Banking Law

• Author: POH CHU CHAI LLB (Sing), LLM, LLD (Lond), Advocate & Solicitor (Singapore), Associate Professor, Faculty of Law, National University of Singapore
• Published date: 01 December 2001
• Date: 01 December 2001
• Citation: (2001) 2 SAL Ann Rev 36

Introduction

4.1 This section of the review seeks to examine decisions which have made a direct impact on banking law. Decisions which have made major impacts on other areas of the law but with only incidental reference to banking law have been omitted in order to avoid duplication in the review.

Letter of credit

4.2 When fraud is perpetrated by a beneficiary under a negotiable letter of credit, the fraud has no effect on the negotiating bank unless the negotiating bank is a party to or has knowledge of the fraud. A banker making payment under a deferred payment credit, on the other hand, is directly affected by the fraud perpetrated by the beneficiary of the credit. The decision by Judith Prakash J on the distinction between a negotiable letter of credit and a deferred payment credit in Banque Nationale de Paris v Credit Agricole Indosuez[2000] 4 SLR 254 has since been reversed by the Court of Appeal in Credit Agricole Indosuez v Banque Nationale de Paris[2001] 2 SLR 1 on the ground that the letter of credit in question should more properly be construed as a deferred payment credit rather than a negotiable letter of credit. Solo Industries Ltd (“Solo”) of Sharjah in the United Arab Emirates applied to the Dubai branch of the appellants, Credit Agricole Indosuez (“CAI”), for a letter of credit to be made in favour of a Singapore company known as Amerorient Pte Ltd (“Amerorient”). On the application for the credit, it was stated that the credit was to be “available with BNP, Singapore by deferred payment 180 days from the date of presentation of documents at BNP, Singapore”. The Dubai branch of the appellant bank duly sent a telex to the Singapore branch of the respondent bank, BNP Singapore (“BNP”), informing them that the appellants had opened an irrevocable letter of credit for US$1,333,600 in favour of Amerorient. The letter of credit (“LC”) stated that the credit was “available against presentation of drafts at 180 days from the date of negotiation by deferred payment”. The respondents wrote to the appellants stating that they had advised the beneficiary of the credit and had added their confirmation to the credit. In due course, the respondents made payment to the beneficiary against the drafts drawn by the beneficiary but the appellants refused to reimburse the respondents. The appellants discovered that Amerorient had conspired with the applicant of the credit to defraud various banks through the issuance of a number of letters of credit and the

discovery was made before the maturity date of the credit. The respondents were warned not make any payment under the credit until further notice from the appellants. It was decided by Prakash J that on a construction of the credit as a whole, the credit was to be construed as a negotiable letter of credit rather than a deferred payment credit. The respondents having negotiated the credit in good faith were not responsible for the fraudulent conduct of the beneficiary.

4.3 In reversing the trial judge”s decision, the Court of Appeal held that the letter of credit should properly be construed as a deferred payment credit rather than a negotiable letter of credit. Chao Hick Tin JA said at 9:

“The availability clause here is really far from clear. Indeed, it is inherently ambiguous, referring as it does to both ‘negotiation’ and ‘deferred payment’, these being two distinct types of LC. Interestingly, the term “deferred payment” is preceded by the word ‘by’, as used in art 10(a) [of the Uniform Customs and Practice for Documentary Credits 1993]. It is not so in respect of the term ‘negotiation’ which is preceded by the word ‘of’ instead of ‘by’. If it was intended that this should be a ‘negotiation credit’, then the availability clause would have provided that it is available ‘by negotiation’. It has been suggested by CAI that the word ‘negotiation’ is a mistake. It should have been ‘presentation’ as can be seen from the application form of Solo. We agree that the availability clause would have made perfect sense if the word “presentation” had appeared instead of ‘negotiation’.

4.4 The Court of Appeal went on further to decide that the respondents could not claim to be holders in due course of the drafts drawn under the letter of credit for two reasons. First, the drafts were not bills of exchange as they had been made payable upon an uncertain event, namely, “180 days from date of negotiation”. Secondly, the respondents being the payees of the instruments could not be holders in due course of the drafts. Chao JA said at 16:

“There is furthermore a second obstacle to BNP”s claim as a holder in due course of the bills. In the two drafts, BNP are named as the payee of the bill. The drafts were not indorsed over to them. They did not hold the bills as indorsees. Under s 29 of the Bills of Exchange Act [Cap 23, 1985 Ed], a holder in due course must be a person to whom the bill of exchange is negotiated and s 31(3) provides that a bill payable to order is negotiated by indorsement completed by delivery. In R E Jones Ltd v Waring and Gillow Ltd[1926] AC 670 at 680, the House of Lords held that in the light of these provisions, the original payee could not be considered a ‘holder in due course’ within the meaning of the Act.”

Performance bond

4.5 A performance bond is normally issued with the object of securing speedy payment for the beneficiary of the bond when the conditions under

which the bond is issued are duly met by the beneficiary. Payment under the bond will not be restrained by the fact that there is a dispute between the beneficiary and the applicant of the bond over the underlying contract upon which the bond was issued. The underlying basis for this principle, commonly alluded to as the “cash principle”, is that the parties involved with a performance bond look upon the bond as a security to be readily available when the terms of the bond are duly met by the beneficiary so that the bond is as good as cash. Such a bond often takes the place of a cash deposit.

4.6 This principle was recently applied by the Singapore High Court in Chew Pin Pin v AGF Insurance (Singapore) Pte Ltd[2001] 2 SLR 152. The plaintiff engaged a company known as TDS Construction Pte Ltd (“TDS”) to construct three houses at Robin Road. On the instructions of TDS, the defendant, AGF Insurance (Singapore) Pte Ltd, issued a performance bond for $205,000 in favour of the plaintiff. Under the bond, the defendant “irrevocably and unconditionally agree to pay the same to [the plaintiff] immediately on demand without further reference to [TDS] and notwithstanding any dispute or difference which may have arisen under the Contract or any instruction which may be given to [the defendant] by [TDS] not to pay the same”. The plaintiff made a call for payment under the bond on 25 October 1999. The defendant refused to make payment under the bond contending, inter alia, that it was entitled to refer to the underlying contract between the plaintiff and TDS to show that the call for payment by the plaintiff was fraudulent and unconscionable. This contention was...