Proper Approach to Interpretation of the UCP 600 as to Documentary Compliance

A.   Background to the UCP Regime

5.07 The UCP regime has been the linchpin of letters of credit for nearly a century.

As part of its commitment to facilitate international trade and foster the employment of letters of credit in sales transactions, the International Chamber of Commerce (‘ICC’), headquartered in Paris, launched the Uniform Regulations for Commercial Documentary Credits in 1929 to unify ‘the commercial documentary credit regulations previously adopted and published by banking associations in various countries’.^[404] This was replaced four years later with the Uniform Customs and Practice for Commercial Documentary Credits.^[405] Further revisions of the code at substantially regular intervals^[406] have enabled the UCP to retain its international currency by keeping abreast of new developments in the global practices relating to letter of credit operations, the nature and form of shipping docu­ments, and marine insurance policies, as well as gaining the acceptance of banks in more than 180 countries—the UCP thus crystallised into a worldwide code of uniform banking practice, embodying since 1962 the standard criteria for establishing conformity of docu­ments tendered under credits.^[407]

5.08

5.09

Over the years, the revision process has culminated in successive updated editions of the UCP, which have adopted a drafting style that seeks to ensure a uniform understanding, interpretation, and application of the UCP in determining documentary compliance.

B.                               Contractual Interpretation of Letters of Credit and the UCP 600

1.         General Principles of Contractual Interpretation

5.10 Documentary letters of credit and the underlying credit-opening (or indemnity) agreement customarily contain clauses that incorporate the UCP 600 by reference.

5.11 Under Anglo-American law, the doctrine that parties are free to contract on whatever lawful terms they think fit is based on the fundamental premise that the law will give ef­fect to the parties' mutual intention as expressed in the terms of their contract. To discover their common intention, the common law's policy has been to adopt an objective standard of interpretation and generally to reject evidence of the parties' subjective or actual in- tentions.^[412] Traditionally, the pertinent case law is marked by an insistence on the literal meaning of words. Nevertheless, a significant line of weighty dicta adopted an alternative approach which entailed placing a business sense construction on commercial contracts and business instruments in order to identify the meaning of the contract's words that most closely accords with the parties' intentions.^[413] The modern technique of interpretation drew inspiration from the balanced approach in influential early cases and effectively started life with Lord Wilberforce's observations in Prenn v Simmonds^[414] and Reardon Smith Line Ltd v Hansen-Tangen.^[415] These were subsequently developed, applied,^[416] and lucidly re-formulated in Investors Compensation Scheme Ltd v West Bromwich Building Society,^[417] which was in

turn substantially reaffirmed in a series of decisions by the House of Lords and UK Supreme Court.^[418] To summarise: in construing a written contract or contractual document, the court's concern is to identify the parties' intentions by reference to what a reasonable busi­ness person would have understood the parties to have meant by the language that they employed in the contract.

5.12

Despite this shift towards ‘contextualism, the English courts have continued to emphasise that loyalty to the text of the contract or contractual document (known as ‘textualism') is of paramount importance in identifying the parties' common intention.^[421] Admittedly, the starting point in the construction process must be the ordinary meaning of the contract's words because the natural import of what a person says usually affords a useful guide to what he means.^{style='font-size:9.0pt;font-family: "Times New Roman",serif;color:black'>[422]} Textualism produces difficulties, however, when the words are unam­biguous, but their literal construction leads to an improbable commercial result.

5.13 Conversely, in Rainy Sky SA v Kookmin Bank (‘Rainy Sky’),^[426] which concerned the correct construction of certain clauses in six advance payment bonds, Sir Simon Tuckey in the Court of Appeal^[427] stated that, if the plain language of the bonds leads clearly to the con­clusion that one or other of the proposed constructions is the correct one, the court must give effect to that interpretation, however surprising or unreasonable the result might be.

and commented: ‘This robust declaration does not however mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement.'^[432] All three Lords Justices in substance pointed out that only the most unambiguous clause could support the landlord's proposed construction, but never­theless upheld one of the clauses that did ‘unambiguously... achieve the improbable result for which the landlord contended'.^[433]

5.14

As interpretation aims to determine the parties' intentions, it is probably unrealistic to ex­pect contracting parties, as rational actors, to intend the unreasonable result of their un­ambiguous contractual language. Whilst textualism and the ‘natural meaning' approach may well remain a canon of contractual interpretation in English law, given its approval in Co-operative Wholesale and Rainy Sky, there is little room for such an approach when ap­plying the UCP's requirements for a complying presentation or interpreting express stipula­tions in a letter of credit that incorporates the UCP or some other code of banking practice. Ascertainment of the meaning of a given provision or term requires an examination of what the clause in question would convey to a reasonable document-checker having the relevant background knowledge of how letters of credit operate. Interpretation of the UCP provi­sions should take care to eschew literalism.

The application of these principles in the context of the UCP 600 is considered next.

