Grains and Industrial Products Trading Pte Ltd v Bank of India and another

• Jurisdiction: Singapore
• Court: Court of Three Judges (Singapore)
• Judge: Sundaresh Menon CJ
• Judgment Date: 23 May 2016
• Neutral Citation: [2016] SGCA 32
• Citation: [2016] SGCA 32
• Hearing Date: 07 July 2015
• Defendant Counsel: Tan Teng Muan and Loh Li Qin (Mallal & Namzie),and Sarjit Singh Gill SC, Probin Dass and Ng Wenling (Shook Lin & Bok LLP)
• Subject Matter: Agency,Letter of credit transactions,Bills of Exchange and Other Negotiable Instruments,Damages,Duties of Agent,Civil Procedure,Interest
• Docket Number: Civil Appeal Nos 156 and 158 of 2014
• Plaintiff Counsel: Winston Kwek, Winston Wong and Max Lim (Rajah & Tann Singapore LLP)
• Published date: 26 May 2016
• Date: 23 May 2016

Sundaresh Menon CJ (delivering judgment on behalf of Andrew Phang Boon Leong JA and himself): Introduction

If payment and cash-flow form the lifeblood of commerce, then in the context of commercial transactions where the buyer and the seller are in different countries and the goods must be transported across borders, a documentary credit (also known as a “letter of credit”) serves a vital role by providing security of payment against delivery thus benefitting both sellers and buyers (Chartered Electronics Industries Pte Ltd v Development Bank of Singapore [1992] 2 SLR(R) 20 at [32]). To receive payment, the seller presents the stipulated documents, which the parties have agreed will signify the delivery or shipment of the goods. The bank issuing the credit (“the issuing bank”) will often be located in the country of the buyer (ie, the applicant for the credit). It is common for the issuing bank to instruct another bank in the country of the seller (ie, the beneficiary of the credit) to communicate the terms of the credit, to accept presentation of documents and to effect payment. This is often done for the convenience of the beneficiary who will thus be able to deal with a bank within his own country.

The framework that is established by The Uniform Customs and Practice for Documentary Credits 600 (“UCP 600”) provides the beneficiary an additional avenue to make the presentation of the stipulated documents within the validity period of the credit and to receive payment. Apart from the issuing bank, the beneficiary may also receive payment from a correspondent bank that is nominated to accept a presentation of documents and to effect payment on behalf of the issuing bank (defined as a “nominated bank” under Art 2 read with Arts 7(a) and 12(b) of UCP 600).

What happens if the beneficiary delivers the documents to the nominated bank not just for the purposes of presentation to it as the paying agent of the issuing bank, but also with a view to the nominated bank effectively agreeing to accept the documents as a transferee in exchange for its own agreement to make immediate or at least advanced payment before this has fallen due under the terms of the credit? In such circumstances, does the nominated bank receive the documents as agent of the issuing bank or is it acting as principal in its own right to the exclusion of any question of agency? If it receives the documents as agent of the issuing bank, what consequences arise from this as between the issuing bank and the nominated bank? And if the nominated bank does not accept the documents, is the beneficiary required to submit the documents once more to the issuing bank within the validity period of the credit? In this judgment, we address a number of these questions by characterising the proper relationship between the issuing bank, the nominated bank and the beneficiary having regard to the factual background that underpins these appeals.

Civil Appeal Nos 156 and 158 of 2014 are appeals against the decision of the Judicial Commissioner (“the Judge”) who heard the matter. His decision is reported as Grains and Industrial Products Trading Pte Ltd v Bank of India and another [2015] 1 SLR 1213 (“the GD”). These appeals concern a letter of credit issued by the Mumbai Fort Branch of Indian Bank (“Indian Bank”). The Singapore Branch of the Bank of India (“Bank of India”) was the nominated bank under the letter of credit. The beneficiary of the letter of credit is Grains and Industrial Products Trading Pte Ltd (“GRIPT”). It was unable to obtain payment despite having made a timely and complying presentation of documents to the nominated bank, Bank of India. Dissatisfied, it sued both Bank of India and the issuing bank, Indian Bank. The Bank of India and Indian Bank in turn claimed and counterclaimed against each other for indemnity and/or contribution. The Judge allowed GRIPT’s claim against Indian Bank and dismissed its claim against Bank of India. He also dismissed Indian Bank’s counterclaim against Bank of India.

Civil Appeal No 158 of 2014 (“CA 158/2014”) is Indian Bank’s appeal against the Judge’s finding that it was liable to honour the credit in favour of GRIPT. Indian Bank also appeals against the Judge’s dismissal of its counterclaim against Bank of India.

