CHAPTER-7

OBLIGATIONS OFCORRESPONDING BANK

CHAPTER 7

OBLIGATIONS OF CORRESPONDING BANK

The corresponding bank plays a pivotal role in the documentary credit

transactions. Its obligations vary according to the nature of the function it agrees

to undertake. The role of corresponding bank can be viewed from two different

angles. One view is that they agree merely to advise the beneficiary. In this

situation the obligation of corresponding bank is limited. It is not under binding

contractual relationship with the beneficiary.‘ Another view is that it agrees to

confirm the credit. Then it undertakes an independent contractual obligation to

pay the beneficiary apart from the issuing bank. The obligation towards the

beneficiary initiates at the moment the beneficiary tenders the documents

specified in the letter of credit and demands paymentz.

In practice, difficulties arise due to the fact that the instructions are not

clear and are intended to mean something different from what they actually

convey. The consequences of wrong compliance of instructions are different and

needs detailed evaluation. Similarly, once the bank agrees to pay to the

beneficiary, the primary scrutiny of the documents needs to be done by them.

This task is very complicated as there are different types of documents’ the

parties require under documentary credit.

' Mark Hapgood (Ed.), Pagers Law ofBarcking, Butterworths, London (1933), p.6232 Richard King (Ed.), Law of Bankers ’ Commercial Credits, Europa Publications Ltd, London(2001), p.100.3 See Charles Debattista, “The New UCP 600-«Changes to the Tender of the Seller’s ShippingDocuments under Letters of Credit”, [2007] .l.B.L.329.

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Obligations of Corresponding Banker

The services of a corresponding banker are availed to facilitate the

payment under documentary credit. The beneficiary is likely to rely on the

corresponding banker placed in his country. Therefore the issuing banker

approaches the corresponding banker with an option of either acting as a mere

advisor of credit or to confirm the credit. The corresponding banker is having an

option either to accept the offer or to reject it. In case it decides to act as mere

advisor of credit, it should be intimated to the issuing bank immediately.“ Some

writers have criticised this position‘. They observed that the correspondent bank

should not accept the instructions to advise unless it is prepared to give effect to

the cretlit. This argument is favourable for the beneficiary who does not know

anything about the issuing bank. He may prefer to have the obligations on a bank

in his own country‘.

The obligations of a correspondent banker towards the beneficiary depend

on the terms in which it gives its confirmation. The most important aspect of the

obligation of corresponding banker is that it does not guarantee the fulfillment of

its obligations by the issuing banker. This obligation is an additional obligation

given by the correspondent banker. It is apart from the original obligation

undertaken by the issuing bank. Gutteridge is, of the opinion that every

confirmation given by the correspondent banker will not result in an additional

“ The U.C.P.600, Article 9 (e).5 Epschtein et Bontoux: Reflexians sur le credit Documentaire Ir-revocable non Confirme, as citedin H. C. Guteridge and Maurice Megrah, The Law of Banker's Commercial Credits, EuropaPublications Ltd, London (1979), p.70.‘ Ibid.

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obligation7. The reason is that in case the correspondent bank issues its own

credit which states that the credit is given pursuant to the irrevocable credit of

another bank, the direct relationship is formed between the beneficiary and the

issuing bank. This is refiected in the U.C.P.600 also“.

Inspite of different arguments the position of a confirming bank can be

considered as the bank which undertakes the risk of accepting documents from

beneficiary when he makes payment‘’. If the documents are in the order, the

correspondent bank can escape from the liability. On the other hand if there is

any irregularity the correspondent bank will have to face the consequences. This

is because the correspondent banker's rights and obligations are governed by the

instructions received from the issuing bank. They cannot use any discretion in this

transaction though sometimes they act independently. The correspondent bank

gives as an independent undertaking to pay to the beneficiary in terms of

instructions received from the issuing bank. Apart from this, the peculiar feature

of the obligation is to take reasonable care to ensure that the documents received

must appear on their face to be in consistent with the terms of the credit‘°.

Corresponding Banker and Seller

Once the correspondent banker agrees to pay the seller beneficiary, a

contractual relationship comes into existence between them“. This relationship

gives rise to certain obligation for the correspondent bank towards the seller. As

7 H.C.Gutteridge and Maurice Megrah, The Law of Banker's Commercial Credits, EuropaPublications Ltd., London (1979), p.72.3 See the U.C.P.600, Article 3 (c).9 Ray August, International Business Law, Prentice Hall, New Jersey (1997), p.631.'° Supra n. 1. at p. 624.” For the detailed discussion on the legal nature of relationship between correspondent banker andseller. See supra Chapter 2.

245

the banker deals with documents only and not with goods” the basis of the

obligation can be confined to the authenticity of documents. The obligation to

honour the credit is accepted by courts in general terms. The observation of the

court is general with wide dimensions as letter of credit is used as a means to

supply goods world over. They always treat the obligation to honour the credit as

vital”.

The object of confirmation of credit by the correspondent banker is

different from payment to beneficiary on tendering of documents. This view is

supported by the decision in Trans Trust 5 P. R. 1.. v. Danub/an Trading Co.

Ltd."’. Denning L.S., said“,

“A Banker’s confirmed credit is a different thing from payment. Itis an assurance in advance that the seller will get paid. It is evenmore than that. It is a chose in action which is of immediatebenefit to the seller.”

This distinction however will not relieve the correspondent bank from its duty to

pay the seller when he presents the documents.

One of the important obligations of the correspondent bank is to take

quick decision regarding the acceptance of documents presented by the seller.

