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Court confirms issuer’s liability under letter of credit

News / / Dubai, London

Heytex Bramsche GmbH v. Unity Trade Capital Ltd [2022] EWHC 2488 (Ch)
The Court has rejected a finance company’s contention that the documents presented under a letter of credit (LC) that it had issued were discrepant, rendering the LC void. Among other things, the issuer had sought to argue that the standard UCP 600 terms that were incorporated into the LC had been modified and overriden by additional terms, such that the documents were discrepant. The Court, however, emphasised that clear notice would have to be given to effectively incorporate such additional terms which were a clear departure from the UCP 600 and which conflicted with the commercial nature of a LC. Here, any notice given was insufficient and the issuer remained liable under the terms of the LC.

The background facts

On 5 June 2020, a German company, Heytex Bramsche GMBH (“Heytex”) entered into a contract for the sale of PVC coated fabrics with a UAE company, Jibran Technical Services LLC (“Jibran”). Jibran instructed Unity Trade Capital Limited (“UTC”), an English finance company, to issue an express irrevocable LC in the sum of €200,707.50 in favour of Heytex to facilitate the purchase of the fabrics. The letter of credit incorporated the standard terms contained in the UCP 600 (the current version of the Uniform Customs and Practice for Documentary Credits).

Heytex and Jibran agreed payment deferrals. On 9 November 2020, Heytex presented various documents to UTC seeking payment, through its bank, Sparkasse Osnabruck (“Sparkasse”), by means of a SWIFT message. Heytex believed that the documents presented were in accordance with the terms of the LC.

On 12 November 2020, Sparkasse was informed by UTC that the documents that had been presented and signed on behalf of Heytex and Jibran were discrepant because they were not signed by “all sides of LC”, as required by the LC. UTC contended that the presentation was non-compliant and no payment was, therefore, due to Heytex.

Heytex subsequently agreed with Jibran on two deferral payments with the first instalment of €100,000 falling due on 20 March 2021. Heytex did not receive this payment from UTC or Jibran.

Consequently, on 25 November 2021, Heytex presented a petition to wind up UTC on the basis of an unsatisfied statutory demand and UTC’s inability to pay its debts within the meaning of the Insolvency Act 1986. Heytex’s claim was for payment under the LC.

The Chancery Court decision

UTC disputed liability under the LC and opposed the petition on various bases, all of which were rejected. Among other things, UTC argued that the LC had been issued by an associated company, UTB, but the Court found, on the evidence, that UTC was clearly the issuer and the party liable under the LC.

The Court also dismissed the submission that “all sides of LC” meant that UTC and Sparkasse had to sign the documents in addition to Heytex and Jibran. Those words must have been intended to mean the parties to the underlying sale contract only. The LC only existed in order to facilitate payment under the sale contract. Fundamentally, the two sides of the transaction were Heytex and Jibran.

Furthermore, this was an “irrevocable” LC. UTC’s position would have made this a revocable credit because it could simply have chosen to withhold its signature and thereby create a discrepancy. The UCP 600 also describes credits as irrevocable and there was nothing to suggest that a revocable credit would have been commercially acceptable to the parties or was genuinely intended. UTC’s construction would, therefore, have resulted in a fundamental inconsistency between the terms of the credit and a departure from the scheme of the UCP 600.

UTC also sought to argue that UTC/UTB’s “Credit Norms” were incorporated into the LC such that discrepant documents could be released to Jibran without UTC and/or UTB incurring liability to Heytex. Further, that pursuant to the Credit Norms, the LC was rendered “void” and “released” UTC from any further liability to Heytex because Heytex and Jibran varied the payment schedule and renegotiated the sale contract.

The Court, however, held that the Credit Norms were not incorporated into the LC and that had they been relied upon, they would be a departure from the UCP 600 and commerciality of a LC. Article 16 of the UCP 600 entails either the return of discrepant documents by the issuer to the beneficiary, or a waiver and acceptance of the issuer’s liability to the beneficiary, but in either case, protects the beneficiary’s interests.

The Court emphasised that clear notice would have been required to incorporate the Credit Norms into the LC. The question of what satisfies that notice requirement turns on three factors:

  1. The nature of the document and whether it is objectively intended to have contractual force;
  2. The timing of the notice. The terms must be made available before or at the time of contracting, and not after contracting; and
  3. The nature of the terms being incorporated. In particular, if the purported terms are onerous or commercially unusual, they may need to be printed in red ink on the face of the document with a red hand pointing to it”.

On the evidence, there was insufficient notice to incorporate the terms of the Credit Norms into the LC and/or to modify the operation of the UCP 600 to such a significant and highly unusual extent. The Court added that even if it were wrong and the Credit Norms had been incorporated, they would not have had the effect UTC contended for.

Comment

The Court will endeavour to construe a LC commercially and will not allow an issuer to avoid liability under a LC on technicalities. Parties intending to depart from standard terms or international LC norms will need to state this clearly and expressly in the document.

Natasha Rai

Natasha Rai Senior Associate

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