Civil Appeal No 156 of 2014 (“CA 156/2014”) is GRIPT’s appeal against the Judge’s finding that Bank of India did not negotiate the credit. It pursues this only in the event that Indian Bank succeeds in its appeal that it should not be held liable. In the event that GRIPT’s claim succeeds only against Indian Bank, GRIPT also asks for pre-judgment interest and an order that it is entitled to recover from Indian Bank any costs that it may be obliged to pay Bank of India as a result of its unsuccessful suit against Bank of India. For reasons that will become evident later, we refer to this as a Sanderson/Bullock order.

Background facts

GRIPT was the beneficiary under a letter of credit issued by Indian Bank on 24 February 2012. The contract underlying the letter of credit was supposedly entered into on 6 February 2012 between GRIPT as sellers and Varun Industries Limited (“Varun”) as buyers. Under the terms of the contract, GRIPT agreed to sell Varun a cargo of US No. 2 or better yellow soya beans to be shipped from the United States of America to Lanshan, People’s Republic of China. We use the word “supposedly” because, as will become apparent, there is a dispute as to whether the shipment actually existed. As payment for the purchase of the cargo, Varun approached a number of banks to open an irrevocable letter of credit in favour of GRIPT. GRIPT and Varun agreed between themselves that payment under the letter of credit, which Varun was to procure, would only be made 180 days after its issuance.

GRIPT wished to receive payment before the maturity of the credit. To that end, it sought to sell the credit to a bank other than Indian Bank, the issuing bank, for advance payment. Having purchased the draft, the third-party bank would then claim reimbursement from Indian Bank at maturity. The act of purchasing a credit in this way is described as “negotiation” under Art 2 of UCP 600, though the representatives of GRIPT and Bank of India referred to it as “discounting” in their correspondence. While there may be a slight difference in the technical definition of these two terms (see Peter Ellinger and Dora Neo, The Law and Practice of Documentary Letters of Credit (Hart Publishing, 2010) (“Ellinger and Neo”) at p 188), nothing material turns on this. In this judgment, we use either of the terms “negotiation” or “discounting” to describe the purchase of the credit by a correspondent bank. If the credit was successfully negotiated, GRIPT would be entitled to a discounted amount of the sum secured by the letter of credit. Such a discount would usually reflect the interest and fees incurred by the third-party bank that made the payment ahead of its due date (Ali Malek QC and David Quest, Jack: Documentary Credits (Tottel Publishing, 2009) (“Jack”) at paras 2.19 and 6.32).

On 24 February 2012, GRIPT’s sales representative, Mr Shirkant Bhasi (“Bhasi”), called Mr S Rajendra Prabhu (“Prabhu”), the manager of the Trade Finance (Exports) Department of Bank of India, to enquire whether Bank of India was willing to negotiate GRIPT’s draft. GRIPT alleges that during that conversation, Bhasi and Prabhu concluded an oral agreement for the Bank of India to “negotiate by discounting” a letter of credit for the sum of US$10,000,000 (+/- 10%) to be issued by the Bank of Baroda in favour of GRIPT. It should be noted that at the time of the conversation, GRIPT thought the letter of credit would be issued by Bank of Baroda as opposed to Indian Bank. The latter entity was not even mentioned during this conversation.

GRIPT is a subsidiary of Bunge Agribusiness Singapore Pte Ltd (“Bunge”). Ms Yeo Lye Cheng (“Yeo”), the Regional Director of the Trade & Structured Finance Department of the Financial Services Group of Bunge, wrote to Prabhu later on the same day to record the terms of that discussion for Prabhu’s “confirmation” and “acceptance”. Bank of India did not respond to this email.

As it turned out, the letter of credit that was discussed between Prabhu and Bhasi was eventually issued by Indian Bank instead of Bank of Baroda. This letter of credit issued by Indian Bank shall hereinafter be referred to as the “Letter of Credit”. The Letter of Credit was issued in favour of GRIPT for an initial sum of US$6,500,000.91. It incorporated the latest version of the Uniform Customs and Practice of Documentary Credits (ie, UCP 600). The Letter of Credit provided that Bank of India was the bank with which the credit was available “by acceptance”. It is not disputed that this term meant that Indian Bank had appointed Bank of India as a nominated bank in accordance with UCP 600, whose authority included effecting payment to the beneficiary upon acceptance of documents presented to it (Art 2 read with Arts 7(a)(iv) and 12(b) of UCP 600). The Letter of Credit also appointed Bank of India to advise the credit, which meant that it was authorised by the Indian Bank to advise GRIPT of the terms of the credit and any amendments. A correspondent bank authorised to advise the credit is defined under Art 2 of UCP 600 as the “advising bank”. In accordance with GRIPT’s and Varun’s earlier agreement, payment under the Letter of Credit was only due 180 days from the issuance of the Letter of Credit. As the Letter of Credit was issued on 24 February 2012, payment in accordance with its terms would fall due on 22 August 2012. The Letter of Credit was stated to expire on 26 March 2012, which meant that a complying presentation of the documents had to be made by this date in order to trigger the issuing bank’s liability to make payment. Some of the other terms contained in the Letter of Credit may be summarised as follows: ...