This case considers the rights and obligations that arise between an issuer of a letter of credit and a confirming party that makes payment to a beneficiary.
Why is the case of interest?
Letters of credit are in widespread use as a means of financing international trade.Deutsche Bank AG, London Branch v CIMB Bank Berhad clarifies the scope of the principle of autonomy and whether it is applicable in relation to the obligation of an issuer of a letter of credit to reimburse a confirming party who has made payment to a beneficiary.
The principle of autonomy operates to keep the letter of credit separate from the sale or other commercial contract underlying it. It is a fundamental rule of trade finance designed to facilitate the smooth operation of the market. It ensures financing parties are insulated from disputes between a buyer and a seller in an international sale transaction.
What were the facts?
Cashcot Industries Pte, a Singaporean company, bought cotton from Global Tradinglinks Limited (the beneficiary) a company based in Hong Kong. Cashcot asked its bank, CIMB Bank Berhad (the issuing bank), to issue a series of letters of credit to the beneficiary. CIMB did so and nominated Deutsche Bank AG, London Branch (the confirming bank) as the confirming bank. The confirming bank would make payment to the beneficiary upon presentation of specified documents. The beneficiary was also a borrower from Deutsche Bank with outstanding loans.
Cashcot went into liquidation meaning that the issuing bank’s right of reimbursement against it was worthless. Global was also in financial difficulties. The confirming bank ‘made payment’ by asserting a right of set off against Global’s loan liabilities. It then claimed reimbursement from the issuing bank for the $10m value attributed to the beneficiary because of the set off. The court accepted for the purposes of this judgment based on Charter Reinsurance v Fagan AC 313 at 384 that payment under a letter of credit could be made by effecting a set off. The logic being that the beneficiary receives value because of the credit against other sums due to the confirming bank and that is a sufficient ‘payment’ under the letter of credit. That point may come back before the court and be fully argued on some future occasion if these parties continue this litigation.
The issuing and confirming banks had set up the letters of credit using SWIFT communications. These stated that UCP 600 was to regulate the letters of credit and went on to deal with several other points of detail.
Issue before the court
CIMB, as issuing bank, did not accept that it was bound to reimburse Deutsche Bank, as a paying confirming bank, based on alleged discrepancies in the documents presented by the beneficiary to the confirming bank. CIMB wanted to put Deutsche Bank to ‘strict proof that it honoured presentations by Global under the L/Cs’. In that context, the issuing bank made a formal request for further information from the confirming bank. It wanted, amongst other things, the documents presented by the beneficiary prior to payment.
The confirming bank refused to make that information available arguing that, as a matter of principle, the issuing bank under a letter of credit must accept on its face a statement by a confirming bank that it has paid the beneficiary. The question before the court was whether the issuer was entitled to the further details it had requested.
Arguments of confirming bank
Deutsche Bank argued that as a matter of general principle under Article 7(c) of the UCP 600 any issuing bank that receives compliant documents from a confirming bank together with a statement that it has made a payment must, without more, reimburse the confirming bank. The proper effect of Article 7(c) of the UCP 600 was key. It is in the following terms:
‘An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary’.
Effectively, Deutsche Bank (who was in the same position as a nominated bank) was arguing that the underlined words in Article 7(c) should be read with the additions in bold as ‘nominated bank states that it has honoured’—that is the actual facts did not matter. It argued this was consistent with case law that drew a close comparison between payment obligations owed to a beneficiary under letters of credit and those arising under performance bonds and first demand guarantees. Deutsche Bank pointed out that the payment obligation it owed to the beneficiary once compliant documents had been presented to it was strict. To hold that the issuer’s reimbursement undertaking was conditional upon the confirming bank satisfying it in some other unspecified respect was inconsistent with its payment obligations towards the beneficiary and would undermine the ‘cash principle” applicable to instruments used in international trade finance; see Solo Industries UK Ltd v Canara Bank  EWCA Civ 1041 at . Deutsche Bank considered it’s view was consistent with the principle of autonomy applicable to letters of credit—that is any payments should be made speedily and any disputes should be sorted out later so as not to delay payment.
