In international trade, a Letter of Credit (LOC) is used to negate the risk of non-payment for goods by the buyer to the seller. Release of funds hinges on the seller tendering the required documents and the bank verifying them. In The Yue Hua 523 [2021], Standard Chartered Bank had transferred the funds on submission of documents which later turned out to be false. So, how far should a bank go to examine such documents?
In this case, under the terms of LOC, which was subject to 'UCP 500', the seller was required to provide a clean onboard ocean bill of lading and a certificate showing cargo was shipped on a seaworthy vessel classed by Lloyds or equivalent society. After the bank had made payment, the buyer noticed seller had not produced the required documents before obtaining payment. The discrepancies noted were:
- The combined transport B/L indicated that the goods were shipped on board, Yue Hua 523, designated as pre-carrier but an ocean vessel was not named and also [obviously] no class certificate furnished.
- Shipper’s certificate was not dated or signed
- Enquiries showed that cargo had not been shipped
Buyers were now requesting the bank to refund the amount (>$0.6m). The bank said that it was not expected to carry out detailed investigations and the documents seemed to be in conformity with UCP 500.
The Court said that under UCP 500, a bank is expected to only examine the documents as they appear on their face and not to undertake the role of an investigator. UCP 500 allows for multimodal B/Ls where the ocean vessel need not be named, however here the LOC expressly required an ocean B/L to be submitted instead, which obviously wasn’t complied with. There was also no class / seaworthiness certificate provided. The bank should have noticed these glaring errors. As per the court, Standard Chartered was NOT obliged to debit the account of the buyers in this case.
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