2.          Interpretation of UCP 600

Upon its incorporation into a documentary credit, the UCP 600 has the unique standing of being a hybrid, international set of standard-form contractual terms and conditions. As a result of the intensive and exhaustive revision process described above, the UCP 600 can also be considered a unique product of seasoned international trade-finance professionals, reflecting global best practice in trade finance and the reasonable expectations of experi­enced international bankers and traders.^[434] As an international banking code designed to achieve uniformity in letter of credit operations generally, and more specifically in the cri­teria for determining documentary compliance, the UCP 600 has a justifiable claim to be treated like other international commercial conventions when it comes to the question of its interpretation. Examples of such instruments include the various Hague regimes on bills of lading,^[435] the Warsaw Convention,^[436] and the CMR Convention.^[437] These conventions are intended to have a unifying effect upon the specified international rules falling within their scope. In the interest of achieving a uniform application across the various contracting states, it has been long-settled that those conventions should be interpreted ‘unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation’,^[438] as appropriate to their international mercantile subject-matter.^[439] In essence, such conventions require a purposive internationalist construction: an English judge is entitled to avail himself of any aid to interpretation available to foreign courts, ex­cept that he should not engage in speculation about the interpretation that those courts are likely to adopt in relation to the relevant provision.^[440]

5.17 An issue concerning the construction of the UCP 600 arose in Fortis Bank SA v Indian Overseas Bank (‘Fortis Bank’).^[441] Primarily, it concerned the scope and content of the obliga­tions imposed on an issuing bank by article 16(c) of the UCP 600 towards a presenting nom­inated bank when sending a rejection notice to the latter bank following a non-conforming presentation. Article 16(c) imposes no explicit obligation on the issuing bank to return the discrepant documents to the presenting bank following service of the rejection notice. This omission is further complicated by article 16(e), which provides that the rejecting bank, after sending the above-mentioned notice, ‘may... return the documents to the presenter at any time’. Judging by the literal import of the words ‘may’ and ‘at any time', returning the documents is left to the rejecting bank’s discretion, but it is unclear if this was the intended meaning of articles 16(c) and (e) when read together. This narrow issue developed into a wider argument in Fortis Bank about how an English court should interpret the UCP 600 or whether further requirements might be implied into the UCP. All the judges at first in­stance^[442] and in the Court of Appeal^[443] in Fortis Bank acknowledged the UCP’s uniqueness as an international code of banking practice, settled by experienced trade-finance profes­sionals with the aim of achieving common and definite standards of conduct for banks, applicants, and beneficiaries in documentary credit operations throughout the world. All four judges also accepted that a purposive construction of the UCP was appropriate and that a court should accordingly give due consideration to the code’s overriding objective of maintaining good practice consonant with the reasonable expectations of international bankers and international traders. In particular, Thomas LJ in Fortis Bank emphasised^[444] that the court must recognise the UCP’s international nature when interpreting its terms. In that regard, his Lordship stated that the UCP ‘is intended to be a self-contained code for those areas of practice which it covers and to reflect good practice and achieve consist­ency across the world. Courts must therefore interpret it in accordance with its underlying aims and purposes reflecting international practice and the expectations of international bankers and international traders so that it underpins the operation of letters of credit in international trade. A literalistic and national approach must be avoided.’^[445]

Whilst, as considered above, Thomas LJ was correct to eschew a literal or textual approach to the UCP 600, the suggestion that a ‘national approach' must be avoided is confusing and too widely stated to be an appropriate guideline. Where the law governing an issuing bank's en­gagement under the credit is English law, the prevailing principles for construction of com­mercial contracts, as discussed above, will apply to determine the bank's rights, obligations, and liabilities to the beneficiary or a nominated bank located in a foreign jurisdiction. Those principles, albeit influenced to some degree by developments in the New York Court of Appeals,^[446] are simply part of English domestic law. English law does not have a body of spe­cial interpretational rules for dealing with international standard-form contractual terms any more than it has specialised principles for the interpretation of private law treaties or international commercial conventions implemented into UK law by a statute. Accordingly, it is difficult to see how a ‘national approach' can be avoided. In approaching the UCP 600, an English court would consider all the relevant contextual background, which would include decisions of foreign courts; ascertained international standard banking practice; expert evidence concerning the existence and scope of any particular banking practice relevant to the litigation; and the reasonable expectations of the class of international commercial actors and letter of credit practitioners to whom the UCP is addressed. A national approach involving due consideration of all the material elements of the relevant background may very well represent an interpretative breakthrough as to the proper meaning of a given UCP provision, leading the way for courts and arbitrators abroad to follow.

5.18

5.19

Given such a contextual approach to the interpretation of the UCP 600, a particular issue that arose in Fortis Bank concerned the materials to which an English court might make reference as part of the interpretative exercise. Before Hamblen J, the claimant nomin­ated bank sought to rely on the UCP 600 Drafting Group's Commentary on UCP 600 (‘the Commentary')^[447] to contend that articles 16(c) and (e) should be interpreted as requiring the rejecting bank to return the documents to the presenter reasonable promptly, and that the presenter's failure to do so had engaged the ‘preclusion rule' in article 16(f) of the UCP 600. Hamblen J doubted that the Commentary was analogous to the travaux preparatories (preparatory works) underlying an international convention or treaty. His Lordship con­cluded that the ‘comments made are of interest, but... do not... have an evidential status’.^[448] The Court of Appeal made no pronouncement regarding this specific point.

