IIIn This Issue 18 FEATURE · 2020. 3. 5. · Professor Katsuto Iida (retired, Tezukayama Univ.,...

Published in partnership with BAFT

Nov/Dec 2019Volume 23, Number 10

18 FEATURE

NEW YORK COURT ADDRESSES

DEFENSES AND CLAIMS REGARDING

SEVERAL STANDBY LCS

A set of recent New York state court

decisions addressed fraud defenses raised

by the applicant and issuer against 11 LC

beneficiaries. In his commentary on the

cases, James G. Barnes examines the court’s

application of specific sections of New

York’s adoption of Uniform Commercial

Code (NYUCC) Article 5 (Letters of Credit)

including those pertaining to issuer’s rights

and obligations (5-108), fraud (5-109), and

remedies (5-111). The commentary is

partially in response to the court’s decision

to incorporate its summary disposition of

applicant and issuer claims against all 11

beneficiaries to that of its separate

summary disposition of wrongful dishonor

claims brought by certain beneficiaries

against the issuer. Following Barnes’

commentary are summaries of two of the

court decisions.

IIIIIn This Issue...

■■■■■ 3 UPDATES: Algerian ImportPolicies Raising Concerns; LCImplications of Bank Office Closure orRelocation; A Lawyer’s Point of View;China Construction Bank Amps Up ItsBlockchain Trade Platform; HSBC TakesFirst Step in Advancing Trade FinanceAPIs; Trade Technologies Completes Digital LCPresentations in Europe; India Releases Report onFintech-Related Issues; Correction: eB/Ls; OceanShippers Pursuing Non-Bank Alternatives forFinancing; Deutsche Bank Severs CorrespondentBanking Relationships in Malta, Lithuania; LC-RelatedFDIC Statement of Policy Rescinded; Lorenzo Retires;Austrian Bank Loses Banking License; TechnologyUpdate; International Updates; Ricci Retires

■■■■■ 11 LITIGATION DIGEST:■■■■■ Yuchai Dongte Special Purpose Automobile Co.

v. Suisse Credit Capital (2009) Ltd.■■■■■ Mamancochet Mining Ltd.

v. Aegis Managing Agency Ltd.

■■■■■ 26 ARTICLES:■■■■■ “Comparing Receivables Purchase withDocumentary Credit Financing” by YAP Tat Yeen■■■■■ “The Reasons and Rationale for Producing theBAFT Guidance Paper for Automatic Extensions”by Kristine SIEBEL and Mary Ann MCCARTY■■■■■ “Incoterms 2020 & Letters of Credits – A New

FCA Option” by Pavel ANDRLE■■■■■ “Preclusion Under ICC Rules: AChinese Perspective” by HEI Zuqing

■■■■■ 52 LC STATISTICS:■■■■■ US Branches of Non-US Banks(3Q19)

■■■■■ 55 CONFERENCE REPORTS:■■■■■ 2019 Americas Standby & Guarantee Forum■■■■■ 2019 Americas LC Law Summit

■■■■■ 61 SCAM SURVEY

2 Documentary Credit World ■ November/December 2019

Editorial Advisory Board

Lena AnderssonGlobal Product SpecialistSEB (Sweden)

Pavel AndrleTrade Finance ConsultantCzech Republic

Hasan Apaydin (Turkey)

Michael Evan Avidon, PartnerMoses & Singer LLP (NY)

Buddy BakerVP, Investment Banking DivisionGoldman, Sachs & Co. (Chicago)

James G. Barnes*Baker McKenzie (Chicago)

Abdulkader BazaraTrade Finance Structuring HeadAbu Dhabi Islamic Bank (Abu Dhabi)

Jack ChanHong Kong

Dr. Alan Davidson, Senior LecturerTC Beirne School of LawUniversity of Queensland (Australia)

Roger D. Fayers, LLBBarrister (UK); Department of Trade& Industry, Soliciter’s Dept. (retired)

Clyde Fletcher, Documentation ManagerFonterra Limited

Xiang GaoDean & Professor of Law, China Univ.of Political Science & Law (Beijing)

Paula GreavesConsultantSeattle, Washington

A.T.M. Nesarul HoqueVice President,Mutual Trust Bank (Bangladesh)

Professor Katsuto Iida(retired, Tezukayama Univ., Japan)

Dean Rafael Illescas OrtizUniversity Carlos III de Madrid (Spain)

Chris JenkinsThailand

Jin Saibo, PartnerBeijing Jincheng Tongda & NealLaw Firm (China)

Carter Klein, PartnerJenner & Block (Chicago)

Michelle Kelly-LouwProfessor in Banking LawUniversity of South Africa

*Denotes Editorial Board member

Dr. Karl MarxenOstfalia University of AppliedSciences (Germany)

Khalil MatarAssistant General ManagerAlinma Bank (Saudi Arabia)

David MeynellOwner, TradeLC Advisory

Neal MillardMusick, Peeler & Garrett LLPAdjunct Professor, USC Law School

K. NizardeenFIB (Dubai, UAE)

Vincent O’Brien, Technical Trade AdvisorChina Systems Corporation

Janis S. Penton, Assistant General CounselMUFG Union Bank, N.A.

Gabriel ShamTrade Finance ConsultantSingapore

Kim SindbergExecutive AdviserNordea Trade Finance (Denmark)

Donald R. Smith*President,Global Trade Advisory, Ltd.

Soh Chee Seng, Technical Consultant,Trade Finance Issues, the Associationof Banks in Singapore (Singapore)

Chang-Soon Thomas Song, First Expert,Trade and Services Department,KEB Hana Bank (Seoul)

Lorna K. StrongDeputy General CounselHSBC Global Trade & ReceivablesFinance (London)

Hugo VerschorenConsultant, goVer Trade TechnologiesBelgium

Jun XuDeputy General ManagerBank of China, Jiangsu Branch (China)

KK YeungHong Kong

Alexander Zelenov, DirectorBank for Foreign Economic Affairsof the USSR (Moscow)

Published by Documentary Credit World, Inc. ISSN 1520-0221. Copyright © 2019 by Documentary Credit World, Inc.All rights reserved. No part of this journal may be reproduced in any form, including microfilm, xerography orotherwise, or incorporated into any information retrieval system, without the written permission of the publisher.Single subscription price: $595 per year. Global license information available upon request. This publication is designedto provide accurate and authoritative information in regard to the subject matter covered. It is sold with theunderstanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legaladvice or other expert assistance is required, the service of a competent professional should be sought.

ocumentary Credit World (DCW) is published monthly by Documentary Credit World, Inc.

Opinions expressed in it do notnecessarily reflect the official positions ofthe publishers of DCW, its EditorialBoard, Editorial Advisory Board, or theorganizations with which they areassociated. Authors, editors, members ofDCW’s Editorial Board and EditorialAdvisory Board, and the institutions withwhich they are associated often areactively involved in the field as lawyers,advisers, parties, consultants, or expertwitnesses in many of the mattersaddressed in DCW. The publication oftenreflects and sometimes adopts theirviews. Notwithstanding positionsexpressed in DCW, every effort will bemade to publish differing viewpoints andcontributions expressing such views arewelcomed.

The support of the Journal ofInternational Commercial Lawis gratefully acknowledged.

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Documentary Credit World

20203 Goshen Road., No. 343

Gaithersburg, MD 20879 USA

phone: +1-301-330-1970

fax: +1-301-926-1265

e-mail: [email protected]

website: www.doccreditworld.com

FounderProfessor James E. Byrne

Contributing EditorsVincent MaulellaVincent O’BrienSoh Chee Seng

Executive EditorChristopher S. Byrnes

Correspondent EditorLisa V. Chin

Case EditorMatthew J. Kozakowski

Scam Survey EditorJacob A. Manning

DesignersMario Escalera, Christopher V. Sandler

Emeritus Board Members

DCW is grateful to prior members ofits Board and appreciates their pastservice. Emeritus Board Members arerecognized on the DCW website at:www.doccreditworld.com

November/December 2019 ■ Documentary Credit World 3

UPDAUPDAUPDAUPDAUPDATESTESTESTESTES

Algerian Import Policies Raising Concerns

P resently, Algerian regulations mandate that mobile phonesand certain electrical household products can only beimported into Algeria on a deferred payment basis of at

least 9 months and no more than 12 months. After 31 December2019, the deleterious rule will be extended to all goods importedinto the country, according to Algerian news site Interlignes.

In September 2019, Algeria’s Association of Banks and FinancialInstitutions (ABEF) released a letter to its members informingthem of new requirements for imports. The policies adopted alsostipulate that all imports into Algeria must be made using theIncoterms rule FOB; all other rules are prohibited.

Interlignes‘ reporting suggests that the current impact of theprovisions for the average Algerian is negligible, however seriousconcerns and consequences are emerging. The new regulationsare projected to cause substantial price increases for all goods.Major international shipping companies may be disinclined orunable to operate in the Algerian market if shipments must be ona “freight collect” basis. Additionally, the regulations provide thatthey will receive their freight charges and fees in Algerian Dinarsinstead of in US dollars or Euros. The FOB-price of the goods canbe paid in the currency of the contract concluded with the selleroutside Algeria (mostly US Dollars or Euros).

According to DCW sources, the representative of the EuropeanUnion in Algeria has sent a letter to the ABEF, expressing concernand asking the association to reconsider its decision. There is alsosome speculation that the regulations may have been formulatedwithout adequate consultation and might contravene existingtrade agreements between the EU and Algeria.

LC Implications of Bank Office Closure orLC Implications of Bank Office Closure orLC Implications of Bank Office Closure orLC Implications of Bank Office Closure orLC Implications of Bank Office Closure orRelocationRelocationRelocationRelocationRelocation

W hen a bank moves an office location, several measuresneed taken into account including how it managesdemands on outstanding standby letters of credit and

demand guarantees. One banker contacted by DCW shares thefollowing insights from experience.

When we closed an office and had to send all the work to

another office location, we pulled up our database of beneficiariesand account parties and sent each of them a letter announcing themove. The letter was carefully constructed by our legal area incollaboration with senior trade services staff.


For each beneficiary andaccount party, we sent theletter by courier so we couldkeep track of when each letterwas received and who signedfor it. We kept a copy of thedocumentation on file tomitigate risk of any partyclaiming that the bank had notnotified them of the relocationthus impeding their right todemand payment thereforethey were suing the bank.

This procedure also

provides us intelligence onthose automatic extensionstandbys on which thebeneficiary had moved andneglected to inform our bankof their move. The bank wouldthen follow up with theaccount party on location ofthe beneficiary as well as usingthe internet in attempting tofind beneficiary’s newlocation. This proceduremitigates the risk of sendingout a non-extension notice andhaving the notice returnedundeliverable in which casethe bank has the responsibilityof attempting to locate the beneficiary in order to deliver the non-extension notice.

If the bank, in the process of sending out its letters to beneficiaries, is able to identify those

beneficiaries that have moved with no forwarding address, then at least the bank will have on filedocumentary proof of their attempt to locate the beneficiary in the event that the beneficiary decidesto present a demand after the letter of credit had expired and the bank declines to pay.

Further on the matter of letters of credit with auto extension clauses, we pulled reports that listed

these types of LCs to make sure we sent the letter prior to its notice date to mitigate risk of theletter being received after a non extension notice had been sent, the beneficiary needed to demandpayment and we had moved. The beneficiary might use that as a good excuse to sue since they areunhappy with the account party and decided to also include the bank in its suit. We sent out abroadcast message to our SWIFT banks as well as sending the letter to our advising banks and banksthat we named as beneficiary.

Other Considerations: A Lawyer’s Point of View

US Uniform Commercial Code Article 5 (Letters ofCredit), and ICC rules that treat each branch as aseparate bank, make it awkward to treat branch

closure (with transfer of branch obligations to another branch) assomething that can be done without express consents from theaffected LC parties that would suffice for an LC amendment.And bank regulators limit options as well. Most LCs say nothinghelpful except those that incorporate ISP98 and its Rule 3.14b(Closure on a Business Day and Authorization of AnotherReasonable Place for Presentation) for relying on priorreasonable receipted notices.

Our experience is similar to that described here, i.e., thatbanks try to treat this as a notification matter (as if ISP98 Rule3.14 applied to all LCs to be “re-located”) and then deal with andwork out the problems that are sometimes caused. One thing toconsider is whether to affirmatively state that nothing ischanged, including any express or implied choice of rules, law, orforum, other than place of presentation, which might be hedgedby saying that the old or new or both places may act asprocessing agent for an affected LC.

The bank notification may want to look like it is effectivewithout consent and assume that the affected parties will all goalong with any reasonable approach but not quite overcome therisk that the notice might be treated as a proposed amendmentor, worse, a repudiation of the issuer’s obligations. See THE

OFFICIAL COMMENTARY ON ISP98, especially ISP98 Rule 3.14 OfficialComments No. 13 (No Effect on Jurisdiction) and No. 14(Repudiation).



China Construction Bank Amps Up Its Blockchain Trade Platform

Building on the reported success of its initial use of blockchain-enabling technology for tradesaid to have reached an estimated CNY 360 billion (USD 54b) in transaction volume since itslaunch in April 2018, China Construction Bank announced on 9 October 2019 the release of

BCTrade 2.0, a new version of its blockchain-based platform for digitizing trade and financingtransactions. This new version adds the function of re-factoring which allows commercial factoringcompanies to trade on the platform.

According to CoinMod’s coverage of reporting from Chinese news source Xinhua, some 54 ChinaConstruction Bank branches based within and outside China along with another 40 externalorganizations are using BCTrade 2.0.

Beyond BCTrade 2.0’s handling of trade and financing transactions, CoinMod describes publishedaccounts suggesting loftier goals for the platform. “BCTrade 2.0 reportedly aims to establish aregulatory system for the industry of trade finance, which would ultimately enable participants tomonitor their financial activities in real-time.” China Construction Bank also intends to inviteadditional industry entities to help promote the blockchain platform.

HSBC Takes First Step in Advancing Trade Finance APIs

Application Programming Interfaces (APIs), intended to enable systems to interact seamlesslyand securely to exchange data and allow developers to plug-in new products andapplications, have been labeled as integral to the maturation of trade finance digitisation.

In September 2019, HSBC introduced a Bank Guarantee API designed to give partnering financialinstitutions the ability to offer clients full visibility of their guarantees on their own platform evenwhen they are delivered by HSBC to the beneficiary.

“APIs are fundamental to the digitisation of trade finance”, said Surath Sengupta, Global Head ofFinancial Institutions, Portfolio Management and Distribution, GTRF at HSBC. “HSBC handles half amillion Bank Guarantees a year. The Bank Guarantee API is the first of several API we’redeveloping. We’re looking forward to working with our network partners to realise the full benefitsof open banking and improve the customer experience.”

ING Bank and Standard Bank are working with HSBC to integrate the Bank Guarantee API intotheir banking platforms. According to an ING news release: “The current prototype of the APIcovers the guarantee issuance process between two banks at the request of their client. It can beimproved with features that enable real-time documentation negotiations or pricing agreements.”

Trade Technologies Completes Digital LC Presentations in Europe

International trade document solutions provider Trade Technologies announced in November2019 expansion into Europe of its process for presenting original letter of credit documents totrade banks. Through its web-based TradeSharp™ Platform, Trade Technologies completed

online presentations of LC export payment documents to banks in the United Kingdom, Switzerland,and the Netherlands.




India Releases Report on Fintech-Related Issues

A Steering Committee on Fintech Related Issues established by the Ministry of Finance ofIndia’s Department of Economic Affairs (DEA) issued a report in which it accesses Fintechdevelopments in the Fintech space, both within India and at the global level. The report

offers 45 recommendations across four areas addressing: measures required for growth of Fintechservices; actions needed for the promotion of Fintech; means for advancing Fintech capacity forfinancial inclusion; and approaches for promoting and monitoring expansion of Fintech and GovTech.

Correction: Electronic Bills of LadingThe Oct 2019 DCW issue included discussion on the ICC

Banking Commission’s work as part of its Digitalisation in TradeFinance Working Group (p. 9-10). It was noted that the legalgroup “assessing the acceptability of digital data has determinedthat legal status for electronic bills of lading is not possibleunder US law.” It is incorrect to state that electronic bills oflading have no possible legal status under U.S. law. This is dueto specific provisions under New York state law, particularly itsadoption of Article 1 (General Provisions) of the UniformCommercial Code (UCC). As a general matter, the UCC is amodel law which the individual states may enact as written orwith modifications. Accordingly, New York promulgated amodified version of Article 1 as part of its 2014 ModernizationAct. The precise text providing a legal avenue for electronic billsof lading rests in Section 1-201(b)(16) (General Definitions andPrinciples of Interpretation) which includes as part of thedefinition of “document of title” that “[t]he term includes a billof lading…[a]n electronic document of title means a documentof title evidenced by a record consisting of information storedin an electronic medium. A tangible document of title means adocument of title evidenced by a record consisting ofinformation that is inscribed on a tangible medium.” Moreover,as part of its promulgation of UCC Article 7 (Documents ofTitle), New York’s Section 7-105 (Reissuance in AlternativeMedium) states the requirements for substitution of a tangiblerecord in electronic form, and vice versa.

Contacted by DCW, Digitalisation in Trade Finance WorkingGroup Co-Chair Michael Vrontamitis said: “In fact, only the UShas specific legislation supporting an eB/L.”

For a detailed review of this topic, including discussion onseveral jurisdictions, see the ICC’s report, The Legal Status ofElectronic Bills of Lading, prepared by Clyde & Co. Available at:https://iccwbo.org/publication/legal-status-electronic-bills-lading/

The complete Report of theSteering Committee on FintechRelated Issues (150 pages) isavailable on India’s DEAwebsite.

Ocean ShippersPursuing Non-BankAlternatives forFinancing

Shipping and logisticsprovider, CMA CGMGroup, has

announced launch of SHIPFINTrade Finance, a means tooffer financing alternatives toits importing and exportingcustomers. As introduced, theinitiative is based on twoproducts: Supply ChainFinancing, a solution intendedfor importers, and CargoFinancing, a solution gearedtowards exporters.

According to Supply ChainDive, CMA CGM’s roll out is abyproduct of a 2017 studyconducted by Norton RoseFulbright which showed thatin ten years since the globalfinancial crisis, shippers aremoving away from traditionalforms of financing andtowards innovative types offinancing. To a large extent,they have had no choice but toseek financing alternatives as

https://dea.gov.in/sites/default/files/Report%20of%20the%20Steering%20Committee%20on%20Fintech.pdf

https://iccwbo.org/publication/legal-status-electronic-bills-lading/



nearly 75% of shippers expect funding sources to shrink or remain stagnant over the next five years.In recent years, European ship finance banks have sought to exit the industry, selling off shippingportfolios and declining to back new business.

Previously, CMA CGM announced in August 2019 the availability of a “Paperless Bill of Lading”that offers the same functions as a traditional paper B/L but “does not have to be printed to bearlegal value”.

Deutsche Bank Severs Correspondent Banking Relationships in Malta,Lithuania

According to reports by Times of Malta on 12 October 2019, Deutsche Bank has decided to takeserious de-risking measures and end its correspondent banking services for Maltese banks.Several banks based on the European island state rely on Deutsche Bank’s services to

conduct international transactions and will need to find new correspondent partners by the end of2019.

The decision to cease correspondent services to Maltese financial institutions comes afterregulatory reviews by bodies of the European Union. Concerns have been expressed about DeutscheBank’s exposure to Malta and other non-EU jurisdictions criticized for insufficient anti-moneylaundering checks or relationships with correspondent banks which are under investigation forinvolvement in illicit funds transfers. According to a report on 16 October by Frankfurter Allgemeine



Zeitung, a German newspaper, Deutsche Bank has already taken similar steps in regard to Lithuanianbanks for which it has ceased correspondent banking services since September 2019.

LC-Related FDIC Statement of Policy Rescinded

T he US Federal Deposit Insurance Corporation (FDIC) Board of Directors on 12 December2019 approved publication of a Notice of Rescission for four FDIC Statements of Policy,including a Statement of Policy on Treatment of Collateralized Letters of Credit After

Lorenzo Retires from Bank HapoalimOrlando Lorenzo, A.V.P.

Trade Services and Letters ofCredit Head at Bank HapoalimBHI USA in New York, retiredas of December 2019 after 47years in the banking industry.

