Court of Appeal, Malaysia

Hamid Sultan bin Abu Backer JCA, Hanipah binti Farikullah JCA, Kamaludin bin Md Said, JCA

18 June 2020

KEYWORDS

Letter of Credit – Strict Compliance – Tender of House Bill or Freight Forwarder’s Bill for Payment – Bank-to-Bank Reimbursement – Dispute between Confirming Bank and Issuing Bank – UCP 600 – Payment upon faxed copy – Application of 5 banking days rule in reimbursement claims – UCP 600 Articles 7, 13, 14, 17, 20, 26

FACTS

A letter of credit (LC) was issued by an issuing bank in India for USD1,962,500 plus / minus 2% in value in favour of a beneficiary (seller) in Malaysia. The LC was payable in 60 days after the date of the bill of lading. The LC was confirmed to the beneficiary by a confirming bank in Malaysia. The LC was issued subject to UCP 600. The documents required under the LC for payment included a bill of lading. It was one of the terms of the LC that “Short Form, Blank Back, Stale, Freight Forwarder, House Bill of Lading is not Acceptable.” The following events took place, in chronological order:

24/11/2011     Beneficiary faxed the document including a bill of lading signed by one Diffreight Agencies (M) Sdn Bhd on behalf of the carriers.

25/11/2011     Confirming bank, upon request of the beneficiary, negotiated and paid the beneficiary in advance of the maturity date.

30/11/2011     Beneficiary tendered the original documents (same as those faxed).

01/12/2011     Confirming bank couriered the original documents to the issuing bank.

01/12/2011     Issuing bank sent a SWIFT message to amend the LC terms to additionally require SGS Certificate of Analysis, Weight and Quantity.

03/12/2011     Issuing bank received the original documents.

10/12/2011     Expiry of 5 banking days after 03/12/2011.

20/12/2011     Issuing bank sent, by SWIFT, the Notice of Refusal to reimburse to the confirming bank on two grounds of discrepancies, namely, the bill tendered was a freight forwarder’s bill and no SGS certificate was tendered. The notice claimed it was issued pursuant to Art. 23.

06/01/2012     Document were returned by the issuing bank to the confirming bank.

21/01/2012     Maturity date of the LC, i.e. 60 days after the date of the bill of lading (if the bill of lading was an acceptable one).

The issuing bank refused to reimburse the confirming bank on the maturity date. Hence, the confirming bank sued the issuing bank.

The case went for a full trial. Articles 2 (definitions), 7, 10(a) and (c), 14(a), (b) and (l), 16(c), (d), (f) and (g), 20, and 23 of the UCP 600 were considered by the court in arriving at its decision.

The High Court ([2018] MLJU 1716, decided by Noorin Badaruddin J on 13 November 2018) found for confiming bank. On appeal by the issuing bank, the Court of Appeal unanimously reversed the High Court decision and found for issuing bank.

HELD BY HIGH COURT (Subsequently reversed by Court of Appeal)

1. The documents tendered were compliant.

• The amendment made by the issuing bank on 01/12/2011 was not effective.

• The confirming bank had complied with its duty to examine the documents on the face of them pursuant to Art. 14.

• The time limit to notify any refusal with reasons was 5 banking days by virtue of Art. 16 but that the issuing bank notified the purported discrepancy and refusal only after this time limit.

• The sum of USD 1,983,765.65 (equivalent to RM8,118,560.92 based on the exchange rate of USD1.00 equivalent to RM4.0925) be paid by the issuing bank to the confirming bank.

• Interest at the rate of 5% per annum on USD1,983,765.65 (equivalent to RM8,118,560.92 based on the exchange rate of USD1.00 equivalent to RM4.0925) from 22.1.2012 until the date of payment.

• Costs of RM60,000.00.