5.20

Hamblen J's conclusion appears suspect, as it betrays an unduly narrow approach to what counts as admissible extrinsic evidence. Ample authoritative guidance on the use of travaux preparatories as an interpretative aid was provided by the House of Lords in Fothergill v Monarch Airlines Ltd (‘Fothergill’),^[449] which was cited to the court in Fortis Bank. Fothergill concerned the meaning of the word ‘damage' in article 26(2) of the Warsaw Convention,^[450] and the legitimacy of resorting to the travaux preparatories contained in the minutes of meetings concerning the negotiation of the Hague Protocol of 1955 to that convention.^[451] A majority of the House of Lords in Fothergill^[452] accepted that, when determining what the delegates at an international conference decided by their majority vote in favour of a par­ticular convention text, regard should be had to any material that was available to those delegates when clarifying any textual ambiguities. Indeed, the United States Court of Appeal for the Second Circuit in Day v Transworld Inc^[453] has expressed a similar view and was prepared to consider the minutes of a drafting committee for the Warsaw Convention, although ultimately this provided little assistance in the particular circumstances of the case before the court.^[454] Whilst accepting their relevance, these decisions (i.e. Forthergill and Transworld) also establish that such material as is readily or reasonably accessible to those involved in negotiating or drafting international conventions cannot be treated as the gospel truth or in any way conclusive; rather, that the material should be used cautiously for the purpose of resolving any ambiguity in the treaty. In the context of the UCP 600, the Drafting Group prepared the Commentary in question to enlighten practitioners in docu­mentary credit operations about ‘a number of the thought processes behind the changes in each article and to explain why a change was introduced, why no change was made, why some issues may appear new but are [in fact] not... and to suggest the way the wording in UCP 600 should be understood and applied’.^[455] The content of the Commentary does not represent the official opinion of the ICC Commission on Banking Technique and Practice (‘ICC Banking Commission’). However, a published official statement, opinion, or deci­sion of the Commission itself can command a highly persuasive status before the Anglo- American courts.^[456] Similarly, the Commentary considered in Fortis Bank can provide valuable assistance in determining the correct meaning of a UCP 600 provision and ought not to be excluded from the interpretation of such an international code simply because some antediluvian local precept apparently denies its evidential character. Utility and sub­stance, rather than fastidious adherence to antequated formalism, should govern resort to such preliminary material.

3.          Implication of Terms into UCP 600

5.21 One further point remains for consideration in light of Fortis Bank: can a judge, or an arbi­trator hearing letter of credit submission under the DOCDEX Rules, imply a requirement into the UCP 600? The primary contention of the claimant nominated bank in Fortis Bank was that article 16(c)(iii) imposes a duty on the rejecting issuing bank to return the rejected documents upon sending a rejection notice, and that such an obligation could be imposed by implying a term, as an alternative to interpreting the UCP 600’s language. This approach

gained favour with Hamblen J. The judge recognised that the English courts had been pre­pared to make such an implication on three previous occasions^[457] (albeit without specifically considering the propriety of doing so). But Thomas LJ found it unnecessary to provide a concluded view on the issue, not least because he had already dismissed the appeal on the key issue of article 16(c)(iii)'s proper construction. Insofar as the processes of implication and interpretation differ, his Lordship did, however, raise serious concerns about using do­mestic implication principles as the basis for writing an obligation into the UCP.

5.22

Those misgivings might appear understandable and do echo the occasional objection^[458] to the tendency of some English judges to construe the provisions of the UCP according to traditional domestic canons of interpretation. The objections, however, need to be kept in perspective. To start with, the relevant letter of credit contracts in Fortis Bank were sub­ject to English law. Pursuant to article 12(1) of the Rome I Regulation,^[459] when English law applies to a letter of credit contract, that law governs the ‘interpretation’ of the UCP when incorporated by reference into the credit. In English law, the process of interpretation dif­fers from the implication exercise. Whilst interpretation and implication were conflated by Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd,^[460] this was firmly re­jected by Singapore’s apex court.^[461] The rejection was endorsed by the UK Supreme Court in Marks & Spencer plc v BNP Paribas Securities Trust Co (Jersey) Ltd?^{New Roman",serif;color:black;font-weight:bold'>[462]} This now repre­sents English law. Indeed, Sir Thomas Bingham MR, in Philips Electronique v British Sky Broadcasting Ltd,^[463] captured the essential distinction between interpretation and implica­tion thus: ‘The courts’ usual role in contract interpretation is, by resolving ambiguities or resolving apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract.’ That process is iterative, involving checking each of the rival meanings against other provisions of the contractual document and investigating its commercial consequences.^[464] In contrast, ‘the implication of contract terms involves a different and altogether more ambitious undertaking: the interpretation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision’. Essentially, construction is a non-intrusive exercise, while interpolation in a contractual provision entails ‘the supplying’^[465] or ‘adding’^[466] of a term or a requirement in respect of which the contract is silent, and therefore operates as an ad hoc gap-filler,^[467] namely filling up identified interstices in the express clauses of the contractual document.^[468] Compared with construction, implication into a document runs a greater risk of violating the cardinal principle that judges have no right to make or improve the parties' contract. For these reasons, the court should only exercise this extraordinary power if the proposed term, satisfies very strict criteria.

5.23 As well as possibly implying a term by custom, it is conceivable that a term may be implied ‘in fact' into a particular letter of credit on a ‘one-off' basis,^[469] provided that the implication is necessary to give business efficacy to the credit.^[470] When the issue concerns whether to imply a term into the UCP, as in Fortis Bank, the issue concerns whether it is necessary to imply a term ‘in law' into a whole category of contracts. In this situation, implication is ap­proached differently, involving wider considerations, such as the overriding objective of the UCP and the standard of practice expected of banks in the documentary credit community and the reasonable expectations of experienced practitioners in the marketplace. Given the need for such implication to be ‘necessary', the misgivings articulated in Fortis Bank about implying terms into the UCP can hardly be justified. A court applying English law to the UCP should encounter little difficulty if it pays proper regard to the above principles.

