Further to the decision made in the Court of Appeal Malaysia (appellate jurisdiction) between Punjab National Bank (PNB) and Malayan Banking Berhad (Maybank), Maybank has successfully obtained leave from the Federal Court of Malaysia Putrajaya to file an appeal against the decision made in the Court of Appeal Malaysia.

The appeal is based on the following questions of law: 

Three questions of law

1. Notice of refusal: where an issuing bank of a letter of credit (LC) governed by the UCP 600 determines documents presented do not constitute a complying presentation: 

a) Must the issuing bank give notice to the negotiating bank in accordance with UCP 600 Article 16(c) and (d), irrespective of the nature of the non-compliance?; 

b) Is the issuing bank precluded from claiming that the documents presented do not constitute a complying presentation and obliged to honour its reimbursement undertaking if notice is not given in accordance with the UCP 600 Article 16(c) and (d)?

2. Standard for examination of documents presented under an LC: if a negotiating bank is only required to examine whether or not the documents appear to constitute a complying presentation based on the UCP 600? 

3. Grounds for refusal to reimburse on an LC: where an LC, governed by the UCP 600, expressly provides it is available for negotiation by any bank in Malaysia, whether an issuing bank can avoid its obligation to reimburse the negotiating bank on grounds not stated in the notice of refusal and which relate to the manner of negotiation of the documents presented under the LC? 

Case details

This case involves an LC issued for $1.9 million, subject to the UCP 600, available for negotiation with any Malaysian bank with a tolerance of plus or minus 2%. 

Apart from other documents, LC required presentation of a full set of signed, clean, on-board, ocean bills of lading (BoL) and stated that freight forwarders’ BoLs were not acceptable. 

Beneficiary presented faxed copies of the documents to Maybank in separate presentations and requested Maybank to negotiate them. 

Maybank negotiated on the following day. Six days thereafter, Maybank received the original compliant documents from the beneficiary and confirmed no difference from the faxed copies presented earlier. 

Documents were subsequently forwarded to PNB by Maybank seeking reimbursement by crediting its account with Wells Fargo Bank, New York. 

Five days after the documents had been forwarded to PNB, Maybank received amendment advice from the first advising bank and the LC was amended to include a certificate of analysis (COA), weight and quality in triplicate issued by SGS at the loading port (proposed amendment). 

The proposed amendment was not accepted by the beneficiary.

UCP 600, Letters of Credit, ICC, Trade FInance

A notice of refusal was sent by SWIFT from PNB to Maybank seventeen days after the documents had been received by PNB, as the refusal notice was initially sent in error to Wells Fargo Bank, New York. PNB claimed that the documents contained the following two discrepancies: 

  1. Freight forwarder BoLs presented contrary to the terms of the LC;
  2. COA, weight and quality in triplicate issued by SGS not presented. 

Maybank disputed the discrepancies raised by PNB and the validity of the notice of refusal as it failed to comply with the provisions in UCP 600 Article 16. 

Subsequently, PNB returned the documents to Maybank unpaid. The case was brought by Maybank to the High Court of Malaya. 

The arguments

PNB argued that Maybank was not entitled to reimbursement as it relied on faxed copies to determine compliance. 

The judge quoted the Hong Kong case, ‘China New Era International Ltd v. Bank of China (HK) Ltd & Ors [2010] 5 HKC 82’ and said, “The plaintiff, as the negotiating bank, is perfectly entitled to make advanced payment to the beneficiary in anticipation of submission of the original documents by the beneficiary.” 

After all, the High Court found that the UCP 600 did not outline an “obligation to examine the original documents”, allowing the negotiating bank to be made beneficiary before payment. 

Maybank was entitled to determine the precise manner of negotiation of the documents. The judge viewed that PNB had failed to give a valid notice of refusal to Maybank and was precluded and estopped from claiming that the documents were discrepant, even if the discrepancies cited by PNB were valid. 

The notice of refusal sent to Wells Fargo Bank could not be accepted as documents were not presented by Wells Fargo Bank.

court trial

The decision

The trial court had also accepted the International Chamber of Commerce’s (ICC’s) Opinion R734 and held that the BoL presented was not discrepant. In addition, it was found that the COA, weight and quality issued by SGS were not required to be presented as the proposed amendment had never been accepted by the beneficiary. 

The High Court of Malaya entered judgment in favour of Maybank. It held that the issuing bank, PNB, was obliged to honour its undertaking to reimburse the negotiating bank, Maybank, as the BoLs complied with the terms of the LC and the UCP 600 provisions, and PNB’s notice of refusal failed to comply with the UCP 600 Article 16(c). 

Appeals

PNB’s petitioned the Court of Appeal which set aside the decision of the High Court. 

The Court of Appeal held that banks must apply the principle of strict compliance with the terms of the LC, and the freight forwarder BoL was a “weak form of document as compared to an ocean bill of lading.” 

Due to the fact that the LC required an ocean BOL, and freight forwarder BOLs were not permitted, non-production of an ocean BOL constituted a fundamental breach of the LC. It was not an issue of discrepancy and no notice of refusal was required. 

According to the Court of Appeal, Maybank’s contention that it had negotiated the documents on fax copies rather than originals was non-compliant with the terms of the LC.

In its appeal to the Federal Court of Malaysia at Putrajaya, Maybank claimed that the Court of Appeal had significantly departed from widely accepted international rules governing LCs, particularly the UCP 600. 

The Federal Court dealt with the three questions of law listed at the top of this article. In its judgment, the Federal Court applied the provisions of the UCP 600 and held that the view of the Court of Appeal was “plainly untenable and…not supported by any authority.” 

The BoLs presented by the beneficiary constitute a complying presentation. Concerning the manner of negotiation, Maybank was entitled to pay the beneficiary in advance before receiving the original documents. 

The Court of Appeal erred in reversing the High Court’s finding. In conclusion, the order of the Court of Appeal was set aside and the order of the High Court restored. 

The judgment given by the Federal Court is final and in line with international standard banking practice for the examination of documents under LCs. 

The matter of freight forwarder BoLs is not new. 

The ICC Banking Commission has issued official opinions and a DOCDEX decision affirming the acceptability of freight forwarder BoLs even if an LC requires only ocean BoLs and does not allow freight forwarder BoLs to be presented. 

In Abani Trading Pte Ltd v. BNP Paribas 3, the judge concluded that “there is thus no legal impediment or reason why a freight forwarder is unable to sign the BoLs as an agent of the carrier, as opposed to an agent for the shipper.

“I commend the Federal Court of Malaysia as it has made a sound and right judgment on this case.”

 “Malaysia boleh” (“Malaysia can do”)! 

This article was first published in Documentary Credit World.