Fortis Bank SA & Anor v Indian Overseas Bank

Article 16 of UCP 600 requires an issuing bank to act in accordance with the disposal statement made in its refusal notice. That obligation applies after the notice has been given and includes returning documents, or complying with instructions to return them, with reasonable promptness. Failure to do so is a failure to act in accordance with Article 16 and engages the preclusion in Article 16(f), preventing reliance on the documentary discrepancy. UCP 600 should be construed purposively, having regard to established international banking practice and the reasonable expectations of experienced market practitioners. The same obligation may, if necessary, be implied into the contractual arrangement.

The claimants sought payment under letters of credit issued by the defendant and subject to UCP 600. On an earlier summary judgment application, most defences failed, but a documentary discrepancy remained in relation to certain drawings. The court directed a preliminary trial of whether the defendant was precluded under Article 16(f) from relying on that discrepancy because it had failed to return documents promptly after issuing notices stating that they were being returned or held pending instructions.

The central questions were whether Article 16(f) applied to post-notice conduct, what obligations followed from “return” and “hold” notices, and whether the defendant’s conduct engaged the preclusion.

1. Construction of UCP 600. The UCP is an international code incorporated into the letters of credit. It should be construed purposively so as to reflect established international banking practice and the reasonable expectations of experienced market practitioners.

2. Effect of the disposal statement. Article 16(c)(iii) requires the issuing bank to state what it will do with the documents after refusing payment. A statement that documents are being returned or held pending instructions carries an undertaking to act accordingly. Article 16(e), which permits certain documents stated to be held to be returned, supports that construction.

3. Reasonable promptness. The obligation must be performed with reasonable promptness. The requirement takes account of the circumstances facing the issuing bank, and force majeure may be relevant, but ordinary international banking practice generally requires despatch within one or two banking days.

4. Article 16(f). The preclusion applies to a failure occurring after the Article 16(c)(iii) notice. The omission of equivalent express wording from UCP 600, compared with UCP 500, did not demonstrate an intended change to established banking practice. If the obligation were not contractual by construction, it would be implied because it is necessary to make the contractual scheme work, is obvious, and is capable of clear expression.

5. Application. The claimant’s insistence that documents covered by “return” notices should be retained because the refusals were invalid did not withdraw or alter the notices. The defendant’s delay of several weeks breached the obligation. The later instruction concerning documents covered by “hold” notices was a valid instruction to return them. The defendant should either have returned the documents or promptly queried and explained any difficulty. Its failure to do so also breached Article 16.

6. The defendant was therefore precluded from relying on the Consolidated Certificate Discrepancy. The claimants were entitled to judgment on their remaining claims.

The judgment describes an earlier summary judgment decision in the same proceedings, under which most defences failed and a preliminary issue concerning Article 16(f) was ordered for trial. This judgment determined that preliminary issue.