HELD BY COURT OF APPEAL

1. The documents tendered were not compliant.

2. The time limit to notify any refusal with reasons within 5 banking days by virtue of Art. 16 did not apply here. Art. 16 refers to ‘discrepancy’ in documents. It applies when the required document is tendered, but is discrepant. It does not apply where the document tendered is different from the document called for by the LC), as in this case. In this case, the LC called for a bill of lading issued by a shipowner, but what was tendered was a bill of lading issued by a freight forwarder.

3. Art. 1 of UCP 600 renders itself subject to express terms of the LC. In this case, the express terms required a bill of lading issued by a shipowner. That requirement cannot be circumvented by any terms of the UCP 600.

4. The confirming bank had not complied with its duty to examine the documents on the face of them pursuant to Art. 14.

5. The confirming bank is not entitled to any reimbursement under the LC.

6. Appeal was allowed with costs here and below, and order of the High Court was set aside.

OBSERVATION ON HIGH COURT DECISION

The two core questions as to liability to be decided in the case were:

1. Whether the documents presented were compliant, i.e. whether the bill of lading was a fit one for payment under the LC?

• Whether the issuing bank was time-out in notifying discrepancies and refusal?

One question that surfaces as to quantum was:

• Whether the liability to pay was in USD or equivalent sum in MYR as per exchange date on some date?

Issue 1

The LC expressly prohibited ‘freight forwarder bill of lading’. In this case, Diffreight signed the bill on behalf of the carrier. This does not tell, on the face of the bill, in one way or another whether it is a freight forwarder’s bill. Accordingly, the objection premised on ‘freight forwarder bill’ should fall.

The true question is whether the bill was compliant in terms of Art. 20(a)(i), which reads as follows:

Article 20: Bill of Lading

a.     A bill of lading, however named, must appear to:

1. indicate the name of the carrier and be signed by:

                • the carrier or a named agent for or on behalf of the carrier, or

                • the master or a named agent for or on behalf of the master.

        Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent.

        Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master.

This binds two things. First, the document must be a bill of lading. Second, it must state the name of the carrier under the bill of lading.

On the first point: ‘bill of lading’ is not defined in any statute, hence one must go back to the common law to find its meaning. Under the common law, a document will be a bill of lading if (i) is the receipt for cargo, (ii) evidences contract of carriage, (iii) confers constructive possession of the goods on the person to whom it has been issued, (iv) is a document of title in the sense that the rights under it can be negotiated (i.e. transferred without attornment by the issuer). ‘Constructive possession’ is the right to claim possession. Such a right can only exist against a person who has the actual possession and thus can give it. To say otherwise will render the constructive possession illusory. Thus, only a document issued by a person having the actual possession can confer constructive possession of the goods on any other and hence be a bill of lading. This means only a document issued by a shipowner can be a bill of lading, although it may be signed by an agent or charterer on behalf of the shipowner. Almost all popular forms of bills of lading intended to be signed by a charterer, such as BIMCO forms, have a demise clause and an identity of the carrier clause that will render the charterer an agent of the shipowner when singing the bill, hence rendering it a bill of lading issued by the shipowner for legal purposes. For a detailed discussion of this point, see John S Mo, ‘Forwarder’s Bill and Bill of Lading’, Asia Pacific Law Review, Vol. 5, No. 2, Summer 1997, p. 96-110. In this case, the bill of lading merely stated in effect that it was issued on behalf of the carrier. ‘Carrier’ can mean two things in practice. One is the ‘actual carrier’ another is ‘mere contractual carrier’. There is nothing on the face of the bill for one to determine that it was issued on behalf of the actual carrier, i.e. the shipowner. Hence, the bill does not comply with the terms of the LC read together with Art. 20(i)(a).

On the second point: independent of the outcome of the first point, in this case, the bill does not disclose the ‘name’ of the carrier. For this reason too, the bill does not comply with Art. 20(i)(a).

Accordingly, the bill was not a compliant one and not fit for payment.

