High Court Considers Contractual Construction Of Irrevocable Letter Of Credit Incorporating UCP 600

• Published date: 16 November 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Real Estate and Construction, Financial Services, Corporate and Company Law, Contracts and Commercial Law, Construction & Planning
• Law Firm: Herbert Smith Freehills
• Author: Mr Ajay Malhotra, Ceri Morgan and Elina Kyselchuk

In the context of a trade finance dispute, the High Court has considered the contractual interpretation of an irrevocable letter of credit incorporating the commonly used code in the Uniform Customs and Practice for Documentary Credits 600 (UCP 600), published by the International Chamber of Commerce (ICC). In particular, the court held that the issuer's interpretation of the letter of credit would, in practice, render the instrument revocable, which was inconsistent with the UCP and therefore not the proper construction. Finding that there was no real or substantial dispute that the issuer of the credit was liable, the court held that a winding up petition presented by the beneficiary succeeded against the issuer: Heytex Bramsche GmbH v Unity Trade Capital Ltd [2022] EWHC 2488 (Ch).

One of the key issues considered in this case was whether or not the documents presented as part of the demand were compliant with the terms of the letter of credit, which required the documents to be signed by 'all sides of [the letter of credit]'. The court roundly rejected the issuer's contention that its own signature was required, emphasising the need to consider letters of credit as a whole and - as far as possible - to read the contractual terms consistently with the UCP. In the court's view, the issuer's construction would have resulted in the letter of credit becoming revocable, because the issuer could have chosen simply to withhold its signature from the demand. This would have created a fundamental internal inconsistency in the terms of the letter of credit and a very significant departure from the UCP 600.

The court also rejected the issuer's proposition that the letter of credit incorporated its own 'credit norms', modifying and prevailing over the UCP 600. Assuming the issuer's interpretation of the effect of those credit norms was correct, incorporation would have resulted in a dramatic departure from the scheme of the UCP 600 and from the commercial essence of a letter of credit. The court said that to have successfully incorporated these provisions into the credit would have required very clear notice, the equivalent of Denning LJ's 'red hand' in J Spurling Ltd v Bradshaw [1956] 1 WLR 461 (CA) 466. Alternatively, even if the credit norms were incorporated, they did not have the effect argued for by the issuer, which undermined a number of characteristics fundamental to the function of credits.

The present decision continues the trend of decisions considering the UCP 600 in which the courts have consistently favoured an international focus on the question of interpretation. We considered recently the interpretation of ICC standardised rules in trade finance disputes across a number of commonly used codes, including UCP 600, in this article published in Butterworths Journal of International Banking and Financial Law: Interpreting ICC standardised rules in trade finance disputes: courts take an international perspective.

We consider the decision in...