This aspect is clear from the following observations made by Lord Diplock in

Commercial Banking C0. of Sydney Ltd v. Ja/sand Pty Ltd,”

'2 The U.C.P.600, Article5 reads, “ Banks deal with documents and not with goods, services orperfonnance to which the documents may relate”.[3 Edward Owen Engineering Ltd v. Barclagvs Bank International Ltd, (1978) 1 All E.R. 976(C.A.)." [1952] 2 Q.B.297.‘5 Id, at p. 305.“ [1973] A.C.279.

246

“Both the issuing banker and his correspondent bank have tomake quick decisions as to whether a document which has beentendered by the seller complies with the requirements of the creditat the risk of incurring liability to one or other of the parties to thetransaction if the decision is wrong. Delay in deciding may in itselfresult in a breach of his contractual obligations to the buyer or tothe seller. This is the reason for the rule that where the banker'sinstructions from his customer are ambiguous or unclear hecommits no breach of his contract with the buyer if he hasconstructed them in a reasonable sense, even though upon closerconsideration which can be given to questions of construction inan action in a court of law, it is possible to say that some othermeaning is to be preferred.""

This shows that any breach of this obligation by the correspondent bank will give

rise to liabilities.

Apart from this the U.C.P.600 has also made an attempt to clarify the

obligation of the correspondent bank under two categories of confirming bank

undertaking and advising banks undertaking”. It has also provided nominated

bank's obligation”. It reads”;

“a. Provided that the stipulated documents are presented to theconfirming bank or to any other nominated bank and that theyconstitute a complying presentation, the confirming bank must:

i. honour, if the credit is available by

a) sight payment, deferred payment or acceptance withthe confirming bank;

b) sight payment with another nominated bank and thatnominated band does not pay;

c) deferred payment with another nominated bank andthat nominated bank does not incur its deferred

'7 Ibid. Also see European Asian Bank AG. v. Punjab and Sind Bank (No.2), (1983) 2 All E.R.508(C.A.).'3 The U.C.P.600, Article 8 and 9.” Id., Article 12.1° Id., Article 8.

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payment undertaking or, having incurred its deferredpayment undertaking, does not pay at maturity;

d) acceptance with another nominated bank and thatnominated bank does not accept a draft drawn on it or,having accepted a draft drawn on it, does not pay atmaturity;

e) negotiation with another nominated bank and thatnominated bank does not negotiate.

ii. negotiate, without recourse, if the credit is available bynegotiation with the confirming bank.

b. A confinning bank is irrevocably bound to honour or negotiateas of the time it adds its confirmation to the credit.

c. A confirming bank undertakes to reimburse another nominatedbank that has honoured or negotiated a complying presentationand forwarded the documents to the confirming bank.Reimbursement for the amount of a complying presentationunder a credit available by acceptance or deferred payment isdue at maturity, whether or not another nominated bankprepaid or purchased before maturity. A confirming bank'sundertaking to reimburse another nominated bank isindependent of the confirming bank's undertaking to thebeneficiary."

This shows that the correspondent banker is under an obligation towards the

seller to make payment by examining the documents tendered. A breach of these

obligations that causes loss to the beneficiary is actionable by the seller“.

Duties of Correspondent Banks

When the correspondent bank agrees to act as confirming bank and given

an undertaking in the terms as the issuing bank, it owes precisely the same duties

to the beneficiary. One of the important obligations of the correspondent bank is

2’ Supra n.2. at p.99.

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to take reasonable care to ensure that the document received appear on its face

to be consistent with the terms of the credit. Gutteridge comments":

“It is the duty of the banker to scrutinize the documents tenderedto him by the beneficiary under the credit and check themcarefully with the instructions which he has received from hiscustomer. Any default in this respect will debar the banker fromclaiming reimbursement by the customer of any amount whichmay be paid against the documents and also cause him to forfeithis right to get remuneration."

Therefore scrutiny of the documents needs to be done by correspondent

bank when it agrees to make payment to the beneficiary. It must make certain

that the documents tendered by the seller are exactly the same documents

required by the credit. As it is an accepted principle that credits are by their

nature separate from the sales contract between the parties” the correspondent

bank is not concerned with any such contracts even if any reference is included in

the credit. This shows that corresponding banker's obligation is concerned only

with the accuracy of documents produced before it. If a minor mistake in

examining the document is occurred, the banker will be held liable for the breach

of its obligation“. Any relaxation permitted by the bank on the documents

tendered will cause serious embarrassment. As Lord Summer has rightly pointed

out:

“There is no room for documenls which are almost the same, orwhich will do just as well."’5

Therefore the correspondent banker cannot be compelled to honour the

credit unless the beneficiary pursues and confirms the document in every I

22 Supra n.7. at p.89.2’ The U.C.P.600, Article 4.24 Equitable Trusl Co. of New York V. Dawson Partners Ltd, (1927) 27 L1.L.Rcp. 4925 1d,, at p.52

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respect“. The correspondent banker's obligations are obviously be most difficult

to pinpoint. It is because each case will be different from one another. As

different documents are used their obligation varies from one to another.

Therefore in case of bill of lading document, the banker must ensure the literal

compliance with the terms mentioned in the bill of lading”. He is not concerned

with the legal interpretation of the clauses in a bill of lading.

