Financing International Trade

Question 1

Sale of Goods Act 1979, Article 28

Answer 1

S may make price payable on shipment (where confident in B’s creditworthiness)

Question 2

Article 2, UCP 600

Answer 2

Documentary credit is “any arrangement, however named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.”

Question 3

Articles to read

Answer 3

Goode: “the most successful harmonizing measure in the history of international commerce” [1992] LMCLQ 190

Question 4

Garcia v Page & Co Ltd (1936) 55 L1 L Rep 391

Answer 4

Case: Contract dated 27 May 1935; P sold 2000 tons of ammonium sulphate to G in Spain; Shipment to be made during first half of September 1925; CoS required G ‘to open immediately a confirmed credit in London’ in favour of P; On 22 Aug P wrote to G stating that if the credit was not received in London by 24 Aug the contract would be cancelled; Credit opened on 24 Aug but P not notified until 26 Aug; credit was not sufficient as it did not comply; P repudiated the contract; Satisfactory credit opened on 3 Sept but p maintained their repudiation

Decision: Under the original contract there was a condition precedent that a confirmed credit immediately, so this must be done within a reasonable time (which 27 May to 27 Aug is not)

Rule: B’s obligation to ensure that LoC issued to S is that prescribed by CoS is a condition precedent of S’s obligation to delivery to B

Question 5

Kronman & Co v Steinberger (1922) 10 Li L Rep 39, 40, per Greer J

Answer 5

Rule: If S rejects because of defective credit, B may remedy defect if there is still time before the credit is required: B may simply procure the issue of a fresh credit

N.B. LoC must conform with CoS

Question 6

Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145

Answer 6

Rule: If B fails to open or remedy a defective LoC in time = a repudiatory breach: S is entitled to treat the CoS as discharged and claim damages for breach of contract

Question 7

Trans Trust SPRL v Danubian Trading Co Ltd [1952] 2 QB 297

Answer 7

Rule: S able to claim damages for loss of profit if (at the time the contract was made) such loss was within the reasonable contemplation of the parties as the probable consequence of the breach (if B fails to open or remedy a defective LoC in time)

Question 8

Dix v Grainger (1922) 10 L1 Rep 496

Answer 8

Rule: If S elects to waive the breach and accept the nonconforming LoC, S loses his right to complain

Question 9

Panoutsos v Raymond Hadley Corpn of New York [1917] 2 KB 473

Answer 9

Rule: S may decide to ship the goods despite B’s failure to open LoC on time or in required form: S may be deemed to waive non-conformity

Question 10

Pavia & Co SpA v Thurmann-Nielsen [1952] 2 QB 84

Answer 10

Case: CoS for Brazilian groundnuts payment by confirmed irrevocable credit; shipment due in the period from 1 Feb to 30 Apr at S’s option; B did not open the credit until 22 Apr (putting seller at disadvantage); S claimed damages for breach of contract by delay in opening credit

Decision: S’s claim upheld

Rule: B must open the LoC by the date stipulated in the CoS (if specific date stipulated) and where there is no date specified then the credit must be made available to the seller at the beginning of the shipment period

Quote: “the very first date when the goods may be lawfully shipped in compliance with the contract” (per Denning LJ)

Question 11

Ian Stach Ltd v Baker Bosley Ltd [1958] 2 QB

Answer 11

Case: FoB CoS for steel plates provided for payment by confirmed irrevocable credit; provided for shipment during Aug-Sept at B’s option; B failed to open LoC

Decision: B in breach of contract as the credit must be opened by the earliest shipping date at the latest

Rule: LoC should be in S’s hands a sufficient time before the shipping date to enable S to make the necessary shipping arrangements

Question 12

Midland Bank v Seymour [1955] 2 Lloyd’s Rep 147

Answer 12

Case: CoS for feather from HK; credit issued by MB after receiving instructions from B given on the bank’s pro forma application form; B had instructed MB to make the credit ‘available in HK’; on presentation of the shipping documents the MB accepted, and later paid, various bills of exchange drawn by S; S were fraudulent and had shipped rubbish; B seeking to avoid reimbursing MB on basis that documents did not confirm to credit; credit was ambiguous, MB could construe documents as conforming

Decision: Devlin J ruled in favour of the bank that the issuing bank reasonably construed a conforming credit

Rule: IB only entitled to be reimbursed where instructions are ambiguous if it construes them reasonably

Quote: “The true view of the matter, I think, is that when an agent (*) acts upon ambiguous instructions he’s not in default if he can show that he adopted what was a reasonable meaning.” per Devlin J

N.B. IB does not contract with S on B’s behalf: IB enters into a separate contract with S as principal. See European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 WLR 642

Question 13

Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279 (PC)

Answer 13

Quote: “The banker is not concerned as to whether the documents for which the buyer has stipulated serve any useful commercial purpose or as to why the customer called for tender of a document of a particular description. Both the issuing bank and his correspondent bank have to make quick decisions as to whether a document which has been tendered by the seller complies with the requirements of a credit at the risk of incurring liability to one or other of the parties to the transaction if the decision is wrong. Delaying in deciding may in itself result in a breach of his contractual obligations to the buyer or to the seller. This is the reason for the rule that where the banker’s instructions from his customer are ambiguous or unclear he commits no breach of his contract with the buyer if he has construed them in a reasonable sense, even though upon the closer consideration which can be given to questions of construction in an action in a court of law, It is possible to say that some other meaning is to be preferred.” per Lord Diplock

