Case Updates

Case Update: Banks assessing a presentation under a letter of credit is only obliged to examine whether the documents appear to be compliant on the face of it

Share:

Print
BANKING & FINANCE LAW
Bank – Letter of Credit – Fundamental Discrepancy – Beneficiary – Freight Forwarder Bill of Lading – Express Exclusion – Oceans Bill of Lading - Uniform Customs and Practice for Documentary Credits

Malayan Banking Berhad v Punjab National Bank
Civil Appeal No: 02(f)-75-11/2020(w) | Federal Court
- see the grounds of judgment here

Facts At the request of Sara International Limited (‘Buyer’), Punjab Bank (‘Respondent’) issued a Letter of Credit (‘LC’) in favour of SIMS Copper Sdn Bhd (‘Seller’) to finance the purchase of goods. The LC was conveyed by the Respondent to the Royal Bank of Scotland which was then forwarded to Malayan Banking Berhad (‘Appellant’). The pertinent terms of the LC expressly stated that, the LC was governed by the provisions of Uniform Customs and Practice for Documentary Credits (‘UCP 600’), that a full set signed clean on-board ocean bills of lading was to be presented to obtain payment under the LC and a freight forwarder or house of bill of lading was not acceptable. Subsequently, the Seller presented the documents which were not acceptable under the terms of the LC, in that freight forwarders bills of lading were presented instead of the ocean bills of lading. The Appellant, however paid the Seller and subsequently commenced a claim for the recovery of the sum of the LC against the Respondent. Nevertheless, the Respondent through a notice of refusal informed the Appellant that the bills of lading presented under the LC were discrepant. As payment and reimbursement was not forthcoming, the Appellant commenced an action at the High Court. The High Court allowed the Appellant’s claim. On appeal, the Court of Appeal set aside the decision of the High Court and allowed the appeal by the Respondent. Hence, this appeal at the Federal Court.

Issue 1. Where an issuing bank of a LC governed by UCP-600 determines documents presented do not constitute a complying presentation, whether the issuing bank must give notice to the negotiating bank irrespective of the nature of the non-compliance?
2. Whether a negotiating bank is only required to examine whether or not the documents appear on their face to constitute a complying presentation?
3. Whether an issuing bank can avoid their obligation to reimburse the negotiating bank on grounds not stated in the notice of refusal, and which relate to the manner of negotiation of the documents presented under the letter of credit?

Held In allowing the Appellant’s appeal, the Federal Court set aside the order of the Court of Appeal and restored the order of the High Court. The Federal Court firstly explained that a LC is a separate transaction from the underlying contract between the buyer and the seller. Further, the Federal Court stated that there exist a strict obligation on an issuing bank to give notice of refusal to the negotiating bank, if they refuse to honour their reimbursement undertaking on the ground the documents do not constitute a complying presentation. In addition to that, it was held that the bank examining a presentation is only required to examine whether the documents appear on the face to constitute a complying presentation. Banks are not required to go beyond the face of the document. To impose a duty to investigate beyond the documents, as suggested by the Court of Appeal, was to the Federal Court, both unrealistic and burdensome to banks. Hence, the Appellant was justified in saying the bills of lading presented by the Seller in this case appear on their face to constitute a complying presentation. In conclusion, the Federal Court held that the Court of Appeal was therefore plainly wrong to have reversed the High Court's finding.

Zul Rafique & Partners
{31 May 2022}

Please email your details to [email protected] if you would like to subscribe to our Knowledge Centre.

Let's Connect!
➭ LINKEDIN: Zul Rafique & Partners
➭ INSTAGRAM: @zrplaw