Following the decision rendered by the Malaysian Court of Appeal (Appeal Court) between Punjab National Bank (PNB) and Malayan Banking Berhad (Maybank), Maybank has successfully obtained permission from the Federal Court of Malaysia Putrajaya to appeal the decision to the Malaysian Court of Appeal.
The appeal is based on the following questions of law:
Three questions of law
1. Notice of refusal: when a bank issuing a letter of credit (LC) governed by UCP 600 determines that the documents presented do not constitute a conforming presentation:
a) Is the issuing bank required to notify the negotiating bank in accordance with Section 16(c) and (d) of UCP 600, regardless of the nature of the non-compliance? ;
(b) Is the issuing bank precluded from claiming that the documents presented do not constitute a conforming presentation and is it bound to honor its obligation to reimburse if notice is not given in accordance with Article 16 (c ) and (d) of the UCP 600?
2. Standard for reviewing documents submitted under an LC: whether a negotiating bank is only required to consider whether or not the documents appear to constitute a conforming presentation based on UCP 600?
3. Reasons for refusal of reimbursement on an LC: where an LC, governed by UCP 600, expressly provides that it is available for negotiation by any bank in Malaysia, if an issuing bank can avoid its obligation to reimburse the negotiating bank for reasons not indicated in the notice of refusal and which relate to the mode of negotiation of the documents presented within the framework of the LC?
This case concerns a letter of credit issued for $1.9 million, subject to UCP 600, available for negotiation with any Malaysian bank with a tolerance of plus or minus 2%.
Along with other documents, LC demanded the submission of a complete set of signed, clean, on-board bills of lading and stated that freight forwarder slips were not acceptable.
The beneficiary presented faxed copies of the documents to Maybank in separate presentations and asked Maybank to negotiate them.
Maybank traded the next day. Six days later, Maybank received the original conforming documents from the payee and confirmed no differences from the faxed copies submitted earlier.
The documents were then forwarded to PNB by Maybank for reimbursement by crediting its account with Wells Fargo Bank, New York.
Five days after the transmission of the documents to PNB, Maybank received a change notice 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 port of loading (proposed amendment).
The proposed modification was not accepted by the beneficiary.
A notice of denial was sent by SWIFT from PNB to Maybank seventeen days after receipt of the documents by PNB, as the notice of denial was originally sent in error to Wells Fargo Bank, New York. PNB claimed that the documents contained the following two discrepancies:
- Forwarder’s delivery slips presented contrary to the terms of the LC;
- COA, weight and quality in triplicate issued by SGS not presented.
Maybank challenged the discrepancies raised by PNB and the validity of the denial notice because it failed to comply with the provisions of Article 16 of UCP 600.
Subsequently, PNB returned the documents to Maybank without payment. The case was brought by Maybank in the High Court of Malaysia.
PNB argued that Maybank was not entitled to reimbursement because it relied on faxed copies to determine compliance.
The judge cited the Hong Kong case, ‘China New Era International Ltd v. Bank of China (HK) Ltd & Ors  5 HKC 82’ and stated: “The applicant, as the negotiating bank, is fully entitled to make an advance payment to the beneficiary in anticipation of the submission of original documents by the beneficiary.”
After all, the High Court held that UCP 600 did not provide for a “duty to examine original documents”, allowing the negotiating bank to be the beneficiary before payment.
Maybank had the right to determine the precise mode of negotiation of the documents. The judge held that PNB had not given a valid notice of denial to Maybank and that it was prohibited and estopped from claiming that the documents were discrepant, even if the discrepancies cited by PNB were valid.
The denial notice sent to Wells Fargo Bank could not be accepted because the documents were not presented by Wells Fargo Bank.
The trial court had also accepted the R734 opinion of the International Chamber of Commerce (ICC) and considered that the BoL presented was not contradictory. Furthermore, it was found that the COA, weight and quality issued by SGS were not required to be presented as the proposed change was never accepted by the beneficiary.
Malaysia’s High Court has ruled in favor of Maybank. It found that the issuing bank, PNB, was required to honor its commitment to repay the negotiating bank, Maybank, since the BoLs complied with the terms of the LC and the provisions of UCP 600, and that the notice refusal of PNB did not comply with UCP 600 Article 16(c).
PNB asked the Court of Appeal to overturn the High Court’s decision.
The Court of Appeal ruled that banks must apply the principle of strict compliance with the terms of the LC, and the forwarding agent BoL was a “weak form of document compared to a maritime bill of lading“.
Since the LC required an Ocean BOL and freight forwarder BOLs were not permitted, failure to produce an Ocean BOL was a fundamental breach of the LC. It was not a matter of discrepancy and no notice of denial was required.
According to the Court of Appeal, Maybank’s assertion that it negotiated the documents on faxes rather than originals did not comply with the terms of the LC.
In its appeal to the Federal Court of Malaysia in Putrajaya, Maybank claimed that the Court of Appeal significantly departed from widely accepted international rules governing LCs, in particular UCP 600.
The Federal Court dealt with the three questions of law listed at the beginning of this article. In its judgment, the Federal Court applied the provisions of RUU 600 and found that the opinion of the Court of Appeal was “patently unsupportable and … is not supported by any authority”.
The BoLs presented by the beneficiary constitute a conforming presentation. Regarding the mode of negotiation, Maybank was entitled to pay the beneficiary in advance before receiving the original documents.
The Court of Appeal erred in overturning the High Court’s finding. In conclusion, the Court of Appeal’s order was set aside and the High Court’s order restored.
The judgment rendered by the Federal Court is final and consistent with standard international banking practice for reviewing documents under the LCs.
The issue of freight forwarders’ slips is not new.
The ICC Banking Commission has issued official opinions and a DOCDEX decision affirming the acceptability of freight forwarder BoLs even though an LC only requires maritime BoLs and does not allow the presentation of freight forwarder BoLs.
In Abani Trading Pte Ltd v. BNP Paribas 3, the judge concluded that “there is therefore no legal impediment or reason why a freight forwarder is unable to sign BoLs as an agent for the carrier, as opposed to an agent for the shipper.
“I commend the Federal Court of Malaysia for delivering a fair and just judgment on this case.”
“Malaysia boleh” (“Malaysia can do”)!
This article first appeared in Documentary Credit World.