IV. Conceptual Implications of Treating Nominated Bank as Issuing Bank’s Agent
The foregoing section examines the practical implications of the decision in Grains on 4.14 banking practice and puts forward some suggestion on how banks, in their respective role, as issuing banks and nominated banks, can protect themselves.
The rest of this chapter will be focused on a separate question, that is, how well do the principles of agency law function in the context of the relationship between a nominated bank and an issuing bank? A survey of the pre-UCP 600 cases as well as the views of commentators on the UCP 600 reveals a lack of support (and indeed justification) for a general role of agency on the part of the nominated banks vis-a-vis the issuing bank. This suggests that a narrow reading of Grains should be adopted.A. The Nominated Bank as Defined in UCP 600
Historically, before modern technology made it possible (and economical) for banks to set 4.15 up branches in key trading hubs around the world, banks involved in cross-border trade financing had to rely on banks in jurisdictions where the credit’s beneficiaries were located. Correspondent banking, it is said, is one of the ‘most important features of the international banking system’ without which beneficiaries would lose the ability to work with a local bank who is empowered to act on the credit.[338] The correspondent bank usually played an advising role[339] as well as a negotiating/confirming function if authorised under the credit.
4.16 'The term ‘nominated bank' was not in common usage in documentary credit law or practice in the early days. A definition of a ‘nominated bank' was only introduced in art 2 of UCP 600. A nominated bank is in fact ‘the bank with which the credit is available or any bank in the case of a credit available with any bank.
In UCP 500 the nominated bank is mentioned, perhaps oddly, in parenthesis in art 10(b)(i) which deals with ‘Types of Credit.[340] Once nominated, the nominated bank becomes a party to the credit and is authorised to act under the credit.[341] This notion of nominated bank evolved in the UCP in order to ‘categorise all banks named to act in the credit except the issuer and advising bank.[342] It includes, inter alia, a confirming bank and a negotiating bank.4.17 By nominating a bank as the bank with which the credit is available, an issuing bank invites and authorises the nominated bank to receive and examine documents and to honour or negotiate, as the case may be.[343] Further, the issuing bank agrees to honour the credit as long as a timely and complying presentation is made to the nominated bank by the beneficiary whether or not the nominated bank acts upon its nomination and even if the nominated bank wrongfully refuses to accept the documents.[344] An issuing bank or a confirming bank may be precluded from claiming that the documents presented are discrepant if they fail to act in accordance with the rejection procedure prescribed in art 16 of UCP 600.
4.18 To the extent that a nominated bank is able, pursuant to the articles in the UCP 600, to act in a manner that affects the rights and obligations of the issuing bank vis-a-vis a third party, ie the beneficiary, its role does resemble that of an agent. This may provide some justification for characterising the relationship between the issuing bank and the nominated bank as one of agency. This notion of agency, however, finds no express grounding in the articles of the UCP 600.[345] [346] Neither will one be able to find a principled (or even a consistent) basis in the case law prior to UCP 600 (which will be discussed below) for the proposition that a negotiating/confirming bank is an agent of the issuing bank.
1. Pre-UCP 600 Cases
size=1 color=black face="Times New Roman">4.19 The pre-UCP 600 cases do not speak with a consistent voice as regards the role of a negotiating or confirming bank acting as agent of the issuing bank.
4.20 In respect of negotiating banks, they are not generally regarded as agents of the issuing bank, a view which finds support in European Asian Bank AG v Punjab and Sind Bank (No.
2).32 In that case, the English Court of Appeal rejected the appellant’s argument (relying on the well- established principle in Ireland v Livingstone)[347] that, as the letter of credit was ambiguous in its terms (specifically as to whether they were authorised as negotiating bank), the respondents (as issuing bank) could not deny that the appellants were authorised to act as negotiating bank.[348] Goff LJ held that, on the facts of the case, that the appellants (negotiatingbank) cannot be regarded as agent of the respondents (issuing bank).[349] Significantly, his Lordship went on to state, as a matter of general principle, that a negotiating bank cannot be regarded as an agent of an issuing bank,[350] and on that basis, held that the principle as stated in Ireland v Livingstone could not be applied.[351] This statement also coheres with the role of the negotiating bank prior to UCP 600. A negotiating bank did not have to examine the documents presented by the beneficiary for compliance. It may decide to negotiate but is not obliged to do so. It may even negotiate a set of documents with discrepancies ‘under reserve’.[352] In the event that the negotiating bank decides not to negotiate, it would owe no duty to the issuing bank.