Arguments of issuing bank
CIMB argued that a confirming bank must establish that it had ‘honoured’ a complying presentation by making a payment to the beneficiary on sight of the specified documents. That was consistent with the definition of ‘honour’ in Article 2 UCP 600. A mere statement by a paying bank that it had honoured a letter of credit should not be treated as conclusive—there was no compelling market consideration that demanded that should be the case.
The issuer saw no justification for adding words into Article 7(c). It said UCP’s authors could have inserted them if they had intended to trigger the issuer’s obligation to reimburse without actual proof of proper payment.
The issuer did not think the principle of autonomy was engaged in these circumstances. The principle of autonomy did not operate as between an issuing and confirming bank. It’s primary purpose was to insulate the finance parties from the underlying sale contract. It was unnecessary to invoke the principle as between the finance parties as a group. Chaos in the trade finance market would not erupt, as the confirming bank had suggested, if as between the issuing and confirming banks, a payment to a beneficiary had to be proven to be in accordance with the letter of credit before an issuer had to make reimbursement.
Blair J boiled the matter down to one simple issue:
‘the question being whether the confirming bank must have paid the beneficiary to have the right to reimbursement, or whether a statement to that effect is enough’.
Payment—the facts matter
The point had not been considered fully previously. The court considered the weight of the authority that did exist supported the issuing bank’s case. In both Credit Agricole Indosuez v Generale Bank  2 All ER (Comm) 1009 and Fortis Bank v Indian Overseas Bank  EWHC 2303 (Comm) the court had proceeded on the basis that an investigation into the presentation of documents by a beneficiary was relevant to the right of the paying bank to seek reimbursement. The House of Lords in United City Merchants v Royal Bank of Canada  1 AC 168, although obiter in this respect, had proceeded on the basis that the contract between the issuing and confirming bank required payment to the beneficiary to be made against the presentation of proper documents before the reimbursement obligation of the issuer was triggered. Additionally, statements in each of the leading textbooks on trade finance and documentary credits supported the issuer’s view. Blair J was also reluctant to construe UCP 600 in a manner which made an issuing bank’s obligation to reimburse a confirming bank first demand in nature.
CIMB was entitled to further information from Deutsche Bank. The court issued a warning that a request for further information should not turn into a fishing expedition in the hope something would turn up which allowed the issuer to refuse or delay its payment.
The court also dealt with a subsidiary point of whether a statement in the SWIFT communications between the issuing and confirming banks affected the reimbursement obligation. The SWIFT form passing between the parties in the lead up to the issue of the letters of credit stated:
‘TT reimbursement is allowed, in which case, [confirming] bank is required to send an authenticated swift to issuing bank certifying that documents have complied with all L/C terms and conditions. We shall cover the [confirming] bank as requested value 3 (three) working days after date of receipt of claim.’
The court considered that this statement did not affect the proper construction of Article 7(c) of the UCP 600. The SWIFT text dealt with the timing and mechanics of reimbursement and not whether that reimbursement obligation had arisen.
Given the widespread use of letters of credit and UCP 600 the court has clarified that an issuing bank can go behind statements by parties seeking reimbursement. Where Article 7(c) of the UCP 600 is relevant an issuer has the right to request further information of a paying party. UCP 600 does not operate to make the issuer’s reimbursement obligation first demand in nature. If that is what the confirming bank wants it will have to contract to that effect. The principle of autonomy has no application as between an issuing and confirming bank. The case also suggests that if part of the SWIFT communication package is intended to modify the substantive obligations of the parties that should be made plain on the face of the relevant SWIFT form.
- Court: High Court, Queen’s Bench Division, Commercial Court
- Judge: Blair J
- Date of judgment: 25 May 2017