C.   Treatment of Expert Testimony

5.24 An important yardstick for determining the conformity of documents presented for pay­ment under a letter of credit is ‘international standard banking practice’. This requirement first appeared in article 13(a) of the 1993 UCP Revision (UCP 500), which provided that the compliance of documents, on their face, with the terms and conditions of the credit, ‘shall be determined by international standard banking practice as reflected in these Articles’ This requirement attracted widespread controversy, generating significant uncertainty in the trade-finance community. The choice of words in article 13(a) was generally, and rightly, considered unwise, seeing that the UCP cannot seriously profess to define ‘international standard banking practice' exhaustively. The concept has now been suitably expressed as part of the definition of ‘complying presentation' in article 2 of the UCP 600. To assist ap­propriate understanding of ‘international standard banking practice', there exists a set of ICC Banking Commission guidelines, the ‘ISBP’^[471] Unfortunately, the current experience suggests that the ISBP's precepts only provide a limited helping hand to document-checkers examining a documentary presentation to determine its regularity; partly because, no doubt owing to resource and budget constraints, the ISBP's content was not the product of an in-depth survey of documentary credit practices currently prevalent among banks in different regions and trade finance centres around the world. Accordingly, the ISBP does

not necessarily reflect a universal consensus regarding international banking practice, al­beit that the ISBP was an initiative commendably intended to explain the workings of cer­tain requirements articulated in the UCP.

5.25

5.26

Nevertheless, Andrias J, delivering the maj ority judgment, affirmed that the relevant banking usages and practices are embodied in the UCP and that the court, rather than the expert witness, is the sole determinant of compliance with that code. Their Honours in effect sub­stituted their own opinion of what counts as a proper document in international standard banking practice for the thirty years of experience possessed by the credit applicant’s ex­pert witness. Professor Byrne lamented this type of undesirable substitution by pointing out that ‘[j]udges deceive themselves if they think that their legal training qualifies them to understand the UCP without resort to expert guidance’.^[474] The principal difficulty with the majority approach in Blonder stems from their characterisation of ‘international standard banking practice’ as a trade usage that is exclusively articulated in the UCP, so that the ex­pert testimony in that case was an attempt to ‘usurp [the court’s] function’ of determining the bank’s observance of relevant banking practice. In effect, their Honours seem to have been misled by the wording of article 13(a) of the UCP 500 into thinking that ‘international standard banking practice’ cannot be determined beyond the four corners of that code. On the other hand, their Honours inexcusably failed to give any proper meaning to the crit­ical requirement in section 5-108(e) of revised article 5, which also applied on the facts, that the ‘court shall offer the parties a reasonable opportunity to present evidence of [an alleged] standard practice’ A knee-j erk rej ection of unchallenged expert testimony signifies non-adherence to section 5-108(e) and represents a regrettable error. It is suggested that expert evidence concerning a party’s compliance or otherwise with ‘international standard banking practice’, or as to the meaning of a UCP provision, should normally receive careful judicial consideration and be accepted by the court, unless to do so would be inconsistent with the fundamental principles underlying documentary credits. If rival expert evidence is adduced, then whichever testimony appears more compelling, considering the specific necessities of the trade-finance facility, is entitled to judicial recognition and enforcement.

5.27 Putting aside the court’s problematic approach to the expert evidence in Blonder, it is sub­mitted that the bill of lading in that case was non-conformity as a matter of legal principle. A bill of lading is either a negotiable bill^[475] (whether a bearer or order bill) or a non- negotiable or straight bill. Both are documents of title to the goods mentioned therein and they cus­tomarily contain a series of numbered boxes on their front page.^[476] Negotiability of a bill of lading often depends primarily on the form of the typewritten entries in the information box headed ‘Consignee’ The relevant information in most negotiable bills of lading consists of a specific name followed by the time-honoured words ‘or order’ Variations may have the wording ‘to order’ or ‘order or assigns’. By contrast, non-negotiable bill of lading has the name of the consignee alone, without adding such words. The information box under con­sideration performs yet another important function: it enables the carrier to identify the person to whom the goods are deliverable and makes it possible for the named consignee to use the document as evidence of his entitlement to delivery of the cargo at the port of des­tination, or as security for an advance. A major drawback of the straight bill of lading lies in its inability to be transferred by endorsement and delivery to a sub-buyer in a string of sub-sales or some other third party. For this reason, a presenting beneficiary usually has no discretion over the form of the bill of lading to be tendered to the bank for payment. There

is a strong presumption in the UCP^[477] that a stipulation in a credit requiring presentation of a bill of lading signifies a negotiable bill of lading (termed an ‘ocean bill' in previous edi­tions of the UCP). Accordingly, presentation of a non-negotiable bill would not conform to the UCP and would be at variance with the credit's terms.^[478] On the basis of these consid­erations and the expert evidence, what the issuing bank honoured in Blonder and what the buyer was requested to accept belonged to none of the established classes of bill of lading, as no consignee was indicated in the ‘bills of lading' which the bank honoured. Separately, the inspection certificate appeared to state a port of loading (Leon, Nicaragua) that was at odds with the letter of credits explicit requirement of ‘1 copy of bill of lading evidencing freight prepaid and shipment from Corinto Port, Nicaragua to Rotterdam, Netherlands'. No document-checker acting with reasonable care and diligence ought to have accepted such a bill of lading or inspection certificate, and it was arguably wrong that the credit ap­plicant in Blonder be obliged to reimburse the issuing bank in such circumstances. Any suggestion that the reference to ‘substantial compliance' in the reimbursement arrangement effectively relieved the issuing bank of its obligation to check the tendered documents with reasonable care should be rejected; if the parties had intended those words to have such an exclusionary effect, then long-established principles instruct that clearer and more precise wording was required to achieve that result.