4.21
As for confirming banks, they are sometimes characterised by bankers as agents of the issuing bank and this notion (or misconception)[353] is perhaps partly due to the fact that the confirming banks are traditionally regarded as doing in the jurisdiction of the beneficiary what the issuing bank is supposed to do (but could not do because the issuing bank is not present in the jurisdiction). Indeed, it is convenient for bankers and lay persons to view the role of the confirming bank as one of ‘extending’ the presence of the issuing bank into the jurisdiction where the beneficiary is operating its business, the purpose of which is to mitigate the risks that come along with the fact that the issuing bank is not local to the beneficiary.[354]
4.22
This notion that a confirming bank is an agent of the issuing bank (at least in this limited way) finds support in pre-UCP 600 cases such as Bank Melli Iran v Barclays Bank (Dominion, Colonial & Overseas)[355] and The Bank of Baroda Ltd v The Vysya Bank Ltd,[356] where the English courts took the view that the confirming bank and the issuing bank are in a relationship of agency, albeit only for the narrow function envisaged in the UCP.
Indeed, as Mance J explained in Bank of Baroda v Vysya Bank, the relationship of agency between the confirming bank and the issuing bank is consistent with the language of authorisation and request used in the UCP,[357] and is also shown by the language used in the correspondence in that case when the confirming bank was instructed.[358]4.23 On the other hand, a different (and perhaps more nuanced) view was taken by the English Court of Appeal in Credit Agricole Indosuez v Muslim Commercial Bank Ltd.[359] Even though the Court held that there is ‘not in law an agency relationship between an issuing bank and a confirming bank’, nevertheless Christopher Staughton LJ considered that the principle in Ireland v Livingstone would apply as between a confirming bank and an issuing bank:
But in terms of commerce the confirming bank is the correspondent of the issuing bank, and acts for the issuing bank in order to do what the issuing bank is not present to do for itself. That is in my respectful opinion sufficient to attract the rule that an agent is to be excused for acting on a reasonable, even if ultimately wrong, interpretation of his principal instructions.[360]
4.24 In the recent Hong Kong case of So Sau Lai Connie t/a Wing Fung Trading Co v DBS Bank (Hong Kong) Ltd,[361] the Court took a more ‘conventional’ view that the confirming bank acts as agent for the issuing bank, but only with regard to the obligations of the issuing bank, citing Jack: Documentary Credits.[362] Jack suggests that the position of the confirming bank is that, in carrying out its function, where appropriate, it will act in a ‘dual capacity’ (ie, prin- cipal/agent). In other words, it acts as a principal ‘in relation to its obligations as confirming bank’ vis-a-vis the beneficiary but acts as agent for the issuing bank ‘with regard to the obligations of the issuing bank’.[363]
4.25 As can be seen from the discussion above, the state of law as regards whether, and if so, to what extent there exists a relationship of agency between a confirming/negotiating bank on the one hand and an issuing bank on the other in the pre-UCP 600 cases is one of some uncertainty.
The cases are not only inconsistent, but also lack in-depth reasoning as to how they reached the conclusion as to whether a confirming/negotiating bank is or is not an agent of the issuing bank. To the extent that the confirming bank performs the role of the issuing bank in the place where the beneficiary carries on business, ie receiving presentation of documents under the credit and honouring it if the presentation is conforming, it can be said to replicate the role of the issuing bank in the beneficiary’s jurisdiction. To that extent, the agency characterisation appears to be attractive. But there is a limit to this characterisation. The confirming bank has a self-standing contractual obligation to honour a conforming presentation by the beneficiary unlike a conventional agent who drops out once the principal and third party enter into a contractual relationship.4.26 The justification for not describing a negotiating bank as an agent is perhaps easier to explain. The negotiating bank has no obligation to discount or give value to a set of conforming documents; it is performing the role of the issuing bank in the beneficiary’s place of business. However, if it decides to do so, then it acquires an independent right of reimbursement against the issuing bank.