Similarly the extent of obligation of the correspondent banker to acquaint

himself with the terms of the documents has not been analysed by courts. This

situation was discussed in a case“ by Scrutton, L. J. He said”,

“In some cases the obligation of a banker, under such a credit,may need very careful examination. I only say at present that toassume that for one-sixteenth percent of the amount headvances, a bank is bound carefully to read through all bills oflading presented to it in ridiculously minute type and full ofexception, to read through the policies and exercise a judgment asto whether the legal effect of the bill of lading and the policy is, onthe whole, favourable to their clients, is an obligation which Ishould require to investigate considerably before I accepted it inthat unhesitating form....."

Salmon, J., shared the doubt expressed by Scrutton, L. J. He said3°,

“I doubt whether they [the bank] are under any greater duty totheir correspondens than to satisfy themselves that the correctdocuments are presented to them, and that the bills of lading bearno endorsement or clausing which could reasonably mean that

2° Moss v. Old Colony Trust Co., 140 N.E.803 as cited in H. C. Gutteridge and Maurice Megrah,The Law of Banker 's Commercial Credits, Europa Publications Ltd., London (1979), p.92.27 See Bank Melli Iran v. Barclays Bank D. C. 0. Ltd., [1951]2 Lloyd’s Rep.367. Midland BankLtd. v. Seymour, [1995] 2 Lloyd’s Rep. 147. Laudisi v./Imericn Exchange Bank, (1924) 239N.Y.234 as cited in R.R.Pennington and I-I.H.Hudson, Commercial Banking Law, MacDonald &Evans, Plymouth (l978),at p.339.

: National Bank of Egypt v. Harmevig’s Bank, (I919) l LI.L. Rep. 69Ia'., p.75.

3° British lmex Industries Lmi, v. Midland Bank Ltd., [1957] 2 Lloyd’s Rep. 591 at p.597

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there was or might be some defect in the goods, or in theirpacking.”

He also expressed concern regarding the purpose of letter of credit if a

bank is made obliged to read through the clauses in minute print and consider

their legal effect. This will consume time for verification so there will be delay in

the payment as there will be large number of clauses in the document tendered.

Apart from this the clause in the document relating to defect in the goods will also

create difficulty for the corresponding bank.

Correspondent banker is also under an obligation to verify the charter

party bill of lading. In this situation the banker is not expected to examine charter

party contract even if the credit requires them to do so“. In Enrico Furst& Co. v.

W. E. F/scher Ltd.,“’‘’ the correspondent banker was held to be entitled to reject a

bill of lading which was not clean. Here a bill of lading was issued by a forwarding

agent and expressed it to be subject to the charter party. However it was found

that the bill of lading contained qualifying words inconsistent with the common

practice followed when bill of lading is issued. Diplock J said,

“...on the evidence of banking witnesses, the banking practice isthat, where the credit is for payment against bills of lading, banks,whether in London or Switzerland or in Italy, do not treat as goodtender either bills of lading signed by forwarding agents or bills oflading claused to incorporate the terms of a charter party."

The obligation of the correspondent banker relating to the bill of lading document

is confined to reasonable examination of document tendered by the beneficiary.

Once it is in oonforrnity with the terms of credit, he is bound to make payment.

3' The U.C.P.600, Article 22(b) reads, “A bank will not examine charter party contracts, even ifthey are required to be presented by the temis of the credit”.3’ [1960] 2 Lloyd’s Rep. 340.

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If the goods are to be transported by land or air involving the letter of

credit, it will require an air transport document and other documents including the

insurance cover. The law relating to the sufficiency and accuracy of other

documents which must be tendered to the correspondent bank is not as complex

as the rules relating to bills of lading.

Duty of Care in Insurance Documents

The correspondent banker is expected to take reasonable care to examine

insurance document. He must be able to distinguish between a certificate of

insurance and policies of insurance. In Diamond A/ka/P3, it was held that a

certificate of insurance could not be regarded as equivalent to policies of

insurance. In Scott v. Barclays Bank Ltd”, the documents tendered by

beneficiary included a certificate of an American insurance company. It merely

stated that a policy had been issued but was silent as to the nature of the

insurance and its terms and conditions. The correspondent bank rejected this

document. The letter of credit stated that drafts would be honoured against

documents including “an approved insurance policy." The court justified the

refusal. Scrutton, L. J., said:35

“In my view they have a right to see a document or documentswhich contain the terms of the insurance which is offered to themas security for the loss of the goods, and if the documenttendered to them does not show them what the terms of thatinsurance are, they are, from a commercial point of view,reasonable in refusing to approve it or accept it as a policy."

33 DiamondAlkali Expor! Corporation v. Bourgeio '5, [1921] 3 K.B. 443.3‘ [1923] 2 K.B. 135 Id. at p.15.

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Moreover regarding what will constitute an approved insurance policy, a good

definition for an “approved” bill can be found in Hodgson v. Davies”. ATKIN, L. J.,

said,

an “approved policy" indicates, in my view an objectivestandard. That is to say, it does not mean a policy which may ormay not be approved by the person to whom it is tendered, but itmeans a policy such that no reasonable objection could be takento it by commercial men.”

The correspondent banker can accept insurance certificate or a declaration

under an open cover in lieu of an insurance policy37. However an insurance policy

or certificate must cover all the risks specified in the letter of credit. In Borthw/‘ck

v. Bank of New Zea/and”, the policy contained exclusion clauses which exempted

the insurer from liability in certain circumstances and allowed him to limit the

amount. It was held that the confinning bank could reject the documents

tendered.

Similarly the term “all risks" does not have a clear meaning. The U.C.P.600

states”,

“When a credit requires insurance against “all risks" and aninsurance document is presented containing any “all risks"notation or clause, whether or not bearing the heading “all risks”,the insurance document will be accepted without regard to anyrisks stated to be excluded”.