5.28

Slightly different problems, but with much the same significance, arose in Mago International LLC v LHB Internationale Handelsbank AG.^[479] The beneficiary of a standby letter of credit incorporating the UCP 600 sought to obtain payment for large consignments of poultry, beef, and other meat products that had been shipped to buyers in Kosovo. To that end, the beneficiary presented a set of shipping documents to LHB, the confirming bank, in New York a couple of days prior to the credit's expiry. As is customary, the credit was issued on a SWIFT format and Field 46A called for a ‘photocopy of B/L (bill of lading) evidencing shipment of the goods to the (credit) applicant’. Among the tendered documents was a copy of an unsigned bill of lading. The confirming bank rejected that document on the ground that the credit and the UCP required a copy of a signed bill of lading. Subsequently, the seller managed to procure the requisite copy of the signed bill and re- tendered the documents, to­gether with various sight drafts, but by that time the credit had lapsed; payment was refused. The lateness of its final presentation left the seller with no choice, but to insist that its initial presentation (including the copy of the unsigned bill of lading) constituted a complying presentation. Nevertheless, McMahon J in the Southern District Court of New York ruled that, to conform to Field 46A, the requisite shipping document had to be a photocopy of a signed original bill of lading, rather than the copy of an unsigned, non-negotiable bill of lading that was actually presented. The Court of Appeal for the Second Circuit agreed with the trial judge.^[480]

5.29 The ICC Banking Commission’s ‘ISBP’ guidelines under the UCP 600, which were designed to assist document-checkers in deciding whether a documentary presentation accords with ‘international standard banking practice, might have caused both courts in Mago a compli­cated dilemma, but their Honours fortunately took no serious notice of these. The version of the ISBP applicable at the time that the documentary examination in Mago provided that ‘[w]here a credit allows for the presentation of a copy transport document rather than an original, the credit must explicitly state the details to be shown. Where copies (non- negotiable) are presented, they need not evidence signature, dates, etc.’^[481] This ill-conceived provision unfortunately misinformed the seller about his rights and caused him to advance the wholly unsustainable argument that the initially presented (unsigned) copy document was a complying bill of lading. To satisfy a credit calling for a copy of a bill of lading, the relevant document must be a photocopy of a bill of lading that itself complies with the re­quirements for valid transport documents in the UCP 600. According to article 20(a)(i) of the UCP 600, signature is an essential feature of bills of lading. In particular, the signature on the bill of lading ‘must appear to indicate the name of the carrier and be signed by the carrier or a named agent for or on behalf of the carrier, or the master or a named agent for or on behalf of the master’.^[482] A carrier’s, master’s, or agent’s signature ‘must be identified as that of the carrier, master or agent’.href="#_ftn483" name="_ftnref483" title="">^[483] Moreover, an agent’s signature ‘must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master’.^[484] In mari­time practice,^[485] the box headed ‘signature’ on the shipping document (usually in the lower part of the document’s front page) will be signed (upon receipt of the goods for shipment or the completion of the shipment) by means of a handwritten name or a manually applied stamp or symbol. The signature box identifies the carrier^[486] and serves two crucial commer­cial purposes: to identify the party who witnessed the shipment of the goods or their receipt for shipment in a specified condition; and, more crucially, to establish the party who has undertaken to perform the carriage contract from the designated port of loading to a stated port of discharge, and who accordingly bears contractual responsibility for loss of, damage to, or delay in carrying, the goods to the stipulated destination. An unsigned original bill of lading effectively means that the cargo owner will have no carrier to sue under the bill in the event of, for instance, misdelivery or mishandling of the goods; a photocopy of such a bill should afford the cargo owner no different legal protection than the original document. In contrast, if the bill of lading is properly signed, a copy of that signed bill in the cargo owner’s hands would provide him as ‘holder’ with certain proprietary and contractual rights. The courts in Mago were, therefore, correct to brush aside counsel’s suggestion for the seller that the presentee bank should have accepted copy of the unsigned bill of lading.

An important salutary lesson from the Mago litigation is that credit-litigants should tread 5.30 carefully when relying on the ISBP and related ICC publications to contest the validity of a refusal of their documents. Banks and beneficiaries under letters of credit should only exceptionally regard the guidance offered by such material as furnishing a foolproof in­terpretation of what amounts to a conforming document, especially for the purpose of de­ciding whether to initiate or defend a claim asserting the compliance or non-compliance of a documentary presentation.

