirming bank as noted by the Viscount Sumner in Equitable Trust Co of New York v Dawson Partners Ltd, where he observed that there is “no room for documents which are almost the same, or which will do just as well.” The emphasis on strict compliance of documents is aimed at ensuring that buyer’s interest is safeguarded as the buyer is not inspecting the goods prior to the payment and is making the payment for the goods on the basis of the documents that strictly comply with the contract.

Under UCP 600, article 16(a), a confirming bank, may determine that a presentation does not comply with the terms stipulated and refuse to honour or negotiate the credit. Where the contract is under a Letter of Credit, UCP 600, article 8 provides that the confirming bank is required to honour the credit on the presentation of the documents. The obligation to not make the payment comes into effect if the confirming bank is of the opinion that the documents are forged as held in Edward Owen Engineering v Barclays Bank. In United City Merchants v Royal Bank of Canada, the documents presented to the confirming bank had a misstatement regarding the shipment date, and the confirming bank made the payment regardless while the issuing bank refused to pay; it was held that if the confirming bank knows of the fraud then it is not entitled to payment from the issuing bank.

In this case, the agreement dated 30th November 2019 between B and S is for 30,000 tonnes of olive oil originating in Greece with moisture of maximum 0.05%. The agreement also specifies that the payment for the same will be by an irrevocable letter of credit and the shipment is to be done as per bill of lading dated between 20th April and 10th May 2019. In this case, the payment is by letter of credit, which is a document that represents promises made by banks to guarantee payment once the seller submits appropriate documents.

These terms of the contract contain both the documentary and physical aspects of the contract that bind the buyer and the seller. The irrevocable letter of credit sent by the confirming bank to S on the 30th April 2019, mentioned that the shipment would be between 15th April and 15th May 2019 instead of between 20th April and 10th May 2019 as agreed at the time of the contract between B and S. The letter of credit also mentions that S would have to provide a certificate indicating that the goods were of Greek origin and a policy of insurance. This letter has been sent to S after the cargo was shipped aboard the nominated vessel with the bill of lading as dated 24th April 2019. The requirement of certificate indicating that the goods were of Greek origin was made in the letter of credit dated after the shipment and bill of lading. In the light of the discrepancy between the original agreement requiring the shipment between 20th April and 10th May 2019 and the letter of credit dated 30th April 2019, the question arises as to whether the confirming bank was correct in refusing the payment to S.

Under UCP 600, article 8, the confirming bank is under an undertaking to honour the credit on the presentation of the stipulated documents. In this case, the payment was refused on 25th July 2019, on the grounds that the bill of lading was dated 24th April 2019, whereas the certificate of inspection was dated 1st May 2019 and; that the description of the goods in the commercial invoice was inconsistent with the description in the certificate of origin. Both the common law, and the UCP 600 (article 14(a)) require that where payment is to be made on letter of credit, the documents must be strictly complied and the confirming bank is under an obligation under this provision to ensure such compliance. However, the question is that which documents are to be provided and whether the discrepancy between the bill of lading and the certificate of inspection dates and the discrepancy between the description of the goods in the commercial invoice and the certificate of origin are sufficient grounds to refuse payment by the confirming bank.

With regard to the first ground of refusal by the confirming bank, that is, that the bill of lading was dated 24th April 2019, whereas the certificate of inspection was dated 1st May 2019, this is a discrepancy in the inspection certificate because it shows the date of inspection to be later than the date of shipping. However, in this case it is also important to note that the letter of credit did not specify certificate of inspection as one of the documents to be presented by the seller. Therefore, this is an additional document that is sent by the seller to the bank and not one that is asked for in the letter of credit. The obligation of the seller is only to present documents stipulated in the letter of credit and not other documents. Therefore, the question arises as to whether this discrepancy is sufficient to deny payment by the confirming bank. Under Article 14(a) the bank is required to examine a presentation in order to see whether it is complying with the stipulations. In this case, there is no stipulation to submit a certificate of inspection and therefore, the discrepancy between the two dates cannot be said to be adequate justification for refusing payment to the seller.