2. Under UCP 600
As observed by Chan SJ in Grains, the articles in UCP 600 make no mention of agency.[364] It 4.27 follows that there is no clear articulation in the UCP 600 as to the scope of any relationship of agency between an issuing bank and the nominated bank. In the absence of any clear authority, the preponderantview among commentators is against any general role of agency.
According to Byrne et al, UCP 600: An Analytical Commentary, the nomination of a bank 4.28 does not confer a general agency status on the nominated bank with respect to the issuer or confirmer even if it elects to act pursuant to the nomination, unless otherwise expressly provided.[365] In the similar vein, the authors of Ellinger & Neo, The Law and Practice of Documentary Letters of Credit, note that the precise legal position depends on the role that the bank is asked to play.
In their view, a bank that is nominated to negotiate documents and/or drafts under the credit does so in its own capacity and is not an agent of the issuing bank.[366] As for a confirming bank, their view is that it is sometimes said to be an agent of the issuing bank but that is only in one aspect of its legal position, ie it has mandate to honour or negotiate the credit for which it will be entitled to claim reimbursement, and further, where it honours or negotiates the credit, it might be seen as acting on behalf of the issuing bank in the sense that it discharges the issuing bank's obligation to the beneficiary.[367]Insofar as some of the commentators seem to take a contrary view (such as John Dolan 4.29 and Jack),[368] they appear to refer to specific acts contemplated under the provisions of UCP 600 and not to general agency (as noted by Chan SJ in his separate judgment in Grains).[369] Moreover, both Dolan and Jack can be understood to be merely describing the operation of the relevant articles in UCP 600 and referring to the relationship as one that is analogous to that of an agency relationship.[370]
B. A Narrow Reading of Grains
The role of the nominated bank as an agent of the issuing bank should be confined to a 4.30 situation where, for example, the nominated bank is timeously[371] presented with a set of conforming documents by the beneficiary which it does not negotiate (where the credit is available by negotiation) or where it does not accept a draft drawn on it (where the credit is available by acceptance). Where such a presentation is made to the nominated bank, the obligation of the issuing bank is triggered. To that extent only, the nominated bank assumes the capacity of an agent of the issuing bank. On the other hand, if the nominated bank negotiates the conforming documents,[372] it acts as a principal in its own right, both vis-a-vis the beneficiary and the issuing bank of the credit.[373] As against the beneficiary, it discounts the documents presented by imposing its own terms (including interest that it charges and any negotiation commission) without having to consult the issuing bank as regards these terms. Having negotiated the documents presented, it acquires a right of reimbursement vis-a-vis the issuing bank under art 7(c) of UCP 600 (which, it is noted, bears some similarity to the right that an agent has against a principal under agency law). The contractual relationship between the issuing bank and the nominated bank and the right of reimbursement thereunder comes into effect by the acceptance by the nominated bank of an offer contained in the credit to negotiate the conforming documents presented by the beneficiary.
4.31 Even on this narrow reading of the nominated bank's role as agent, several potential difficulties arise.[374]
1. A Freely Negotiable Credit
4.32 In a freely negotiable credit, which in practice is more frequently encountered than a credit in which negotiation is restricted to a specified bank, any bank operating in the jurisdiction of the beneficiary can be a nominated bank.[375] It is conceivable that a beneficiary may present a set of documents to a bank that has no relationship with the beneficiary, requesting the bank to negotiate. If the bank refuses to negotiate, thereby declining to act on the nomination, the issuing bank is put at risk if that bank does not reject the documents within the maximum five-day period and/or in accordance with the rejection procedure prescribed in art 16(c) of UCP 600. Likewise, if the bank examines the documents negligently and misses a discrepancy or conversely wrongfully rejects documents that turn out to be compliant, the issuing bank is similarly at risk.