There are some risks which cannot be included under this “all risk”. For

instance, the risk of unlimited transshipment or delay cannot be covered under all

36 (1810) 2 Camp 530 at p.532 as cited in Gutteridge, Supra n.7 at p.127.3’ The U.C.P.600, Article 23 (d).3” (1900) 6 Com. Cas. 1 cited in R. R. Pennington and H. H. Hudson, Commercial Banking, supran.27.39 The U.C.P.600, Article 28 (h).

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risks“°. Therefore it is impossible to visualize all the possibilities of loss which

would be excluded from “all risks" insurance. Moreover lack of a universal

meaning to such a term will invite difficulties to understand the exact meaning.

The corresponding banker is only having an obligation to take reasonable

care while examining the insurance document. He should also have a clear

understanding of the terms contained in it.

Duty of Care under Other Documents

In addition to a bill of lading and insurance document, letters of credit

may require tendering of other documents like commercial invoice, certificates of

weight, quantity or analysis or expert's certificate or opinions. The corresponding

banker is under an obligation to verify the correctness of each document. In

Equitable Trust Co. of New York v. Dawson Partners Ltd.” the letter of credit

called for a quality certificate by experts. The certificate tendered oontained the

opinion by one expert only. The court held that the banker's obligation was to

verify whether the certificate contained more than one expert's opinion. In Basse

and 5e/Ve v. Bank of Australia" it was held that the banker was not under an

obligation to insist that the beneficiary should prove that the expert's quality

report was based on a sample of the goods delivered to him for testing and was

accurate. The banker had only an obligation to verify whether sufficient detail to

show that sample delivered to the expert was a sample of the bulk which was

shipped.

4° F. W. Berk & Co. Ltd v. Style, [1955] 2 Lloyd’s Rep. 382." (1926) 25 Ll.L. Rep. 90.“ (1904) 20 T.L.R. 431 cited in R. R. Pennington and H. H. Hudson, Commercial Banking Law,Supra n. 27.

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The banker is under an obligation to accept documents tendered provided

that they are the usual documents used in that particular trade. However if they

failed to provide the expected information, documents become invalid. In Old

Colony Trust Co. v. Lawyers fit/e and Trust C0,”, the “certificate of analysis" was

tendered. It was found that though it was labeled as such, it did not provide the

information which it was intended to give. It was held that the banker should take

reasonable care to verify the genuineness of the document tendered.

The corresponding bank has to see that the document received appear on

their face to be consistent with the term of the credit. Similarly, it has an

obligation towards issuing bank to forward these documents.

Correspondent Banker's Obligation Towards Issuing Bank

Once the documents are accepted by the correspondent bank from the

seller, it has to transmit them to the issuing bank. This obligation should be

carried out promptly and failing which, the correspondent bank will not get the

eligible reimbursement“.

The corresponding banker is having an obligation to take utmost care. If

any doubt arises as to the validity of any document, it should enquire and clear it

with the issuing bank. However in a Court of Appeal decision“, it was held that if

the issuing bank acknowledged the receipt of the documents without making any

objection to them, it cannot reject the same. It was bound to reimburse the

‘*3 297 F 152 (2"“ Cir 1924) as cited Ibid.44 Richard Schaffer and Beverely Earle (Eds), International Business Law and its Environment,West Educational Publishing Co., Ohio (1999), at p. 266.45 Supra.n.28.

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correspondent bank. Similarly, in Bank Me///' Iran v. Barr/ays Bank 0. C. 0. l.ta1“5,

it was held that by taking unreasonable length of time to reject the shipping

documents received from the confirming bank, the issuing bank waived its right of

rejection.

If the issuing bank request the correspondent bank to confirm a credit

and the correspondent bank is not prepared to do it, it must inform the issuing

bank without any delay“. It can undertake to advise the credit without

confinnation. In case of acting as an advising bank, the obligation can be inferred

from the following. The U.C.P.600, states“,

“A credit and any amendment may be advised to a beneficiarythrough an advising bank. An advising bank that is not aconfirming bank advises the credit and any amendment withoutany undertaking to honour or negotiate.

By advising the credit or amendment, the advising bank signifiesthat it has satisfied itself as to the apparent authenticity of thecredit or amendment and that the advice accurately reflects theterms and conditions of the credit or amendment received.

An advising bank may utilize the services of another bank(“second advising bank”) to advise the credit and any amendmentto the beneficiary. By advising the credit or amendment, thesecond advising bank signifies that it has satisfied itself as to theapparent authenticity of the advice it has received and that theadvice accurately reflects the terms and conditions of the credit oramendment received.

A bank utilizing the services of an advising bank or secondadvising bank to advise a credit must use the same bank to adviseany amendment thereto.

4° [1952] 2 Lloyd’s Rep. 357.‘*7 The U.C.P.600, Article 3 (d).‘"‘ 1d.,Article 9.

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If a bank is requested to advise a credit or amendment but electsnot to do so, it must so inform, without delay, the bank fromwhich the credit, amendment or advice has been received.

If a bank is requested to advise a credit or amendment but cannotsatisfy itself as to the apparent authenticity of the credit, theamendment or the advice, it must so inform, without delay, thebank from which the instructions appear to have been received. Ifthe advising bank or second advising bank elects nonetheless toadvise the credit or amendment, it must inform the beneficiary orsecond advising bank that it has not been able to satisfy itself asto the apparent authenticity of the credit, the amendment or theadvice”.