During his banking career,Lorenzo accrued workingknowledge in FIS All-ProfitsLC software system, FIS ACBSVersion 8.0 Supervising,documentary collections,acceptances, and amassedexperience in all facets of theLC business, includingissuance, documentarychecking, first and secondamendments. He was active in the enforcement of anti-moneylaundering requirements, KYC policies, Fair Lending, BankSecrecy, and USA PATRIOT Acts.

At BHI USA, he attended to client issues and helped accountofficers with their requests as well as legal issues pertaining toLCs. Other duties included monthly income reports, issuanceand management of evergreen standby LCs, and conducting in-house LC workshops across the bank. At time of his retirement,he was working supervisor responsible for overseeing the TradeServices Department and its daily activities.

Lorenzo intends to remain active in banking matters as aconsultant through his company, Structured Business Solutions.He also plans to further pursue his artistic interests – art workon display on Instagram (Olorenzo54) – and enjoy more time totravel and to cook.

Appointment of the FDIC asConservator or Receiver(1995).

Pursuant to an FDIC reviewof its Statements of Policy andin relation to the EconomicGrowth and RegulatoryPaperwork Reduction Act, thefour Statements of Policy wereidentified through an initiativeto determine regulations andguidance that may beoutdated, duplicative, orinconsistent. A Notice ofProposed Rescission was thenpublished in the US FederalRegister on 30 September 2019in which a 30-day commentperiod was given. The FDICdid not receive any commentson the Notice of ProposedRescission during the commentperiod.

Austrian Bank LosesBanking License

After a string ofcomplaints and legalproceedings, Meinl

Bank (Austria) had its bankinglicense revoked by theEuropean Central Bank on 14November 2019. The reasonsare insufficient anti-moneylaundering checks andallegations of terrorismfinance.


Earlier in 2019, Austrian regulators fined Meinl Bank €500,000 for “breaches of due diligencerequirements for the prevention of money laundering and terrorist financing ”, according to theFinancial Times.

Because previous measures by Austrian authorities such as supervisory notices, administrativeremoval of the bank’s management, and monetary fines proved ineffective, the European CentralBank stepped in to take action. The bank in question underwent a name change in June 2019 to AngloAustrian AAB Bank, but is now obligated to cease all banking activities. On its website, AAB Bankmanagement indicated it regrets the European Central Bank’s decision but maintains that it decidedon its own more than a month ago to withdraw from the business of banking.

Technology UpdateHSBC announced on 20 Nov 2019 completion of two blockchain LCs involving Middle East

entities, according to Ledger Insights. One LC issued by Saudi British Bank on behalf of Saudi Arabia’sAltaiseer Aluminium Corporation (TALCO) in favor of Aluminium Bahrain backed the shipment ofaluminium products. In another arrangement, an LC for the benefit of Oman Oil and Orpic Groupsupported the shipment of polypropylene to Abu Dhabi National Carpet Factory. The LC wasadvised by HSBC Oman using the LC blockchain platform.

International UpdatesCHINA: On 19 Nov 2019, Bloomberg News reported that ICBC transferred USD 7.875 million to

repay interest due 1 Dec on troubled commodities trader Tewoo Group Co’s USD 500m dollar bonddue 2020. ICBC had provided a standby LC on the note. Tewoo reportedly has five otheroutstanding dollar bonds totaling USD 1.55b which are without standby providers.

EGYPT: Crédit Agricole Egypt has announced launch of ‘Digital Trade Finance’, a new service tohelp companies obtain LCs and guarantees for commercial activities.

LIBYA: Reporting suggests that black market demand for US dollars has plummeted as theCentral Bank of Libya is opening LCs for large traders.

MOLDOVA: The EBRD has agreed to issue a standby LC of up to USD 50 million to guaranteepayment obligations of Moldovan state energy importer Energocom. The LC serves to safeguardMoldova’s ability to secure gas supplies which would be hampered if Russia and Ukraine fail toextend a gas transit agreement set to expire 31 Dec 2019.

PAKISTAN: State Bank of Pakistan, the country’s central bank, is permitting banks to makeadvance payment up to 50% of the value of imports against LCs issued on behalf of manufacturers.

PAKISTAN: An Iranian envoy visiting Karachi conveyed interest in his country joining the China-Pakistan Economic Corridor (CPEC) as a means of encouraging legal trade and discouragesmuggling between Pakistan and Iran. In 2016, the two countries signed a memorandum ofunderstanding (MoU) intended to open bilateral trade channels and reduce usage of the US dollarfor LC clearances. ■



Ricci Retires After Distinguished 43-Year Banking CareerIn October 2019, Rita Ricci announced her retirement after decades of dedicated service working

for banks. With over 40 years of experience, she was highly respected throughout her career as atrade finance specialist in international trade and banking operations. Rita began her career at CIBCMontreal in 1976 in the bank’s International Department as theRegistered Mail Clerk and over the years she progressed to therole of Trade Finance Consultant. Her duties included the deliveryof trade related products, trade product marketing, givingseminars to importers, exporters and freight forwarders, andworking closely with the Risk Consultants and Legal Council in anadvisory capacity.

In 2003, Rita joined BNP Paribas Trade Finance Operations, alsobased in Montreal, where her responsibilities increased steadilyover 10 years from Assistant Manager to Regional Trade Advisorfor North America. Rita was appointed Global Head of the TradeExpertise Desk of BNP Paribas in February 2014 with a mandate tolead a team of highly specialized trade finance experts whoprovide advisory services and trainings to the Group’s networkand clients. Over the past two years until her retirement, Rita heldthe position of Executive Global Trade Advisor within the TradeFinance Competence Centre of BNP Paribas.

A holder of the CDCS designation, Rita’s most enduring legacy is her deep passion for the tradebusiness and the wealth of knowledge she amassed throughout her career. Rita is recognized for hervaluable contributions to various trade-related associations such as the ICC, BAFT, and the IIBLP.Rita was Chair of the ICC Canada National Committee, Chair of the BAFT National LC Committee,Member of the ICC’s eUCP and eURC Drafting Team, Member of the ISDGP Drafting Group,Member of the CDCS Item Writing Committee, Member of the IIBLP Advisory Council onInternational Standby Practices, Member of the SWIFT MT 798 Working Group, and othercommittees and specialized working groups. Rita frequently participated on speaking panels at tradeindustry events where she was known for sharing valuable insights on trade-related topics.

Said Don Smith, member of the US delegation to the ICC Banking Commission: “I have had thepleasure of knowing Rita for over 20 years. Her presence is already missed on the BAFT LCCommittees and at the ICC Banking Commission. Rita brings unique talents to every conversationwith her intelligence and remarkable memory. Although we occasionally disagree, she is alwaysinterested in discussing our varying perspectives until we are both satisfied we understand eachother’s position and the logic behind them. Usually one of us is swayed in our argument or we finda satisfactory middle ground. On the rare occasion we continue to disagree, we do so as respectfulfriends. Rita is a lady from the old school - gracious, smiling, warm, and filled with laughter. I missher and wish her the very best always.”

Rita is immensely happy to have entered this new chapter of her life and is very much enjoyingspending more time with her husband Yves Saint-Jean, and their beloved pets. DCW wishes Rita allthe best in her well-deserved retirement. ■



LITIGALITIGALITIGALITIGALITIGATION DIGESTTION DIGESTTION DIGESTTION DIGESTTION DIGEST

Yuchai Dongte Special Purpose Automobile Co.v. Suisse Credit Capital (2009) Ltd.

[2018] EWHC 2580 (Comm) [England]

Topics: Agency; Nominated Bank; SWIFT MT700;UCP600 Article 1 (Application of UCP); UCP600Article 2 (Definitions); UCP600 Article 4(Credits v. Contracts); UCP600 Article 5(Documents v. Goods, Services orPerformance); UCP600 Article 7 (Issuing BankUndertaking); UCP600 Article 37(c) (Disclaimerfor Acts of an Instructed Party); Waiver

Type of Lawsuit: Beneficiary sued Defendant for wrongfuldishonor.

Parties: Plaintiff/Beneficiary– Yuchai Dongte SpecialPurpose Automobile Co. Ltd.(Counsel: Edward Brown, Covington &Burling LLP)

Defendant– Suisse Credit Capital (2009) Ltd.(Counsel: Andrew Ayres QC & BenjaminTankel, C J Jones Solicitors LLP)

UnderlyingTransaction: Unspecified sales contract.

LCs: Two UCP600 letters of credit, one for USD7,000,000 and another for USD 3,000,000.

Decision: The High Court of Justice, Queen’s BenchDivision, Commercial Court, Hancock, J.,granted judgment in favor of Beneficiary.

Rationale: Sender of SWIFT MT700 incorporating Englishlaw and UCP600 undertakes liability as LCissuer where evidence extrinsic to LCdisregarded in favor of internationallyaccepted SWIFT standards and LC practice;absent an express provision excluding UCPrule, UCP600 Article 7 (Issuing BankUndertaking) liability not disclaimed.


Factual Summary:To facilitate an international sale of goods, Laheq (Applicant) requested its bank, Suisse Bank PLC

(Applicant Bank) to issue a commercial letter of credit in favor of Yuchai Dongte Special PurposeAutomobile Co. Ltd. (Beneficiary), a Chinese company. Applicant Bank, as well as Suisse BankOffshore Ltd. (Second Applicant Bank), were subsidiaries of Suisse Bank Group (Parent Company).Applicant Bank, however, did not issue the letter of credit but instead forwarded a “draft” letter ofcredit to Suisse Credit Capital (2009) Ltd. (Defendant), a non-bank SWIFT member providing trade-related financial services. Under prior agreements, Defendant would send SWIFT messages on theinstructions of Parent Company and its subsidiaries. Using the draft LC provided by Applicant Bank,Defendant sent Bank of Ruifeng (Advising Bank), a Chinese bank, a SWIFT MT700 message whichincorporated the draft LC and provided in Field 72 (Sender to Receiver Information): “no ourresponsibility for payment” (the Disclaimer). Advising Bank advised the USD 7,000,000 LC toBeneficiary including a statement that Defendant had issued the LC. Subsequently, Beneficiarypresented documents to Bank of China, Hubei Branch (Presenting Bank) which forwarded thedocuments to Applicant Bank, which the LC described as “reimbursing bank/drawee bank”.Defendant, at the instruction of Applicant Bank, messaged Presenting Bank that Applicant Bank wasdishonoring based on discrepancies. Defendant included the Disclaimer in the refusal message.

At this point, Beneficiary and Parent Company began negotiations regarding a second LC. In themeantime, however, Applicant Bank, through Defendant, informed Presenting Bank that it intendedto cancel the credit on the basis that Applicant and Beneficiary had agreed for payment to occur“outside” the first LC. In messages between Beneficiary and Parent Company, Beneficiary requestedthat the documents presented under the first LC be retained by Parent Company for presentationunder the second LC. Moreover, there was evidence that Beneficiary obtained a second certificate oforigin under “questionable circumstances” for use under the second LC and there were discussionswithin Parent Company expressing concern that the second LC would not be used to facilitate a saleof goods.

After Parent Company drafted the second LC, Defendant sent a SWIFT MT700 message,incorporating the second LC, to the Rural Commercial Bank of Zhangjiagang (Second AdvisingBank), which advised the message to Beneficiary. The “covering form” indicated that Defendant wasthe LC issuer. The LC included the Disclaimer in Field 72 and Field 41D (Available with…by…)provided that the LC was “available with [Second Applicant Bank] by negotiation”.1 Later,Presenting Bank forwarded documents to Second Applicant Bank. The next day, Presenting Banksent Defendant a SWIFT MT999 message stating that complying documents had been “negotiated”the day before and claimed payment of USD 3,000,000. Defendant’s response included the Disclaimerand stated that it relayed the message to Second Applicant Bank. Months later, Presenting Bankagain requested that Defendant forward its claim for payment under the second LC to SecondApplicant Bank. Previously, however, Second Applicant Bank was sold and renamed Asia CapitalDevelopment Bank. Defendant responded to Presenting Bank stating that Defendant no longer hadany relationship with Second Applicant Bank, included the Disclaimer and refused to pay.Subsequently, Beneficiary sued Defendant for wrongful dishonor claiming that, as the issuer of the

1. Field 51A (Applicant Bank) stated “SBOL (Comoros) [Second Applicant Bank]”; Field 78 (Instructions to the Paying/Accepting/Negotiating Bank) provided that SBOL, London Branch, would, as applicant bank, effect payment atmaturity after receiving complying documents.




second LC, Defendant was liable to it for USD 3,000,000. The High Court of Justice, Queen’s BenchDivision, Commercial Court, Hancock, J., granted judgment in favor of Beneficiary.

Legal Analysis:1. Issuer. The opinion focused on the proper construction of the second LC. Defendant denied

that it was the issuer and, in any event, had effectively excluded its liability as a UCP600 issuer byway of the Disclaimer. In arguing whether Defendant was the LC issuer, the parties disagreed on theadmissibility of extrinsic evidence, i.e. whether evidence outside of the terms and conditions statedin the LC could be used to explain the true understanding of the terms therein. Both parties agreed,however, that a SWIFT MT700 was the correct form for issuance of an LC, whereas the proper formfor advising an LC was an MT710. Beneficiary primarily argued that the use of the MT700 form wasdispositive regarding whether Defendant was the issuer. Defendant noted that Beneficiary haddiscussed with Parent Company about issuing the second LC and that a “holistic reading” of the LCgiven the contradictions regarding which bank was the applicant bank as well as the presence of theDisclaimer suggested that the wrong message form was used and that Second Applicant Bank alonewas undertaking responsibility for payment. Looking to UCP600 Article 4 (Credits v. Contracts) andUCP600 Article 5 (Documents v. Goods, Services or Performance), the Judge also emphasized theimportance of the autonomy (or independence) principle of LCs. On the issue of extrinsic evidence,the Judge noted that while such evidence could be relevant in construing the terms of an LC, theJudge declined to do so in this case and stated that “[i]t is against this background that the actualterms of LC2 fall to be construed, as they would appear to a reasonable reader, with the backgroundknowledge available to the parties, and with a reasonable technical knowledge of SWIFT.” TheJudge placed considerable weight on the SWIFT messaging forms and standards and the importanceof such messages being “read in the same way across the world, and in the context of an industrythat utilises mechanisation to a large extent”. (para 55). Thus, the Judge concluded that Defendantwas “indeed the issuer of LC2.” Additionally, regarding the role of Second Applicant Bank, theJudge noted that “the terms of the letter of credit are much more consistent with it being anominated bank.” (para.56).

2. Disclaiming Liability. Defendant argued that, even if it were deemed issuer of the second LC,it had disclaimed its liability under UCP600 Article 7 (Issuing Bank Undertaking) through the termspresent in Fields 78 and 72 of the MT700 sent to Second Advising Bank. Beneficiary argued that thetext in Field 72 was “directed to precisely the situation envisaged by [UCP600] Article 37(c)[Disclaimer for Acts of an Instructed Party].” Thus, the Disclaimer merely indicated that the recipientbank’s charges would be for the account of Beneficiary and not issuer. Additionally, Beneficiaryargued that even if Defendant did not wish to be liable as issuer of the LC, English law, applyingUCP600 Article 1 (Application of UCP), requires that an “express provision…excludes” a particularUCP600 rule. Defendant noted that Beneficiary had sued claiming Defendant breached UCP600Article 7(a)(iii) regarding when an issuer must honor a complying presentation to a nominated bankthat does not incur a deferred payment undertaking or fails to otherwise pay at maturity. Defendantargued that because the LC stated that it was available by negotiation, Beneficiary’s claim wasimproper. Moreover, Defendant also argued that even if it were the issuer and Second ApplicantBank had received documents as a nominated bank, Second Applicant Bank’s decision to waivediscrepancies could not “effect” Defendant’s liability; thus, Defendant argued that “the risk that[Beneficiary’s] presentation was non-conforming…has materialised.” (para.69(3)).



The Judge rejected Defendant’s argument that Beneficiary had improperly pled its case and notedthat, even if necessary, permission to amend the pleadings would have been forthcoming. Afterreviewing the text of the UCP, the Judge noted that “Article 7…contemplates a series of situationswhere, if compliant documents are presented, the issuing bank must pay”, and that “equally, if non-compliant documents are presented but any such non-compliance is waived in a way that serves tobind the issuing bank, then Article 7 would apply.” Ultimately, the Judge agreed with Beneficiary,noting that there was “no question” that Defendant had failed to expressly limit its obligations as anissuer under UCP600. Even though the second LC stated that payment would be made by SecondApplicant Bank by acceptance of drafts drawn on Second Applicant Bank, the Judge concluded that a“reasonable third party would construe this credit” as having not used the “technical meaning” ofnegotiation as provided under UCP600 Article 2 (Definitions). The Judge also rejected Defendant’sargument that Second Applicant Bank, as the nominated bank, could not bind Defendant by waivingdiscrepancies. The Judge applied an agency rationale (citing Jack on Documentary Credits 6.21), statingthat “the waiver by [Second Applicant Bank] of the discrepancies in the documents bound theDefendant, who thereby became liable to pay if the nominated bank – ie [Second Applicant Bank] –did not.” (para.82).

3. Estoppel. Finally, Defendant argued that there was a shared assumption between it andBeneficiary whereby Beneficiary must have known that Defendant believed it was not the issuer ofthe second LC, and moreover, that Defendant acted in reliance on that assumption to its detriment.The estoppel arguments failed as there was no shared assumption between the parties thatDefendant was the issuer of the second letter of credit nor was there any correspondence thatunambiguously limited Defendant’s role under the second LC. The Judge concluded that “[t]heevidence is thus that the Defendant’s objective conduct in sending the MT 700 message would beunderstood by a reasonable observer as indicating that the Defendant was the issuer. It would notconvey that the Defendant did not regard itself as issuer.” (para 95(2)).

Comment:The suggestion that Article 7 supports the proposition that a nominated bank may waive

discrepancies and so bind the issuer is strange. Article 7 makes no mention of discrepancies orwavier and, importantly, states that an “issuing bank’s undertaking to reimburse a nominated bankis independent of the issuing bank’s undertaking to the beneficiary.” In UCP600: An AnalyticalCommentary, Professor James E. Byrne wrote:

Under standard international letter of credit practice, nomination does not confer a generalagency status on the nominated bank with respect to the issuer even if it elects to act pursuant tothe nomination unless otherwise expressly provided. …Under the UCP, a nominated bank isindependent of the applicant, issuer, or another nominated bank. It acts, if it acts, on its ownbehalf and in its own interest…More importantly, a nominated bank cannot in any way bind theissuing bank with the exception of where it decides to take up a commercial invoice in an amountgreater than that available under the credit. This right is specifically addressed in UCP600 Article18(b) (Commercial Invoice) as an exception to the general rule that the issuer is not bound by theact of a nominated bank and is stated without any of the terminology that would be typical ofagency. (p.377).



Additionally, UCP600 Article 16(b) (Discrepant Documents, Waiver and Notice) provides that,“[w]hen an issuing bank determines that a presentation does not comply, it may in its sole judgmentapproach the applicant for a waiver of the discrepancies.” (Emphasis added). The UCP does notafford any discretion to a nominated (or confirming) bank to so approach the applicant. Moreover,the issuer’s customer is the applicant and any discrepancy waiver would contemplate prior applicantapproval lest an issuer risk its right to reimbursement. ■

[MJK]

Topics: Assignment; Blocking Regulation; Insurance Policy; JCPOA; Licenses; OFAC; Sanctions;Sanctions Clause

Note: To protect itself from losses, Metalloyd Ltd. (Shipper/Assignor) obtained a maritimeinsurance policy from, among other underwriters, Aegis Managing Agency Ltd. (Defendant/Underwriter) regarding two cargoes of steel billets being shipped from Russia to Iran. After thecargo was delivered to bonded storage and Shipper/Assignor arranged for a substitute buyer, thecargo was stolen in the latter months of 2012. Upon discovering the theft, Shipper/Assignor made avalid claim on the policy in late March 2013. At that time, Defendant/Underwriter “resistedpayment” citing the Sanction Limitation and Exclusion Clause (reprinted below) in the insurancepolicy.

Subsequently, Shipper/Assignor, by deed, assigned the policy to Mamancochet Mining Ltd.(Claimant/Assignee). Claimant/Assignee sued all 30 underwriters for payment on the policy; 19underwriters settled and eleven remaining underwriters, including Defendant/Underwriter, citedeither EU, U.S., or both sanctions regimes in refusing payment. The High Court of Justice, Queen’sBench Division, Teare, J., granted judgment in favor of Claimant/Assignee.

