Little Sympathy for Beneficiaries
3.08 The bleakly unsympathetic attitude of the ISBP is largely mirrored by the response of courts
that have been called on to consider the effect of soft clauses in letters of credit.
We have already seen that the English Court of Appeal in The Messiniaki Tolmi used the traditional strict-compliance doctrine to deny payment to a beneficiary who could not comply with a soft clause. Some examples from the United States illustrate a variety of different, fairly typical, soft clauses, all of which produce the same result: difficulty for the beneficiary to present strictly conforming documents in order to get paid.3.09 In Eximetals Corp v Guimaraes Sff,[266] an importer in New York agreed to buy steel flanges from an exporter in Brazil. Payment was to be made by two letters of credit issued by New York banks, both requiring presentation of (among other things) an ‘inspection certificate verified by and countersigned by Mr. Gang,' who was the president of the ap- plicant/buyer corporation. One bank rejected the inspection certificate first presented by the Brazilian beneficiary on account of a discrepancy that had nothing to do with the requirement for countersignature; it also rejected a later tender that cured the original discrepancy because the certificate had not been countersigned by Mr. Gang. The other bank rejected the inspection certificate, even though it appeared to have been signed by Mr. Gang, because it had not been signed by the person who had conducted the inspection.[267] The Appellate Division of the New York Supreme Court held that both issuing banks were
entitled to refuse to pay because in neither case did the inspection certificate comply strictly with the terms of the credit.
The inspection certificate that had not been signed by Mr. Gang was not a conforming presentation for that reason alone. The inspection certificate that was signed by Mr. Gang but not the inspector was not ‘countersigned’ by Mr. Gang; ‘countersigned’ meant that his signature should be added to someone else’s.3.10
In Marino Industries Corp v Chase Manhattan Bank NA,[268] there were three different soft clauses, each of which caused problems for the beneficiary. The plaintiff, an American manufacturer, contracted with a German company to send construction materials to a job site in Saudi Arabia. Payment was to be made under two letters of credit issued by a German bank, both of which were confirmed by the defendant bank in the United States, naming the American seller as beneficiary: 40% of the price was to be paid on shipment and 60% when the goods were received. The seller/beneficiary shipped all the goods to Saudi Arabia as required, but the confirming bank refused to honour the seller/beneficiary’s three separate presentations, claiming in each case that the documents were discrepant because of their failure to comply strictly with the soft clauses in the letter of credit. (It may or may not have been a coincidence that the confirming bank’s rejection of the documents occurred after the German buyer went into bankruptcy.) Each of the three refusals was for a different reason; all three turned on a soft clause in the letters of credit.
3.11
The first refusal related to a requirement in the letter of credit that the beneficiary should present (among other things) a certificate showing that the goods had been received in Saudi Arabia. The certificates of receipt were to be signed by a representative of the Saudi Arabian joint venture that was to receive the goods, or a notarised signature of the freight forwarder arranging transportation of the materials to Saudi Arabia.
The German issuing bank had sent three signature samples to the American confirming bank, but the confirming bank did not tell the beneficiary that only those three signatures would be acceptable, or that other signatures would be acceptable only if they identified the signer as a representative of the Saudi joint venture. On the first presentation, the beneficiary presented a certificate of receipt that had been signed, but the signature was not one of the three authorised ones. The confirming bank rejected the presentation on account of that discrepancy. The beneficiary cured the discrepancy by securing a notarised signature of the freight forwarder, but was not able to present the revised document before the credit expired. The US Court of Appeals for the Second Circuit held that the letter of credit itself did not make any mention of the fact that only three signatures were acceptable (which is often done in soft clauses of this kind). If it had, the doctrine of strict compliance would have required the beneficiary to present a certificate of receipt bearing one of the approved signatures. Because there was no mention in the credit itself of the requirement for one of the approved signatures, the certificate of receipt would be an acceptable tender if the signature that it originally bore was that of a representative of the Saudi joint venture.[269]3.12
The second refusal related to a requirement in the letter of credit that the beneficiary present a copy of a telex to the German applicant/buyer confirming that various ‘legalized’ documents, including a packing list, had been sent to the buyer’s representative in Riyadh, Saudi Arabia, and also to a customs agent at the port of destination. The telex that the beneficiary presented to the confirming bank confirmed that a packing list had been sent, along with the other documents, but not that the packing list had been ‘legalized.’ ‘Legalization’ required the document to be stamped by the consulate of the country of destination, Saudi Arabia, which had not been done in relation to the packing list.