The obligation of the correspondent bank towards the issuing bank in case if it

agrees to act as a nominated bank is different. The U.C.P.600 states”,

a. Unless a nominated bank is the confirming bank, anauthorization to honour or negotiate does not impose anyobligation on that nominated bank to honour or negotiate,except when expressly agreed to by that nominated bank andso communicated to the beneficiary.

b. By nominating a bank to accept a draft or incur a deferredpayment undertaking, an issuing bank authorizes thatnominated bank to prepay or purchase a draft accepted or adeferred payment undertaking incurred by that nominatedbank.

c. Receipt or examination and fon/varding of documents by anominated bank that is not a confirming bank does not makethat nominated bank liable to honour or negotiate, nor does itconstitute honour or negotiation.

Therefore the obligation towards the issuing bank depends upon the terms

it has agreed with the issuing bank.

49 Ia'., Article 12.

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Correspondent Bank's Obligation towards Buyer

The correspondent banker is not having any obligation towards the buyer

as there is no direct relationship between them. In Calico Printers Association v.

Barclays Bank Ltd“, it was observed that a confirming bank owes no duty of care

to the applicant. However if the confirming bank knowingly permits the

beneficiary to draw under letter of credit by any unauthorized means, it becomes

liable“. So the correspondent bank is having an obligation not to permit any

unauthorized transactions. But there is no supporting case law which justifies this

obligation. In Auto Servicio San Ignacio v. Compania Anon/"ma Venezo/ana de

Nawyation,” Schwarz J., dismissed the complaint filed by the buyer alleging

negligence in verifying the authencity of a bill of Iading. The judge observed that

the confirming bank was having duty only to the issuing bank and not to the

issuing bank's customer. Similarly in Orr and Barber v. Union Bank of Scotiant:/,5‘

the House of Lords held that the applicant could not sue the confirming bank

when it had paid a forged draft and subsequently refused to honour a genuine

draft presented by the beneficiary.

Breach of Obligation by Correspondent Banks

The correspondent bank should examine the documents with reasonable

care. If it acts negligently or omits to take reasonable care it will lead to breach of

duty. The bank will be liable to the concerned parties. They may have to pay

5° (1930) 36 Com. Cas. 71 as cited in R. R. Pennington and H. H. Hudson, Commercial BankingLaw, Supra n. 27.5' See for instance, Oelbermann v. National City Bank ofNew York, (193 5) 79 F. 2d 534. Ibid.5’ Federal Supplement, Vol 586, p. 259 (Dist. Ct. for E. Dist. Of Louisiana, (1984),supra n.9.5’ (1354) 1 Macq. H. L. Cas. 512 as cited in ibid.

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damages for such breach. However damages are determined in the ordinary

way“. The banker will not be liable to pay any special damages. In Urquhart;

Lindsay & Co. Ltd. v. Eastern Bank trot“, it was observed that if a confirming

bank refuses to accept or purchase drafts presented by the beneficiary under a

credit without lawful excuse, the beneficiary can recover general damages.

However, the beneficiary cannot recover any special damages.

Instead of damages, the beneficiary can claim the actual amount of the

letter of credit in some cases. In Belgian Grain and Produce Co. v. Cox & Co.“

,the Court of Appeal held that the beneficiary can sue the bank for the actual

amount of the credit without proving loss. The same view was taken by the Privy

Council in Larios v. Bonany y Gurity‘7.The question whether the damages are to

be computed with reference to the loss suffered by the beneficiary by the non­

acceptance of shipping documents or solely on the basis of the banker's failure to

pay was considered. In this regard, Bankes, L. J., said,

“The object of letters of credit in this form.... is to secure paymentof the purchase price of the goods or of the actual amount namedin a letter of credit in exchange for the particular documentsnamed therein, and one of the objects is to avoid any controversyin reference to the amount of damage and to secure that asagainst the documents if they are in order the amount of moneynamed in the letter of credit should be paid over."

Thus it is a settled that if there is a breach of obligation towards the

beneficiary by the correspondent banker, he is entitled to get damages. In case of

54 Damages are given meaning of the rule laid down in Hadley v. Baxendale (1854) 9 Ex. 34] ascited in supra 11. 755 [1922] 1 K.B. 313.5“ (1919) 1 Ll.L. Rep. 256.5’ (1373) L.R. 5 PC. 346.

259

the buyer, the correspondent bank has no obligation and hence cannot be sued”.

Similarly the question of damages will not arise as there is no privity between

them. In case of breach of obligation towards issuing bank, the correspondent

bank has to face the consequences. They cannot get reimbursement from the

issuing bank.

Correspondent Bank and Exclusion Clauses

Correspondent bank is liable to perform its obligation to the extent

mentioned under the credit. The U.C.P.600 contains provision which excludes

liability of the banks for the inevitable risks of inaccuracy connected with the

transmission of instructionsgand acts of an instructed party°°. Another exclusion

clause is related to force majeure“. However the clause does not expressly

mention about negligence on the part of banks. It is reasonable to assume that

the clause merely clarifies the position of a bank while acting as intermediaries”.