Sanction Limitation and Exclusion Clause:

“No (re)insurer shall be deemed to provide cover andno (re)insurer shall be liable to pay any claim or provideany benefit hereunder to the extent that the provision ofsuch cover, payment of such claim or provision of such benefitwould expose that (re)insurer to any sanction, prohibition orrestriction under United Nations resolutions or the tradeor economic sanctions, laws, or regulations of the [EU],[UK] or the [US].” (Emphasis added).

The three issues presentedby the case were: (1) theproper interpretation of thesanctions clause in the policy;(2) whether payment as amatter of fact would “expose”the underwriters to US or EUsanctions within thatinterpretation; and (3) whetherthe EU Blocking Regulationwould otherwise allowunderwriters to refusepayment. The policy was governed by English law and despite having an office in the UnitedKingdom, Defendant/Underwriter was ultimately owned or controlled by US persons and therefore

Mamancochet Mining Ltd. v. Aegis Managing Agency Ltd.[2018] EWHC 2643 (Comm) [England]



constituted a US owned or controlled foreign entity (USCFE). At the time the policy was issued,there were no sanctions regarding Iran applicable to USCFEs. On 22 October 2012, the US Office ofForeign Assets Control (OFAC) added section 560.215 to the Iranian Transactions & SanctionsRegulations (ITSR), coming into force 8 March 2013, affecting USCFEs. It was generally accepted thatprovision of insurance cover, including the payment of a pre-existing claim, constituted a “service”within the meaning of ITSR s.560.204. When payment was first claimed by Shipper/Assignor inMarch 2013, payment would have “exposed” Defendant/Underwriter to sanctions based on USCFEstatus and ITSR s.560.215, as the wind-down period (ending 8 March 2013) had lapsed.

US sanctions regarding Iran, however, changed on 16 January 2016 when OFAC introducedGeneral License H, made pursuant to Annex II of the Joint Comprehensive Plan of Action (JCPOA),allowing USCFEs to engage in the provision of insurance and re-insurance services. Thereafter, USpolicy changed yet again when on 8 May 2018, the US announced its withdrawal from the JCPOA;OFAC accordingly revoked General License H on 27 June 2018, subject to a wind-down provision(s.560.537) ending 4 November 2018. Nothing in that wind-down provision supported anydistinction between claims which arose after General License H was introduced and those whicharose before: it extended to all transactions and activities that were ordinarily incident andnecessary to wind down of transactions otherwise prohibited by ITSR section 560.215.

After reviewing the relevant sanctions regimes, the Judge turned to the issue of construction ofthe sanctions clause in the maritime policy. Both parties focused on the term “exposed”. Defendant/Underwriter argued that the sanctions clause had the effect of extinguishing its liability to pay if itwere “at risk of being sanctioned by OFAC”. Claimant/Assignee, however, argued that the clauserequired the underwriters “to establish, on the balance of probabilities, that payment would putthem in breach of the applicable sanctions” so as to “lawfully expose” them to sanctions. The Judgenoted that the dictionary definition of “expose” was a “useful starting point” but not determinativeof what the clause in full “would convey to a reasonable person.” Accordingly, the Judge concludedthat, to a reasonable person, the clause meant that “the insurer is not liable to pay a claim wherepayment would be prohibited under one of the named systems of law and thus ‘would expose’ theDefendants to a sanction.”

Having interpreted the sanctions clause, the Judge applied its meaning against the changes in USsanctions beginning in 2012. After October 2012, with OFAC’s implementation of s.560.215, USCFEswere brought within the ITSR regime as if also US persons subject to the wind-down provisionending 8 March 2013. Thus, experts from both parties agreed that when the first claim was made byShipper/Assignor, “payment of the claim would have been prohibited and would have exposed theDefendants to a sanction.” Thereafter, the Judge noted that the parties initiated discussionsregarding payment after implementation of General Licence H on 16 January 2016. Under thatlicense, “payment by the Defendants of the claim under the Policy in sterling would not have beenprohibited.” (General Licence H continued to prohibit transactions by USCFEs in US dollars and anytransactions involving the Iranian military).

As previously mentioned, the analysis changed following the 8 May 2018 decision by the US toend its participation in the JCPOA. Accordingly, OFAC announced its revocation of General LicenseH on 27 June 2018 subject to a wind-down provision (s.560.537) ending 4 November 2018. A witness



for Defendant/Underwriter argued that there remained a “serious question” as to whether OFAC“would consider payment of a claim arising before the effective date of General License H to be awind down activity within the meaning of section 560.537.” Having heard “conflicting testimony”from two US attorneys on how a US court might resolve the issue, the Judge turned to a review ofthe “plain meaning” of section 560.537 as well as to “FAQs” regarding each ITSR sectionpromulgated by OFAC. After reviewing these materials and others, the Judge concluded that:

[OFAC FAQs] support the proposition that the wind down provision applies to operations thatwere consistent with the lifting of sanctions under the JCPOA. Payment of the insurance claim inquestion is consistent with the JCPOA. For these reasons I agree with and accept the opinion …that until 1159 pm eastern standard time on 4 November 2018 payment of the insurance claim inquestion is not prohibited by the US and so payment by that date would not expose theDefendants to sanction.

Against this finding, and that payment would not be prohibited by EU law, Defendant/Underwriter argued in the alternative that “once the sanctions clause was triggered, its effect was toextinguish any liability of the Defendants to pay the claim.” The Judge rejected that argument notingthat the clause only limited payment liability “to the extent that … payment of such claim … wouldexpose” the insurer to sanction (emphasis added). Nothing in the sanctions clause supported a resultthat would “extinguish liability once the insurer [was] exposed to a sanction.”

In anticipation that Defendant/Underwriter would prevail and be able to rely on the sanctionsclause to resist payment, Claimant/Assignee also argued that the EU 1996 Council Reg. (EC) 2271/96‘Blocking Regulation’ amended August 2018 in response to US JCPOA withdrawal (protecting againsteffects of extra-territorial application of legislation adopted by a third country and actions basedthereon or resulting therefrom) would prohibit Defendant/Underwriter from relying on thesanctions clause as a violation of that regulation and/or English law. In response, Defendant/Underwriter submitted a “short answer” to the argument by stating that reliance on the sanctionsclause to resist payment would simply be to allow the clause to operate as written. The issue was notripe for determination, however, as the question of whether payment by Defendant/Underwriterbefore 4 November 2018 would cause it to be exposed to a sanction had been resolved.Nevertheless, the Judge concluded the opinion by stating that there was

considerable force in the Defendants’ “short answer” to the point, namely that the BlockingRegulation is not engaged where the insurer’s liability to pay a claim is suspended under asanctions clause such as the one in the Policy. In such a case, the insurer is not “complying” with athird country’s prohibition but is simply relying upon the terms of the policy to resist payment.(Emphasis added). ■

[MJK]


FEAFEAFEAFEAFEATURETURETURETURETURE

* James G. Barnes practices law as senior counsel in the Chicago office of Baker & McKenzie LLC. He is a member ofthe DCW Editorial Board.

1. Dickerson OL2 LLC v. Natixis, New York Branch, No. 652397/2018, freely available on Google Scholar by searchingcase law and entering 2019 NY Slip Op 31517(U). Also entered on the same date by the same judge (Andrea Masley ofthe Supreme Court, New York County, New York) were three very similar wrongful dishonor summary judgmentdecisions against Natixis, New York Branch, and in favor of Dickerson OL1 LLC, Dickerson OL3 LLC, and DickersonOL4 LLC.

COMMENTARY ON 2019 NEW YORK COURT DECISIONS ON CLAIMSAND DEFENSES AFFECTING ELEVEN NATIXIS LCS

by James G. BARNES*

This commentary is prompted by five recent New York statecourt decisions involving eleven beneficiaries of eleven standbyletters of credit issued on January 27, 2017 by Natixis, New YorkBranch. Four of the decisions grant summary judgment forwrongful dishonor in favor of four beneficiaries whoseNovember/December 2017 presentations to the issuer weredishonored. The other decision dismisses the claims and defensesof the applicant (Natixis Funding Corp.) and the issuer (Natixis,New York Branch) in their separate lawsuit against all elevenbeneficiaries. (Case summaries in the usual DCW format follow inthis issue.)

Issuer’s Discrepancy Defense(s)(UCC section 5-108)

On May 27, 2019, letter of credit beneficiary Dickerson OL2 LLCobtained summary judgment against issuer Natixis, New York Branch, for wrongful dishonor in theamount of US$821,466.77.1

The issuer timely gave a Notice of Noncompliance stating a single specified ground fordishonoring the beneficiary’s presentation, that “sufficient funds are not available for drawing underthe Letter of Credit to satisfy the Drawing Request at this time.” The court treats the notice asidentifying a “credit overdrawn” discrepancy and rejects that defense, finding that “The amount ofthe draw does not exceed the maximum amount set forth in Schedule 1 of the Natixis letter ofcredit.”

The court also found that “On its face, the Drawing Request strictly complies with the terms andconditions for draws set forth in the Natixis letter of credit.” This finding of overall facial



compliance2 follows from the court’s rejection of the “credit overdrawn” discrepancy and frompreclusion of all other possible discrepancy defenses by operation of NYUCC section 5-108(c).3

Issuer’s Fraud Defense(s) (UCC section 5-109(a))

The issuer raised other defenses of its dishonor of Dickerson OL2 LLC’s presentation. Thedecisions recognize fraud within the scope of NYUCC section 5-1094 as a possible defense to awrongful dishonor claim, whether or not mentioned in a timely given refusal notice.5 The issuer’sfraud defenses are identified in the Dickerson OL2 LLC summary judgment decision and in thecourt’s decision in a separate lawsuit filed by Natixis, New York branch, and Natixis Funding Corp.against Dickerson OL2 LLC and ten other beneficiaries of letters of credit issued by Natixis, NewYork Branch.6

Summary judgment was granted to Dickerson OL2 LLC against Natixis, New York Branch, uponthe court’s determination that the issuer’s fraud defenses were not sufficiently alleged or shown.The issuer (and applicant) argued that Dickerson OL2 LLC (and other beneficiaries) committed fraudby drawing while knowing that they had no right to expect honor in excess of an established7 cap onthe amount of their combined drawings and no right to expect honor by treating Natixis LC(s) as notqualified8 to replace imminently expiring LC(s) issued by another bank.

2. NYUCC section 5-108(a) provides the general test for wrongful dishonor claims: “Except as otherwise provided inSection 5-109, an issuer shall honor a presentation that as determined by the standard practice referred to in subsection(e), appears on its face strictly to comply with the terms and conditions of the letter of credit.” (The decision includesmultiple citations to New York’s Uniform Commercial Code, Article 5 (Letters of Credit), and none to UCP600 or ISP98,which have similar provisions on an issuer’s discrepancy defenses.)

3. NYUCC section 5-108(c) provides that “…an issuer is precluded from asserting as a basis for dishonor anydiscrepancy…not stated in the notice if timely notice is given.”

4. NYUCC section 5-109(a) addresses any presentation in which a “required document is forged or materiallyfraudulent” or, if honored, “would facilitate a material fraud by the beneficiary on the issuer or applicant.”

5. NYUCC section 5-108(d) provides that failure to mention fraud in a refusal notice does not preclude the issuerfrom asserting as a basis for dishonor fraud as described in Section 5-109(a).

6. Natixis Funding Corp. v. GenOn Mid-Atlantic, LLC, No. 650817/2018, freely available on Google Scholar bysearching case law and entering 2019 NY Slip Op 31511(U). This contemporaneous decision is incorporated by referenceand relied upon in the Dickerson OL2 LLC’s Summary Judgment decision (where it is referred to as the “Natixisaction”).

7. The decisions do not indicate that the beneficiary was or might have been a party to, or otherwise bound by, anyagreement establishing a cap on drawings that would reduce the amount stated to be available in the schedule attachedto the LC. This fraud defense would presumably require showing that the beneficiary did not honestly believe that itwas bound by a cap outside the LC terms.

8. The decisions indicate that the beneficiary was a party to an agreement that provided for replacing an LC withanother bank’s LC, subject to certain qualifications for the replacement issuer and LC terms. This fraud defense wouldpresumably require showing that the beneficiary did not honestly interpret or apply the agreed qualifications to thereplacement LC issued by Natixis, New York Branch.



The arguments and supporting facts for and against fraud based on replacement LC qualificationsor on capped combined9 drawing amounts depend on documents filed in the cases but not fully setout in the court decisions. The decisions, however, are clear about finding section 5-109 fraud only ifthere is a showing of intentional fraud that is material such that the beneficiary has no colorableright to expect honor and no basis in fact to support such a right.

Summary Judgment Remedy for Wrongful Dishonor (UCC section 5-111(a))

In summarily rejecting discrepant and fraudulent presentation as viable defenses, the court alsodetermined that summary judgment in the amount wrongfully dishonored need not await conclusionof the previously filed Natixis action for declaratory and other relief. In this regard, NYUCC section5-111(a)10 on remedies for wrongful dishonor, like section 5-108 on issuer obligations, facilitatessummary disposition of beneficiary claims of wrongful dishonor, and courts regularly decide suchclaims on an accelerated basis, including those in which a fraud defense is raised.

Breach of Warranty Claims of Applicant and Issuer (UCC section 5-110)

NYUCC section 5-110(a)(2) provides: “If its presentation is honored, the beneficiary warrants tothe applicant that the drawing does not violate any agreement between the applicant and beneficiaryor any other agreement intended by them to be augmented by the letter of credit.” Unlike NYUCCsection 5-110(a)(1), which provides for a post-honor “no fraud” warranty, the sub-section 5-110(a)(2)“no violation” warranty is made to the applicant only. It supplements contract and other laws thatmay provide remedies to an applicant that reimburses the issuer and looks to the beneficiary toremedy a drawing that the beneficiary made for too much, too soon, or otherwise in violation of theunderlying contract or other legal relationship between them. As noted in the Official Comment 2 tothis UCC section, this “no violation” warranty has primary application in standby LCs where theapplicant is not contractually obligated to the beneficiary.

The Natixis, New York Branch, LC to Dickerson OL2 LLC was issued “at the request of NatixisFunding Corp. (the ‘Applicant’) for the benefit of GenOn Mid-Atlantic, LLC.” The court identifies“GenMa” as the lessee obligated to provide and maintain letter of credit support for GenMa’s leasepayment obligations to the lessee-beneficiary.11 Natixis Funding Corp. thus appears to qualify as an

9. The decisions do not indicate the basis on which a cap on the amount of drawings by multiple beneficiaries mightbe applied to Dickerson OL2 LLC alone. The ISP98 Form 11.1 standby (freely available at www.iiblp.org) includes thefollowing: “Overdrawing. If a demand exceeds the amount available, but the presentation otherwise complies, Issuerundertakes to pay the amount available.” This provision is intended to limit disputes based on “credit overdrawn”discrepancies. It might also limit the scope of any defense based on fraud that affects only part of the amount drawn.

10. Under NYUCC section 5-111(a), wrongful dishonor is to be remedied by a judgment in the amount dishonoredplus interest from the date of dishonor. In this regard, for purposes of obtaining accelerated treatment in court underNew York’s Civil Practice Laws and Rules section 3213, an LC is considered to be an instrument for the payment ofmoney only.

11. GenMa filed for Chapter 11 relief on June 14, 2017 after the January 27, 2017 issuance of the eleven replacementLCs and while remaining obligated as lessee to the eleven LC beneficiaries as lessors.



“applicant” as defined in NYUCC 5-102(a)(2), with an applicant’s rights and remedies followinghonor and reimbursement under sections 5-110 and 5-111.

Section 5-110 is not cited in the Dickerson OL2 LLC Summary Judgment decision or in the Natixisaction. It could become applicable if, in response to a court order or otherwise, the issuer paidDickerson OL2 LLC and the applicant reimbursed the issuer. It could also be applied to theapplicant’s disputes with other beneficiaries, some of whom were paid under their LCs.

The court decisions affecting these eleven LCs may not preclude or materially prejudice thepursuit by Natixis Funding Corp.’s claims of breach of the “no violation” warranty on re-examination of the documents and circumstances that failed to show beneficiary fraud but mightshow that one or more of the eleven beneficiaries “violated any agreement between the applicantand beneficiary or any other agreement intended by them to be augmented by the letter of credit.”Post-honor, the focus can be shifted from whether the beneficiary’s presentation facially complied ordefrauded the issuer or applicant to whether the beneficiary’s drawing violated an agreementbetween the beneficiary and applicant or intended by them to be supported by the LC.

NYUCC Article 5 keeps the analysis of wrongful dishonor disputes based on discrepantpresentations (5-108) separate from disputes based on fraud (5-109) and separate from disputesbased on non-fraudulent violation of underlying agreements and obligations (5-110). In this regardthe law implements the ancient “pay now, argue later” concept central to international LC practice. ■

Topics: Compliance; Fraud; Notice of Refusal; UCC Article 5-103; UCC Article 5-108; UCC Article5-109; UCC Article 5-111; Unjust Enrichment

Note: As part of eleven sale-leaseback transactions regarding power plant units in Maryland,several entities (collectively, Owner Lessors)1 acquired undivided interests in the Morgantown andDickerson power facilities and leased those interests to GenOn Mid-Atlantic, LLC (Lessee), awholesale power company. Under each leaseback agreement, Lessee and Owner Lessors executedseparate Lease and Participation Agreements requiring Lessee to provide “qualified”2 security toOwner Lessors against Lessee’s default. Accordingly, Lessee provided eleven letters of credit issuedby JPMorgan Chase Bank, N.A. (JPMorgan) in favor of Owner Lessors. Those letters of credit weresubsequently “replaced” with LCs issued by Natixis, New York Branch (Issuer) pursuant to a

1. Specifically, Morgantown OL1 LLC, Morgantown OL2 LLC, Morgantown OL3 LLC, Morgantown OL4 LLC,Morgantown OL5 LLC, Morgantown OL6 LLC, Morgantown OL7 LLC (collectively, Morgantown Owner Lessors); andDickerson OL1 LLC, Dickerson OL2 LLC, Dickerson OL3 LLC, and Dickerson OL4 LLC (collectively, Dickerson OwnerLessors).

2. The opinion notes that “qualified” security under the leases meant that Lessee would obtain “irrevocable,unconditional, [security]…not collateralized by [Lessee]’s assets.”

Natixis Funding Corp. v. GenOn Mid-Atlantic, LLCNo. 650817/2018, 2019 WL 2319171 (N.Y. Sup. Ct. May 28, 2019) [USA]



Payment Agreement between Lessee and Natixis Funding Corp. (Issuer Affiliate/Applicant). Underthe Payment Agreement, Lessee paid Issuer Affiliate USD 131,466,787.56 while Issuer Affiliate/Applicant applied for and promised to reimburse Issuer for any amounts drawn by Owner Lessorsunder the Natixis LCs. The LC terms provided that Owner Lessors could demand payment in theevent that Lessee either defaulted, failed to timely pay rent, or failed to provide within 30 days ofexpiration or termination, qualified replacement security.

Apparently, the JPMorgan LCs had not expired when Issuer issued the replacement LCs. SeveralMorgantown Owner Lessors demanded payment on five JPMorgan LCs “issued to them, on thegrounds that those letters of credit were expiring within 30 days and that [Lessee] had failed toprovide replacement qualifying credit support”, asserting that Issuer’s LCs were collateralized byLessee’s assets contrary to the participation agreements. JPMorgan honored the demands totalingUSD 125,000,000. Repeating their claim of unqualified credit support, the same Morgantown OwnerLessors subsequently demanded payment on the LCs issued by Issuer. Issuer honored for USD125,000,000 but “later discovered that the five draw requests were not proper and that they shouldnot have paid them.” Issuer then sent a notice purporting to cancel the remaining LCs in 60 days.Owner Lessors who had not previously made any demands for payment then did so “on thegrounds that the [Issuer] letters of credit had been terminated and that there was no replacementqualifying credit support.”

Issuer and Issuer Affiliate/Applicant sued all eleven Owner Lessors3 in a multicount complaintseeking orders stating (1) that the demands made were fraudulent justifying dishonor; (2)alternatively, that, even if Issuer were bound to pay, “Owner Lessors disgorge the funds to [IssuerAffiliate/Applicant]”; and (3) that Owner Lessors “return all amounts previously improperlydrawn”. Issuer also sought alternative equitable claims of unjust enrichment and money had andreceived. Owner Lessors moved to dismiss the complaint and Issuer moved to compel OwnerLessors to participate in discovery. The Supreme Court of New York, Masley, J., dismissed thecomplaint.

