Case Study #2: Commercial Letters of Credit. Chee Seng Soh CEO DC Consultancy Services

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1 Case Study #2: Commercial Letters of Credit Chee Seng Soh CEO DC Consultancy Services

2 [2014] SGHC 274 [2016] SGCA 32 Singapore High Court - Suit No 802 of 2012 Court of Appeal Civil Appeal Nos 156 and 158 of 2014 GRAINS AND INDUSTRIAL PRODUCTS TRADING PTE LTD V BANK OF INDIA AND ANOTHER

3 Bills of exchange and other negotiable instruments Letter of credit transactions Agency Duties of agent Civil procedure Damages Interest

4 Grains 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 Grains claim against Indian Bank and dismissed its claim against Bank of India. He also dismissed Indian Bank s counterclaim against Bank of India.

5 Plaintiff/Beneficiary: Grains and Industrial Products Trading Pte Ltd 1 st Defendant/Nominated Bank: Bank of India, Singapore Branch 2 nd Defendant/Issuing Bank: Indian Bank, Mumbai Fort Branch Initial LC Amount: US$6,500, available by acceptance 180 days from LC issuance date with 1 st Defendant Amount after Final Amendment: US$9,993,239.54

6 As the Letter of Credit was issued on 24 February 2012, payment in accordance with its terms would fall due on 22 August The Letter of Credit was stated to expire on 26 March 2012.

7 Some of the other terms contained in the Letter of Credit may be summarised as follows: The documents required: original signed commercial invoice, one photocopy or fax copy of the original ocean bill of lading and a copy of beneficiary certificate. Fax copies or photocopies of documents acceptable. All discrepancies are acceptable except invoice value and validity of the LC. Bank of India could discount at Grains own cost and upon Grains request.

8 15 March 2012 Grains sent the documents required under the LC for presentation to the Bank of India through Standard Chartered Bank. 16 March 2012 Bank of India received the Documents, that is, prior to the expiry date of the LC. 18 April 2012 Bank of India then transmitted the Documents to Indian Bank, that is, after the expiry date of the LC. 19 April 2012 Indian Bank notified the Bank of India that it was rejecting the Documents and would not honour the LC on the grounds of late negotiation and expiry of the LC.

9 Grains alleged that Bank of India had orally agreed to confirm and/or honour and/or negotiate the Indian Bank LC during a telephone conversation between Mr Bhasi of Grains and Mr Prabhu of Bank of India; Grains also claimed that Bank of India was the Confirming Bank because Indian Bank had asked Bank of India to confirm the LC and Bank of India had not informed Indian Bank that it was not prepared to do so.

10 To the extent Bank of India was alleged to be the Confirming Bank, the plaintiff claimed the full amount of US$9,993, against Bank of India. To the extent that Bank of India was alleged to be the Negotiating Bank, Grains claimed the discounted amount of US$9,890, against Bank of India. This was on the basis that Bank of India had allegedly agreed to discount the Indian Bank s LC as part of negotiating it.

11 Grains relied on Art 8(d) of UCP 600 to contend that the Bank of India was the Confirming Bank under the LC. Article 8(d) reads as follows: Confirming Bank Undertaking... d. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.

12 Grains claim against Indian Bank was based on Indian Bank s liability as the Issuing Bank under the LC. Grains asserted that because a complying presentation of the LC Documents had been made to the Nominated Bank (that is, Bank of India) within the validity period of the LC, Indian Bank was obliged to honour the LC and pay Grains the full amount of US$9,993,

13 Art 7(a)(iv) of UCP 600, which reads as follows: Issuing Bank Undertaking 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 added]

14 It was clear from Art 7(a)(iv) that if a complying presentation of documents was made to the Nominated Bank or the Issuing Bank within the validity period of the letter of credit, the Issuing Bank was obliged to honour the letter of credit. In this regard, the presentation of the documents to the Nominated Bank also tolled the expiry date and timelines under the letter of credit.

15 In the present case, this meant that Indian Bank was liable to honour the LC because a complying presentation of the LC Documents had been made to Bank of India as Nominated Bank, and this was within the validity period of the LC.

16 Bank of India and Indian Bank also filed a claim and a counterclaim against one another respectively. Bank of India claimed an indemnity or contribution Indian Bank in the event that it was found to be liable to Grains as the Confirming Bank or the Negotiating Bank under the LC. Indian Bank, on the other hand, counterclaimed for an indemnity or contribution from Bank of India in the event that it was found to be liable to Grains as the Issuing Bank, for various alleged breaches of Bank of India s obligations under the LC.

17 Grains claim against Bank of India depended on whether Bank of India was the Confirming Bank and/or the Negotiating Bank under the LC. This was critical because if Bank of India had not assumed either of these roles, Bank of India would not have incurred any liability towards Grains to honour or negotiate the LC.

18 Whether Bank of India had agreed to confirm and negotiate? Grains representatives used the words discount and discounting on multiple occasions instead. The difference between them was explained by Chan Seng Onn JC in Kredietbank NV v Sinotani Pacific Pte Ltd (Agricultural Bank of China, third party) [1999] 1 SLR(R) 274 (at [48] [49])

19 Chan Seng Onn JC in Kredietbank Case: As I understand it, discounting means the discounting bank advancing or lending money after the bill has been accepted, which becomes the security for the advancement or loan, and upon failure of that security, there is recourse to the borrower for reimbursement of the moneys advanced or lent. A discounting transaction is in fact a separate side transaction outside the credit to which the issuing bank is not privy to.

