Letters Of Credit: What Is An Issuing Bank Entitled To Know Before Paying Out?

Letters of credit (LCs) are very widely used as a secure means of financing international trade. In the last year, there have been several English court judgments1 about the role and responsibilities of issuing banks in an LC transaction, and in particular their obligation to pay against receipt of conforming documents.

Now, the English High Court has ruled2 on an issuing bank's entitlement to require further information as to whether a confirming bank has made payment under an LC before reimbursing it.

Background

HFW represents CIMB Bank Berhad (CIMB) in an action brought against them by Deutsche Bank AG in the English High Court. CIMB was the issuing bank under 10 letters of credit to which Deutsche Bank added its confirmation.

The substantive hearing of this case will take place later this year, but an interesting point of principle arose at the first case management conference, which is of significant interest to issuing and confirming banks under LCs.

Deutsche Bank argued that having made payment to the beneficiary, its client, under the LCs and having passed what it alleged to be compliant documents to CIMB, it was entitled to reimbursement from CIMB. CIMB disagreed.

The issue between them related to the interpretation of Article 7(c) of the UCP 600, which states:

"An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank [...] An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary."

In its pleadings, Deutsche Bank asserted that it had made payment and CIMB had made a formal Request for Further Information as to whether payment had actually been made.

Deutsche Bank refused to comply with this Request, contending that as a matter of principle, an issuing bank must accept on its face a statement from a confirming bank that it has paid the beneficiary - there is no entitlement on the part of an issuing bank to enquire as to whether a confirming bank has actually made payment before reimbursing it. It argued that CIMB's undertaking to reimburse Deutsche Bank arose once Deutsche Bank had sent CIMB the allegedly conforming documents and stated that it had paid the beneficiary. To permit issuing banks a right of enquiry as to whether payment has in fact been made would be "uncommercial, unworkable and plainly not what the parties must be taken to have intended".

CIMB...