While facts alleged in Issuer’s complaint were to be taken as true and any inferences construed inits favor, the Judge noted that where documentary evidence contradicted those allegations, such asthe LC terms and presented documents, Issuer’s complaint would not be afforded the same analysis.Citing New York’s adoption of UCC Article 5 (Letters of Credit), the Judge noted that theindependence principle as stated in Section 5-103 requires that “the obligations of the issuer of aletter of credit must be separate from, or independent of, the performance or breach of any contractrelating to” the LC. Issuer argued that demands made by Owner Lessors were fraudulent due to“certain surrounding circumstances.” The Judge disagreed, however, citing New York’s adoption ofUCC 5-109 which states the “narrow” fraud exception to LC independence as requiring materialfraud. Based on Issuer’s complaint, the Judge noted that “[n]one of the three grounds for fraudalleged by [Issuer]…demonstrate the existence of material fraud or fraud in the transaction.” Issuer

3. Dickerson Owner Lessors individually pursued four summary judgment in lieu of complaint actions against Issuerfor wrongful dishonor. See e.g., Dickerson OL2 LLC v. Natixis, No. 652399/2018, 2019 WL 2299900 (N.Y. Sup. Ct. May30, 2019) (granting judgment in favor of Dickerson OL2 LLC on its claim of wrongful dishonor and incorporatingdiscussion of instant case against Owner Lessors referenced as the “Natixis action”).



attempted to argue that by referencing the underlying Lease and Participation Agreements, itsobligation to pay was dependent on more than the demands made by Owner Lessors. The Judgerejected that argument as no LC “expressly” incorporated those agreements but merely referencedthem in providing for when Owner Lessors could demand payment, i.e., where Lessee failed totimely provide “replacement qualifying credit support”.

As for Issuer’s remaining allegation of material fraud, the Judge noted that it was “belied by thedocumentary evidence.” Issuer argued that Owner Lessors had “attempted to draw a large amount”by “fraudulently taking advantage of a drafting error” as Owner Lessors knew that Issuer’s liabilitywas limited to USD 130,000,000. The Judge disagreed, however, noting that a “literal reading” of theLCs established that Issuer’s potential liability exceeded USD 200,000,000. Moreover, the Judgerejected Issuer’s argument that Owner Lessors had made an admission in the bankruptcyproceedings of Lessee regarding their knowledge of “an aggregate cap” by again referencing theindependence principle found in UCC 5-103 and stating that “[e]ach of the [Issuer] letters of creditare independent of each other. None of them includes a provision capping the amounts that could bedrawn based on prior draws on another [Issuer] letter of credit.”

The Judge dismissed Issuer’s final equitable claims on the basis of being “fatally defective,primarily on the ground that an express contract governing the underlying dispute exists”, namely,the LCs themselves. Furthermore, Issuer Affiliate/Applicant’s claim of a “quasi contractualrelationship” between Issuer and Owner Lessors based on the Payment Agreement between Lesseeand Issuer Affiliate/Applicant was rejected by the Judge, again noting the independence of the LCshaving been issued by Issuer and not its affiliate. Having failed to allege a plausible claim of materialfraud, the Judge dismissed Issuer’s and Issuer Affiliate/Applicant’s complaint. ■

[MJK]

Dickerson OL2 LLC v. Natixis, New York BranchDickerson OL2 LLC v. Natixis, New York BranchDickerson OL2 LLC v. Natixis, New York BranchDickerson OL2 LLC v. Natixis, New York BranchDickerson OL2 LLC v. Natixis, New York BranchNo. 652399/2018, 2019 WL 2299900 (N.Y. Sup. Ct. May 30, 2019) [USA]

Topics: Compliance; Fraud; Notice of Refusal; UCC Article 5-103; UCC Article 5-108; UCC Article5-109; UCC Article 5-111; Wrongful Dishonor

Note: As part of eleven sale-leaseback transactions regarding power plant units located inMaryland, several entities (collectively, Owner Lessors)1 acquired undivided interests in theMorgantown and Dickerson power facilities and leased those interests to GenOn Mid-Atlantic, LLC(Lessee), a wholesale power company. Under each leaseback agreement, Lessee and Owner Lessorsexecuted separate Lease and Participation Agreements requiring Lessee to ensure its performance by

1. Specifically, Morgantown OL1 LLC, Morgantown OL2 LLC, Morgantown OL3 LLC, Morgantown OL4 LLC,Morgantown OL5 LLC, Morgantown OL6 LLC, Morgantown OL7 LLC (collectively, Morgantown Owner Lessors); andDickerson OL1 LLC, Dickerson OL2 LLC, Dickerson OL3 LLC, and Dickerson OL4 LLC (collectively, Dickerson OwnerLessors).


providing “qualified”2 security in favor of Owner Lessors. As qualified security, Lessee providedeleven letters of credit issued by JPMorgan Chase Bank, N.A. (JPMorgan) in favor of Owner Lessors.Those letters of credit were subsequently “replaced” with LCs issued by Natixis, New York Branch(Issuer), pursuant to a Payment Agreement between Lessee and Natixis Funding Corp. (IssuerAffiliate/Applicant). Under the Payment Agreement, Lessee paid Issuer Affiliate/Applicant USD131,466,787.56 while Issuer Affiliate/Applicant applied for and promised to reimburse Issuer for anyamounts drawn by Owner Lessors under the Natixis LCs. The LC terms provided that OwnerLessors could demand payment in the event that Lessee either defaulted, failed to timely pay rent,or failed to provide within 30 days of expiration or termination, qualified replacement security.

As one of the Owner Lessors, Dickerson OL2 LLC (Beneficiary) received from Issuer a Notice ofTermination regarding its LC effective in 60 days. Before the LC expired, and citing Lessee’s failureto timely provide qualified replacement security, Beneficiary fully drew on the LC for USD821,466.77. Issuer dishonored. Subsequently, Beneficiary sued Issuer citing New York’s UCC Article 5(Letters of Credit) sections 5-108 and 5-111(a), seeking summary judgment in lieu of complaintalleging that its demand complied with the LC terms and that its request for judgment was properlymade under New York law regarding an instrument for the payment of money only. Issuer moved todismiss the action arguing that the same issues were being litigated in Natixis Funding Corp. v. GenOnMid-Atlantic, LLC (the Natixis Action).3 The Supreme Court of New York, Masley, J., grantedjudgment in favor of Beneficiary.

Although the instant action and Natixis Action were substantially related, the Judge refused todismiss the case noting that “this court resolved all of the New York Uniform Commercial Code(UCC) and fraud issues raised in the action at bar relating to the [Issuer] letter of credit” and“incorporated” that order in the instant opinion. Turning to the merits of Beneficiary’s motion, theJudge rejected Issuer’s argument that the case was inappropriate for accelerated treatment becauseIssuer “failed to raise any…triable issues” regarding the documentary evidence offered byBeneficiary sufficient to undermine granting judgment as a matter of law. Looking both to the LCtext and the demand made by Beneficiary, the Judge noted that the demand “strictly complie[d] withthe terms and conditions” of the LC and did not exceed the amount available thereunder. Issuer haddishonored with a refusal stating “sufficient funds are not available for drawing under the Letter ofCredit to satisfy the Drawing Request at this time”. As in the Natixis Action, the Judge cited NewYork’s UCC Article 5 sections 5-103 and 5-109, which state the independence principle and fraudexception, respectively. The Judge noted that “no ground exists that would permit [Issuer] todishonor a facially compliant draw request” and granted judgment in favor of Beneficiary plusinterest and costs. ■

[MJK]

2. The opinion notes that “qualified” security under the leases meant that Lessee would obtain “irrevocable,unconditional, [security]…not collateralized by [Lessee]’s assets.”

3. No. 650817/2018, 2019 WL 2319171 (N.Y. Sup. Ct. May 28, 2019).


mailto:[email protected]?Subject=CTFC Programme


ARTICLES

COMPCOMPCOMPCOMPCOMPARING RECEIVARING RECEIVARING RECEIVARING RECEIVARING RECEIVABLES PURCHASEABLES PURCHASEABLES PURCHASEABLES PURCHASEABLES PURCHASEWITH DOCUMENTWITH DOCUMENTWITH DOCUMENTWITH DOCUMENTWITH DOCUMENTARARARARARY CREDIT FINANCINGY CREDIT FINANCINGY CREDIT FINANCINGY CREDIT FINANCINGY CREDIT FINANCING

by YAP Tat Yeen*

Within the ambit of tradefinance is found a broad rangeof products and solutions thatsupport global trade and itsgrowth. This article discussesReceivables Purchase, amethod of financing differentfrom traditional lending, andfinancing linked todocumentary credits.

Financing underdocumentary credits takes anumber of forms. Whilst it isusual for many specialistsdealing with trade finance torefer to “LC discounting”, forpurposes of this article weshall use terms found in UCP600 when describing financing doneby a nominated bank within its nomination.

UCP600 stipulates that a credit must state with which bank it isavailable,1 and whether it is available by sight payment, deferredpayment, acceptance, or negotiation.2 If an LC is available with anominated bank, that nominated bank may provide financing inthe method stipulated in the credit (see chart on next page).

The provision for nominated bank’s role and financing actiontherein are conditioned upon a complying presentation. Theundertaking of an issuing bank and a confirming bank is toreimburse a nominated bank that has honoured or negotiated acomplying presentation.

* Yap Tat Yeen is Head of Asian Business Transformation for Trade Financeat Société Générale. He is a member of the Global Supply Chain FinanceForum Working Group.

1. UCP600 sub-article 6(a).

2. UCP600 sub-article 6(b).


ARTICLESARTICLESARTICLESARTICLESARTICLES

Often, a bank may provide financing outside of its nomination. The terms honour and negotiationas defined in UCP600 are not applicable for such actions. When a nominated bank performs afinancing action for a non-complying presentation, or a presenter that is not a nominated bankperforms a financing action, it does so outside the provisions of UCP600 – this includes the instanceswhen the bank provides “post-acceptance discounting”, i.e. financing after receipt of the issuingbank’s communication of its acceptance or waiver of discrepancies for the presentation. It ought tobe pointed out that the bank that has provided financing in such instances is not entitled toreimbursement under UCP600.8

3. A nominated bank is not obligated to honour or negotiate, save when expressly agreed to between the nominatedbank and beneficiary, or when the nominated bank is the confirming bank – UCP600 sub-article 12(a).

4. A nominated bank that has incurred a deferred payment undertaking is authorised to prepay that deferredpayment undertaking so incurred – UCP600 sub-article 12(b) – as the nominated bank is prepaying its own obligationunder the deferred payment undertaking, such financing ought to be without recourse to the beneficiary.

5. Found in the definition for “Honour” in UCP600 article 2. The draft is understood to be drawn on the nominatedbank.

6. A nominated bank that has accepted a draft is authorised to prepay or purchase that draft so accepted – UCP600sub-article 12(b) – as the nominated bank is prepaying its own obligation under the draft, such financing ought to bewithout recourse to the beneficiary.

7. UCP600 article 2 – Definition for “Negotiation”. If the nominated bank is the confirming bank, the negotiation shallbe without recourse to the beneficiary – UCP600 sub-article 8(a)(ii).

8. UCP600 sub-articles 7(c) and 8(c) provide for an issuing bank and a confirming bank respectively to be obligated toreimburse a nominated bank that has honoured or negotiated a complying presentation and forward the documents tothe issuing bank.


The bank may agree to do so based on a combination of one or more of these considerations:

a. reliance on the issuing bank’s undertaking to the beneficiary,9

b. reliance on the practice that the issuing bank normally effects payment at maturity based onthe instructions of the presenter from whom it received the documents,10

c. an assignment of proceeds by the beneficiary,11

d. recourse on the beneficiary.

In either case of financing within a nomination or outside of nomination in a documentary credit,the finance provider is typically looking to the issuing bank (and/or confirming bank, if any) as thesource of repayment for the financing.

In Receivables Purchase, the first source of repayment that a finance provider would look to is thedebtor of the receivables. The debtor is usually the buyer of goods or services and the debt isnormally evidenced by invoices issued by the seller of the goods or services. The receivables that thefinance provider purchases are commercial debt, i.e. debt emanating from payment obligations forpurchase of goods or services. A finance provider acquires the right to be paid from suchcommercial debt, typically by way of assignment or transfer of the receivables.12

9. Per UCP600 sub-articles 7(c) and 8(c), an issuing bank and confirming bank’s undertaking to reimburse anominated bank is independent of the issuing bank’s undertaking to the beneficiary.

10. See UCP600 sub-article 12(c) and article 35 concerning the forwarding of documents by a nominated bank withoutthe need to have honoured or negotiated.

11. See UCP600 article 39, which states that a beneficiary may assign any proceeds to which it may be or may becomeentitled to under the credit, in accordance with the provisions of applicable law.

12. For reference, the United Nations Convention on the Assignment of Receivables in International Trade providesthis definition: “Assignment” means the transfer by agreement from one person (“assignor”) to another person(“assignee”) of all or part of or an undivided interest in the assignor’s contractual right to payment of a monetary sum(“receivable”) from a third person (“the debtor”). (Article 2 paragraph (a)) To be noted that this UN ReceivablesConvention, adopted in 2001, has not entered into force as of the writing of this article.

The table that follows presents salient typical differences between Receivables Purchase andfinancing under Documentary Credits.

ARARARARARTICLESTICLESTICLESTICLESTICLES


13. UCP600 sub-article 8(a)(ii).

14. Prepayment or purchase by a nominated bank of its own accepted draft or deferred payment undertaking islogically without recourse, considering that the nominated bank that has accepted a draft or incurred a deferredpayment undertaking has incurred an independent obligation to pay at maturity.



Standard Definitions for Receivables PurchaseIn January 2014, a number of industry associations broadly representing finance providers15

formed the Global Supply Chain Finance Forum (Forum), to develop, publish, and champion a set ofcommonly agreed standard market definitions for Supply Chain Finance (SCF) and relatedtechniques. A document entitled Standard Definitions for Techniques of Supply Chain Financewas then published in March 2016 aimed at providing guidance to finance providers, their clients,regulators, and other interested parties on nomenclature to describe practices and techniques

15. The participating organisations are the ICC Banking Commission, BAFT, Euro Banking Association, Factors ChainInternational, and International Trade and Forfaiting Association.



16. Global Supply Chain Finance Forum. (2016). Standard Definitions for Techniques of Supply Chain Finance. pages11-12. The document is downloadable from the ICC website: https://iccwbo.org/publication/standard-definitions-techniques-supply-chain-finance/.

17. ibid, page 24.

18. The Standard Definitions recognises the existence of various synonyms to the nomenclature in this column. As anexample, Receivable Discounting is also variously called Receivables Purchase, Invoice Discounting, Early Payment (ofReceivables), and these synonyms may overlap the four identified techniques (e.g. synonyms for Factoring includeReceivables Finance and Invoice Discounting).

thereto.16 The Forum recognises that SCF is an evolving set of practicesthat uses or combines a variety of techniques as well as variants ofestablished techniques.17

The Forum’s Standard Definitions document considers ReceivablesPurchase as a category of SCF and identifies four techniques under thiscluster:

Common to each of the identified techniques is first and foremost the existence of receivables (i.e.they must be capable of being identified and validated) which ought to be assignable and whichought to be enforceable against the debtor in the debtor’s jurisdiction. The receivables aretransferred into the ownership of the finance provider, upon which the seller (of the receivables) willreceive an advance payment for the receivables.



Risks common to the finance provider across the techniques include default or insolvency of thebuyer (debtor of the receivables), insolvency of the seller of the receivables, dilution of thereceivables, double financing of the receivables, and fraud. A variety of mitigation techniques aredeployable to address each of the risks.19

A synopsis of the different Receivables Purchase techniques showing the characteristics of eachfollows (next page).20

A mention ought to be made of loan-based SCF techniques. These are loans and advances madeagainst receivables, rather than by means of purchase of the receivables. Receivables are usuallysecurity for the financing, but such financing may also be unsecured.21

Benefits of Receivables PurchaseA seller may derive the following benefits:

1. Working capital optimisation, if the ‘sold’ receivables can be removed22 from the seller’sbalance sheet resulting in reduction in Days Sales Outstanding and shorter cash conversioncycle.

2. Off balance sheet financing, if the financing is on non-recourse basis.

3. Credit protection from buyer insolvency or default.

4. Strengthening of capacity to sell on open account basis.

5. Strengthening of capacity for increased sales to a buyer without increasing the credit limitsfor the buyer.

6. Strengthening of capacity to offer longer credit terms to buyers.

7. Reduction of concentration risk on large buyers, by distributing the risk to a financeprovider.

8. Lower cost of financing if financing terms are based on superior credit rating of the buyer.

9. Lower cost of goods sold if financing cost is lower than early payment discounts that may beoffered to buyers.

It should be noted that many of the benefits are inter-related and reinforce each other, forexample (1), (2), and (3) all result in working capital optimisation and (4), (5), (6), and (7) all result inincreased capacity for business.

19. The Forum’s Standard Definitions document provides an overview of the risks and mitigating techniques for eachof the SCF techniques.

20. Extract from page 72 of the Standard Definitions.

21. See definition of the technique ‘Loan or Advance against receivables’ on the Standard Definitions page 49.

22. A ‘true sale’ of the receivables in the legal structure of the transaction could help to achieve this, but auditors mayalso take into account various other factors e.g. the track record of the receivables, dilution, performance risk of theseller, whether the seller is a publicly listed company or a private company.



A finance provider may derive the following benefits:

1. Acquires title to the receivables and the right to be paid by the debtor of the receivables.

2. Improved visibility on the quality of the seller’s performance and collections – the financeprovider is able to monitor the quality of the receivables it is financing on an ongoing anddynamic basis, instead of relying on periodic snapshots of financial indicators such as debtorsageing list.

3. Protection from insolvency of the seller where the transfer of receivables has been perfectedagainst third parties.

4. In cases where the buyer’s credit rating is superior to the seller’s, the financing transactionsmay consume less capital than those where lending is based on the seller’s risk rating.

5. Possibility for optimisation of risk-weighted assets based on credit insurance cover for thereceivables.

A buyer may derive the following benefits:

1. Improved stability of the supply chain with reduced risks of disruption caused by fundingand liquidity issues of the seller.

2. Ability to buy more from the seller, as the seller’s capacity is increased thanks to availablefinancing.

3. Possibility of longer credit terms from the seller, thanks to available financing to the seller.

4. In Payables Finance programs, the ability to make available approved invoices for seller toavail financing, at financing costs pre-agreed with the finance provider.

Elements of Receivables Purchase Which Finance Providers Need to ManageIn Receivables Purchase, the finance provider relies on the trade receivables as the primary source

of repayment, as settlement of the financing will be the payment by the debtor of the receivables.23

23. This is usually the case, even if financing is with recourse to the seller.



24. In this article, the terms ‘assign’ and ‘transfer’ are used interchangeably.

25. The transferor in a transaction could also be a transferee in a prior transaction, in which case more than onetransfer of the receivables occurs.

26. “Insolvency administrator” means a person or body, including one appointed on an interim basis, authorized in aninsolvency proceeding to administer the reorganization or liquidation of the assignor’s assets or affairs. (UNReceivables Convention, article 5 paragraph (e).)

27. E.g. in Germany, notice of transfer to debtor is not required for perfection; in Korea, the same is required; underEnglish law, a valid assignment may be either statutory or equitable – the former requiring a notice of assignmentserved on debtor, and the latter no notice. For a survey of the perfection requirements in 15 jurisdictions (the US,Canada, New Zealand, Australia, Korea, Japan, France, Belgium, England, China, Germany, Austria, the Netherlands,Singapore, Hong Kong), please refer to Chapter 3 of “Cross-Border Transfer and Collateralisation of Receivables” byWoo-Jung Jon.

28. In some jurisdictions, a notice of transfer to the debtor is valid only if it is served by the assignor (transferor); inother jurisdictions, either the transferor or transferee may serve the notice.

The party that receives the financing ‘sells’ the receivables to the finance provider, by way oftransferring or assigning the receivables that it owns, to the finance provider.24 The finance provideris acquiring an asset, not in the form of a financial debt owed by the party financed, but in the formof a transfer of commercial debt owed by a third party to the party financed.