It fails to perform their functions correctly on time. Such an interpretation is

58 Courleen Seed Co. v. Hong Kong & Shanghai Banking Corporation, 245 N.Y. 377 as cited inPhilip W. Thayer, “lrrecoverable Credits in International Commerce: Their Legal Effects”, 37 Col.L_R. 1326 (1937), atp. 135859 The U.C.P.600, Article 35 covers two distinct issues: (a) errors or delays which occur during thetransmission of communications either by post or using telecommunications (b) errors arising inthe translation or interpretation of technical terms.6° Id., Article 37 reads, Disclaimer for Acts of an Instructed Party(a) A bank utilizing the services of another bank for the purpose of giving effect to the instructionsof the applicant does so for the account and at the risk of the applicant.(b) An issuing bank or advising bank assumes no liability or responsibility should the instructionsit transmit to another bank not be carried out, even if it has taken the initiative in the choice of thatother banks. .(c) A bank instructing another bank to perfonn services is liable for any commissions, fees, costsor expenses (“charges”) incurred by that bank in connection with its instructions.If a credit states that charges are for the account of the beneficiary and charges cannot be collectedor deducted from proceeds, the issuing bank remains liable for payment of charges.A credit or amendment should not stipulate that the advising to a beneficiary is conditional upon

the receipt by the advising bank or second advising bank of its charges.(d) The applicant shall be bound by and liable to indemnify a bank against all obligations andresponsibilities imposed by foreign laws and usages.6‘ Id.,Article 36.62 Post office can be intennediary.

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neither fanciful nor remote and would not absolve banks from their obligation to

exercise reasonable care when operating the documentary credit“.

In case of errors in interpretation of technical terms are concerned, it is

applicable only among bankers themselves and not of the third party. Again the

framing of the provision in broad terms will allow banks to escape liability even if

they are negligent. If this is followed it will result in paying a seller under the

tenns of an erroneously advised credit and claiming reimbursement from the

buyer even though the documents obtained did not confirm to his instructions.

This will result in contradiction with the doctrine of strict compliance“. The U.C.P.

states“,

“A bank assumes no liability or responsibility for the consequencesarising out of delay, loss in transit, mutilation or other errorsarising in the transmission of any messages or delivery of lettersof documents, when such messages, letters or documents aretransmitted or sent according to the requirements stated in thecredit, or when the bank may have taken the initiative in thechoice of the delivery service in the absence of such instructions inthe credit.

If a nominated bank determines that a presentation is complyingand forwards the documents to the issuing bank or confirmingbank, whether or not the nominated bank has honoured ornegotiated, an issuing bank or confirming bank must honour ornegotiate, or reimburse that nominated bank, even when thedocuments have been lost in transit between the nominated bankand the issuing bank or confirming bank, or between theconfirming bank and the issuing bank”.

However its exclusion of terms are very precise and does not include any error

made in translating a non-technical term. It is confined solely to the situation

63 Suisse Atlantique Société d ’Armement Martine S.A. v. N.V. Rotterdamsche Kolen Centrole,[1967] 1 A.C. 36]. See also Hollier V. Rambler Motors, [1972] 2 Q.B. 7|.64 For details, see supra chap.3.‘>5 The U.C.P.600, Anicle 35.

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where instructions expressed in one language require to be translated into

another in order to operate the credit successfully. Where the bank provides such

a service, the effect of the clause is merely to ensure that it does so at the risk of

the applicant. Any such error in translation could result in confusion and delay.

Before considering the efficacy of the exclusion clauses, it is necessary to

recall the background against which attempts are made by banks to exclude

liability. Although the U.C.P have been accepted by banks worldwide and seen as

a clear reflection of international banking custom and practice, they do not solve

all questions arising from documentary credits. They are essentially contractual in

nature and are subject to municipal law. Under English law also there is no

prohibition on disclaiming liability“.

The common law, on the other hand developed strict requirements

regarding the incorporation of disclaimer clauses into a contract. In Spur//'/7g v.

Bradshaw”, it was held that the more onerous an exclusion clause, the greater is

the burden upon those seeking to rely on it to bring it to the counter party's

attention.

Therefore, generally a banker cannot incorporate more stringent exclusion

clause into the contract with the applicant. Courts have also developed strict rules

of construction to restrict the scope of exclusion clauses. In order to avoid liability

banks should define the exclusion in precise terms. The bank can avail of the

exemption only if a clause to that affect is expressly mentioned in the contract in

clear and unambiguous terms.

66 See Photo Productions V. Securicor, [1980] A.C. 827.*7 [1956] 2 All ER. 121 (C.A.).

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In the U.K., the Unfair Contract Terms Act, 1977“ is applied to all

documentary credit transactions with regard to exclusion clause. Any attempt to

exclude liability for the negligent performance of a contract is controlled by it“. In

order to exclude any liability, it has to satisfy the test of “reasonableness”

provided under the UCT Act, 1977". Therefore in the U.K. the disclaimer clauses

of the U.C.P. must satisfy the test of reasonableness set out in the UCT Act, 1977.

Courts in the U.K. are using broad discretion in applying the test of

reasonableness although they are not under any obligation to consider them“.

They will consider other matters including the difficulty of the task undertaken by

the parties apart from the practical consequences of the decision on

reasonableness”. The discretion given to the courts in applying the concept of

reasonableness in documentary credit is really debatable.

A problem will arise in case, the validity of exclusion clause under

documentary credit is challenged. Can the exclusion clauses set out as standard

terms of the U.C.P. be challenged on the ground of lack of reasonableness is the

moot question to be decided. Although there is no English authority on the point,

it would appear that where standard terms have been formulated by an

6" Hereinafter referred to as UCT Act, 1977."9 The UCT Act, 1977, s. 2(2) provides that any type of loss or damage arising from the negligentperformance of a contract other that death or personal injury is effective only in so far as the clausesatisfies the “requirement of reasonableness”.7°Id., s. 1 1 provides that a term is reasonable if it has been a reasonable one to be included havingregard to the circumstances.71 The Unfair Contract Terms Act, 1977, schedule I] provides number of guidelines to decide thecase.