D.                Credit Stipulations Tying Payment to Performance of the

Underlying Contract

Article 4(a) of the UCP 600 articulates the fundamental autonomy doctrine by providing 5.31 that ‘[a] credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit.’^[487] The separation between the credit and the underlying contract is augmented in articles 4(b) and 5 of the UCP 600. Article 5 makes clear that the letter of credit is a document-based transaction: ‘Banks deal with documents and not with goods, services or performance to which the documents may relate.’^[488] This provision reflects the common law understanding of the bank’s role dating back to 1922,^[489] and differs materially from the corresponding article 4 of the UCP 500, in that article 5 of the UCP 600 replaces the word ‘parties’ with ‘banks’. That replacement is justified and com­mendable. As a practical matter, in letter of credit operations, neither the credit applicant/ buyer nor the beneficiary/seller can be accurately regarded as dealing only in documents.^[490] In the context of a credit covering a shipment of goods, for example, upon the discovery of a discrepancy in the documents, the issuing bank will often refer the matter to the buyer to waive the discrepancy. The bank has no general contractual obligation to do so,^[491] but instead consults with the buyer as a matter of standard banking practice when handling ap­parently irregular documents. Although this practice is recognised in the UCP 600,^[492] the bank’s consultation with the buyer is often driven by commercial considerations, not least the desire to strengthen banking relationship with its customers. In deciding whether or not

to waive a non-conforming presentation, the buyer typically looks at the nature and materi­ality of the irregularity in the documents, as well as any additional information concerning the conformity of the goods with the sales contract. Similarly, the seller's performance of the sales contract naturally involves his dealing in the goods forming the subject-matter of that contract, as well as the shipping documents, which, if they involve a bill of lading, will repre­sent the goods and serve as a key to the warehouse in which the consignment are stored.^[493] It follows that neither buyer nor seller deals solely with documents.

5.32 The autonomy doctrine, therefore, primarily seeks to prevent the banks becoming em­broiled in disputes between the credit applicant and the beneficiary over performance or non-performance of obligations embodied in the sales contract underlying the credit.^[494] The corollary is that the beneficiary's right to payment under the credit depends absolutely on his presentation of the documents stipulated in the credit. The autonomy principle also forbids the courts from looking at the contractual arrangements underlying the credit when judging compliance of the documents with the terms of the credit.^[495] Consistently with these propositions, article 4(b) of the UCP 600 requires an issuing bank to ‘discourage any attempt by the applicant to include, as an integral part of the credit, copies of the under­lying contract, proforma invoice and the like’.^[496] As banks deal only in documents, however, what is the position where a credit nevertheless contains a stipulation conditioning pay­ment upon the proper performance of the underlying contract? Can a nominated bank that has honoured a set of documents by reference to article 4(b) claim to be in no way bound by the credit's reference to the due performance of the underlying contract? Conversely, would the issuing bank be entitled to refuse reimbursement or payment by insisting that the docu­mentary presentation must conform to the express clause outlawed under article 4(b)?

5.33 Considered from the perspective of article 4(b) of the UCP 600, it is certainly arguable that the reference in a credit to the underlying transaction ought to be treated as straightfor­wardly invalid, or alternatively, that the relevant clause might constitute a non- documentary condition and therefore liable to suffer the fate reserved for such eventuality pursuant to article 14(h) of the UCP 600 - the subarticle provides that ‘[i]f a credit contains a condi­tion without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it’^[497] The former approach was adopted in Pringle-Associated Mortgage Corp v Southern National Bank of Hattiesburg.^[498] The beneficiary was to draw upon the credit ‘only after the credit extended under (a stated) First Mississippi National Bank letter of credit in the amount of... has been exhausted’. The principal issue concerned the effect of the reference in the credit to another contract, and whether this had expressed a condition for payment. In line with the autonomy doctrine,

the Court of Appeal for the Fifth Circuit intimated that general references to an underlying sale contract in a credit are surplusage and should not be considered in deciding whether the beneficiary has tendered documents conforming to the letter of credit's terms. Ultimately, the court in Pringle-Associated ruled in favour of the beneficiary, who in the event filed an affidavit attesting that the funds available under the Mississippi bank letter of credit had in fact been withdrawn, as required by the credit in dispute. The bank's dishonour of the pres­entation was thus wrongful and liable in damages to the beneficiary. That said, it always re­mains possible for a credit explicitly to make compliance with another contract a condition for honouring the drafts and documents presented to the bank. An example is provided by the District Court of Utah in Newvector Communications Inc v Union Bank.^[499] At issue was a letter of credit expressed ‘available by sight draft(s) as per Resellers Agreement on past due accounts'. Thomas Greene J stated that the reference to the ‘Resellers Agreement constituted a sufficiently clear documentary requirement, or a sufficiently clear non-documentary requirement, which in either case would require presentation of the document for exam­ination of the written representations contained therein'.^[500] In the result, the bank was en­titled to decline payment under the credit unless the beneficiary produced the referenced ‘Resellers Agreement'.^[501]

5.34

An alternative objection to a credit that references the performance of the underlying con­tract as a precondition for payment is that such a payment instrument should not be char­acterised as a letter of credit at all, since it makes payment dependent upon the existence of facts, rather than documents evidencing the existence of those facts. Wichita Eagle & Beacon Publishing Co v Pacific National Bank^[502] instructs that an instrument that labels itself as a letter of credit may cease to be so, if it ‘strays too far from the basic purpose of letters of credit', namely an assurance of payment upon presentation of specified documents. Such an instrument may, instead, be characterised as an ordinary contract of guarantee that obliges the bank-issuer to pay if the beneficiary establishes the actual existence of the stipulated condition (usually a breach of the underlying contract). The instrument in Wichita prom­ised payment of a stated amount in the event of a named lessee failing to perform the terms of the lease and neglecting to remedy that default. The Court of Appeal for the Ninth Circuit denied that the document was a letter of credit because its substantive provisions required the issuing bank to deal not simply in documents alone, but in facts relating to the perform­ance of the underlying lease. This was inconsistent with the autonomy principle: the bank is a paymaster that must determine whether or not a documentary presentation is con­forming within a short five-day window,^[503] rather than a self-appointed adjudicator over disputes arising out of the underlying transaction.