Purchase of the receivables is by way of an agreement signed between the seller and the financeprovider, in which the seller assigns or transfers the receivables to the finance provider for apurchase price paid by the finance provider to the seller. The debtor may be made aware of thetransfer of receivables by way of a notice that it receives.

It is in the finance provider’s interest to determine that it has a valid title to the receivables andthat it is able to enforce its rights on the debtor and against competing claims for the receivables. Forthis, the finance provider ought to pay attention to questions of effectiveness, perfection, andpriority of the transfer of receivables.

Effectiveness of TransferThe transferor/assignor is the seller of the receivables, and in a trade finance transaction, is

usually the seller of goods.25 The finance provider as purchaser of the receivables is the transferee, orassignee. Third parties refer to any party that might claim on the transferred receivable, and theseinclude other creditors of the seller, other transferees of the same receivables, insolvencyadministrators,26 and the state.

For a transfer of receivables to be effective against the transferor, the debtor, and third parties,the provisions concerning transfers in the relevant legal system need to be observed and questionsin this regard may include:

• Is notice of assignment to the debtor required?27

• Who may serve the notice of assignment on the debtor?28



• Is there a need to register the assignment/transfer?29

• Is a transfer invalidated by a restriction on assignments in the underlying contract betweenbuyer and seller?30

Perfection of Transfer‘Perfection’ is the step required to make a transfer effective against third parties, and in the case

of insolvency, against the transferor.31

Perfection of a transfer of receivables is regulated by the laws on transfers of receivables.32

Applicable laws differ by jurisdiction and hence the requirements for perfection need to beunderstood by finance providers for their particular transactions. Requirements to be met forperfection may include any or a combination of creation of the assignment, notice of assignment tothe debtor, formality requirements, and registration. When the transferor, transferee, and debtor areall in the same location, and local law applies to the underlying commercial transaction and thetransfer of receivables, perfection of the transfer would typically be subject to the law of the samelocation – when the transferor and debtor are in different legal jurisdictions, conflict of laws mattersneed to be managed. For these reasons, finance providers ought to perform their ReceivablesPurchase transactions with proper legal due diligence.

Effectiveness is a requirement for perfection, but an assignment may be effective between thetransferor and transferee even if it has not been perfected against third parties.

PriorityPriority is determined by the order of perfection against third parties.33 As the requirements for

perfection differ across legal systems, it is important for a finance provider to do the necessary tocomply with the provisions of applicable law in order to protect its rights to be paid on thereceivables.

29. As an example, the United States’ Uniform Commercial Code Article 9 requires the filing of a financing statement,not only for security rights but for transfers of receivables, and in India, the Factoring Regulation Act requiresassignment of receivables to be registered with CERSAI. In Singapore and Hong Kong, the requirement forregistration with the Companies Registry / ACRA does not apply to outright assignment of receivables.

30. A waiver in writing may be required in case there is a prohibition of assignment in the contract; such is notrequired in the US as per UCC Article 9 (Secured Transactions), clauses restricting security interests in receivables arevoid and a sale of a receivable is treated as a security interest.

31. Woo-Jung Jon. (2018). Cross Border Transfer and Collateralisation of Receivables. Hart Publishing. Page. 70.

32. Jon, page 70.

33. ibid, p. 70.

Taken from the UN Receivables Convention, article 5 paragraph (g): “Priority” means the right of a person inpreference to the right of another person and, to the extent relevant for such purpose, includes the determinationwhether the right is a personal or a property right, whether or not it is a security right for indebtedness or otherobligation and whether any requirements necessary to render the right effective against a competing claimant havebeen satisfied.



As an example, there may be more than one assignment of the same receivables to differentassignees/transferees, giving rise to competing claims by the different transferees – the multipletransfers could have been made by the same transferor or subsequent transferors (who weretransferees). In principle, the transferee that first achieves perfection against third parties haspriority over the other transferees.34

In the example shown above, even though the 1st transfer was made chronologically earlier than a2nd transfer to another transferee, by the same transferor, the 2nd transferee shall have priority overthe 1st transferee if the 2nd transferee had perfected the transfer before the 1st transferee did. Thereare exceptions to this principle in certain legal systems, for example under English law, if the 2nd

transferee gave notice of the transfer to the debtor before the 1st transferee did, but knew at thetime of notice about the prior transfer to the 1st transferee, it cannot have priority over the 1st

transferee.35 There are jurisdictions where notice to the debtor is not required for perfection. Forexample, in Germany, there is no difference between perfection of a transfer and creation of atransfer– in the example of the schematic above, the 1st transferee would have priority.36

Receivables Purchase in PracticeReceivables Purchase can be for domestic receivables or for cross-border receivables. Particular

attention needs to be paid to address conflict of laws issues when more than one jurisdiction’s lawsare involved, with regard to effectiveness, perfection, and priority.

In a Receivables Purchase, there are three sets of relationships:

1. The relationship between the seller (transferor) and the finance provider (transferee)

2. The relationship between the seller (transferor) and the buyer (debtor)

3. The relationship between the transferee (finance provider) and the debtor (buyer)

Each relationship may be governed by different choice of law.

34. ibid, p. 75.

35. ibid, p. 77.

36. ibid. p 131.



The law governing the contract generating the receivable between the seller and buyer alsogoverns the relationship between the transferee and the debtor, even if the law governing thetransfer contract (agreement for Receivables Purchase) may be a different law. This is because thetransferee does not obtain a better ‘title’ than the transferor in relation to the receivables. Questionson assignability of the receivables and the debtor’s obligations in regard to the receivables, aregoverned by the law of the underlying sales contract between seller and buyer.

In the event of the transferor’s insolvency, the relationship between the transferee and theinsolvency administrator is governed by the state where the transferor is located.

Perfection against third parties including potential competing transferees has to take into accountthe conflict of laws governing the different sets of relationships. Enforcement on debtors will besubject to the law of the state where the debtor is located. For these reasons, it is possible that aReceivables Purchase deal may involve a number of legal opinions to be obtained based on the lawsof different relevant jurisdictions, for the finance provider to be sure that it perfects its transferagainst third parties and preserves priority on the debt.

In practice, finance providers may accept certain risks, for example not serving a notice ofassignment on the debtor upfront even when such notice would make the assignment binding on thedebtor, preserve its priority on the debt and cut off set-off rights the debtor might have against thereceivables. This may be done based on commercial considerations to accommodate a seller whodoes not wish to disclose to the buyer that it has sold the receivables.

It can be seen from the above discussion that Receivables Purchase is quite different fromfinancing under documentary credits.

• A documentary credit transaction is “self contained” in the sense that a finance provider isrelying on the provisions of the credit (which incorporates the provisions of UCP600, if issuedsubject to the rules) for its rights to reimbursement or to receive proceeds under the credit; aReceivables Purchase transaction is much more “exposed” to elements of applicable law andregulations, which a finance provider needs to take heed of to secure its rights to be paid on thereceivables.

• A documentary credit is an instrument for payment to a beneficiary for an underlying tradetransaction, with payment normally effected to the named beneficiary or to a bank which will pay orhas paid the beneficiary; in Receivables Purchase, a buyer that originally owes a debt to a seller ismade to owe the debt to an assignee (finance provider to the seller), and it is discharged of its debtprovided it has correctly paid on it (in the case of notified assignments, normally by paying to theassignee) – the finance provider is concerned with effectiveness of the assignment and preserving itspriority to be paid on the debt.

Receivables Purchase performs an important role in the financing of trade, both domestic andcross-border. In global trade, the volume of open account trade is estimated to be four times that oftrade settled by documentary credits and documentary collections. Finance providers and tradingcounterparties therefore have a very sizeable opportunity for availing finance with ReceivablesPurchase and other techniques of Supply Chain Finance. ■




* Kristine Siebel is Chair of the BAFT North American Standby and Guarantee Committee and VP, Societe Generale.

** Mary Ann McCarty is Co-Chair of the Task Force, a member of the BAFT North American Standby and GuaranteeCommittee, and VP at PNC Bank.

THE REASONS AND RATIONALE FOR PRODUCING THE BAFTGUIDANCE PAPER FOR AUTOMATIC EXTENSIONS

MCCARTYSIEBEL

by Kristine SIEBEL* and Mary Ann MCCARTY**

For decades, the bankingindustry has been challengedwith issues arising from therisks associated with use ofautomatic extension clauses.By some estimates, automaticextension clauses appear inover 60% of standby letters ofcredit issued. This type ofclause was initially created inorder to support long termcontracts which are backed bystandby letters of credit. MostUS banks today haveoutstanding standby letters ofcredit on their books that were issued in the 1970s or 1980s which continue to extend annually. Inthese instances, the voluminous paper files, if not electronically imaged, can be 4 inches (10 cm) thickin size and dusty with age.

An automatic extension clause is used in situations where it is impractical or impossible for a bankto extend the initial credit required to support a contract, not to mention forecast when the contractwill cease. To monitor automatic extension clauses, solid controls, systems, process, and proceduresare necessary to mitigate the risk of continual extensions. Most banks have an entire department orgroup established to manage letters of credit containing such clauses.

Over the years, there have been numerous legal consequences, court cases, and other unfavorableoutcomes for clients based on situations involving automatic extension clauses which have occurredfrom either failing to manage risk appropriately or poor drafting and structuring by the bank. Asmany of us in the letter of credit business navigated through mergers and acquisitions by and of ourbanks, we unfortunately discovered standby letter of credit transactions retained in the deskdrawers of relationship managers or branch managers no longer with the institution. Many of thesestandbys contained automatic extension wording and not surprisingly, it was determined that therewas no liability recorded, no collateral on file, and no fees taken on the letters of credit. Typically,



these transactions are only discovered when a demand for payment is presented. We all know thestory what this means for the bank on the receiving end of this presentation. It has little choice butto pay.

Risks with an automatic extension clause present themselves on all types of standby LCs. Andrisks exist whether you are an Issuing, Advising, Confirming Bank, or party to a counter standby.Even the simple updating of a beneficiary address, transfer of a letter of credit, or changes to theautomatic extension clause can create additional risks and require careful review and considerationwhen processing. The routine sending of a non-extension notice or even an early cancellation alsorequires procedures in place to ensure the notice is given properly and the bank’s risk is mitigated. Itis probably safe to say that there is not one bank in the industry that has not dealt with challenges,court costs, and client ramifications relating to standby letters of credit containing automaticextension provisions.

The fact is that due to all the issues the industry has faced, themost “Ask the Expert Questions” posed to the BAFT NorthAmerican Standby and Guarantee Committee over the yearsconcerned automatic extension clauses. In 2015, this BAFTCommittee assembled a task force to study the use of automaticextension clauses in standby letters of credit and demandguarantees in the United States. The objective was to produce awhite paper to be used as guidance for banks within the USrelating to phrasing suggestions, accounting practices, andidentification of problematic wording. As referenced in thepaper’s introduction and objectives, the task force sought tooutline “the good, the bad and the ugly as it relates to auto-extension clauses and the challenges faced by banks in managingthe associated risks.” We can all agree with the statement as therehave been far too many automatic extension situations whichhave resulted in bad and/or ugly outcomes.

Invitations to nominate participants on the task force were extended to US-based banks with thelargest standby LC portfolios, based on LC statistics published in Documentary Credit World.Representatives from 15 banks participated and placed a member on the task force. It is safe to saythat the total years of experience of the members of the task force well exceeded over 350 years.

The task force gathered various court cases and collected examples of automatic extension clausesconsidered to be either “good, bad or ugly”. The task force then divided into teams, each focusingon one specific topic such as legal issues, good wording, bad wording, etc. Each team reviewed thevarious court cases and problematic wording to provide risk guidance. Members of the task forcerespected the opinions of each other and although there were some aspects of automatic extensionon which we could not mutually agree, the paper does provide guidance on options which can beimplemented by banks based on their own internal processes.

https://baft.org/docs/default-source/default-document-library/guidance-paper-for-auto-extensions.pdf?sfvrsn=2



The paper was written to provide guidance to all banks regardless of size, however, the belief isthat banks with smaller operations will gain a more comprehensive picture of the risks involved withuse automatic extension clauses.

It was clear to the task force that the fundamental overarching key risk mitigation is at the time ofissuance of the standby letter of credit. Task force members all agreed that the process of drafting,structuring, and booking is critical to successful evaluation and mitigation of risk. The paper outlinesclauses which appear on their face to be innocuous, however, after a second review, they cansometimes be open to interpretation and put the bank in a situation where it cannot end thetransaction without the beneficiary’s consent. Most specialists in the LC industry for many years canremember previous managers repeatedly urging them to “read the credit”. That was, and continuesto remain, the most important advice imparted to LC professionals of the past, present, and future.

Although all specialists may not agree with where the task force landed on each topic impactingautomatic extension clauses, the BAFT North American Standby and Guarantee Committee hopes ifnothing else, the paper will assist specialists in thinking through issues within their operations andimplementing proper controls to mitigate risk. Released in June 2019, the BAFT Guidance Paper forAuto Extensions is available on the BAFT website and because the material is considered to help allbanks within the industry, BAFT is offering this paper free of charge.

About BAFTBAFT, the leading global financial services association for international transaction banking, helps bridgesolutions across financial institutions, service providers and the regulatory community that promote soundfinancial practices enabling innovation, efficiency, and commercial growth. BAFT engages on a wide range oftopics affecting transaction banking, including trade finance, payments, and compliance. The association websiteis www.baft.org. ■

https://baft.org/docs/default-source/default-document-library/guidance-paper-for-auto-extensions.pdf?sfvrsn=2

https://baft.org/



* Pavel Andrle is an international trainer and consultant. He can be reached at: [email protected]

INCOTERMS 2020 & LETTERS OF CREDITS –INCOTERMS 2020 & LETTERS OF CREDITS –INCOTERMS 2020 & LETTERS OF CREDITS –INCOTERMS 2020 & LETTERS OF CREDITS –INCOTERMS 2020 & LETTERS OF CREDITS –A NEW FCA OPTIONA NEW FCA OPTIONA NEW FCA OPTIONA NEW FCA OPTIONA NEW FCA OPTION

by Pavel ANDRLE*

Since launch of the new Incoterms 2020 in September 2019, ICCNational Committees have conducted many trainings andpractitioners are getting familiar with all the changes. Most tradespecialists, myself included, are relieved that there are notwidespread revisions. But on the other hand, some specialistsmight be a bit disappointed!

My personal view is that despite the fact there are not manysignificant changes in this latest iteration of Incoterms rulescompared to its predecessor (Incoterms 2010), the 2020 revisionprovides notable enhancements; above all, in the style. Itrepresents great refining which makes the Rules easier to readand clearer to understand. I very much like the „“horizontalpresentation“ of the Rules which nicely highlights the differencesamong the individual Incoterms Rules in relation to eachparticular article. It’s a great idea with significant practical effect.Congratulations to the drafting group on a job very well done!

In the following discussion I wish to focus on one specific aspect of Incoterms 2020 which mightwell interest documentary credit practitioners.

Sea Transport (only) IncotermsIncoterms FOB, CFR, and CIF are traditionally among the terms most often used in practice. Note

that they are intended to be used strictly for port-to-port shipments only. An LC would require ashipped on board bill of lading.

On the other hand, FOB, CFR and CIF (and FAS), are not the only Incoterms which can be usedfor sea transport. Practitioners may well, when suitable, use any other Incoterms for sea transport.Many ICC representatives have been persistently recommending use of FCA instead of FOB in caseof containerised shipments (as well as CPT and CIP instead of CFR and CIF). It is true that in suchinstances, from the seller´s perspective, FCA seems more suitable than FOB. Containers arecommonly handed over to the carrier or their agent at a container terminal, however, under FOB,the seller still bears all cost and risks until the goods (containers) are loaded on the vessel in the portof loading! Unless it has been agreed between the contract parties otherwise, the buyer contracts forthe carriage; not the seller. This leaves the seller with no control over the handling and loading ofgoods or issuance of the bill of lading, etc., all of which the seller is still responsible for! Moreover,the LC would call for presentation of a shipped on board bill of lading.



Therefore, it indeed seems that FCA would be more advantageous for the seller than FOB.However, the buyer would have to agree. For the buyer, FOB seems the better option as the shippedon board bill of lading clearly evidences that the goods have successfully reached the board of thevessel, having being cleared for export, etc., leaving all these risks behind.

If the contract parties clearly agree on the FCA term for sea transport, how should they specifythe relevant LC conditions? Choice of FCA would suggest that only a “received for shipment“ bill oflading is to be requested. Remember that UCP600, as the default rules, requires presentation of ashipped on board bill of lading regardless of what Incoterm is chosen.

The beneficiary (seller) should carefully evaluate whether they are willing to assume the risk ofaccepting an LC merely calling for ”bill of lading“ (thus requiring an on board bill of ladingaccording to UCP600) or whether they should insist on express modification of that UCP600 defaultrule so as to provide that the LC expressly require or allow presentation of a received for shipmentbill of lading or another suitable “received for shipment document”.

ICC’s Incoterms drafting experts have long sought to discourage continuous — in their viewsignificant — “overuse“ of FOB for containerised sea shipments. Certainly, they have a very validpoint but it seems to me that buyers (and their financing bankers) have understandably preferredFOB. That stance, and the corresponding submission of a shipped on board B/L, most oftenprevails.1

Incoterms 2020 and FCA with the New On Board Bill of Lading OptionAdditionally, Incoterms 2020 now caters to the possibility that a seller needs a shipped on board

B/L under FCA (to present, e.g. under an LC) by including a new optional mechanism. The partieswould so agree in their contract that the buyer would have to instruct its carrier to issue a bill oflading with on board notation and pass it to the seller at the risk and cost of the buyer. The sellerthen would have to provide the same document to the buyer, most likely under the LC, who wouldneed it to obtain discharge of the goods from the carrier.

In my view, such option deserves the full understanding of the seller. The delivery takes placeunder the FCA when the goods are received by the carrier, but the seller is expected to present anon board bill of lading which they only obtain from the carrier if the buyer indeed so instructs thecarrier and he accedes to it (and obviously provided that the goods have in fact been loaded onboard in the port of loading, i.e. a place after the place of delivery).

In other words, the delivery risks pass as per FCA, but the seller is to present a documentreflecting FOB. Date of shipping (loading) the goods on the board of the vessel would be taken asthe shipment date (reflecting FOB), not the date of receiving goods by the carrier (which wouldreflect FCA requirement).2 The seller would assume the risk that the buyer and/or their carrierwould not act as the new option requires them.

1. Note that analogous issues as discussed above regarding the relationship between FCA and FOB are also relevantto the relationship between CPT and CFR as well as CIP and CIF.

2. Unless otherwise expressly stated in the LC.



Moreover, the Incoterms 2020 explanatory notes for FCA users mentions, as the example of theoptional mechanism, a situation where the place of receipt is Las Vegas and the port of loading is LosAngeles. Las Vegas is an inland place, quite far from Los Angeles. First and foremost, the properrequirement would be a multimodal transport document (multimodal bill of lading) not a (ocean) billof lading. In such a scenario it seems to be very uncommon, cumbersome, and evidently incorrect torequest the seller to submit a shipped on board a vessel (in Los Angeles port) (multimodal) bill oflading under an LC. The buyer would be obliged to instruct its carrier to issue such a document (oradd the on board notation on the already issued received for shipment multimodal bill of lading) athis risk and cost. Would you, as the seller, rely on such mechanism? It seems to me that the sellershould rather adhere to the “standard“ option – to present a multimodal bill of lading showing thatgoods have been received for the carriage in Las Vegas.3

Is the New FCA (B/L) Option More Advantageous Than the Traditional FOB for the Seller in CaseWhen the L/C Credit Requires Shipped on Board B/L?

With the FOB term, the seller would typically hand over the container to the carrier or their agentat the container terminal when he surrenders control of it it. Yet, the seller bears the risk and costuntil the goods have been loaded on board the vessel, and furthermore until they obtain the cleanon board bill of lading. This certainly represents significant risk. However, a shipped on board billof lading clearly reflects fulfillment of FOB obligations of the seller in relation to delivery of thegoods.

Arguably, the seller might be in a better position if they agreed with the buyer that they wouldcontract for the ocean carriage, possibly with the carrier nominated by the buyer, at the risk and costof the buyer. Note that Incoterms 2020 recognizes such practice.4 In this instance, the seller should beable to exercise better control over the shipment and the issuance of the bill of lading.