In fact, a trial is not necessary most of the times to determine the compliant-effect of a bill, as this is a matter of construction of documents only and has to be decided on such basis alone, per Art. 14, that reads as follows:

Article 14: Standard for Examination of Documents

1. A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

Issue 2

Under Art. 14(b), the time limit for a bank to examine the documents for compliance is 5 banking days. It reads as follows:

• 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.

The 5 banking days rule is reflected with more strength in Art. 16. It requires a refusing bank to notify the refusal with reasons to the presenter within the 5 banking days, failing which the refusing bank is precluded from claiming the documents are non-complying. It reads in relevant part as follows:

Article 16: Discrepant Documents, Waiver and Notice

1. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.

• …

• When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.

The notice must state:

1. that the bank is refusing to honour or negotiate; and

1. each discrepancy in respect of which the bank refuses to honour or negotiate; and

1. a)  that the bank is holding the documents pending further instructions from the presenter; or

b)     that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or

c)      that the bank is returning the documents; or

d)     that the bank is acting in accordance with instructions previously received from the presenter.

• The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation.

• A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.

• If an issuing bank or a confirming 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 references to presentation and presenter above, including a confirming bank claiming reimbursement from the issuing bank, per Art. 2, which reads in relevant part as follows:

Article 02: Definitions

For the purpose of these rules:

                       …

‘Presentation’ means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.

‘Presenter’ means a beneficiary, bank or other party that makes a presentation

In this case, the issuing bank took more than 5 days to notify the refusal to pay. Accordingly, Art. 16(g) will preclude it from claiming the document are non-compliant. However, there is nothing in the UCP 600 to relieve the burden on the presenter, in this case, the confirming bank, to prove that the documents are complying on the face of it to claim the reimbursement.

It must be noted that Art. 16(g) does not say if the bank does not refuse within the 5 banking days, then the non-compliance is waived or it is presumed the documents are compliant or the presenter is relieved from its duties to tender compliant documents. In this connection, a few articles of the UCP 600 must be visited. First, Art. 7, that sets out the obligation of the issuing bank as follows:

Article 07: Issuing Bank Undertaking

1. 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: …

• …

• 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. …

Article 15: Complying Presentation

1. When an issuing bank determines that a presentation is complying, it must honour.

• When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.

• When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.

In this case, on the face of the documents, there is no compliance as the purported bill was not a bill of lading and in any event, the name of the carrier was not stated in the bill. Accordingly, no case on the part of the confirming bank is established for the issuing bank to defend.

On passing, it must be noted that the failure of the issuing bank to comply with the 5 banking days timeline did not affect the confirming bank’s payment to the beneficiary (which was made even before the sight of the original documents contrary to UCP 600 Art. 17(a)) or the ability of the confirming bank to decide within the 5 business days after receipt of the documents from the beneficiary (whilst the end of the 5 business days for the issuing bank to refuse to the confirming bank would fall later). The duty imposed by the UCP 600 Art. 16 on the confirming bank is for it to independently decide, based on the document, to refuse or not. If it makes a wrong decision, it has to face the consequences.

Issue 3

This is an international transaction. What the parties had agreed to pay is only in USD. There is no reason to convert it to MYR or any other currency on any given date. Any judgement in such cases should only be in the currency that parties have agreed, in this case, USD.

Conclusion

The High Court decision on Issues 1 and 2 above were not substainable. As such, the need to go into Issue 3 would not in fact arise.

OBSERVATION ON COURT OF APPEAL DECISION

The Court of Appeal rightly reversed the High Court decision. The court observed that the classical common law cases about bills of lading are largely about ocean bills, meaning shipowner’s bills, as opposed to NVOC’s bills (eg. freight forwarder’s bill). The court also looked at the practical side of the NVOC’s bills and observed that the ‘security’ provided by an NVOC bill was inferior to the security provided by a shipped bill issued by the shipowner, although, to say it more accurately, there is no security in an NVOC’s bill save that an in personam claim can be taken against the NVOC / transferor of the bill.