The US Court of Appeals for the Second Circuit held that the confirming bank was entitled to reject the presentation because it did not conform strictly to the credit.3.13 The third refusal related to a requirement in the letter of credit that the certificate of receipt should show that freight charges had been prepaid for carriage all the way to the Saudi jobsite. The certificates of receipt stated nothing about prepayment of freight charges, but they did contain the words ‘ACCOUNT: CASH’ with the word ‘CASH’ crossed out. Apparently, the crossing-out of the word ‘CASH’ reflected a practice in the freight forwarding industry of recording that freight had been prepaid, but nevertheless the confirming bank rejected the document. The US Court of Appeals for the Second Circuit held that the confirming bank was entitled to reject the presentation. The confirming bank could not properly be expected to know what the crossing-out of the word ‘CASH’ signified; the certificate of receipt did not bear a notation indicating that freight had been prepaid, so it did not conform strictly to the requirement in the letter of credit.
3.14 In retrospect, it is difficult to know why the seller/beneficiary accepted such far-reaching ‘soft clauses’ in the Marino Industries case, although it was probably a consequence of the parties’ relative bargaining power in the underlying transaction. That may also have been the explanation for the willingness of the beneficiary to accept soft clauses in the Canadian case Nareerux Import Co v Canadian Imperial Bank of Commerce (‘Nareerux’).[270] A Thai shrimp producer agreed to sell shrimp to an American buyer for eventual on-sale to Sam’s Club, a division of Wal-Mart. The buyer applied to its bank in Canada to issue letters of credit to the Thai seller. Initially, the credits included the ‘soft’ provision that payment would not be made until the issuing bank had received documentary proof that the shrimp had cleared inspection by the US Food and Drug Administration.
The seller/beneficiary later agreed to an additional, even ‘softer’, condition, which was that payment would not be made until the bank had received from the applicant a signed purchase order from Sam’s Club and delivery receipts showing that the shrimp had actually been received by one of Sam’s Club Distribution Centres. By agreeing to such terms, the Thai seller was knowingly taking the risk of handing over possession of the shrimp to the ultimate buyer, Sam’s Club, before payment was made. The case reports give no indication of why the seller was prepared to take such a commercial risk, but one can speculate that the size and market share of the final customer, Sam’s Club, were large enough that it could dictate terms both to the American wholesaler and the Thai seller. A division of America’s largest retailer certainly had a legitimate reason for wanting to satisfy itself that the shrimp it would be putting on its shelves were fit for human consumption, and, unlike most buyers, it had the market muscle to ensure that payment was not released to the producer until it had satisfied itself of that fact.3.15 Whatever the reason for the Thai seller/beneficiary’s acceptance of the risk of non-payment in the Nareerux case, the soft clauses made an apparently irrevocable letter of credit into something very like a revocable one, where the applicant could secure the withholding of payment simply by refusing to produce the required receipts from its customer—which is exactly what it eventually did. One writer has gone even further in his description of the parties’ arrangements in Nareerux, arguing that this was, in effect, no longer a letter of credit at all, because the beneficiary could only hope to secure payment by trusting in the applicant’s cooperation, which meant that it had given up on the letter of credit as its security in the transaction.[271] Whether or not one accepts that rather extreme characterisation, there is no doubt that letters of credit with soft clauses do not conform readily to the stereotype upon which UCP 600 and traditional letter of credit law are built.
The payment mechanisms set up in The Messiniaki Tolmi, Eximetals, and Marino Industries did not secure payment to the seller because of the traditional doctrine of strict compliance. That doctrine would also have denied payment to the seller in Nareerux, but for court intervention that will be described in the next section. If letters of credit with soft clauses are not to be treated as an entirely different payment instrument, which seems excessive,[272] and if the UCP is not going to be amended to accommodate this type of banking practice, which seems highly unlikely, then some other means must be found within the existing legal framework to avoid abuses by unscrupulous applicants.III.