ConclusionThe execution of the chosen Incoterm can cause some challenges when it comes to the payment

terms; above all when payment is to be done through an independent, documentary- based paymentinstrument, i.e. a letter of credit. When an LC covers only port-to-port shipment, the shipped onboard bill of lading is required as a default under UCP600 rules which reflects FOB (or CFR or CIF)Incoterms Rule. The contract parties may well agree on FCA, which is recommendable if the goodsare shipped in containers. To accommodate such an eventuality, i.e. FCA to cover port to port (oreven multimodal) transport, the new Incoterms 2020 FCA rule now includes a new option, i.e. therequirement of the shipped onboard bill of lading to be issued to the seller so they may present theB/L to the buyer, most often under an LC. However, this new option poses its own challenges to theseller/LC beneficiary, of which they should be fully aware. On the other hand, obviously if theseller/LC beneficiary agrees to present a shipped on board B/L under FCA, then the new FCAoption is better than the “simple” FCA. ■

3. Note that the example given in the Incoterms 2020 explanatory notes for FCA users relates to FCA Las Vegas.

4. See Incoterms 2020 A4 (Carriage) with FOB which states: “If agreed, the seller must contract for carriage on theusual terms at the buyer´s and cost.” In this context, Incoterms 2010 A3 (Contracts of Carriage and Insurance) stated:“The seller has no obligation to the buyer to make a contract of carriage. However, if requested by the buyer or if it iscommercial practice and the buyer does not give an instruction to the contrary in due time, the seller may contract forcarriage on usual terms at the buyer´s risk and expense.“



* HEI Zuqing is a Research Fellow with the Institute of Free Economic Zone at Tianjin Normal University andGraduate Mentor at Nankai University. He had worked at Bank of China and Societe Generale. He can be reached at:[email protected]

1. “Ten Major Stages in the Evolution of Letter of Credit Practice” by James E. Byrne, Documentary Credit World,November/December 2003, p. 28, reprinted at 2004 ANNUAL SURVEY OF INTERNATIONAL BANKING LAW & PRACTICE 22.

2. “The UN Convention on International Independent Undertakings: Do States with Mature Letter-of-Credit RegimesNeed It?” by John F. Dolan, © Banking & Finance Law Review, reprinted at 1999 ANNUAL SURVEY 101.

3. STANDBY & DEMAND GUARANTEE PRACTICE: UNDERSTANDING UCP600, ISP98, AND URDG758, by James E. Byrne, Institute ofInternational Banking Law & Practice, p.187.

PRECLUSION UNDER ICC RULES: A CHINESE PERSPECTIVE

by HEI Zuqing*

The Query addressed in ICC Opinion TA.891 discussed at theOctober 2019 ICC Banking Commission Meeting held in Paris,involved the return of original documents. The presenting bankhad asked the issuing bank for the return of the documents, butthe issuing bank did not return all the documents and returnedthe documents with a substituted document (page 1/2 of the billof lading was a photocopy instead of the initially presentedoriginal). The Opinion concluded that the issuing bank isprecluded from claiming that the documents do not constitute acomplying presentation. In my view, the preclusion rule iscorrectly applied to in the Analysis and Conclusion of ICCOpinion TA.891. UCP600 Article 16(f) provides that an issuingbank or confirming bank is precluded from claiming thatpresented documents are non-complying if it fails to act inaccordance with UCP600 Article 16 (Discrepant Documents,Waiver and Notice). This Article spells out in detail what thenotice of refusal is to say1 and it might permit the beneficiary tore-present and cure the discrepancy or take steps to protect itself.2 I agree that: “The content of UCP600 sub-article 16(f) requires the issuing bank to act fully in accordance with article 16”, but thissentence was regretfully removed from the final version of ICC Opinion TA.891’s Conclusion. Thetechnical failure of the bank to act under the preclusion rule is severe and could result its liability.Consequently, technical aspects to the proper scope and application of this rule should be observed.3

Notice of Refusal RequiredThe preclusion rule turns on the notice of refusal and its terms. UCP600 Article 16(c) provides that

when an issuing bank or confirming bank decides to refuse to honor or negotiate, it must give asingle notice to that effect to the presenter. ISP98 Rule 5.03 (Failure to Give Timely Notice ofDishonor) also provides that preclusion would apply to failure to give a notice of refusal. In Export-



Import Bank of the United States v. United California Discount Corp.,4 a standby LC required presentationof the original operative LC but the beneficiary failed to present it and the issuer failed to givenotice of the discrepancy. The court concluded that the issuer was precluded from asserting thisdiscrepancy on subsequent re-presentations as reason for dishonor. In China New Era InternationalLtd. v. Bank of China (H.K.) Ltd.,5 a nominated bank negotiated documents bearing discrepanciesagainst an indemnity and forwarded the documents to the issuing bank, but the issuing bank did notgive a notice of refusal to honor. Therefore, the court concluded that the issuing bank was precludedfrom asserting that the documents did not comply with the terms and conditions of the LC. In thesetwo cases, the issuing bank did not send a notice of refusal to the presenter and the claim ofpreclusion was correctly met. In J.P. Doumak, Inc. v. Westgate Financial Corp.,6 a standby LC requiredspecified documents, including a written demand for payment, and the beneficiary sent all requireddocuments except a written demand for payment. The court concluded that the written demand wasrequired, but the issuer had no obligation to cite the discrepancy. In this case, the beneficiary did notsend a written demand while the issuer did not give a notice of refusal for the failure. It is my viewthat the issuer was precluded from claiming the discrepancy.

The bank should give a notice of refusal. The issuing bank or confirming bank is required to senda notice of refusal, as the beneficiary is entitled to know the basis for dishonor in order to assess itsoptions based on the statement in the notice.7 Otherwise, it would follow that the bank would accepta re-presentation and is precluded from refusing payment.

More Than One Notice Not PermittedIn ICC Opinion TA.605 (2006), a first notice of refusal sent by the issuing bank did not specify a

certain discrepancy, but a subsequent notice stated the discrepancy. The Opinion concluded that theissuing bank is required to give a single notice of refusal and to clearly identify all discrepancies. Inmy view, the issuing bank should be precluded from claiming that the documents were not incompliance. In Swiss Singapore Overseas Enterprises Pte Ltd v. China Citic Bank Corp. Ltd.,8 after receipt ofdocuments, the issuing bank gave notice to the negotiating bank that it could claim reimbursement.The notice did not state any discrepancies in its first notice, but the issuing bank claimeddiscrepancies in its subsequent notice for the same presentation. The court concluded that the issuingbank was precluded from alleging that the documents were non-complying in its subsequent notice.

UCP600, URDG758, and ISP98 all refer to a single notice and provide that there is only one

4. Export-Import Bank of the United States v. United California Discount Corp.2010 U.S. Dist. LEXIS 91170 (C.D. Cal.2010) [U.S.A.], abstracted at 2011 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 444.

5. China New Era International Ltd. v. Bank of China (H.K.) Ltd. [2010] 5 HKC 82 (2010) [H.K.], abstracted at 2011ANNUAL REVIEW 411.

6. J.P. Doumak, Inc. v. Westgate Financial Corp.776 N.Y.S.2d 1 (N.Y. App. Div. 2004) [U.S.A.], abstracted at 2005ANNUAL SURVEY 305.

7. THE OFFICIAL COMMENTARY ON THE INTERNATIONAL STANDBY PRACTICES, by James E. Byrne, ILBLP, p.200.

8. Swiss Singapore Overseas Enterprises Pte Ltd v. China Citic Bank Corp. Ltd, Xiamen Branch [2013] HKCU 1860[Hong Kong], abstracted at 2014 ANNUAL REVIEW 546.



opportunity for the issuing bank or the confirming bank to state discrepancies. Therefore, anydiscrepancy not raised in the first notice cannot be raised thereafter.

Requirement for Properly Stating Discrepancies NeededUCP600 Article 16(c)(ii) further provides that notice must indicate each discrepancy that is a basis

for refusal. In Toyota Tsusho Grp. v. Comerica Bank, the court explained that the plain language of thenotice should clearly state the reasons for dishonor and it must make a specific reference to thedocument.9 In ICC Opinion TA.884 (2018), the notice from the issuing bank did not specificallyindicate the context in which the documents were discrepant. It only mentioned refusal due to“LOCAL AND INTERNATIONAL LAWS AND REGULATIONS AND INTERNAL POLICY FORAML/CTF AND FOREIGN SANCTIONS IN ACCORDANCE WITH OUR L/C TERMS” instead ofdocuments being non-compliant with the terms and conditions of the credit. The Opinion concludedthat the notice based on the above sanction regulations should not be regarded as a refusal noticeand the issuing bank is precluded from claiming that the documents do not constitute a complyingpresentation.

The bank must state all discrepancies on which it relies in a notice. Additionally, the notice mustspecifically indicate the context in which documents are discrepant. URDG758 follows the approachof UCP600. ISP98 also requires that the notice state all discrepancies upon which dishonor is based

.Adequacy of Notice of Dishonor

In Philippine Commercial International Bank v. Korea Exchange Bank,10 an issuing bank notified thepresenting bank that its documents were “unclean”. In so doing, the notice of discrepancies canhardly be considered adequate. In my view, the issuing bank should be precluded from assertingthat the documents do not comply. In Heritage Bank v. Redcom Laboratories, Inc.,11 an issuing bankdishonored on the ground that it was prohibited from paying due to an injunction, but the injunctionthen was dissolved. The court concluded that issuer had “waived its right to raise thediscrepancies”. In this case, the issuing bank based its dishonor on the injunction and not the allegeddiscrepancy. Because of the issuing bank’s failure to state a discrepancy on the documents presentedin its notice of refusal, it is my view that after the injunction lifted, the issuing bank should beprecluded from claiming that the documents do not constitute a complying presentation.

In view of the above, a bank should follow the provisions of the practice rules to which the creditis subject when issuing a notice of refusal and its notice of dishonor should be valid and notambiguous or inadequate.

Indication of RefusalUCP600 Article 16(c)(i) provides that the notice should state that the bank is refusing to honor or

negotiate. In ICC Opinion TA.878 (2017), a message from the issuing bank did not indicate that the

9. “Letters of Credit: 1996 Cases” by James G. Barnes and James E. Byrne, 1998 ANNUAL SURVEY 15.

10. Philippine Commercial International Bank v. Korea Exchange Bank Civil Case No. 99-350 (Regional Trial CourtMakati, Branch 60, 10/21/2011) [Philippines], abstracted at 2014 ANNUAL REVIEW 514.

11. Heritage Bank v. Redcom Laboratories, Inc.2001 U.S. App. LEXIS 9202; 250 F.3d 319 (5th Cir.) [U.S.A.], abstracted at2002 ANNUAL SURVEY 251.



issuing bank was refusing to honor the presentation. In this situation, the message cannot beconsidered a notice of refusal as it did not provide any indication of a refusal to honor. As a result,the issuing bank should be precluded from claiming that the documents do not constitute acomplying presentation. In Voest-Alpine Trading USA Corp. v. Bank of China,12 the issuing bank notifiedthe presenting bank that the documents under the standby LC contained several discrepancies, butthe notice failed to indicate that the presentation was being refused. The court concluded that thediscrepancies noted in the notice were not sufficient to allow rejection of the presentation. In thiscase, the notice implied that the issuing bank had not refused the documents, as it stated that theissuing bank would contact the applicant for acceptance despite discrepancies and that thedocuments might be accepted after consultation with the applicant. It was also not a notice forrefusal. It is my view that the issuing bank should be precluded from claiming that the presentationis non-complying. In Habib Bank Ltd. v. Cent. Bank of Sudan,13 there were discrepancies within thedocuments presented, but the issuer failed to make any objection in its notice. The court concludedthat under the preclusion rule the issuer lost its right to deny payment against the discrepantdocuments.

By failing to state in its notice that it is refusing to honor or negotiate, the bank would have anobligation to accept the documents at a later date. As such, the refusal notice should explicitly statethat it is rejecting documents and the bank should be sure that the noted discrepancies justifydishonor. ISP98 requires that an indication of refusal is to be stated. URDG758 also requires thatnotice state that the issuer is rejecting the demand.

Timely NoticeUCP600 Article 16(d) provides that the issuing bank or confirming bank should give notice of

dishonor no later than the close of the fifth banking day following the day of presentation. In ICCOpinion TA.782 (2013), an issuing bank refused the presentation 14 calendar days after receipt. TheOpinion concluded that the issuing bank should be precluded from claiming documents werediscrepant because the bank did not issue its refusal notice within 5 banking days following the dayof presentation. In Federal Bank Ltd. v. VM Jog Engineering Ltd.,14 a negotiating bank forwardeddocuments to the issuing bank and stated that the documents are in order. Two months later, theissuing bank informed the negotiating bank of discrepancies that it had discovered. The courtconcluded that the issuing bank was precluded from claiming that the documents did not comply.

From the cases, we see that if the bank takes longer than the time permitted to send its notice, itwould be exposed to liability for delay and be precluded from contending that the documents donot comply.15 ISP98 provides that notice of dishonor must be given within a time after the

12. Voest-Alpine Trading USA Corp. v. Bank of China, 288 F.3d 262 (5th Cir. 2002) [U.S.A.], abstracted at 2003 ANNUAL

SURVEY 290.

13. Habib Bank Ltd. v. Cent. Bank of Sudan, 2 Lloyd’s Rep. 412 (Comm. Ct. 2006) [UK], abstracted at 2007 ANNUAL

SURVEY 182.

14. Federal Bank Ltd. v. VM Jog Engineering Ltd. [2002] 4 LRI 204 (Sup. Ct. of India) [India], abstracted at 2004 ANNUAL

SURVEY 271.

15. “A US Perspective on the New URDG758 Compared to ISP98, UCP600, and the NY UCC” by Michael Evan Avidon,© 2010 Moses & Singer LLP, reprinted at 2011 ANNUAL REVIEW 44.



presentation which is not unreasonable. It further provides that notice given within three businessdays is deemed to be not unreasonable and beyond seven business days is deemed to beunreasonable. Beyond this time frame of seven business days would trigger the preclusion penalty.URDG758 provides the notion of giving notice without delay but not later than the close of the fifthbusiness day following the day of presentation.

Disposition of DocumentsDisposition of DocumentsDisposition of DocumentsDisposition of DocumentsDisposition of DocumentsUCP600 Article 16(c)(iii) lists four options for stating the disposition of documents within a notice

of dishonor.16 In ICC Opinion TA.892 (2019), notice from the issuing bank did not state that the bankwas refusing the documents and it also did not contain disposal instructions for the documents. TheOpinion concluded that the bank was therefore precluded from claiming that the documents do notconstitute a complying presentation. In this situation, the notice should have been issued inaccordance with UCP600 Article 16(c)(iii) and stated disposition of the documents. In Amwest SuretyInsurance Co. v. Concord Bank,17 an issuing bank’s notice of dishonor did not indicate that the issuingbank would either return the documents or hold them at the beneficiary’s disposal. The courtconcluded that failure of the issuer to fulfill this notice requirement precluded it from asserting anygrounds for rejecting the documents. In this case, the issuer had a duty to state its intentions withregard to the disposition of documents in its notice of dishonor. In Labarge Pipe & Steel Co. v. FirstBank,18 an issuer sent its notice of refusal to the beneficiary, but the notice failed to advise whetherthe issuer was holding the documents at the disposal of, or was returning them to, the beneficiary. Inthis case, the notice did not state disposition of the documents and so the court concluded that theissuer was precluded from asserting that the documents were discrepant.

In view of the above, the issuing bank or confirming bank should give notice to the presenter asto the disposition of the documents and the failure to do so would incur preclusion on the bank. I doagree that UCP600 Article 16(f), “by application of sub-article 16 (c) (iii), includes the disposal of thedocuments”, but this sentence was also regretfully removed from the final version of ICC OpinionTA.891’s Analysis. ISP98 does not contain provisions on the disposition of documents in the scope ofpreclusion. URDG758 adopts the same approach and its preclusion rule also does not encompass thedisposition of documents.19

Issuing BankIssuing BankIssuing BankIssuing BankIssuing Bank Return of DocumentsReturn of DocumentsReturn of DocumentsReturn of DocumentsReturn of DocumentsUCP600 Article 16(c)(iii)(c) provides that the notice may state that the bank is returning

documents to the presenter and UCP600 Article 16(e) further provides that the bank may returndocuments after giving notice. As to the rule regarding the manner of returning documents, ICCOpinion R214 (1995) explained that the bank should return the documents in the same manner as

16. COMMENTARY ON UCP 600, ICC Publication No. 680 (2007), p.73.

17. Amwest Surety Insurance Co. v. Concord Bank, 2003 U.S. Dist. LEXIS 10027; 248 F. Supp. 2d 867 (E.D. Mo.) [U.S.A.],abstracted at 2004 ANNUAL SURVEY 232.

18. Labarge Pipe & Steel Co. v. First Bank 550 F.3d 442 (5th Cir. 2008) [USA], abstracted at 2009 ANNUAL SURVEY 461.

19. “International Standby Practices (ISP98) (ICC Publication No. 590): Versatile Rules for Modern Practice” by JamesE. Byrne, reprinted at 2012 ANNUAL REVIEW 52.



they were received. In ICC Opinion TA.518(2001), an issuing bank refused documents and returnedthem but omitted 1/3 bill of lading and two invoices. The issuing bank was required to returndocuments in the same number and content as received, but failed to do so. The Opinion concludedthat the issuing bank was precluded from claiming that the documents were discrepant. Althoughdecided under UCP500, the above results would be the same under UCP600. In ICC Opinion TA.744(2011), the issuing bank sent a notice of refusal stating that the documents are being returnedunpaid, but it assisted the release of the goods to the applicant by endorsing one original bill oflading in its favor and it could not return the documents in the same form and number of originalsand copies as received from the presenting bank. In this instance, the issuing bank could not returnthe documents as stipulated in the notice and therefore failed to act in accordance with UCP600Article 16. The Opinion concluded that the issuing bank is precluded from claiming that thedocuments do not constitute a complying presentation. In Emirates Bank Int’l PJSC v. Credit Lyonnais(Suisse) S.A.,20 an issuer was unable to return documents as presented as it had forwarded thedocuments to the applicant. The court agreed that if a bank fails to hold documents at the disposal ofthe presenter, it is precluded from relying on discrepancies. In this case, the issuing bank failed toreturn the presented documents and under the preclusion rule the issuer was obligated to honorunless there was LC fraud.

In view of the above ICC Opinions and court cases, we can see that if an issuing bank orconfirming bank returns documents to the presenter, it has responsibility to return the documents aspresented with none missing nor any substitutions. Regarding ICC Opinion TA.891, the issuing bankissued its refusal notice to the presenting bank and the notice stated a number of discrepancies andalso stated that the documents would be handled in accordance with UCP600 Article 16(c)(iii)(b). Assuch, the issuing bank was holding the documents until it received a waiver from the applicant andagreed to accept it, or received further instructions from the presenting bank prior to agreeing toaccept a waiver. Then the presenting bank asked for the return of the documents, but the issuingbank did not return all the documents in the same number and content as received. Based onprevious ICC Opinions and court cases, it follows that the issuing bank is precluded under UCP600Article 16(f) from claiming that the documents do not constitute a complying presentation and thebank is obligated to honor its undertaking.

Preclusion Rule Also Applies to Re-PresentationISP98 Rule 5.03(a) provides that the issuer is precluded by failure to give notice of dishonor of the

re-presentation. ICC Opinion R328 (1998) concluded that failure to provide a notice ofdiscrepancy(ies) in the re-presentation would render the issuing bank liable to effect payment of thecredit. In my view, the issuing bank would be precluded from claiming that the re-presentation isnot in compliance. In Korea Exchange Bank v. Standard Chartered Bank,21 an issuing bank refuseddocuments and sent a notice of refusal to the confirming bank that stated discrepancies in thepresentation. The confirming bank then re-presented the documents, but the issuing bank failed torespond to the re-presentation. The court concluded that the issuing bank was precluded fromasserting that the re-presented documents were not in compliance. In this situation, the issuing bank

20. Emirates Bank Int’l PJSC v. Credit Lyonnais (Suisse) S.A., abstracted at 2006 ANNUAL SURVEY 302.

21. Korea Exchange Bank v. Standard Chartered Bank, Suit No. 162 of 2004 (REGISTRAR’S APPEAL No. 307 of 2004)[Singapore], abstracted at 2006 ANNUAL SURVEY 376.



should have responded to the re-presentation by sending a new notice to clarify or cite what werealready identified as valid discrepancies stated in the first notice of refusal.

