Do as you say you will: a word of caution to issuing banks

Updated February 2011

On 31 January 2011, the Court of Appeal handed down judgment in Fortis Bank S.A./NV & Stemcor UK Limited v Indian Overseas Bank C.A. The court upheld the decision of Hamblen J, that if an issuing bank has given notice under article 16 of UCP 600 that it will return discrepant documents and fails to do so, then the bank is precluded from relying on the discrepancies.

It is of the essence of a documentary credit that an issuing bank must pay against presentation of conforming documents. If however the issuing bank determines the documents are discrepant and rejects them, then under article 16 of UCP 600 it must give a notice within five banking days to that effect and state whether it is holding the documents to the order of the presenter or is returning them.

Sub-article 16(f) states: “If an issuing bank … fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation”.

The issue that arose in this case was whether an issuing bank that gave notice it was returning the documents, but failed to do so reasonably promptly, was precluded from relying on the discrepancies.

Stemcor (as beneficiary) and Fortis (as confirming bank) had made presentations to Indian Overseas Bank as the issuing bank. Between 4 and 19 November 2008, Indian Overseas Bank rejected the documents and gave notice under article 16(c)(iii) of UCP 600 stating it was returning them. Indian Overseas Bank did not in fact return the documents until 16 January 2009. Stemcor and Fortis sought judgment against Indian Overseas Bank arguing, among other matters, that it was precluded from relying on the discrepancies as it had not acted in accordance with its notice.

Indian Overseas Bank argued that article 16 did not impose an express obligation to return the documents and therefore sub-article 16(f) did not apply. It relied on the fact that while UCP 500 spelled out that preclusion was the consequence of a failure to return the documents, UCP 600 contained no such express wording. It also relied on the messages sent by Fortis requesting that the documents should not be returned.

The Court of Appeal dismissed the appeal, holding that as a matter of construction, sub-article 16(c) requires the issuing bank to act in accordance with the option it has elected. Where it has elected to return the documents it must do so with reasonable promptness, failing which it is precluded from relying on the discrepancies.

In reaching this conclusion, the court took into account the evidence of both parties' experts that it was the practice of banks, on rejection, either to hold the documents in accordance with the instructions of the presenter or to return them promptly and without delay. This practice had not changed following the introduction of UCP 600.

The court did not admit the experts' subjective opinions as to the significance of the changes to the wording from UCP 500 to UCP 600.

The court also rejected the argument based on Fortis's request that Indian Overseas Bank should not return the documents. It was clear that these requests were made in the context of the assertion that the documents were not discrepant and should be accepted.

The judgment is of particular interest for the approach it took to the interpretation of UCP 600. Thomas LJ stated that in his view, "a court must recognise the international nature of the UCP and approach its construction in that spirit. ... It is intended to be a self-contained code for those areas of practice which it covers and to reflect good practice and achieve consistency across the world. Courts should therefore interpret it in accordance with its underlying aims reflecting international practice and the expectations of international bankers and traders. A literalistic and national approach is to be avoided."

While the first instance decision provoked differing views, this judgment of the Court of Appeal brings clarity to the steps that an issuing bank must take when it rejects documents. The message for issuing banks is clear: if you say you are going to return discrepant documents, you must do so, and promptly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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