Banco Santander S A v Banque Paribas

A confirming bank that discounts a deferred-payment letter of credit without negotiable-instrument protection remains subject to any defence available against the beneficiary. An assignee cannot obtain a better right than the assignor where the underlying obligation is subject to fraud. The court will not create an equitable exception for a bona fide assignee for value where the parties made no provision for such protection.

Under the UCP, reimbursement follows payment pursuant to the undertaking. A confirming bank’s authority to discount on its own account does not, without more, make the issuing bank liable to reimburse the discount. Express authority or subsequent confirmation may create an estoppel.

Paribas issued and confirmed a deferred-payment letter of credit in favour of Bayfern Limited, requiring payment 180 days after the bills of lading. Santander discounted the documents and took an assignment of Bayfern’s rights. Before maturity, Paribas notified Santander that the documents contained forged or false representations and relied on the fraud exception.

Langley J decided preliminary issues in Paribas’s favour. Santander appealed, arguing that it was entitled either as assignee or under the reimbursement provisions of the UCP. The central questions were whether Santander’s claim was an assigned claim, whether Paribas could rely against Santander on the fraud defence available against Bayfern, and whether Santander had a right to reimbursement after discounting before maturity.

1. Appeal dismissed. Waller LJ gave the leading judgment, with Mummery LJ and Morritt LJ agreeing.
2. The transaction documents showed that Bayfern assigned its rights under the letter of credit to Santander. Although assigning a debt to one of the joint and several obligors may in some circumstances extinguish the debt, the parties could intend to keep the joint and several obligation alive. That was the intention here.
3. Santander therefore claimed as assignee. A confirming bank could not claim against Paribas merely because it had discounted the documents; Santander first had to establish Bayfern’s underlying claim at maturity. Any defence available against Bayfern was available against Santander as assignee.
4. The fraud exception applied. If Bayfern had demanded payment at maturity, the established fraud in the documents would have provided a complete defence. The court declined to create an exception for an innocent assignee for value. Where parties choose a deferred-payment promise rather than a negotiable instrument, and provide no contractual or trade protection for assignees, they must accept the consequences.
5. Alternatively, Santander had no right to reimbursement under the UCP. The issuing bank had authorised Santander to undertake payment at maturity and promised reimbursement when that undertaking was paid. It had not authorised Santander to discount before maturity. Discounting without breach of mandate did not make the transaction authorised so as to require indemnification or reimbursement.
6. A confirming bank wishing to obtain protection when giving value before maturity should use an acceptance credit or obtain authority to negotiate and confirmation of reimbursement. If the issuing bank expressly confirmed the discount, it could be estopped from relying on lack of authority.

• Court of Appeal (Civil Division) [2000] EWCA Civ 57 : appeal dismissed.
• High Court of Justice, Queen’s Bench Division (Commercial Court): Langley J decided preliminary issues in favour of Banque Paribas on 9 June 1999.