For its re-presentation, the beneficiary or nominated bank is entitled to effect a cure of thediscrepancies until expiration of the credit. The issuing bank or confirming bank is then required tosend a new notice of refusal stating discrepancies even if the beneficiary or the nominated bank wasaware of the discrepancies. If the re-presentation creates a new discrepancy, the new basis fordishonor should also be raised. If the bank fails to do so, it is precluded from claiming that thedocuments are not in compliance. The preclusion rule of UCP600 and URDG758 is silent on re-presentation.

The Preclusion Rule Does Not Apply to a Nominated BankUCP600 Article 16(f) also plainly provides that the preclusion rule does not apply to a nominated

bank that is not also a confirming bank. In The Bank of East Asia (China), Da Lian Branch v. Da Lian HuiFeng Da International Trade Co. Ltd.,22 a beneficiary presented documents to the nominated bank whosent them to the issuing bank, but the issuing bank refused to honor due to discrepancies. A monthlater, the nominated bank advised the refusal (sent from the issuing bank) in written form to thepresenter, but the time of such notice exceeded the permissible time frame stipulated in UCP600Article 16(d). The court did not agree with position of the beneficiary that the nominated bank wasprecluded from the refusal due to exceeding the stipulated time frame. It is my view that the court’sexplanation is correct as the preclusion rule applies only to the issuing bank and confirming bank andnot to a nominated bank.

In view of the case, the preclusion rule applies only to the issuing bank and confirming bank.23 Itdoes not apply to the nominated bank and banks to whom documents are presented for purchase.24

The three sets of rules adopt the same approach in this respect.

ConclusionFrom this analysis, we can learn that failure to give adequate and timely notice of refusal results

in preclusion. To balance the notion of strict compliance, UCP600, URDG758, and ISP98 provide rulesof preclusion related to the processing of documents that do not comply and the rules apply only toan issuing bank and confirming bank. The issuing bank or confirming bank should adhere to thestrict notice standards and give a complete and timely notice of dishonor.25 The notice should clearlyand specifically identify the discrepancy(ies) contained in the presented documents and state thedisposition of the documents. Notice should also be given within the stipulated time frame.Otherwise, the notice has no effect and the preclusion rule is to be applied. ■

22. The Bank of East Asia (China), Da Lian Branch v. Da Lian Hui Feng Da International Trade Co. Ltd. [(2014) CivilShen Zi No.680] [P.R. China], abstracted at 2017 ANNUAL SURVEY 460.

23. THE OFFICIAL COMMENTARY ON THE INTERNATIONAL STANDBY PRACTICES, by James E. Byrne, IIBLP, p.200.

24. “New Rules for Standby Letters of Credit: The International Standby Practices”, © 1999 Banking & Finance LawReview, 14 B.F.L.R. 457. by Paul S. Turner, reprinted at 2000 ANNUAL SURVEY 226.

25. THE ABC OF THE UCC, ARTICLE 5: LETTERS OF CREDIT, by James G. Barnes, James E. Byrne, and Amelia H. Boss, 1998,American Bar Association, p.38.


DCW reports the most current data on top US branches andDCW reports the most current data on top US branches andDCW reports the most current data on top US branches andDCW reports the most current data on top US branches andDCW reports the most current data on top US branches andagencies of non-US banks in terms of LC activity. Netagencies of non-US banks in terms of LC activity. Netagencies of non-US banks in terms of LC activity. Netagencies of non-US banks in terms of LC activity. Netagencies of non-US banks in terms of LC activity. NetStandby LCs are after subtracting respective amountsStandby LCs are after subtracting respective amountsStandby LCs are after subtracting respective amountsStandby LCs are after subtracting respective amountsStandby LCs are after subtracting respective amountsconveyed to others. Net LCs are totals for Net Standby LCsconveyed to others. Net LCs are totals for Net Standby LCsconveyed to others. Net LCs are totals for Net Standby LCsconveyed to others. Net LCs are totals for Net Standby LCsconveyed to others. Net LCs are totals for Net Standby LCsand Commercial & Similar LCs. Amounts are in USD 1,000s.and Commercial & Similar LCs. Amounts are in USD 1,000s.and Commercial & Similar LCs. Amounts are in USD 1,000s.and Commercial & Similar LCs. Amounts are in USD 1,000s.and Commercial & Similar LCs. Amounts are in USD 1,000s.

STSTSTSTSTAAAAATISTICSTISTICSTISTICSTISTICSTISTICSUS BRANCHES/AGENCIES OF NON-US BANKSUS BRANCHES/AGENCIES OF NON-US BANKSUS BRANCHES/AGENCIES OF NON-US BANKSUS BRANCHES/AGENCIES OF NON-US BANKSUS BRANCHES/AGENCIES OF NON-US BANKS

3RD QUARTER 20193RD QUARTER 20193RD QUARTER 20193RD QUARTER 20193RD QUARTER 2019

Rank Institution

Standby LCsto US

Addresses

Standby LCsto Non-USAddresses

NetStandby

LCs

Commercial&

Similar LCs

NetLetters

of Credit State City

1. SUMITOMO MITSUI BKG NY BR NEW YORK NY 17,740,888 1,587,531 18,529,962 75,214 18,605,1762. STANDARD CHARTERED BK NY BR NEW YORK NY 12,908,624 2,948,824 15,801,214 755,474 16,556,6883. MUFG BK NY BR NEW YORK NY 19,955,717 4,352,457 12,735,781 1,403,928 14,139,7094. ROYAL BK CAN 3 WRLD FNCL BR NEW YORK NY 11,970,730 1,094,673 11,900,665 0 11,900,6655. DEUTSCHE BK AG NY BR NEW YORK NY 8,723,341 1,453,266 9,687,590 160,508 9,848,0986. MIZUHO BK NEW YORK BR NEW YORK NY 13,564,464 3,340,851 8,623,691 368,996 8,992,6877. CREDIT AGRICOLE CORP NY BR NEW YORK NY 9,681,190 3,555,836 8,585,384 37,840 8,623,2248. BNP PARIBAS EQUITABLE TWR BR NEW YORK NY 8,722,163 979,915 7,699,574 245,722 7,945,2969. CREDIT SUISSE NY BR NEW YORK NY 1,394,136 6,030,630 6,938,385 15,000 6,953,38510. BANK OF NOVA SCOTIA NY AGY NEW YORK NY 5,898,611 2,068,977 6,523,340 0 6,523,34011. LANDESBANK HESSN-THRN NY BR NEW YORK NY 3,843,509 2,480,913 6,021,566 0 6,021,56612. SOCIETE GENERALE NY BR NEW YORK NY 2,963,845 2,010,721 4,965,021 116,891 5,081,91213. UBS AG STAMFORD BR STAMFORD CT 5,452,185 1,202,508 5,006,555 0 5,006,55514. NATIXIS NY BR NEW YORK NY 4,157,458 696,807 4,401,113 6,993 4,408,10615. RABOBANK NEDERLAND NY BR NEW YORK NY 4,784,902 181,968 4,370,512 7,425 4,377,93716. BAYERISCHE LANDESBANK NY BR NEW YORK NY 840,558 3,507,007 4,347,565 0 4,347,56517. BANK OF MONTREAL CHI BR CHICAGO IL 3,844,217 1,107,931 3,812,928 43,926 3,856,85418. COMMERZBANK AG NY BR NEW YORK NY 3,422,210 351,177 3,773,387 23,927 3,797,31419. AUSTRALIA & NEW ZEALAND NY BR NEW YORK NY 2,358,069 752,932 3,111,001 34,104 3,145,10520. TORONTO-DOMINION BK NY BR NEW YORK NY 3,774,381 1,579,766 3,126,888 0 3,126,88821. UNICREDIT BK NY BR NEW YORK NY 2,208,832 810,837 2,963,576 150,148 3,113,72422. LLOYDS BK CORP MKTS PLC NY BR NEW YORK NY 2,073,373 793,218 2,866,591 0 2,866,59123. CANADIAN IMPERIAL BK NY BR NEW YORK NY 1,737,021 1,042,944 2,736,723 0 2,736,72324. NATIONAL AUSTRALIA BK NY BR NEW YORK NY 2,187,988 298,275 2,486,263 0 2,486,26325. BNP PARIBAS SF BR SAN FRAN. CA 3,958,130 8,095 2,408,341 0 2,408,34126. INTESA SANPAOLO SPA NY BR NEW YORK NY 2,150,556 209,059 2,182,854 47,110 2,229,96427. BARCLAYS BK SEVENTH AVE BR NEW YORK NY 1,468,077 650,615 2,118,692 0 2,118,69228. BANK OF CHINA NY BR NEW YORK NY 1,717,183 311,270 2,028,453 0 2,028,45329. CREDIT INDUS ET CMRL NY BR NEW YORK NY 1,409,778 433,903 1,843,681 0 1,843,68130. DNB BK ASA NY BR NEW YORK NY 1,710,920 134,023 1,829,544 0 1,829,54431. NORDEA ABP NY BR NEW YORK NY 987,301 807,070 1,794,371 0 1,794,37132. LANDESBK BADN WURTTMB NY BR NEW YORK NY 400,900 1,365,590 1,766,490 0 1,766,49033. ICICI BK NY BR NEW YORK NY 1,211,502 360,041 1,571,484 144,148 1,715,63234. SVENSKA HANDELS AB PUBL NY BR NEW YORK NY 1,366,945 182,876 1,549,821 0 1,549,82135. BANK OF NOVA SCOTIA HOU BR HOUSTON TX 230,694 1,256,265 1,486,959 0 1,486,95936. BANCO BILBAO VIZCAYA ARG NY BR NEW YORK NY 811,155 367,634 1,178,225 157,260 1,335,48537. BANCO SANTANDER SA NY BR NEW YORK NY 1,111,034 20,830 1,131,864 0 1,131,86438. CHINA MERCHANTS BK CO NY BR NEW YORK NY 4,746 208,651 213,397 882,640 1,096,03739. INDUSTRIAL & CB OF CHINA NY BR NEW YORK NY 874,311 27,293 901,604 137,882 1,039,48640. STATE BK OF INDIA NY BR NEW YORK NY 999,996 5,110 1,005,106 0 1,005,10641. NATIONAL BK KUWAIT SAK NY BR NEW YORK NY 785,103 24,159 672,066 0 672,06642. SWEDBANK AB NY BR NEW YORK NY 531,236 138,604 669,840 0 669,84043. NATIONAL BK OF CANADA NY BR NEW YORK NY 56,683 588,700 636,247 0 636,24744. MUFG BK LOS ANGELES BR L. ANGELES CA 411,561 116,877 528,438 271 528,70945. ARAB BKG CORP NY BR NEW YORK NY 298,613 23,574 322,187 202,530 524,71746. BNP PARIBAS CHICAGO BR CHICAGO IL 539,654 3,354 508,759 0 508,75947. RIYAD BK HOU AGY HOUSTON TX 398,421 50,000 448,421 0 448,42148. KOREA DEVELOPMENT BK NY BR NEW YORK NY 411,211 5,763 381,456 0 381,45649. COMMONWEALTH BK AUS NY BR NEW YORK NY 217,289 163,455 380,744 0 380,74450. MEGA INTL CMRL BK CO NY BR NEW YORK NY 971 0 971 300,000 300,971


STSTSTSTSTAAAAATISTICSTISTICSTISTICSTISTICSTISTICS

Rank Institution

Standby LCsto US

Addresses


NetStandby

LCs

Commercial&

Similar LCs

NetLetters

of CreditStateCity

51. MEGA INTL CMRL BK LA BR L. ANGELES CA 469 0 469 300,000 300,46952. DZ BK AG DEUTSCHE ZNTRA NY BR NEW YORK NY 283,406 6,090 289,496 0 289,49653. UNICREDIT NY BR NEW YORK NY 174,783 9,531 184,314 65,257 249,57154. UBS AG NY 787 7TH AVE WMA BR NEW YORK NY 147,480 93,853 241,333 0 241,33355. DEXIA CREDIT LOCAL NY BR NEW YORK NY 218,596 0 218,596 0 218,59656. KBC BANK NV NY BR NEW YORK NY 178,336 1,874 180,210 0 180,21057. NORDDEUTSCHE LANDESBK NY BR NEW YORK NY 154,468 15,108 169,576 0 169,57658. SUMITOMO MITSUI TR BK NY BR NEW YORK NY 113,480 43,230 156,710 0 156,71059. BANCO LATINOAMERCNO NY AGY WHITE PLNS NY 0 6,226 6,226 135,802 142,02860. MALAYAN BKG BERHAD NY BR NEW YORK NY 137,824 0 137,824 0 137,82461. MASHREQBANK PSC NY BR NEW YORK NY 43,310 22,239 65,549 70,526 136,07562. MUFG BK CHICAGO BR CHICAGO IL 91,072 0 91,072 31,741 122,81363. NATIONAL BK EGYPT NY BR NEW YORK NY 98,219 110 98,329 24,436 122,76564. ITAU CORPBANCA NY BR NEW YORK NY 0 114,079 114,079 0 114,07965. BANK HAPOALIM BM NY BR NEW YORK NY 99,849 1,563 101,412 10,580 111,99266. MITSUBISHI UFJ TR & BKG NY BR NEW YORK NY 1,360 101,954 103,314 0 103,31467. BANCO DE CREDITO E INV MIA BR MIAMI FL 22,164 58,602 80,766 1,647 82,41368. KOOKMIN BK NY BR NEW YORK NY 68,193 10,000 78,193 1,967 80,16069. MEGA INTL CMRL SILICON VALL BR SAN JOSE CA 80,005 0 80,005 0 80,00570. ITAU UNIBANCO SA NY BR NEW YORK NY 0 77,633 77,633 0 77,63371. BANCO DE SABADELL SA MIAMI BR MIAMI FL 33,053 35,115 68,168 2,042 70,21072. UNITED OVERSEAS BK NY AGY NEW YORK NY 61,619 2,105 63,724 0 63,72473. UNITED OVERSEAS BK LA AGY L. ANGELES CA 54,629 37 54,666 0 54,66674. WOORI BK NY AGY NEW YORK NY 48,959 4,480 53,439 240 53,67975. BANCO DEL ESTADO D CHILE NY BR NEW YORK NY 0 51,000 51,000 0 51,00076. GULF INTL BK NY BR NEW YORK NY 26,993 0 26,993 22,500 49,49377. UBS AG MIAMI BR MIAMI FL 0 42,726 42,726 0 42,72678. OVERSEA-CHINESE BKG LA AGY L. ANGELES CA 35,719 823 36,542 0 36,54279. SHINHAN BK NY BR NEW YORK NY 8,428 13,878 22,306 13,735 36,04180. NATIONAL BK OF PAKISTAN NY BR NEW YORK NY 1,693 20,700 22,393 12,381 34,77481. BANK OF BARODA NY BR NEW YORK NY 5,517 25,513 31,030 3,504 34,53482. OCBC NY AGY NEW YORK NY 32,863 100 32,963 0 32,96383. BANK OF CHINA CHICAGO BR CHICAGO IL 30,912 0 30,912 0 30,91284. LAND BK OF TAIWAN LA BR L. ANGELES CA 30,148 0 30,148 0 30,14885. KEB HANA BK NY AGY NEW YORK NY 19,459 0 19,459 10,112 29,57186. CTBC BK CO NY BR NEW YORK NY 13,520 15,300 28,820 737 29,55787. TURKIYE VAKIFLAR BK NY BR NEW YORK NY 6,004 6,319 12,323 17,230 29,55388. ALLIED IRISH BKS NY BR NEW YORK NY 27,382 0 27,382 0 27,38289. WOORI BK LA BR L. ANGELES CA 15,787 1,999 17,786 9,119 26,90590. SHIZUOKA BK NY BR NEW YORK NY 26,542 0 26,542 0 26,54291. BANK OF CHINA LA BR L. ANGELES CA 24,068 0 24,068 0 24,06892. UNITED BK AFRICA NY BR NEW YORK NY 0 13,979 13,979 8,620 22,59993. INDUSTRIAL BK OF KOREA NY BR NEW YORK NY 7,513 12,000 19,513 0 19,51394. CHIBA BK NY BR NEW YORK NY 16,652 0 16,652 0 16,65295. BANK OF EAST ASIA NY BR NEW YORK NY 14,729 0 14,729 0 14,72996. BANCO DO BRASIL SA NY BR NEW YORK NY 7,595 5,430 13,025 197 13,22297. BANK OF INDIA NY BR NEW YORK NY 12,075 0 12,075 709 12,78498. BANCO BRADESCO SA NY BR NEW YORK NY 737 1,950 2,687 10,000 12,68799. BANCO DAVIVIENDA SA MIAMI BR MIAMI FL 0 10,040 10,040 0 10,040100. SHANGHAI CMRL BK SF BR SAN FRAN. CA 2,852 0 2,852 6,743 9,595


Rank Institution

Standby LCsto US

Addresses


NetStandby

LCs

Commercial&

Similar LCs

NetLetters

of CreditStateCity

STSTSTSTSTAAAAATISTICSTISTICSTISTICSTISTICSTISTICS

101. CHINA CONSTRUCTION BK NY BR NEW YORK NY 9,139 0 9,139 0 9,139102. BANCO INTERNACIONAL MIA AGY CRL GABLES FL 0 975 975 7,875 8,850103. BANGKOK BK PUBLIC CO NY BR NEW YORK NY 2,298 0 2,298 5,695 7,993104. HUA NAN CMRL BK LA BR L. ANGELES CA 6,471 0 6,471 0 6,471105. ROYAL BK OF CANADA NY BR NEW YORK NY 5,676 0 5,676 0 5,676106. FEDERATION DES CAISSES FL BR HALLANDLE FL 5,529 0 5,529 0 5,529107. SHANGHAI CMRL BK NY BR NEW YORK NY 1,158 0 1,158 4,161 5,319108. CMB WING LUNG BK LA BR NWPRT BCH CA 5,250 0 5,250 0 5,250109. BANCO LA NACION ARG MIA AGY MIAMI FL 0 260 260 4,890 5,150110. NORINCHUKIN BK NY BR NEW YORK NY 4,558 0 4,558 0 4,558111. STATE BANK INDIA CHICAGO BR CHICAGO IL 0 266 266 3,861 4,127112. BANK SINOPAC LA BR L. ANGELES CA 3,526 0 3,526 477 4,003113. BANK OF E ASIA LA BR ALHAMBRA CA 3,397 381 3,778 0 3,778114. NONGHYUP BK NY BR NEW YORK NY 2,959 0 2,959 0 2,959115. BANK HAPOALIM BM PLAZA BR NEW YORK NY 0 2,942 2,942 0 2,942116. AGRICULTURAL BK CHINA NY BR NEW YORK NY 2,763 0 2,763 0 2,763117. BANK OF TAIWAN LA BR L. ANGELES CA 2,749 0 2,749 0 2,749118. BANCO PICHINCHA CA MIAMI AGY MIAMI FL 0 2,500 2,500 0 2,500119. E SUN CMRL BK LOS ANGELES BR INDUSTRY CA 1,861 0 1,861 0 1,861120. BANCO POPULAR DE PR NY BR NEW YORK NY 1,735 0 1,735 0 1,735121. BANCO NACION ARG NY BR NEW YORK NY 0 110 110 1,455 1,565122. BANCO DE CREDITO MIAMI AGY CRL GABLES FL 0 687 687 760 1,447123. TAIWAN CO-OP BK LA BR L. ANGELES CA 1,436 0 1,436 0 1,436124. CHANG HWA CMRL BK LA BR L. ANGELES CA 1,252 0 1,252 0 1,252125. BANK OF GUAM SAN FRAN BR SAN FRAN. CA 1,239 0 1,239 0 1,239126. CHINA CITIC BK INTL NY BR NEW YORK NY 1,200 0 1,200 15 1,215127. FIRST CMRL BK CO NY BR NEW YORK NY 1,106 0 1,106 0 1,106128. LAND BK OF TAIWAN NY BR NEW YORK NY 1,085 0 1,085 0 1,085129. FIRST CMRL BK LA BR L. ANGELES CA 689 0 689 2 691130. BANK OF CMNTNS SF BR SAN FRAN. CA 8 604 612 0 612131. TAIWAN BUS BK LA BR L. ANGELES CA 595 0 595 0 595132. CHANG HWA CMRL BK NY BR NEW YORK NY 434 35 469 0 469133. BANK OF CMNTNS NY BR NEW YORK NY 446 0 446 0 446134. BANCO REPUBLICA ORIENTL NY BR NEW YORK NY 0 338 338 0 338135. TAIWAN CO-OP BK NY BR NEW YORK NY 324 0 324 0 324136. NATIONAL BK PAKISTAN WA BR WASH. DC 0 0 0 289 289137. P T BK NEGARA INDO PER NY AGY NEW YORK NY 0 0 0 242 242138. SHANGHAI CMRL BK LA BR ALHAMBRA CA 145 0 145 0 145139. METROPOLITAN B&TC NY BR NEW YORK NY 0 0 0 96 96140. TAIWAN BUS BK NY BR NEW YORK NY 79 0 79 0 79141. GUNMA BANK NY BR NEW YORK NY 75 0 75 0 75142. FIRST ABU DHABI BK USA N WA BR WASH. DC 0 0 0 9 9143. MEGA INTL CMRL BK CHICAGO BR CHICAGO IL 2 0 2 0 2144. BANK OF TAIWAN NY BR NEW YORK NY 819 0 0 0 0

TOTALS 180,820,847 52,527,459 193,957,620 6,107,589 200,065,209


CONFERENCE REPORCONFERENCE REPORCONFERENCE REPORCONFERENCE REPORCONFERENCE REPORTSTSTSTSTS

EXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THE2019 AMERICAS ST2019 AMERICAS ST2019 AMERICAS ST2019 AMERICAS ST2019 AMERICAS STANDBY &ANDBY &ANDBY &ANDBY &ANDBY &

GUARANTEE FORUMGUARANTEE FORUMGUARANTEE FORUMGUARANTEE FORUMGUARANTEE FORUM31 OCTOBER 2019, NEW YORK31 OCTOBER 2019, NEW YORK31 OCTOBER 2019, NEW YORK31 OCTOBER 2019, NEW YORK31 OCTOBER 2019, NEW YORK

For the 13th consecutive year, the Institute of International Banking Law& Practice conducted its one-day Americas Standby & Guarantee Forumin New York. This Executive Summary provides an overview of topicsdiscussed and debated by leading professionals at this year’s event hostedby Mayer Brown.