20 Chan Seng Onn JC in Kredietbank Case: Whereas negotiation under a credit in its technical and legal sense, within the meaning of the UCP 500, generally means giving value to or purchasing the bill usually prior to acceptance and making payment to the beneficiary without recourse, after the negotiating bank is satisfied that the documents tendered for negotiation are in compliance with the credit. Here, the negotiating bank relies purely on the creditworthiness of the issuing bank, and the negotiating bank can no longer look towards the seller of the bill for reimbursement, should the issuing bank fail to pay under the credit. A negotiation is a transaction under the credit, to which the issuing bank is privy to, because the negotiation by that bank will have to be first authorised or allowed under the credit.... [emphasis added]

21 To put this simply, while negotiation is a transaction under a letter of credit, discounting is a transaction separate from the letter of credit, to which the Issuing Bank is not privy.

22 If a complying presentation of documents is made to the Nominated Bank, UCP 600 does not provide for a fixed period by which the Nominated Bank is to transmit the documents to the Issuing Bank. It suggests that so long as a complying presentation of documents is made to the Nominated Bank within the validity period of a letter of credit, the Issuing Bank cannot disclaim its liability to honour the letter of credit on the basis that the documents were transmitted to it after the letter of credit has expired.

23 The learned Judge delivered a brief oral judgment: a) dismissed Grains claim Bank of India; b) allowed Grains claim against Indian Bank with interest to run from the date of the judgment; c) dismissed Indian Bank s counterclaim against Bank of India; and d) made no order on Bank of India s claim against Indian Bank.

24 Grains filed an appeal against the decision to dismiss its claim against Bank of India. Indian Bank has also filed a cross-appeal against the whole of the decision.

25 In its appeal [CA 158/2014], Indian Bank argued that: 1. The arrangement between Grains and Bank of India was that the latter would not carry out any dealings in respect of the Letter of Credit until Grains had opened an account with it. On the basis of this arrangement, the presentation of the documents to Bank of India on 16 March 2012 was invalid or at least ineffective. Grains should have presented the documents directly to Indian Bank. 2. The submission of the documents to Bank of India did not come within the meaning of the term presentation under UCP 600. First, Bank of India was acting as a collection bank for Grains rather than as the nominated bank of Indian Bank. Secondly, even if Bank of India was a nominated bank, Prabhu had been told to hold onto the documents pending the opening of the current account. On this basis, Bank of India never received the documents as Indian Bank s agent. Accordingly, Grains could not avail itself of Art 7(a) of UCP 600.

26 The second aspect of Indian Bank s appeal relates to its counterclaim against Bank of India. In the event it is found liable to pay Grains, Indian Bank appeals the Judge s dismissal of its counterclaim against Bank of India. It argues that it is entitled to an indemnity from Bank of India because the latter, as Indian Bank s agent, had breached its implied duty to forward to Indian Bank the documents it received from Grains within a reasonable time.

27 The issues arising from CA 158/2014 are as follows: a) Whether Grains submission of documents to Bank of India on 16 March 2012 constitutes a valid presentation. If it does, it follows that Indian Bank will be liable to honour the Letter of Credit at its maturity. b) If issue (a) is answered in the affirmative, whether Indian Bank is entitled to an indemnity from Bank of India.

28 Grains appealed against three aspects of the Judge s decision [CA 156/2014], namely: 1. the decision to dismiss its claim against Bank of India; 2. the decision not to grant pre-judgment interest to Grains in respect of the sums owed by Indian Bank; and 3. the decision not to make a Sanderson/Bullock order* against Indian Bank in respect of any liability that Grains might incur for Bank of India s costs.

29 Sanderson/Bullock Order Bullock order takes the name from a decision in Bullock v. London General Omnibus Co. It is an award of costs frequently made in an action where the plaintiff has claimed alternative relief against two or more defendants, and while succeeding against at least one and, fails to sustain his allegation against the remainders. Its essential attributes are that the plaintiff is ordered to pay the costs of any successful defendant whereupon the former is compensated by adding these charges onto his own costs to be paid by the unsuccessful defendant. Sanderson order derived from the case of Sanderson v. Blythe Theatre Co., requires the unsuccessful defendant to pay the successful defendant s costs to him directly.

30 The issues arising in CA 156/2014 are as follows: a) Whether Bank of India had in fact negotiated the Letter of Credit. b) If Indian Bank is held liable to honour the Letter of Credit and Bank of India is not, whether GRIPT is entitled to obtain pre-judgment interest on the sum in question from Indian Bank; and whether GRIPT is also entitled to a Sanderson/Bullock order in its favour.

31 Conclusion The Court of Appeal affirms the Judge s decision and uphold Grains claim against Indian Bank. Grains appeal against Bank of India fails. The Court od\f Appeal affirms the Judge s decision insofar as he found that Bank of India is not liable to Grains. It further affirms the decision not to make a Sanderson/Bullock order against Indian Bank. The Court of Appeal allows Grains appeal in respect of Indian Bank to the extent that Indian Bank is liable to pay pre-judgment interest on the sum due under the Letter of Credit. Grains will have its costs of the trial and of this appeal in respect of this issue against Indian Bank.

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