Practical Implications of the Decision in Grains
As would be apparent from the foregoing distillation of the principles established in the de- 4.07 cision, the role of the nominated bank (and performance of that role) can critically affect the rights and liabilities of the issuing bank vis-a-vis the beneficiary as well as the nominated bank itself.
As the case law that applies in Singapore (alongside the UCP 600) to letters of credit is derived from the principles of the English common law, the principles established in the Grains decision have potential relevance in other common law jurisdictions. Banks must therefore be alive to the practical implications that application of these principles may have on their practices, regardless of whether they are acting as issuing bank or nominated bank. Some of these practical implications and suggestions to ameliorate their impact on banks are discussed in the subsection that follows, starting with the perspective of an issuing bank before turning to consider the perspective of a nominated bank.A. Practical Implications from Issuing Bank's Perspective
1. Choice of Nominated B ank
Under UCP 600, if the credit does not narrow the nomination to a named bank, any bank 4.08 operating in the beneficiary’s jurisdiction can potentially be a nominated bank.[337] This potentially exposes the issuing bank to the risk of any failure by a bank (whose identity may be unknown to the issuing bank beforehand) to which documents are presented by the beneficiary and which does not expressly decline to receive the documents or refuse to accept the nomination.
On the majority reasoning of Grains, such a bank may be considered the agent of the issuing bank under art 7(a) of UCP 600. Its acts and omissions in relation to the handling of the presented documents therefore binds the latter. Accordingly, one important aspect for banks (acting in their capacity as issuing banks) to consider is whether (and under what circumstances) would they be prepared to issue a credit that is available with any bank, which by its nature, attracts the risk described above. One possible strategy is to limit the banks with which the credit is available to the advising bank; after all, the choice of the advising bank is something an issuing bank can decide for itself. For this purpose, a provision entitling the issuing bank to restrict nomination to a bank of its choice in the beneficiary’s jurisdiction (overriding any conflicting express instructions from the beneficiary to issue a credit available with any bank if necessary) may have to be included in the letter of credit application form.2. Direct Presentation by Beneficiary to Issuing Bank
A nominated bank may reject the documents without fully complying with the rejection 4.09 procedure in art 16(c) of UCP 600. Arising from such failure, the issuing bank will be bound to accept the documents or be said to have lost its right of rejection under art 16(c)—that was what happened in Grains itself. To protect its interests, an issuing bank may wish to make it clear to the beneficiary that if documents which are initially received by the nominated bank are subsequently refused by the latter whether on account of discrepancies or a refusal to negotiate the documents, the beneficiary has to present the documents directly to the issuing bank and that the issuing bank is not bound by the acts or omission of the nominated bank in its receipt and handling of the documents.
This requires the inclusion of an appropriately worded provision in the credit. The reason a provision making clear the above should be included is that otherwise—in the event that the nominated bank fails to properly handle the documents presented to it while not acting on the nomination to pay or negotiate the credit—all that the issuing bank is left with is a negligence claim against the nominated bank. The issuing bank is still exposed to a claim by the beneficiary for what the nominated bank does or fails to do in handling the documents presented.3. Release of Security and Scope of Applicant's Indemnity
4.10 In some instances, an issuing bank takes security from the applicant before it agrees to issue a letter of credit. If documents do not arrive at the bank's counter by the expiry date of the letter of credit, the issuing bank may assume that the documents have either not been presented at all or that the documents presented have been rejected by the nominated bank. It may be recalled that in Grains, the documents arrived at the issuing bank after the expiry date but the issuing bank was still found to be liable. Thus, an issuing bank should consider if it wants to release the security it holds back to the applicant only after it has ascertained that either no documents have been presented to the nominated bank, or if documents have been presented, they have in fact been found to be discrepant and rejected. However, this practice would only be feasible practically if nomination is restricted to a particular bank. Further, issuing banks may also wish to expand the scope of the applicant's indemnity to the bank (usually set out in the bank's letter of credit application terms and conditions) to cover any loss which the issuing bank suffers from as a result of the acts or omission of the nominated bank in the receipt, examination, handling, and forwarding of documents presented by the beneficiary.
B. Practical Implications from Nominated Bank's Perspective
4.11 The foregoing points pertain to the rights and obligations of a bank where it acts as the issuing bank.
The implications from Grains are somewhat different in relation to a nominated bank.1. Refusing to Negotiate, Discount, or to Act as Nominated Bank
4.12 When presented with documents which are complying but which the nominated bank does not wish to negotiate or discount, it should promptly forward these documents to the issuing bank. That would in the absence of extenuating circumstances be the banking day following the day examination of documents is completed. Further, if a bank does not wish to accept the role of a nominated bank (especially where nomination is restricted to it), the bank should inform the issuing bank and the beneficiary immediately when the latter presents the documents to the bank, as well as promptly return the documents so presented to the beneficiary. Even if the nominated bank refuses to negotiate or discount ie act on the nomination, it may still be requested by the beneficiary to send the documents to the issuing bank by way of collection on the beneficiary’s behalf. If that is the case and the bank agrees to do so, the bank’s role should be clearly stated in the collection schedule to be sent to the issuing bank.
2. Agreeing to Act on the Nomination
If a nominated bank does act on its nomination and pays or otherwise extends financing 4.13 against a conforming set of documents according to the availability of the credit, it becomes entitled to reimbursement from the issuing bank when the documents are forwarded to the issuing bank. The nominated bank’s officers need to be made aware that any negligence or fault on their part in the receipt, examination, and handling of the presented documents may result in the bank being exposed to the issuing bank and/or the beneficiary. In practice, some banks have already introduced provisions in the letters of credit that they issue which expressly oblige the nominated bank to take certain steps, like forwarding of documents expeditiously, in light of the decision in Grains. The nominated bank’s officers must be alerted to such provisions, which means that a close scrutiny of the letter of credit terms is called for.