Question 14

Article 4(a)(b), UCP 600

Answer 14

(a) Issuing bank is not concerned with the CoS - ‘autonomy principle’
(b) The credit should not include copies of the CoS

Question 15

Article 5, UCP 600

Answer 15

“Banks deal with documents, and not with goods, services or other performance to which the documents may relate.”

i.e. IB is only concerned to ensure that documents presented comply (on their face); IB is not required to check accuracy of statements contained in the documents or to examine the goods

Question 16

Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (CA)

Answer 16

Rule: A photocopy is not an original; even if the document was in fact said to be an original but not market as such

Question 17

Article 17(a)(b), UCP 600

Answer 17

(a) S must present original documents unless credit stipulates otherwise
(b) Bank is protected if it accepts a document which appears to be original

Question 18

J H Rayner & Co Ltd v Hambro’s Bank Ltd [1943] KB 37

Answer 18

Case: Credit made reference to the shipment of “Coromandel groundnuts”; S tendered a BoL for “Machine-shelled groundnut kernels” as well as an invoice for “Coromandel groundnuts”; Well known in race that they were the same thing

Decision: CA upheld bank’s refusal to pay

Rule: If documents deviate from the language of LoC, IB may withhold payment even if deviation is not material in fact

Quote: “it is quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of every one of the thousands of trades for whose dealings he may issue letters of credit.” per Mackinnon J

Question 19

Article 14(a)(b), UCP 600

Answer 19

(a) IB is not responsible for ensuring the accuracy, genuineness or authenticity of the documents (IB to examine on presentation determine if on their fact constitute complying presentation)
(b) A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation.

Question 20

Gian Singh & Co Ltd v Banque de l’Indochine [1974] 2 All ER 754

Answer 20

Case: On GS’s instruction, BI opened credit to finance purchase of fishing vessel; Credit required tender of a signed certificate by a specified passport holder certifying condition of vessel; Certificate tendered by signature and passport presented to bank for inspection were forged; Bank accepted documents and debited GS’s account with the sum paid to S; GS sued BI claiming that its account had been wrongly debited

Decision: PC dismissed GS’s appeal as the document conformed on the fact to the requirements of the credit and the forgery itself doe not prevent the bank from recovering money paid under the credit; this is as in business transactions financed by documentary credits banks must be able to act promptly on presentation of the documents

Rule: Ultimately the issuing bank is confined to a minimal obligation; verify that documents presented are at the very least in apparent good order

Question 21

Article 9(a), UCP 600

Answer 21

An AB that is not a ‘confirming bank’ advises the credit without any undertaking to honour/negotiate

Question 22

Article 2, UCP 600

Answer 22

“The bank that adds its confirmation to a credit upon the issuing bank’s authorisation or request” is a confirming bank (where IB asks AB to add its own undertaking to honour the LoC on presentation of the documents if CoS calls for a ‘confirmed credit’

Question 23

Melli Iran v Barclays Bank DCO [1951] 2 Lloyd’s Rep 367

Answer 23

Rule: Relationship between IB and AB (as confirming bank) is that of principal and agent

Question 24

Bank of Baroda v Vysya Bank Ltd [1994] 2 Lloyd’s Rep 87 at 90, Mance J

Answer 24

Rule: Where AB is instructed to confirm the credit as confirming bank, AB acts in “dual capacity” (Sealy and Hooley) but where AB provides separate payment in undertaking to S and becomes confirming bank, AB is principal in its own right (not IB’s agent)

Question 25

Article 7(c), UCP 600

Answer 25

Rule: AB or CB which pays S against the tender of conforming documents may claim reimbursement from IB

Question 26

Article 34, UCP 600

Answer 26

If tendered documents are regular on their fact, AB or CB entitled to reimbursement even if the documents turn out to be forged

Question 27

Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 176, per Field J

Answer 27

Rule AB or CB does not have a right of reimbursement from UB if documents obviously discrepant, unless IB has irrevocably waived its entitlement to insist on payment only against confirming documents

Question 28

Article 6(a) and (d)(ii), UCP 600

Answer 28

LoC must specify the bank with which the credit is available; the location of this bank will be the place for presentation

Question 29

Article 16(a), UCP 600

Answer 29

IB may refuse to honour the credit

Question 30

Article 16(b), UCP 600

Answer 30

IB may consult B to see if b is willing to waive discrepancy

Question 31

Article 16(c), UCP 600

Answer 31

IB may consult B to see if B is willing to waive discrepancy
(iii) the rejection notice must state that the bank holds the documents pending further instructions from the presentations OR holds the documents until it receives a waiver from applicant OR is returning the documents OR is acting in accordance with instructions previously received from the presenter

Question 32

Article 8(a)

Answer 32

AB is obliged to honour the credit if stipulated compliant documents are presented whether or not there has been a breach of the contract of sale