2. The Beneficiary's Request to Negotiate—A Residual Duty
4.33 In documentary credit practice, a beneficiary when requesting a bank to negotiate a set of documents is usually required to complete a form setting out the terms and conditions imposed by the bank for that purpose. The intention of the beneficiary is to offer to the bank the opportunity to negotiate based on the latter's terms. If the bank refuses to negotiate for one reason or another, it simply does not accept the offer to do so. The impact of Grains is that the bank (that refuses to negotiate at the request of the beneficiary) nonetheless comes under a duty vis-a-vis the issuing bank to receive and examine the documents as well as to notify the beneficiary in accordance with the rejection procedure of art 16 of UCP 600 if the documents do not conform to the credit. If it performs this task negligently, and the beneficiary brings a successful claim against the issuing bank, the latter has a potential claim for negligence against the nominated bank. Thus, the bank's involvement does not end simply when it refuses to negotiate—the implied duty which arises when it is deemed to have acted
on the nomination, for which it is not even paid, to examine and handle the documents as required under UCP 600, presents a trap for the unwary. A bank is well advised then to notify the beneficiary and the issuing bank expeditiously of any decision to decline to act on the nomination as well as to return the documents to the former expeditiously.
4.34
From the beneficiary’s perspective, things look considerably better in such a situation. What might have started out as a request to negotiate (which is also regarded as a presentation to the bank in its capacity as nominated bank) in fact yields four options if the nominated bank refuses to negotiate:
(a) Retrieve the documents and present directly to the issuing bank.
(b) Retrieve the documents and approach another bank for negotiation (assuming the credit is freely negotiable).
(c) Unless the documents are rejected in accordance with art 16 of UCP 600 by the nominated bank, after refusal to negotiate, claim against the issuing bank under the credit.
(d) Request/demand that the bank forward the documents to the issuing bank on a collection basis.[376]
3. Scope of the Agency—Does and Should it Go Beyond UCP 600?
4.35
Agency in this context, it is suggested above, should not be understood in the wide common law sense. The agency in Grains is one inferred from the provisions of UCP 600, particularly, arts 7 and 16, ie it is confined to receiving, examining, and depending on whether the documents comply, forwarding them to the issuing bank with reasonable expedition[377] if they do, and following the rejection procedure in art 16 if they do not.New Roman">[378] There should, however, be little or no scope to go beyond the prescribed duties under arts 7 and 16 of the UCP 600. Principles such as fiduciary duty, good faith, apparent authority, ratification, etc, while well established as a matter of common law of agency, might be alien to a nominated bank operating in a jurisdiction with a civil, rather than common law, tradition. It would not be reasonable or fair to expect such a bank to behave in accordance with the standards of an agent at common law.
4.36
Reasonableness and fairness aside, there is a principled basis to avoid such a result, applying choice of law rules. As between an issuing bank on the one hand and the confirming/ negotiating bank on the other, their relationship is governed by the law of the place where the latter carries out its business, in the absence of express choice of law clause.[379] While it is not settled by case law whether the relationship between an issuing bank and a nominated bank which does not act on the nomination is governed by the same choice of law, there is a fairly convincing case to be made in favour of such an extension. The performance of the nominated bank’s duties in receipt, examination, and handling of documents presented under the credit is performed in the jurisdiction in which it carries on business. Such performance is the focus of the relationship between the two banks. As such, the law of the place of such performance should have a strong claim as the law governing that relationship. On the assumption that nominated bank operates in a civil law jurisdiction, the outcome of applying the laws of that jurisdiction is that the common law principles associated with agency may be displaced.
