Hong Kong - Mistaken Identity And A Case Of Swift Justice: Identifying The Issuer Of A Letter Of Credit.
Legal News & Analysis - Asia Pacific - Hong Kong - Dispute Resolution
14 May, 2019
In this article, we discuss the case of Yuchai Dongte Special Purpose Automobile Co Ltd -v- Suisse Credit Capital (2009) Ltd  EWHC 2580.
This case involved a consideration of a number of knotty issues in the context of documentary credits, including the admissibility of extrinsic evidence to identify the issuing bank, the exclusion of liability to make payment, and the reliance upon estoppel by convention.
The claimant was a manufacturing company based in China. The defendant was a company which provided financial services in support of trade and was a member of the SWIFT network.
The claimant claimed payment of US$3 million from the defendant pursuant to a letter of credit, which the claimant alleged was issued by the defendant on 10 March 2014, and which incorporated the UCP 600.
Also featuring in the letter of credit transaction with which the Court was concerned was Suisse Bank Offshore Ltd (SBOL), an entity within the Suisse Bank Group that was unrelated to the defendant.
The defendant denied that it was the issuing bank and that payment under the letter of credit was to be made by SBOL.
On 10 March 2014, the defendant sent a SWIFT MT700 form containing the letter of credit to the Rural Commercial Bank of Zhangjiagang. The relevant SWIFT fields provided that the credit was ‘available with’ SBOL by ‘negotiation’.
On 11 March 2014, the Rural Commercial Bank of Zhangjiagang forwarded the letter of credit to the claimant. On the covering form, it specified that the ‘issuer’ was the defendant.
By documentary remittance dated 18 March 2014, Bank of China presented documents under the letter of credit to SBOL.
On 19 March 2014, Bank of China sent a MT999 form to the defendant. The MT999 form said that documents had been ‘negotiated’ the previous day, that the terms were complied with, and claiming payment for US$3 million. The defendant responded with a message, including a disclaimer, stating:
‘... according to Field 78 of our MT700 ... we have relayed your SWIFT MT999 message to applicant bank: [SBOL (Comoros)] (the issuer) and will revert to you once we received their respond ... no our (SB2LTGB2L) responsibility for payment under this credit.’
Thereafter correspondence ensued in which the representative of Suisse Bank Group stated it would waive apparent discrepancies of documents presented under the letter of credit and accept payment. Also, SBOL underwent a sale of shares and was re-named Asia Capital Development Bank.
On 12 November 2014, Bank of China wrote to the defendant asking it to relay to SBOL a message demanding payment under the letter of credit.
On 4 December 2014, the defendant wrote to Bank of China saying that it was unable to relay its message to (what it called) the issuer, SBOL, because it had no contact relation with it, and advising that SBOL had been sold and changed its name.
The claimant asserted that the defendant was the issuer of the letter of credit and was liable to make payment of US$3 million under it.
The defendant denied that it issued the letter of credit, contending that the issuing bank was in fact SBOL. Alternatively, the terms of the credit were such that the normal liability of an issuing bank in the UCP 600 was excluded. The defendant further asserted that, given the events, the claimant was estopped by convention from claiming that the defendant issued the letter of credit.
The court had to decide:
- whether the defendant was, on the true construction of the letter of credit, the issuing bank
- if the defendant was the issuing bank, whether its liability to make payment was excluded on the true construction of letter of credit
- whether there was an estoppel by convention to the effect that the defendant was not the issuing bank
As to the first issue, the court held that there was a question as to the appropriate role to be played by extrinsic evidence. The claimant had submitted that the letter of credit had to be construed within the ‘four corners’ of the credit and the UCP 600, which was incorporated by reference. The defendant had contended that, despite their special nature, documentary credits should be construed in accordance with the ordinary rules of contractual construction, including as to the admission of extrinsic evidence, where appropriate.
