Jurisdiction - Singapore
Reports and Analysis
Singapore – A Bank’s Duty To Examine Documents Provided For Letters Of Credit.

16 July, 2014

 

 

Introduction


Letters of credit are a common financial instrument, particularly in the arena of international trade. While letters of credit serve to grant greater security and efficiency to the payment process, a certain level of risk is transferred to the issuing bank. What then are the duties of a bank with respect to the examination of documents before making payment under a letter of credit? This was the question faced by the Singapore High Court in the case of Abani Trading Pte Ltd v BNP Paribas [2014] SGHC 111.


The case involved a shipping transaction, with a letter of credit issued by the Defendant bank on the instructions of the Plaintiff. The Defendant eventually made payment upon the receipt of the necessary documents, including a bill of lading. However, the Plaintiff alleged that the bill of lading was not correctly issued and thus should not have been accepted, and that the Defendant had thus breached its duty by failing to exercise sufficient care in examining the relevant documentation.


The High Court held in favour of the Defendant, finding that it had not breached its duty or the terms of the letter of credit. In doing so, the Court focused on the principle of autonomy, highlighting that issuing banks are not required to look beyond the documents presented under the letter of credit, and are generally not obliged to make further investigations into the underlying contract.

 

Brief Facts


The Plaintiff company had purchased a consignment of metal bars from a supplier (the “Supplier”). Pursuant to this agreement, the Defendant applied to the Defendant bank for a letter of credit to be issued in favour of the Supplier. The terms of the letter of credit included the following:

 

(i) The applicable rules were the Uniform Customs and Practice for Documentary Credits 2007 (“UCP 600”).


(ii) The documents required included a full set of clean on board bill of lading issued by the carrier or agent; a forwarder bill would not be acceptable.


On 12 January 2009, the Defendant received the relevant documents from the negotiating bank, including a bill of lading dated signed by a freight company (“Caretta”) as agent of the carrier. On this basis, the Defendant debited the Plaintiff’s account on 16 January 2009.


However, the Plaintiff alleged that the Defendant should not have accepted Caretta’s bill of lading as:


(i) It was not issued by the carrier or its agent, as required, but by a freight forwarder; and


(ii) It was not a “true” bill of lading, as the “true” bill of lading was issued later by the actual agent of the carrier.


Holding Of The High Court


The High Court rejected the Plaintiff’s claim that the Defendant had breached its duty or the terms of the letter of credit and had failed to exercise due care in examining the relevant documentation before making payment. It upheld the District Judge’s finding that Caretta’s bill of lading was a conforming document, and that the Defendant was not required to go further and act on any constructive knowledge or information supplied by the Plaintiff.


Duty Of Issuing Bank


The main issue in this case was the extent of an issuing bank’s duty to examine documents before making payment under a letter of credit. Is the bank required to look beyond the presented documents and make its own investigations based on extrinsic knowledge?


The High Court seemed to gravitate against such a position, instead endorsing the principle of autonomy. This principle states that a letter of credit is an independent contract, unaffected by any irregularities in the underlying agreement. Therefore, the bank is obliged to make payment under a letter of credit once the documents presented – on their face – conform with the requirements of the credit, even if any breach of the underlying agreement is alleged.

 

(i) A key implication of this principle is that banks are confined to dealing with the documents that have been presented to them when determining compliance with the conditions of the letter of credit.


(ii) A second key implication is that banks do not have to take into account matters or circumstances that are extraneous to the documents. Banks are generally not required to carry on investigations into any allegations made.


This position is in keeping with the UCP 600, which states that the credit is “a separate transaction from the sale or other contract on which it may be based”, and that examination of documents only requires a determination, “on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation”.


The reason for this strict view of a bank’s duties is that any obligation to investigate would alter the commercial character of the letter of credit from one of payment on demand to one of payment only after being convinced to pay, which would disrupt the smooth function of international trading and trade finance. Further, a bank often would not possess the necessary tools or expertise to investigate or inquire into the truth of the representations which appear on the face of the document.


Application


In this case, it was undisputed that the Defendant had received a bill of lading, which was duly signed by Caretta as agent for the carrier. However, the Plaintiff argued that this was not a “true” bill of lading as the agent for the carrier was a company known as CMA CGM, and that Caretta was only a freight forwarder.


The Court held that the Defendant was not required to investigate whether or not Caretta was in fact the agent for the carrier. As Caretta had signed as agent, the bill of lading was on its face a complying document, and the Defendant was thus obliged to make payment under the letter of credit.


The Plaintiff then submitted that the Defendant was required to exercise its judgment, banking experience, and general knowledge in examining the documents for compliance. The Plaintiff alleged that the Defendant ought to have known that Caretta was a freight forwarder from its industry reputation and from previous emails from the Plaintiff, and that CMA CGM was the carrier’s agent from previous transactions involving the Plaintiff, the Defendant, and the same carrier.

 

However, the Court rejected the Plaintiff’s interpretation of the Defendant’s duty as going too far.


(i) The duty of a bank to use its judgment, banking experience and general knowledge means only that the bank should exercise a degree of commercial common sense when examining documents for conformity.


(ii) A bank is not required to check the veracity of representations on the document, or to check the documents against those presented in previous similar transactions. Therefore, the previous transactions with the Plaintiff and the carrier were irrelevant.


(iii) In certain cases, there may be facts which a bank is expected to know when examining documents. However, whether or not Caretta was the carrier’s agent does not fall within this category of facts.


(iv) In any event, even though Caretta was a freight forwarder, it was entirely possible that it was acting in the capacity of agent to the carrier.


Therefore, the Defendant was not required to go beyond the documents presented to ascertain the veracity of their contents. As such, the Defendant had not breached its duty or the terms of the letter of credit.

Concluding Words


This decision demonstrates that the duty of investigation of banks issuing letters of credit is strictly limited. Issuing banks are only required to ensure that the presented documents are in order, and are generally not obliged to perform further investigations into the veracity of the statements in the documents. The process of international trade is often dependent upon the efficient operation of credit mechanisms, and the maintenance of this efficiency is one of the reasons why banks are not saddled with onerous investigation obligations when processing payment for letters of credit.


Of course, the principle of autonomy is not absolute. Banks are not mere proof-readers; they are required to exercise their own judgment and general banking experience to identify obvious fallacies within the documents. Nonetheless, it should be noted that banks are only expected to have extrinsic knowledge of facts which are evident in the circumstances, and not of any specific insider or background knowledge.

 

Rajah & Tann

 

For further information, please contact:

 

Kian Sing Toh, Partner, Rajah & Tann

kian.sing.toh@rajahtann.com


Jonathan Wong, Rajah & Tann
jonathan.wong@rajahtann.com

 

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