4.37 Applying choice of law rules to avoid such an outcome, however, is not without its perils. It can, in other situations, lead to unacceptable consequences. There may, for instance, be a shorter limitation period under the laws of the place where the nominated bank carries on business or there may be statutory exclusion or limitation of liability that banks in that jurisdiction may enjoy. Thus, inasmuch as a nominated bank operating in a civil law jurisdiction may be caught off guard by common law notions of agency, likewise an issuing bank operating in a common law jurisdiction may find itself having to deal with any quirks in the laws of the place where the nominated bank is based.
4. ImpliedObligations
4.38 The appellate courts in England and Singapore have read into the provisions of UCP 600 implied terms concerning the disposal of documents presented under a credit.
4.39 In Fortis Bank SA/NV and another v Indian Overseas Bank (‘Fortis Bank’),[380] Indian Overseas Bank (‘IOB’) issued five letters of credit (L/C 1 to 5), each subject to UCP 600 and contained a request for Fortis Bank (‘Fortis’) to act as a confirming bank. L/C 1 to 3 were confirmed by Fortis. The beneficiary presented documents under L/C 1 to 3 which Fortis accepted and paid, and the documents were then forwarded to IOB by Fortis. The documents presented under L/C 4 and 5 (which were not confirmed) were subsequently forwarded by Fortis to IOB. IOB rejected the documents presented under L/C 1 to 5, and refused to reimburse Fortis (for L/ C 1 to 3) or pay the beneficiary (for L/ C 4 and 5). It gave notice under art 16(c)(iii)(c) of UCP 600 stating that it was returning the documents in respect of all the presentations (except for presentations under L/C 3 where IOB stated that it exercised the option under art 16(c)(iii)(a) to hold pending further instructions from the presenter). Further instructions were given by Fortis in January 2009 to return the documents, but IOB did not return any of the documents until 16 February 2009. One of the issues raised was whether there is an implied obligation on the issuing bank to return the documents in accordance with the ‘return’ notice (per art 16(c)(iii)(c)) or ‘hold’ notice (per art 16(c)(iii)(a)), and if so, whether it has to do so with ‘reasonable promptness’. On this issue, Hamblen J held that a term that the documents should be returned within a reasonable period of time to Fortis should be implied, and a reasonable time in the context should refer to ‘reasonable promptness’.[381] This was upheld on appeal by the English Court of Appeal.[382]
Like the English courts, the Singapore Court of Appeal also came to the view that it is pos- 4.40 sible to imply terms into the provisions of the UCP 600. Having considered the decisions in Fortis Bank, the discussions in Byrne et al, UCP 600: An Analytical Commentary[383] as well as having examined the duty of an agent to forward documents under common law,[384] the Singapore Court of Appeal in Grains held that a nominated bank owes an implied obligation to forward the documents with reasonable promptness to the issuing bank whatever course it should decide to take in relation to the credit by virtue of its having accepted its nomination.[385]1
The implication of terms—a technique with a quintessentially common law flavour—into 4.41
the provisions of UCP 600 in these cases does not sit very well with the English Court of Appeal's observation that the domestic canons of construction should not be applied to the UCP 600 because of its international usage. However, the prompt disposal of documents, whether by way of forwarding them to the issuing bank or returning them to the presenting bank, is something that banks would expect of each other in documentary credit practice.[386] To that extent, the technique of implying a duty is nothing more than a convenient way of reaching a result that accords with international standard banking practice. Notably, neither court had to deal with any argument that such implied terms are not permitted by any applicable foreign systems of law.
The question that remains to be answered is the readiness with which such a technique 4.42 will be used by the courts in the future. It is suggested that judicial appetite for implication of duties into UCP 600 should be modest for a number of reasons. First, as a matter of common law, the implication of terms into a contract is governed by strict requirements. Second, as explained above, over-zealous use of a common law technique may sit uneasily with principles that operate in civil law traditions. Third, the document itself, ie UCP 600 is meant to be used internationally and was not drafted with any notions or premises of the common law in mind. Fourth, there is always the possibility that the governing law, derived from a choice of law analysis, does not recognise this technique of implication at all.
IV.