In the court’s view, extrinsic evidence could be relevant to a letter of credit. A letter of credit was not akin to a negotiable or quasi-negotiable document. However, where the issue was who the parties to the contract were, and one party had, effectively, via the use of a particular form, indicated that it was the issuer, there was a need for caution about the extrinsic evidence that one should look at. There was a need to be satisfied that the relevant material went to the question of the identification of the parties to the contract; and a further need to be satisfied that that material was known, or at the least, available to both parties.
The court held that the matters relied on by the defendant in support of its construction of the contract did not constitute the type of extrinsic facts which fell properly to be considered under the heading of contractual construction. In any event, the matters relied on by the defendant did not show that the issuer of the credit was not, as appeared from the use of the SWIFT MT700 format, the defendant, but was instead SBOL.
Accordingly, it was determined that the defendant was indeed the issuer of the credit.
As to the second issue, and despite the defendant’s contentions, the court held that there was no question of exclusion of the terms of the UCP. The question was what those terms, as incorporated, meant, and, in particular, whether certain fields in the MT700 form were inconsistent with the indication that the defendant was the issuer, and, if so, whether they were sufficiently clear to negate that indication.
In the court’s view, the fields which were relied on by the defendant as negativing the conclusion that would be drawn from the use of the MT700 form were not inconsistent with the defendant being the issuing bank. On the contrary, they were wholly consistent with that being the position. The defendant had submitted that the documents presented under the letter of credit were discrepant, and although there had been a waiver by SBOL there was no waiver by the defendant. That submission would be rejected. SBOL, as nominated bank, had actual, apparent or ostensible authority to waive the discrepancies, and such waiver bound the defendant. Accordingly, the waiver by SBOL of the discrepancies in the documents bound the defendant, who thereby became liable to pay if the nominated bank, that is, SBOL, did not.
As to the third issue dealing with estoppel by convention, the defendant had to show an assumption as to the identity of the issuer that was made by the defendant that could be seen to have been shared by the claimant from correspondence that ‘crossed the line’, and which materially influenced the defendant. In other words, what had to be shown was that the claimant must have known that the defendant understood, or believed, that it was not the issuer, and that the defendant acted in reliance on that belief.
However, the defendant had not established that there was this shared assumption that was relied upon. That was sufficient to dispose of the plea of estoppel.
Accordingly, judgment was given in favour of the claimant.
In reaching its decision on the first issue, that is, the identity of the issuer of the letter of credit, the court considered the use of the SWIFT system and its common standards and forms in providing secure financial messaging around the world. It recognised that SWIFT is accepted and understood internationally by specialists in the trade finance departments of financial institutions, as well as by exporters/sellers.
In this case, the court placed considerable weight on the use and format of the SWIFT MT700 form and the fields comprising that standard form.
Particularly, the court put great stock in the fact that the parties’ experts both agreed that the SWIFT MT700 format was appropriate for the issuance of letter of credit and not simply for advising another party’s letter of credit (it was agreed that the appropriate form of message to be used for advising a letter of credit was form MT710). In short, the MT700 form was designed to be used by the issuer of the credit.
Once the court was convinced that the MT700 form connoted that the sender was the issuer, in this case, the defendant, it expressed a need for caution in allowing consideration of extrinsic evidence and subsequent conduct of the parties that contradicted this, and was not persuaded in this case that it should do so.
This judgment also acts as a reminder (and warning) that the waiver by a nominated bank of the discrepancies in the documents can bind the issuer, who thereby becomes liable to pay under the letter of credit if the nominated bank does not.
In addressing the estoppel by convention issue, the court returned to the importance of the parties’ use of the SWIFT MT700 form, stating that the evidence before it was that the defendant’s objective conduct in sending the MT700 message would be understood by a reasonable observer as indicating that the defendant was the issuer. It would not convey that the defendant did not regard itself as issuer of the letter of credit. Against that, the court was satisfied that there was no extrinsic evidence to contradict this and establish that there was a shared assumption by the parties that was relied upon.
This case demonstrates the court’s willingness to place substantial importance on accepted, international banking practice in examining the true construction of the contract in relation to letter of credit.
For further information, please contact:
Andrew Buchmann, Partner, Hill Dickinson