Banking Law

• Published date: 01 December 2016
• Author: Dora NEO MA (Oxon), LLM (Harvard); Barrister (Gray's Inn); Advocate and Solicitor (Singapore); Associate Professor and Director, Centre for Banking & Finance Law, Faculty of Law, National University of Singapore.
• Citation: (2016) 17 SAL Ann Rev 114
• Date: 01 December 2016
• Publication year: 2016

Letters of credit

Duties of issuing bank and nominated bank

5.1 The most difficult banking law decision of 2016 must have been the Court of Appeal's decision in Grains and Industrial Products Trading Pte Ltd v Bank of India1 (“Grains and Industrial Products (CA)”), on appeal from the decision of Lee Kim Shin JC in the High Court.2 The Court of Appeal delivered a split 2:1 decision, with Sundaresh Menon CJ and Andrew Phang Boon Leong JA forming the majority, and Chan Sek Keong SJ in the minority. Chan SJ agreed with the majority judges on the outcome of the appeal, but differed partially on the reasons for their decision, in respect of the relationship between a nominated bank and the issuing bank.

5.2 The plaintiff, Grains and Industrial Products Trading Pte Ltd, was the beneficiary of a Letter of Credit (“LC”) issued by Indian Bank, the second defendant. The first defendant, Bank of India, was named as the nominated bank under the LC, which was stated as being available by acceptance with Bank of India. The LC was subject to the Uniform Customs and Practice for Documentary Credits 600 (“UCP 600”) and had an expiry date of 25 March 2012. On 15 March 2012, the plaintiff sent the required documents under the LC to Bank of India, which were received by the latter on 16 March 2012. Bank of India transmitted the documents to the issuer, Indian Bank, on 18 April 2012, which was after the expiry date of the credit. On 19 April 2012, Indian Bank informed Bank of India that it was rejecting the documents and was not honouring the LC because of the late negotiation and expiry of the LC. The plaintiff then started an action against the two banks.

5.3 The plaintiff's case against Bank of India rested on its obligations as “confirming bank” and/or “negotiating bank” under the LC. The trial judge, Lee JC, after a detailed analysis of the facts, found

that Bank of India did not assume the role of a confirming bank and also did not negotiate the credit. The plaintiff appealed against the judge's decision that Bank of India did not negotiate the LC, but the Court of Appeal did not find sufficient basis to interfere with this finding. This issue involved a largely factual examination and will not be further discussed here.

5.4 The plaintiff's case against Indian Bank was based on its liability as the “issuing bank” under the LC. The plaintiff asserted that because complying documents were presented to Bank of India (the nominated bank) within the validity period of the LC, Indian Bank (the issuing bank) was bound to honour the credit to the full amount of US$9,993,239.54. The judge found in favour of the plaintiff and this decision was upheld by the Court of Appeal, as discussed below.

5.5 Indian Bank and Bank of India claimed and counterclaimed against each other, seeking an indemnity and/or contribution from the other should they be found liable to the plaintiff. As the Court of Appeal found that Indian Bank was liable to honour the LC at its maturity, this led to the question whether Bank of India would be liable to indemnify Indian Bank. The Court of Appeal upheld the judge's decision that it was not, and this is explained further below.

Liability of an issuing bank

5.6 The Court of Appeal was of the view that Indian Bank's liability to honour the credit as the issuing bank stemmed from Art 7(a) of UCP 600, which states:

(a) Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:

…

iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity.

…

[emphasis by the Court of Appeal in Grains and Industrial Products (CA) omitted]

Under this article, the timely presentation of complying documents by the beneficiary triggers the issuing bank's liability to honour the credit at maturity. The Court of Appeal highlighted that presentation could be made by the beneficiary to either the nominated bank or the issuing bank. The issuing bank had to honour the credit even if the nominated bank had not agreed to act on its nomination, and in these circumstances, there was no need for the beneficiary to make a further presentation to the issuing bank. This was because the issuing bank “[was] taken to have authorised the beneficiary to present the documents to the nominated bank”.3 As the Court of Appeal pointed out, such interpretation of Art 7(a) of UCP 600 had widespread support from academics and commentators.4 This is readily apparent if we remember that a typical LC transaction consists of several contracts including:

(a) the underlying contract between the buyer and the seller/beneficiary;

(b) the main LC contract between the issuing bank and the beneficiary;

(c) the contract between the confirming bank and the beneficiary (if applicable); and

(d) the contract between the issuing bank and the nominated bank.