5.35

Nevertheless, Wichita probably no longer offers, if it ever did, a reliable guide as to how the courts would nowadays deal with the type of clause that might have traditionally disqualified an instrument from being a letter of credit. In the several decades that have elapsed since that decision, the law in the US,^[504] England, and Singapore pertaining to the construction of non-documentary clauses in letters of credit has not stood still; but, on the contrary, progressed considerably. Just as the UCP 600 s provisions are to be interpreted in an international spirit by reference to generally accepted principles and free from the rigid constraints of domestic precedents, so too the express clauses in letters of credit should be interpreted in a manner that promotes uniformity.^[505] The courts increasingly appreciate that express clauses in letters of credit are not drafted in the classic mould of Chancery soli­citors, but habitually by clerks in a bank's trade finance department with little or no training in the niceties of legal drafting. When a court is asked to interpret inapt language or provi­sions in letters of credit, it should strive to adopt a construction that makes the performance of the bank's payment or reimbursement undertaking dependent upon the presentation of complying documents to the bank. In this way, a non-documentary stipulation in a credit is construed as calling for any document that would reasonably enable the document-checker to determine whether or not the particular stipulation had been fulfilled.

5.36 The English case of Astro Exito Navegacion SA v Chase Manhattan Bank (‘Astro Exito Navegacion)^[506] provides an authoritative illustration of the proper method for interpreting non-documentary clauses in letters of credit. Taiwanese buyers agreed to purchase from Panamanian sellers a Greek vessel, The Messiniaki Tolmi, for delivery at Kaohsiung harbour, and accordingly furnished the sellers with a letter of credit, confirmed by Chase Manhattan Bank, London (‘Chase'), to secure payment of the price. The buyers intended to dismantle the vessel and recycle her parts on sale to sub-buyers. It was thus vital that the vessel be safe for ‘hot work' upon its arrival. To this end, the credit stipulated for presentation of ‘a valid gas free certificate approved by the Taiwan authorities'. A certificate tendered to Chase had an indecipherable imprint of an approval stamp. Chase rejected the certificate and re­fused payment, drawing the beneficiary's attention to the deficiency. No difficulty arose with the word ‘valid' in the credit: at the very least, this requirement signifies that a docu­ment purporting to be a gas-free certificate should carry a recent date of issue. The parties (namely, the banks, buyers, and sellers) equally had little problem about what ‘Taiwan au­thorities' denoted: they understood that term to mean the Harbour Bureau at Kaohsiung. The main dispute concerned the need for the certificate to be ‘approved' and whether the confirming bank (pursuant to its obligation towards the issuing bank) was entitled to de­mand from the presenting beneficiary documentary evidence of the Harbour Bureau's ap­proval of the certificate. If so, the issue arose as to what type evidence would suffice.

5.37 Both Leggatt J^[507] and the Court of Appeal (Sir Nicolas Browne-Wilkinson VC, Dillon, and Lloyd L JJ) in Astro Exito Navegacion^[508] concluded that the confirming bank was entitled to demand documentary confirmation of the certificate's approval by the relevant authority. In coming to this conclusion, their Lordships found valuable support in Banque de UIndochine et de Suez SA v JHRayner (MincingLane) Ltd (JHRayner'),¹2⁴lang=EN-US> which had been decided sev­eral years earlier. In JH Rayner, the letter of credit stated that shipment was to be effected on a ‘Conference Line' vessel, but the bills of lading and other documents presented under the credit did not evidence in a reasonably clear manner that the vessel used for shipment of the goods belonged to a member of the relevant shipping conference. Accordingly, the bank requested that the beneficiary provide documents evidencing that the shipment had in fact been made on the type of vessel specified in the credit. Parker J accepted that the bank's re­quest was justified. His Lordship said:

[S]ince the credit expressly stipulated for shipment on... ‘a Conference Line Vessel' the [banks] were both entitled and obliged to ensure that the stipulation was complied with. No specific documentary proof was called for by the credit but, since parties to documen­tary credits deal only in documents, the bank[s] were... entitled to insist upon, and the [beneficiaries] were obliged to provide, reasonable documentary proof. The request for a certificate was... a reasonable requirement and accordingly the bank[s] were entitled to regard its absence as a valid ground for refusing payment even if, as was in fact the case, the vessel was a Conference Line vessel.^{[509] [510]}