With regard to the second ground of refusal by the confirming bank, that is, the description of the goods in the commercial invoice was inconsistent with the description in the certificate of origin, the UCP 600, article 14(e) is relevant as it provides that in documents other than the commercial invoice, the description of the goods may be in general terms and not conflicting with their description in the credit. Therefore, the description in commercial invoice is the one that the confirming bank has to consider and if the description in the commercial invoice matches the goods’ description as stipulated in the contract, then the bank may not be correct in refusing to make the payment. In this situation, the description in the certificate of origin does not match the commercial invoice but the law contained in article 14(e) only provides that in documents other than the commercial invoice, the description of the goods may be in general terms. However, it is also significant that article 18(c) requires consistency between the description in the commercial invoice with that in the letter of credit. Under the CIF contract, even though the buyer cannot demand to inspect the goods, the buyer’s interest to receive the goods contracted for are safeguarded because the Sale of Goods Act 1979, sections 13, 14, 15 and 30 are applicable to ensure that the goods comply with the description, quality and quantity agreed upon by the buyer and seller. Therefore, buyer has the right to receive the goods that match the description, quality and quantity; however, in this situation the question is not whether the goods match the description but whether the documents are complying. The discrepancy between the description in the commercial invoice and the certificate of origin is at issue. It is important to consider how significant is the certificate of origin and its contents amongst the documents that are to be provided by the seller to the bank because the seller does provide the commercial invoice and the bill of lading along with the insurance policy which are the three most important documents in this scenario. However, caselaw in the English law suggests that if there are certain documents that are mentioned in the letter of credit, then strict compliance with these documents is expected if the seller is to be paid by the bank; for instance, in Seaconsar (Far East) Ltd v Bank Markazi Jomhouri Islami Iran, the court held that the bank was justified in refusing payment to the seller for non-conforming documents even where the discrepancy was trivial. In JH Rayner & Co Ltd v Hambro's Bank Ltd, the court held that a discrepancy in how the goods were described in the bill of lading and the letter of credit (even though the two words meant the same thing in trade) was sufficient for the bank to refuse payment because the bank would be taking a risk in allowing payment when the documents did not conform with the requirements of the letter of credit.

The stipulation in the letter of credit was that the seller should provide a certificate indicating that the goods were of Greek origin; this does not relate to the description of the goods which is to be provided in the commercial invoice as per the letter of credit. Thus, the question is whether this discrepancy is sufficient to refuse payment by the confirming bank. It can be argued by S that the confirming bank is not justified in refusing payment because all the conforming documents have been provided as per the irrevocable letter of credit these being the letter of origin and the policy of insurance. Even if there was a discrepancy in a document that was not originally asked for by the confirming bank, the seller could have been given an opportunity to cure any lack of conformity in the documents, instead of being refused payment. As per article 8, the confirming bank is under an undertaking to honour the credit on the presentation of the stipulated documents. The stipulated documents were provided by S.

To conclude, the stipulated documents being provided by the seller as per the letter of credit, the confirming bank is under an obligation to make the payment as per the provisions of article 8 of the UCP. Consequently, S can challenge the decision of the confirming bank.

Cases

Biddell Bros v E Clemens Horst Co. [1911] 1 KB 214.

Edward Owen Engineering v Barclays Bank [1978] 1 Lloyd's Rep. 166.

Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 LI LRep 49.

Hindley & Co Ltd v East Indian Produce Co Ltd [1973] 2 Lloyd’s Rep 515.

JH Rayner & Co Ltd v Hambro's Bank Ltd [1943] K.B. 37.

Seaconsar (Far East) Ltd v Bank Markazi Jomhouri Islami Iran (Service Outside Jurisdiction) [1994] 1 A.C. 438.

United City Merchants v Royal Bank of Canada [1982] 2 W.L.R. 1039.

Books

Bridge M, ‘Documents and Contractual Congruence in International Sales’ in Sarah Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing 2003).

Lorenzon F, Sassoon DM, Baatz Y, Skajaa Y and Nicoll C, C.I.F. and F.O.B. Contracts (Sweet & Maxwell 2012).

Morrissey JF and Graves JM, International Sales Law and Arbitration: Problems, Cases and Commentary (Kluwer Law International 2008).

Ryder N, Griffiths M and Singh L, Commercial law: Principles and policy (Cambridge University Press 2012).

Websites

Schwenzer I, ‘Avoidance Of The Contract In Case Of Non-Conforming Goods (Article 49(1)(A) Cisg)’ accessed

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