72 Smith v. Bush, [1990] 1 AC. 331.

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independent body, generally the court would consider whether that body is

neutral in order to decide the validity of such exclusion clause".

Apart from this, the U.C.P. 600 does not allow an issuing bank to disclaim

all responsibility for acts or omissions by an advising bank. It does not deprive the

applicant of any effective remedy. This would be the case even where the issuing

bank uses the services of its own overseas branch." The question will arise

whether a provision which excludes the issuing bank's liability not only for the

negligent performance of an instructed bank but even where that bank fails to act

at all, can be treated as reasonable under UCTA75. It would not be reasonable

because it would enable the bank to avoid liability, no matter how egregious was

the misconduct of the instructed bank and no matter how grave were the

consequences for the applicant. It will leave the applicant at the mercy of issuing

banks if their instructions were not implemented by correspondent banks and

they suffer resultant economic losses. Apart from this the Uniform Rules for

Demand Guarantees also does not allow banks to rely upon the disclaimer clauses

if they fail to act in good faith and with reasonable care”.

Thus it can be seen that if the test of reasonableness provided in the

UCT Act, 1977 is applied to the U .C.P provision, will not protect the interest of the

applicant. It is stated that “the UCP 500 places the applicant—buyer in an absurdly

73 See McCrone v. Boots Farm Sales Ltd., (1981) S.L.T. 103 as cited in Alan Ward and RobertWight, “The Liability of Banks in Documentary Credit Transactions Under English Law,” 13J.1.B.L.387 (1998).74 Branches of a bank in different countries are considered as another bank", Art. 2 of U.C.P 500.75 S. 3.(2)(b) UCTA applies to any contractual term by virtue of which a party claims to be entitled(i) to render a contractual perfonnance substantially different from that which was reasonably tobe expected of him, or (ii) in respect of the whole or any part of his contractual obligation, torender no perfonnance at all.76 See ICC Publication No. 458, Article 15.

264

vulnerable position through its disclaimer clauses"". Moreover there is a serious

absence of meaningful duties on the part of the bank to check the authenticity of

the documents. The duty of the correspondent banker remains only to ascertain

that such documents comply with the terms of the credit on their face. Therefore

if false documents are used by unscrupulous seller, the buyer is Iefl: with little

options. He should nonetheless, indemnify the bank for making the payment". It

is questionable whether buyers to whom the exemption clauses are mainly

applied are aware of the existence of disclaimer clauses. Though the

documentary credit issued contains that the credit is subject to the U.C.P.600

there will not be any infonnation highlighting the existence of disclaimers.

The correspondent banker is in a safer position if they took shelter under

exclusion provision of the U.C.P. Hence this needs redrafcing. The litigations in

these areas are limited. In other countries where UCT Act, 1977 is not followed,

the U.C.P is followed. Hence it is necessary to apply the disclaimer clauses

conditional on the bank's acting in good faith and taking reasonable care.

Corresponding Bankers Obligation in India

In India the corresponding banker’s obligation is similar to that of the

English position. It depends mainly upon the nature of its undertaking regarding

the documentary credit. In. case of mere intimation to the beneficiary by the

correspondent bank that the documentary credit has been issued, then it will

only be liable for the accuracy of the information which it has conveyed. It is not

required to make any payment to the beneficiary in this situation. This position

77 H. Harfield, “Identity Crises in Letter of Credit Law”, 24 Ariz. L. Rev. 239 (1932), p.245.78 D.G. Powles & S. J. Hazelwood, “Maritime Fraud — l”, [1984] J. B. L. 31, at p.37.

265

was accepted by the Calcutta High Court in United Bank of India Ltd v.

Neder/andsc/7e Standard Ban/3°. In this case the information regarding the

opening of letter of credit was not clear. The undertaking of the bank which sent

the information also was not satisfactory to decide the liability for restraining

payment to the beneficiary on the basis of expiry of letter of credit. The court

pointed out the need for care on the part of an advising bank while advising the

beneficiary of a letter of credit. The advise should make it clear that the credit is

that of the issuing bank and that the advising bank is merely advising or

transmitting it to the beneficiary.

On the other hand if the corresponding bank confirms the letter of credit,

it becomes liable to make payment on presentation of the stipulated documents.

The risk of nonpayment by the issuing bank is shifted from the beneficiary to the

confirming bank. The advising bank is a special agent of the issuing bank and the

later is a special agent of the buyer. On presentation of documents for

negotiation, the bank can either accept the document or reject the same. But it

must take reasonable care to examine the documents and ensure that they

comply strictly with the terms of credit. The Bombay High Court distinguished the

terms “Presentation" and “Negotiation” and held that negotiation means

acceptance of documents by the bank. In 5w/35 Bank Corporation v. Jai Hind 0i/

Mi//5 Companf° the court dismissed the case filed by the negotiating bank on the

sole reason the documents were negotiated beyond the date prescribed under

the letter of credit. The court pointed out that the negotiating bank made

payment on is own risk and was not entitled to realize amount from the issuing

7” (1963) 33 Com.Cas. 1 (Cal)“° (1939) 66 Corn. Cas.241 (Bom.).