5.38

All eight judges in both English cases substantially recognised that in documentary credit operations, banks deal solely with documents and have no ready means themselves of establishing the beneficiary's compliance with an explicit stipulation in a credit, other than by way of documentary evidence provided by the beneficiary. At the same time, their Lordships also appreciated the potential commercial consequences of denying any effect to such a non-documentary clause simply because it omitted, whether accidentally or care­lessly, to specify the documents required to evidence fulfilment of its conditions. There can be no doubt as to the vessel purchaser's objective in insisting that the credit in Astro Exito Navegacion contain a stipulation that the Harbour Bureau approve the required gas certificate: that approval was intended to provide independent confirmation of the vessel's gas-free status in readiness for ‘hot work'. Accordingly, a certificate without the necessary approval would undermine the buyer's fundamental purpose in entering the transaction in the first place. Thus, if the Court of Appeal in Astro Exito Navegacion had not permitted the bank to probe the contents of the presented documents (or alternatively if the court had refused to give effect to the non-documentary condition at all), then the buyer in that case risked having to reimburse the bank for accepting a certificate that the Harbour Bureau would not have considered satisfactory and would therefore have rejected. Clearly, the com­mercial justification for the law recognising a bank's entitlement to insist upon presenta­tion of a reasonable documentary evidence showing compliance with a non-documentary clause is to protect the buyer from the potential losses that it might otherwise suffer.

5.39

The issue does not, however, rest there. Astro Exito Navegacion, JHRayner, and the US cases were decided under the UCP 290, which was introduced in 1974, whereas article 14(h) of the UCP 600 now instructs banks in a mandatory tone to ‘disregard' any credit term that ‘contains a condition without stipulating the document to indicate compliance with the condition’.^[511] On its face, the UCP 600 would appear to reverse the effect of those earlier decisions. In Korea Exchange Bank v Standard Chartered Bank (‘Korea Exchange Bank’),^[512] Andrew Ang J in the Singapore High Court demonstrated that this is not necessarily the case, since an express non-documentary clause would effectively create an irreconcilable inconsistency with article 14(h) of the UCP 600 with the result that the latter term, which was only incorporated by reference, should give way to the credit's express terms.^[513] Such reasoning might be potentially problematic, however, in light of article 1 of the UCP 600, which states that the UCPs provisions only apply to a credit that incorporates them ‘unless expressly modified or excluded by the credit’^[514] In Korea Exchange Bank, however, Andrew Ang J clarified the meaning of the identical phrase in article 1 of the UCP 500.^[515] In that regard, his Honour indicated that the words ‘unless expressly modified or excluded by the credit’ are not to be ‘interpreted so stringently as to mean that only an express exclusion of any particular provision of the UCP... will have effect. It is enough if an express pro­vision in the [credit] stipulates a requirement which is clearly at odds with a provision in the UCP... in circumstances where an implication may be drawn that the intention was to exclude the operation of the UCP provision in question. In such an event, the express pro­vision will override the provision of the UCP incorporated by reference’^[516] On that basis, then, notwithstanding the literal effect of article 1 of the UCP 600, a non-documentary con­dition in a letter of credit inherently excludes renders nugatory the attempt to invalidate that condition in article 14(h) of the UCP 600. Hence, the latter subarticle has effectively become something of a dead-letter. Nor would it be justifiable, as a matter of current inter­national standard banking practice, to accord the prescriptive language in article 14(h) a literal meaning. According to the ISPB, ‘data contained in a stipulated document are not to be in conflict with a non-documentary condition’^[517] If the true import of article 14(h) of the UCP 600 is that non-documentary conditions are indeed deemed not to be stated in the credit, so that no account should be taken of them during the document-examining process, why should banks also ensure the consistency of the presented documents with such non-documentary conditions by virtue of the ISBP? The apparent inconsistency of approach between article 14 (h) of the UCP and ISBP is regrettable. It therefore deserves pointing out that current banking practice reflected in the latter code and cases such as Astro Exito Navegacion make clear that a non-documentary condition or stipulation in a letter of credit normally requires presentation of a document reasonably showing its satis­faction before a tendered set of documents under the credit can be accepted and honoured.

5.40 It is submitted that the same conclusion applies to article 14(g) of the UCP 600, which pro­vides that a ‘document presented but not required by the credit will be disregarded and may be returned to the presenter’^[518] As considered above, when interpreting this provision a court should consider the meaning that the language would convey to a reasonable person

EFFECT OF A DRAFT DRAWN ON CREDIT APPLICANT 95

having all the relevant background knowledge that was reasonably available to the credit applicant, issuing bank (including any nominated bank participating in the transaction) and the beneficiary at the time of the credit's issuance. In essence, the reasonable person is deemed to understand the operation of the letter of credit market, standard banking prac­tice as embodied in the UCP and ISBP, and the legitimate expectations of different market participants. In the ordinary runs of events in credit operations, the reasonable merchant or banker would know that data in a tendered document ‘must not conflict with' data in that document or in any other tendered stipulated document.^[519] Critically, such a person would also understand that a presented unstipulated document that helps to clarify an apparent contradiction between tendered stipulated documents (and accordingly removes the osten­sible documentary conflict) is not within the category of unstipulated documents liable to be disregarded under article 14(g).^[520] Rather, that provision should be interpreted as pro­hibiting unstipulated documents that prove to be unhelpful in resolving such conflicts.

5.41

Upon their proper construction, then, the reach of both articles 14(g) and (h) of the UCP 600 is far more limited than their literal interpretation might at first suggest. Presentee banks and presenting parties would be well-advised to apply the subarticles in terms which accord due consideration to their substance as discussed in the foregoing.

III.