Hot TopicsIn the area of government-mandated forms, bank customers

can be disadvantaged and lose the ability to bid on certainprojects if their bank is unwilling to issue LCs using formsrequired by government entities including small municipalitiesand state insurance departments. IIBLP designed ISP98 Form 11.1(Model Government Standby Form) for US federal, state, andlocal governments to use in updating and improving theirrequired or permitted forms of standby LCs supportingunderlying obligations to the government.

An ICC effort is underway to draft International StandardBanking Practices for Demand Guarantees. While URDG758 hasexceeded expectations in many respects, it is debatable whetherthere is a compelling need for an ISBP for Demand Guarantees.There are no plans to draft any comparable standards forstandbys. Instead, the endnotes of ISP98 Model Forms wereformulated to set standards for standby LC practice.

In recent months, LCs containing engagement clauses haveemerged as an unfortunate trend. Clauses stating “We engagewith drawers, drafters, and endorsers to pay you …” is notneeded. Issuing banks are taking on additional risk if suchwording or the like is in their LCs; banks are urged to refrainfrom using it.

Experienced LC specialists observed that the industry has gonefrom drafts being the most important document required by LCsto drafts being largely unnecessary. In early 2019, ICC released aGuidance Paper on the Use of Drafts under Documentary Creditsin an attempt to elevate understanding of market practice.


Recent Standby CasesThe Canadian case, Veolia Water Technologies, involved interpretation of an underlying

applicant-beneficiary contract as to obligating beneficiary to pay prejudgment interest and damages.

The US case, Lexon Insurance Co., involved the alleged repudiation of automatically extendingstandby LCs. This case featured the unusual tactic of a beneficiary claiming that the LC was“wrongfully renewed”. The first complaint was dismissed. Following an amended complaint, judgeheld that standbys are contracts for purposes of US Federal Deposit Insurance Company (FDIC)repudiation authority. Some panelists viewed as problematic this treatment of an LC as a contract.Other panelists added that the case raises the question of what a strict view of irrevocability wouldmean as to LC creditor-priority under the US Bankruptcy Code.

The US case, Lillemoe v. USDA, involved export guarantee program participant’s use of “rentedtrade flows” in which photocopies of shipping documents were reused or altered for purposes ofobtaining synthetic LCs.

Standby Text Around the WorldPanelists took up discussion of questionable clauses and text seen in standbys from different

regions of the world. One standby text specified an expiration event, not an expiration date. Othertext included sample “pay and walk” provisions used by Australian banks and in Singapore. Anotherstandby clause providing for arbitration in Singapore under UNCITRAL rules was consideredundesirable for issuer or beneficiary. Other unsatisfactory clauses referenced requirements forissuing bank’s debt rating and bank responsibility for confirming that a beneficiary’s signature was“legally binding”. Two examples of proposed standby text from the Middle East region wereconsiderable unworkable. Another standby contained a non-documentary condition (acceptance testcompletion) and called for presentation of a draft. Another standby text omitted several UCP600articles without adequate consideration of practice implications.

Looking Out for the Interests of Applicants and BeneficiariesA new panel added to this year’s Forum, this session took up discussion of how LC banks can

better serve applicants, beneficiaries, and other LC users without undue risk. Five topics werecovered: 1) Applicant’s right to terminate an advance pay LC securing shipment by presenting toissuer copies of shipping documents showing shipment; 2) Fax and email; 3) Ways beneficiaries candeal with overly broad sanctions clauses; 4) Local bank’s advising or confirming a foreign bank’s LC;and 5) Court order as a required LC document.

Automatic Extension: Putting Best Practices into PlayIn June 2019, BAFT released a Guidance Paper for Auto Extension. Panelists discussed various

best practices addressed in the paper including rescission of a non-extension notice, detrimentalamendments processing, and acting as an advising bank or confirming bank. Delegates were urgedto be mindful of delivery methods of notices and that a bank’s mail room is an agent to bind theprincipal. These situations arise frequently in the real world. Concluding remarks emphasized: theterm “renew” should not be used; if as a bank you miss a deadline for revocation of a sent notice ofnon-extension, all might not be lost (retain your records); and that all specialists dealing with autoextension credits should study the Paper and the reference materials it contains.

REPORREPORREPORREPORREPORTSTSTSTSTS

https://baft.org/about-baft/news-and-press-releases/2019/06/26/baft-releases-guidance-paper-for-auto-extension


REPORTSREPORTSREPORTSREPORTSREPORTS

SWIFT Update for Guarantees and StandbysA significant upgrade to the functionality and format of the 760 series of message types for

guarantees and standbys will go live in November 2020. Conference delegates were briefed on thechanges timeline, availability of training resources, significantly enhanced message structures, andscope & format specifications of new messages. Changes to the MT 798 guidelines designed for usein the corporate-to-bank space were also addressed.

Traps and Challenges in Standby & Guarantee PracticeThe panel revisited the topic of “pay and walk” provisions and remarked that, although not

commonly used in the US, they seem to work in Australia and may be effective in other markets.Panelists had harsh words for insurance companies and others insisting on standbys with operativeclauses. A standby is operative when issued. When a bank is asked to include an effective date, onetactic could be for the standby to state “effective immediately” with no date given. The panel alsoaddressed local and counter undertakings issued subject to different rule sets.

Recent Guarantee CasesThe South African case, Group Five, involved acceptance of the negative stipulation exception, a

stance that has seemingly been accepted in South Africa and other jurisdictions (Australia, UK), butone that many bank guarantee specialists find unsettling. The case was also addressed within thecontext of FIDIC standard contracts used in the construction industry in the US.

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EXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THEEXECUTIVE SUMMARY OF THE2019 AMERICAS LC LA2019 AMERICAS LC LA2019 AMERICAS LC LA2019 AMERICAS LC LA2019 AMERICAS LC LAW SUMMITW SUMMITW SUMMITW SUMMITW SUMMIT

1 NOVEMBER 2019, NEW YORK1 NOVEMBER 2019, NEW YORK1 NOVEMBER 2019, NEW YORK1 NOVEMBER 2019, NEW YORK1 NOVEMBER 2019, NEW YORK

For the 20th consecutive year, the Institute of International Banking Law & Practice conducted its one-dayAmericas Letter of Credit Law Summit in New York. This Executive Summary provides an overview of topicsdiscussed and debated by leading professionals at this year’s event hosted by Mayer Brown.

Trade TrendsAn overview of the significant upgrade to SWIFT Category 7 messages for documentary credits

implemented in November 2018 was given. Delegates were informed that international LC volumesin China are declining dramatically, but domestic LC use is increasing, as is reliance on forfaitingand factoring. From a US perspective, insights and comments were made regarding China’s Belt andRoad Initiative. In early 2019, ICC released a Guidance Paper on the Use of Drafts underDocumentary Credits in an attempt to address an area of practice causing frequent discrepancies. Ifcustomers filling out an LC application form indicate that they need a draft, bankers were urged toask them why. With eUCP Version 2.0 in force as of 1 July 2019, bankers were advised to reviewtheir reimbursement agreements. Specialists suggested that perhaps not even one hundred eUCPcredits have been issued worldwide and that it is improbable the revised eUCP rules will drivegreater use.

Recent US LC CasesThe US case, In re Westinghouse Electric Company LLC, involved guarantor of Westinghouse

obligations denied recovery of fees it paid for LCs issued and then continued during bankruptcy tosupport those obligations directly or its own obligations as guarantor.

Jury trials are very unusual in LC cases but in International Cards Co., a jury found for theapplicant on its conversion claim, essentially reversing the effect of the beneficiary’s drawing. Thecourt rejected the beneficiary’s post-trial motions, holding that reasonable jurors could conclude thatthe beneficiary converted the entire amount drawn when it drew under the LC.

Another South African case, Schoeman, centered on a strict compliance matter. The demandguarantee in question called for presentation of a demand at the “above stated address”, howeverthe address belonged to the beneficiary instead of the bank. The court said this was a mistake andconsidered the demand presented to the bank to be compliant.

Delegates were also informed of the Chinese case, Zhongtai Construction, involving a localguarantee subject to Kuwaiti law and a counter guarantee subject to Chinese law. The Beijing courtproperly determined both instruments were independent and suspension of payment under thecounter guarantee did not require suspension of payment under the local guarantee. ■


REPORTSREPORTSREPORTSREPORTSREPORTS

In Vanpoy Corp., defendant/standby LC issuer Soliel Chartered Bank argued it is registered inthe country of Comoros and therefore a New York court had no jurisdiction over it, but the courtfound defendant/standby issuer had sufficient contacts in New York.

In SEC v. Alpine Securities Corp., the US Securities and Exchange Commission (SEC) brought suitagainst broker/dealer for failure to file several thousand suspicious activity reports (SARs) asrequired by FinCEN regulations. Panelists suggested this case is the most extensive decisionregarding SAR filings and should serve as a “wake-up call” that the SEC can pursue enforcement ofFinCEN regulations.

North American Airlines, Inc. involved a conversion claim based on wrongful drawing under animminently expiring LC supporting lease of an aircraft. As the funds being converted belonged tothe bank, not the applicant, panelists noted that a claim of conversion was inappropriate in thisdispute.

Several cases involving supersedeas LCs have been decided in recent months. Panelistshighlighted Richardson v. Prisoner Transport in which the court determined an LC instrument to beinsufficient to substitute as supersedeas bond.

Chase v. Merson provides another unfortunate example that a (subsequently disbarred) lawyer isalmost always involved in prime bank LC scam cases.

Sanctions and the CourtsThe US decision in May 2019 to withdrawal from the JCPOA agreement and reinstate secondary

sanctions against Iran has caused difficult circumstances for European banks who are subject to EUblocking regulations intended to prevent EU entities from complying with the secondary sanctions.The Mamancochet Mining decision from England dealt with interpretation of the phrase “wouldexpose that (re)insurer to any sanction … ”. Although not an LC case, it illustrates the nuances ofdrafting sanction clauses. Courts may not decide uniformly the meaning of such a phrase. Attendeeswere also informed of ongoing litigation in the US regarding the cybercrime against BangladeshBank in February 2016.

Global Financial Crime, Compliance, and TBML UpdateDelegates were reintroduced to a 2008 memo addressing mention in LC text of sanctions as a

defense against honor. Any decision to include a mention of sanctions in an LC should be made afterdeciding to include a choice of law clause in the LC. In March 2019, The Wolfsberg Group releasedan update to its Trade Finance Principles document in which it provides guidance on controls foropen account trade, including supply chain finance products. Delegates were reminded of theimportance of OFAC’s 50% Rule regarding entities owned by persons whose property and interest inproperty are blocked. Banks need a carefully constructed plan and to continually assess ownershipconsiderations. The oft-discussed topic of whether or not to use a sanctions clause in an LC wasaddressed. Among key points expressed: Having a sanctions clause deleted from LC text is not thesame as the clause not being there; in this scenario, a bank is actively removing the clause. Also,having a sanctions clause or not will not change what an LC party is obligated to do underapplicable law.


Advising Banks: Are They Expected to do More?In some instances, advising banks are being asked to take on duties nearly akin to those of a

confirming bank. Advising banks need to be very careful regarding the services they offer, includingpresenting on behalf of beneficiaries.

Opining on Recent ICC OpinionsInsights and background into the ICC Banking Commission process of handling requests for an

ICC Opinion were explained. The panel then reviewed key lessons from the five ICC Opinionsfinalized at the October 2019 ICC Banking Commission Meeting. ICC Opinion TA891 dealt withdisposal of refused documents. The failure of the issuing bank to return all documents presentedmeant the bank was precluded and is obligated to honor. In TA892, the issuer’s notice of refusal didnot meet the UCP600 Art. 16(c) standard. The notice had been sent as a SWIFT MT799 message.Panelists noted that banks using this message type instead of the more appropriate MT734 mustensure that all information is properly included in the MT799. TA893 involved an LC calling for apacking list indicating dimensions of the bale. Several commenters disagreed with the Opinion’sconclusion that the presented document was conforming. In their view, the problem started with theapplicant and led to issuance of an unworkable LC. Banks need to be careful about issuingambiguous LCs. TA895 involved an LC condition for deduction of amount. Although the confirmingbank should have sought clarification of the condition, the issuing bank and applicant must take theconsequences of the poorly drafted credit. TA986 involved a certificate of origin found to becompliant because it was possible to determine through obvious cross-references that unattachedpages were part of the same document.

Loan Syndications and Trading Association (LSTA) FormComments to the LC-related provisions of the LSTA form of credit agreement were presented and

discussed. Among them, the desirability to clearly differentiate a bank acting in its capacity as arevolving credit “Lender” from a bank acting in its capacity as an “Issuing Bank” and the aim toclarify choice of law and choice of forum provisions in syndicated credit agreements as they relate toLCs. The importance of bankers being attentive to the construction of their reimbursementagreements was also addressed.

Recent International LC CasesThe Australian case, Santos, addressed whether a demand for payment was purportedly signed

by an authorised representative of the Beneficiary. Applying the principle of strict compliance“intelligently, not mechanically”, the Judge concluded that the demand did not comply with theprovisions of the bank guarantee.

The English case, RBRG Trading (UK) Ltd, involved the presentation of forged bills of lading inorder to comply with an alleged amendment. Following arbitration in China, the case went toEngland where the court considered whether the arbitral award should not be enforced based onpublic policy considerations. The court, finding there was no fraud but a failed attempt at fraud,determined that there was nothing in English law not to enforce the award.

Another English case, Yuchai Dongte, involved a non-bank SWIFT member sending a draft LC viaa SWIFT MT700 message. The Judge found that the sender failed to expressly limit its obligationsand was liable as an LC issuer and obligated to pay. ■



CEO of Nigerian AirlineIndicted for FraudInvolving LCs

Allen Ifechukwu AthanOnyema has been charged ina 36-count indictment withfraud, some charges of whichallege fraud involving lettersof credit. The charges arepending before the USDistrict Court for theNorthern District of Georgia.

According to theindictment, Onyema, aNigerian citizen, is thefounder and Chairman ofseveral entities in Nigeria,including Foundation forEthnic Harmony,International Center for Non-Violence and PeaceDevelopment, All-Time PeaceMedia CommunicationsLimited, and Every ChildLimited. Beginning in 2010,

Jacob Manning, a Partner at the lawfirm of Dinsmore & Shohl, is amember of the Pennsylvania, Ohio,and West Virginia Bars. His practicefocuses on business and commerciallitigation and appellate practice.Manning is also an Associate Fellowof the Institute of InternationalBanking Law & Practice.

Jacob Manning,Scam Survey Editor

SCAM SURVEYSCAM SURVEYSCAM SURVEYSCAM SURVEYSCAM SURVEY

Onyema transferred millions of US dollars from Nigerian bankaccounts for these entities into personal accounts he established inthe United States.

In 2013, Onyema founded Air Peace Limited (Air Peace), aprivate Nigerian airline based in Lagos that provides passengerand charter services. Onyema is the Chairman and CEO of theentity. Funds from the bank accounts of Onyema’s other entitieswere used to purchase airplanes for Air Peace. In 2016, a businessassociate of Onyema’s established Springfield Aviation Company,LLC, a Georgia (US) limited liability company, with Onyema asthe sole owner.

Beginning in 2016, the indictment alleges that Onyema engagedin a fraud that resulted in losses to various banks. The indictmentalleges that Onyema applied for letters of credit, which werepurportedly intended for buying airplanes from Springfield.Onyema then falsified documents to make it appear that airplaneshad been purchased from Springfield and Springfield drew on the


letters of credit. Springfield, though, never owned any aircraft; all of the airplanes allegedlypurchased from Springfield were already owned by Air Peace. Onyema and an accomplice allegedlyproduced fake documents to make the transactions appear legitimate, when in fact, the transactionsinvolved airplanes that Air Peace already owned.

The transactions ranged from USD 1.98 million to USD 4.89 million. In total, Springfield receivedpayments of more than USD 20 million in exchange for sales of airplanes that it never owned andwhich were in fact owned already by Air Peace. The indictment alleges that more than USD 15million of the funds were cycled back to Air Peace, while significant sums were also used forOnyema’s extravagant personal purchases, including multiple vehicles and shopping at various high-end stores.

Onyema has been charged in a total of 36 counts, along with his alleged co-conspirator. The twoare awaiting trial in the federal district court.

(Source: US v. Onyema, 1:19-CR-464 (N.D. Ga.)

Californians Sentenced for Roles in FraudSharon Ringgenberg, 70, of Martinez, California, was sentenced on 9 December 2019 to 15 months

in prison for her role in a scheme to commit wire fraud, according to a press release from the UnitedStates Attorney for the Northern District of California. In addition to the prison term, Ringgenbergwas ordered to pay restitution totaling USD 705,000 to victims of the scheme.

Ringgenberg had pled guilty to the charge on 10 August 2018. According to her plea agreement,Ringgenberg conspired with codefendants Craig Scott, 53, of Oakland, and Kenneth Taylor, 57, ofSan Ramon. Ringgenberg admitted that between 2008 and 2012, she and Taylor sold fraudulentstandby letters of credit and proof of funds statements to clients of a company called Success BullionUSA, LLC (Success Bullion). Success Bullion falsely purported to be a subsidiary of a large HongKong financial institution. Ringgenberg acted as an officer of Success Bullion and signed andprovided false documents on behalf of the company. Success Bullion used brokers, including co-defendant Scott, to find clients.

Scott pled guilty to his part in the scheme on 12 August 2018. In his plea agreement, Scottadmitted that from 2009 to 2012, he was a broker for Success Bullion. Scott solicited customers andacted as a broker for fraudulent standby LCs and proof of funds statements sold by Success Bullion.He was sentenced to five years of probation with a year of home confinement and was ordered topay restitution of USD 527,575 to victims of the scheme.

Additionally, Taylor pled guilty to his part in the scheme on 1 March 2019. He was sentenced on18 October 2019, to 36 months of prison, three years of supervised release, and ordered to forfeitUSD 3,436,002 and to pay USD 1,100,774 to the Internal Revenue Service and USD 90,000 to a victimof the fraud scheme.

(Source: United States Attorney, Northern District of California)

SCAM SURVEYSCAM SURVEYSCAM SURVEYSCAM SURVEYSCAM SURVEY


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