These contracts are separate from each other. The contract currently under discussion is the one between the issuing bank and the beneficiary, which incorporates Art 7(a) of UCP 600, wherein the issuing bank has promised to honour the credit as long as the beneficiary satisfies the stated conditions. Under these circumstances, any wrongdoing of the nominated bank should not adversely affect the beneficiary's rights against the issuing bank. As the Court of Appeal pointed out:5

[I]t is for the issuing bank to determine such matters as … which bank it wishes to nominate; and having made those determinations, it takes the consequences that flow from the acts or omissions of the nominee at least as far as the issuer's liability to the beneficiary is concerned.

5.7 Although Indian Bank did not dispute the legal principles discussed in the preceding paragraph relating to the issuing bank's liability to the beneficiary, Indian Bank argued that, on the facts, the plaintiff/beneficiary did not make a valid or complying presentation to Bank of India within the meaning of UCP 600. Their argument was that the LC authorised Bank of India to “accept” the draft, but instead, Bank of India was approached to “negotiate” the draft, which was a

transaction that took place outside the credit. The Court of Appeal disagreed. They were of the view that the fact that the plaintiff requested Bank of India to negotiate the credit did not preclude the conclusion that the documents were also presented to Bank of India as the nominated bank, and found on the facts that the latter was indeed the correct conclusion. They, therefore, dismissed Indian Bank's appeal on this issue.

Duties of a nominated bank

5.8 Was Bank of India (the nominated bank) liable to indemnify Indian Bank (the issuing bank) in respect of the latter's liabilities to the plaintiff under the LC? Indian Bank argued that Bank of India, as the nominated bank, was its agent and owed it agency duties to act with reasonable care so as not to cause it to suffer losses, including a duty to forward the documents with reasonable despatch.6 As will be discussed below, the majority judges accepted the argument that Bank of India was Indian Bank's agent. But this was not directly relevant to the Court of Appeal's decision on the indemnity. All members of the Court of Appeal agreed that Indian Bank's claim for an indemnity against Bank of India should be dismissed as Indian Bank's liability to the plaintiff resulted from the application of Art 7(a) of UCP 600, which imposed a duty on the issuing bank to honour a credit if complying documents had been presented to a nominated bank and the nominated bank did not accept a draft drawn on it. The majority judges made a distinction between a claim for an indemnity and a claim for damages based on breach by Bank of India of its express or implied duties as agent. Although this was not fully discussed by the Court of Appeal, it would seem that an indemnity was a compensation for loss or damage, whereas the issuing bank's duty to pay under UCP 600 did not amount to loss or damage, but was a liability that the issuing bank had undertaken as a result of issuing the LC. If, instead, Indian Bank had claimed for damages for breach of contract, the majority judges were of the view that it might have been able to succeed if it had been able to prove that it had suffered a loss independent of its liability to the plaintiff under the terms of the LC.7 However, as Indian Bank's pleadings did not include a claim for damages for breach of contract by Bank of India, and it did not bring up evidence relating to any loss that it might have suffered, the majority judges did not go on to consider this point.8

5.9 Although Chan SJ agreed with the majority judges on the result of the appeals, he was of the view that the agency analysis they adopted was not necessary for the disposition of the case. In particular, Chan SJ disagreed with the majority judges on the crucial point of their analysis that Bank of India was an agent of Indian Bank. Chan SJ was of the view that Bank of India was not an agent of Indian Bank. He felt further, that on the facts of the case, “any claim by Indian Bank against Bank of India for damages for breach of duty, arising out of the Letter of Credit was bound to fail”.9 This was because he was of the view that Bank of India had not acted on its nomination.10 He also pointed out that on the facts, Indian Bank had not rejected the documents on the ground of breach of duty to forward them promptly,11 and that Indian bank could not have been able to prove any loss as it was holding a cash security, and in any case, would have been entitled to be reimbursed by the beneficiary.12

5.10 The decision of the Court of Appeal regarding the relationship between the issuing bank and a nominated bank in an LC transaction provide a novel analysis of this area of the...