Introduction: A Rod for the Beneficiary’s Own Back
3.01 ‘Soft clauses' in letters of credit are sometimes known, even more disparagingly, as ‘joker clauses'.[257] They are clauses that require the beneficiary of the credit to present a document issued or signed by the applicant (or someone in the applicant's country) in order to secure payment from the issuing, confirming, or nominated bank under a letter of credit.
One obvious consequence is that the applicant has within its control the means of preventing payment to the beneficiary, because the doctrine of strict compliance is unforgiving in its insistence that the beneficiary is not entitled to payment without presentation of a document that conforms exactly to the requirements of the soft clause. The beneficiary cannot cure any discrepancy in the documents, as it might be able to do with documents produced in its own country at its own request, because it has no control, direct or indirect, over the production of the ‘soft clause' document.3.02 The International Standard Banking Practice (‘ISBP') document produced by the International Chamber of Commerce as a companion to the Uniform Customs and Practice for Documentary Credits (‘UCP 600') is almost brutally unsympathetic to a beneficiary who has agreed to be paid under a letter of credit including such a clause. The 2007 version (‘ISBP 681') stated:
A credit should not require presentation of documents that are to be issued or countersigned by the applicant. If a credit is issued including such terms, the beneficiary must either seek amendment or comply with them and bear the risk of failure to do so.[258]
3.03 The 2013 version (‘ISBP 745') is a little less harsh, but the message for the beneficiary is much the same: if you accept such terms you are making a rod for your own back:
A credit or any amendment thereto should not require presentation of a document that is to be issued or countersigned by the applicant.
If, nevertheless, a credit or amendment is issued including such a requirement, the beneficiary should consider the appropriateness of such a requirement and determine its ability to comply with it, or seek a suitable amendment.[259]That may be easier said than done, of course. The applicant may have a legitimate reason for insisting on the inclusion of such a term, particularly if it relates to the condition or conformity of the goods on arrival in the applicant’s country. Nevertheless, the applicant’s ability to control, directly or indirectly, the release of funds may provide it with an irresistible temptation if the market value of the goods or services in the underlying contract falls. The English case of The Messiniaki Tolmi[260] is both a good example of a case where there was a legitimate reason for inclusion of a soft clause, and also an illustration of the difficulties that the doctrine of strict compliance creates for a beneficiary who has agreed to be paid under a letter of credit requiring presentation of documents to be produced in the applicant’s country, beyond the beneficiary’s ability to cure any possible discrepancies.
3.04
3.05
In The Messiniaki Tolmi, a Panamanian shipowner agreed to sell its ship to a Taiwanese buyer to be scrapped in Taiwan. The buyer’s bank in Taiwan issued a letter of credit in favour of the seller/beneficiary, which was later confirmed by a London bank, as the seller/ beneficiary had requested. The sale contract specified that the ship should be delivered in Taiwan with a valid gas-free certificate ‘to be approved by the Taiwan Authorities’ so that ‘hot work’ could be done on the ship during scrapping. The sale contract also stipulated that the buyer would not accept delivery of the ship without that certificate. Accordingly, the letter of credit required presentation of the following documents (among others):
[A] copy of the valid Gas-Free Certificate for hot work, which Certificate to be approved by the Taiwan Authorities, together with a copy of the notice of readiness countersigned by the Kaohsiung Harbour Master or Lloyds Agents in Taiwan...
confirming the safe arrival of the vessel inside Kaohsiung Harbour and accepted and signed by the Purchasers... [261]3.06
Clearly, the applicant/buyer had (or at least ostensibly had) a legitimate reason for asking for inclusion of the soft clause in the letter of credit, as the ship could not be scrapped safely if it had not been gas-freed properly. However, the clause also gave the applicant/buyer effective control over the release of the funds by the banks, and thus the ability to take advantage of any changes in the market value of scrap metal. In such circumstances, even the most scrupulous of buyers might find itself just a little tempted if the market moved against the seller before performance was completed.
3.07
When the ship arrived at Kaohsiung, the Harbour Master did not sign the gas-free certificate indicating his approval, and the buyer refused to accept and sign the notice of readiness. To cut a long story short,[262] the confirming bank in London refused to accept the documents presented by the seller/beneficiary because the gas-free certificate did not bear any endorsement indicating approval by the Taiwanese authorities.[263] The ship eventually left Taiwan and was sold to a new buyer in Hong Kong at a considerable loss, as the market price of scrap metal had fallen from US$212.50 per ton at the time when the original contract was made to about US$150 per ton.[264] It is impossible now to know whether the refusal of the Taiwanese buyer to accept the ship was driven by its genuine concern for the safety of the scrapping process, or by its desire to take advantage of the steep fall in the scrap value of the ship, but it is tempting to think that there was at least a little of both reasons. Nevertheless, no matter what the buyer's motive, the end result of the case was that the English Court of Appeal held, perhaps not surprisingly, that the confirming bank was entitled to refuse to accept the documents as a conforming tender under the letter of credit, because they did not comply strictly with the requirement of approval by the Taiwanese authorities.[265] The seller/beneficiary had put itself in the position of having to present documents the production of which it could not control, and so had made itself vulnerable to a change in position at the applicant's end of the transaction. In short, it had made a rod for its own back.
II.