266

bank. This decision highlights the extent of care that the corresponding bank is

bound to take. Reasonable care is expected from corresponding bank while

examining the documents. The obligation of corresponding bank and the

standard of care in examining documents are based on the provisions of the

U.C.P. in India also. The Supreme Court explained this position in Federal Bank

Ltd v. I/.M.Jog Engineering Ltd”. In this case, the negotiating bank received

documents from the seller. It got the documents confirmed by the issuing bank

and made payment to the beneficiary. Meanwhile the buyer obtained a

temporary injunction against the issuing bank from honoring the letter of credit

on the ground of fraud. Later when the negotiating bank made claim to get

reimbursement of the amount, the issuing bank refused to pay. It was held that

the temporary injunction granted in favour of the buyer and against the issuing

bank does not preclude the issuing bank to reimburse the negotiating bank. The

court relied on Article 11(d) of the U.C.P.500. The court said that if the

negotiating bank is satisfied that the documents appear on their face to be in

accordance with the terms and conditions of the credit and makes payment the

issuing bank is bound to reimburse the negotiating bank. The court said”,

“The contract between the issuing banker and the paying ornegotiating (intermediary) banker may partake of a dual nature.The relationship is mainly that of principal and agent, mandatorand mandatory. In order that he may claim reimbursement for anypayment he makes under the credit or the indemnity of an agent,the intermediary banker must obey stricfly, the instructions hereceives, for by acting on them, he accepts then and thus entersinto contractual relations with the issuing [b]ank. The instructionsmay take the form of an authority either to pay against documentsor drafts accompanied by document, or to negotiate drafts drawneither on the issuing banker or on the buyer. The authority maybe accompanied by instructions to the intermediary banker to

3' A.I.R.2000 S.C.3l66.3” /4., p.31s1

267

confirm the credit, that is, to place himself in binding contractualrelationship with the beneficiary. There is ordinarily no privitybetween the intermediary banker and the buyer. But theintermediary banker, though initially the agent of the issuing[b]ank, may also act as principal in relation to him."

When corresponding bank pays in compliance with the documentary

credit, it is entitled to receive reimbursement for the same from the issuing bank.

This principle is affirmed by the Supreme Court in UB5 AC v. State Bank of

Pat/‘a/a33.In this case, the letter of credit issued contained a request to the

confirming bank to inform the beneficiary that an irrevocable letter of credit had

been established and to make payment on negotiation of documenb by

beneficiary. As per the instructions the confirming bank after verification of the

documents paid and claimed reimbursement from the issuing bank. The issuing

bank refused to reimburse on the ground of fraud perpetrated by the beneficiary.

It was held that if the fraud had been detected earlier and informed the

confirming bank or put on caution prior to making payment, the issuing bank

might have had a triable issue and was justified in refusal to pay. But in this case

the fraud was detected alter the letter of credit had been negotiated. So the

court held that the issuing bank was liable to make reimbursement.

This analysis shows that the obligations of the corresponding bank in

India are determined on the basis of contractual principles, Ehglish precedents

and the U.C.P. provisions.

3‘ AIR. 2006 s.c.225o

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Correspondent Banker's Obligation: A Critique

The correspondent banks obligation is unilateral. It is bound to accept the

documents only when the beneficiary tenders them before it. There is no

contractual duty for the beneficiary towards the bank to act on terms. But he will

lose his right to get payment if he fails to submit the required documents under

credit. The bank is entitled to insist that the documents presented oorrespond

exactly to the requirements of the credit. It can refuse to accept if they are

inconsistent.

The obligation towards the beneficiary by the correspondent bank is

treated as an additional one. So naturally they should be more cautious when

accepting the documents. So far, there is no law which pinpoints the true

obligations of the correspondent banker. Instead, there is only a general idea to

take “reasonable care". Hence when the instructions are ambiguous the bank is

expected to adopt what would be reasonable in the circumstances“. However the

standard to determine the “reasonable care” is not developed. So the

circumstances determine the reasonableness which may create ambiguities. The

heart of the problem is the limited discretion available to bank in matching the

terms and conditions of credit against the documents presented. This is important

to judge the obligation of the banker.

The correspondent bank looks to the issuing bank alone for

reimbursement. Therefore prima facie it is unlikely that it owes no duty to the

3‘ Razeen Sappideen,”Intemational Commercial Letters of Credit: Balancing the Rights of Buyersand Sellers in Insolvency”, [2006] J .B.L. 133.at p. I 37

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applicant even if he is paying the confirmation fee“. Banks attempt to exclude

their liability by relying on the provisions of uniform customs principles“. The

judicial trend is liberal”. Moreover it is questionable whether courts examine if

reasonable notice has been given when judging the legal effect of these

exemption clauses. This leads to the question whether courts should balance the

interests of the parties or whether applicant's interests should be protected. The

banks have the right to waive discrepancies and pay regardless of the approval

of the applicant“. On the other hand the applicant is liable to indemnify a bank

against all obligations and responsibilities imposed by foreign laws and usages”.

Therefore the applicant has to bear a disproportionate portion of the error and

negligence risk of the bank and he is left at the mercy of the bankers. The

applicant will be the most affected party. As there is no contractual relationship

with the correspondent bank, he cannot sue or claim damages for any breach.

Therefore it is necessary to define in clear terms the obligations of corresponding

bank. The interest of both the banker and the account party should be taken into

account.

*5 See United Trading Corp. v.A[liez1Arab Bank, [1935]2 Lloyd’s Rep. 554. GKN Conlractars v.Lloyds Bank Plc., (1985) B.L.R.48 as cited in Alan Ward, “The Liability of Banks in DocumentaryCredit Transactions under English Law”, 13 J.I.B.L.387 (1998), p.3903‘ The U.C.P.600, Article 37.87 Except in cases of fraud courts are reluctant to interfere.88 Duncan Sheehan, “Rights of Recourse in Documentary (And Other) Credit Transactions",[2005] J.B.L.326.*9 The U.C.P.600, Aniclc 37(d).

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