Decision in Grains

The Singapore Court of Appeal decision in Grains involves a claim brought by the 4.02 Singapore beneficiary of the letter of credit (allegedly issued for a synthetic transaction in which only copies of bills of lading had to be presented) against the issuing bank, Indian Bank, which in turn brought an indemnity claim against the nominated bank in Singapore, Bank of India, if the beneficiary’s claim was successful.

4.03     At the first instance, the High Court Judge allowed the beneficiary’s claim against the issuing

bank and dismissed its claim against the nominated bank.^[318] In essence, the Judge found that the issuing bank was liable to honour the credit pursuant to art 7(a)(iv) of UCP 600 because the beneficiary made a timely, complying presentation to the nominated bank.^[319] The Judge dismissed the issuing bank’s indemnity claim against the nominated bank because he found that the nominated bank did not act upon or accept its nomination, such that no contract arose between them and thus no liability was owed by the nominated bank to the issuing bank.^[320] The issuing bank filed an appeal and the beneficiary filed a cross-appeal (against the dismissal of the claim against the nominated bank and on the issues of interests and costs) against the Judge’s decision.^[321]

4.04 The Court of Appeal, upholding the first instance judge in both appeals, allowed the beneficiary’s claim under the letter of credit against the issuing bank and rejected the is­suing bank’s indemnity claim.

4.05 In arriving at its conclusion to allow the beneficiary’s claim against the issuing bank and refusing the latter’s claim for indemnity against the nominated bank, the Court of Appeal (in the majority opinion delivered by Menon CJ) laid down the following salient legal principles:

(a)    When the documents are presented under a letter of credit to the nominated bank, the latter acts as an agent of the issuing bank in receiving the documents even if it does not negotiate or discount the documents.^{[322] [323]}

(b)    A beneficiary can present documents to either the nominated bank or issuing bank under art 7(a) of UCP 600. If the beneficiary makes a timely and conforming pres­entation to the nominated bank, the liability of the issuing bank to honour or pay under the letter of credit may still be engaged if the nominated bank does not pay at sight, incur a deferred payment undertaking, accept a draft or negotiate against the documents, as the case may be, depending on the type of credit involved. In other words, it does not matter, so far as the issuing bank's liability under the letter of credit is concerned, that the nominated bank does not act on the nomination. If the nom­inated bank does act on the nomination, then it is entitled to seek reimbursement from the issuing bank under art 7(c) of UCP 600.9

(c)    If the nominated bank fails to check the documents for conformity with the terms of the letter of credit and/or rejects the documents for discrepancies, art 16(f) of UCP 600 operates to preclude the issuing bank for rejecting the documents vis-a­vis the beneficiary.

(d)    If the conforming documents are received by the nominated bank before the letter of credit expiry date, they would have been presented on time vis-a-vis the issuing bank, even if the issuing bank receives them after that date.^[325]

(e)    If an issuing bank wants the beneficiary to make a direct presentation of documents to itself in the event that the nominated bank does not negotiate or discount docu­ments presented thereunder, it can (and should) expressly provide for that event under the terms of the letter of credit, thereby departing from the default position in art 7(a) that it is bound by a timely and conforming presentation to the nominated bank.^[326]

(f)     The fact that a beneficiary presents documents to the nominated bank with the in­tention that the nominated bank is to negotiate or discount the documents, does not preclude the possibility that the documents are also presented to that bank in its capacity as the nominated bank. The documents would still be considered to have been presented by the beneficiary to the nominated bank under art 7(a) of UCP 600, thereby triggering off the undertaking of the issuing bank to honour the letter of credit.^[327]

(g)    If a nominated bank, acting as the issuing bank's agent, wrongly accepts the docu­ments which are non-complying, such an act will bind the issuing bank vis-a-vis the

beneficiary even though the issuing bank may be able to sue the nominated bank for failing to act properly and carefully in the examination of documents or reject the non-complying documents in accordance with the rejection procedure prescribed in art 16(c) of UCP 600.¹4

(h)    A nominated bank may be authorised by the issuing bank to perform various tasks, including receiving, examining, and where appropriate rejecting documents pre­sented, advising the beneficiary of the credit, negotiating, or confirming the credit.

(i)     A bank which does not wish to act upon the nomination of the issuing bank should inform the issuing bank as well as the beneficiary, directing the latter to present the documents directly to the former.^[330]

(j)     A nominated bank, having examined and found the documents presented to be complying, should promptly forward the documents to the issuing bank (even if it does not negotiate/discount the documents). (This is so even though art 15 of UCP 600 does not expressly cover this situation.) In the absence of any compelling reasons for the delay, this should be done by the end of the next banking day after the nomin­ated bank determines that the documents are complying. A nominated bank which unreasonably delays the forwarding of documents to the issuing bank may be liable for the losses suffered by the latter arising from or caused by the delay.^[331] (On the facts of Grains, this was not proved by the issuing bank which led to the eventual dismissal of its indemnity claim.)^[332]

4.06 This chapter focuses on the agency reasoning adopted by Menon CJ and Phang JA in Grains, and flowing from that, the result that even if the nominated bank pre­sented with documents under the credit declines to negotiate or discount the same, it can still be an agent of the issuing bank for the purpose of receiving, examining, and handling of the presented documents.^[333] As alluded to earlier, Chan SJ issued a separate opinion^[334] in which his Honour disagreed with the reasoning adopted by Menon CJ and Phang JA and offered an alternative analysis which avoids the agency reasoning altogether. In fact, his Honour opined that there is no need to employ agency reasoning to describe the legal relationship between a nominated bank and an issuing bank.^[335] Instead, his Honour considered that the rights and obligations were (and ought) to be governed by and flowed from the articles of the UCP 600 which operate as contractual provisions incorporated into the letters of credit^[336] as well as the terms of the letters of credit, without having to overlay the same with principles of agency law.

III.