May 2019 DCW Issue

Volume 23, Number 5 May 2019
I n This Issue... 14 FEATURE

■ 3 UPDATES: Indian Guarantee Law  2019 ICC BANKING COMMISSION
& Claim Periods; Standard Chartered
Agrees to Settlement in US, Fine in UK; ANNUAL MEETING
Annual Trade Finance Compliance
Conference Returns to London; OFAC
Announces Settlements for Apparent
US Sanctions Violations; Serious Issue with Compliance
Checks at Deutsche Bank; FELABAN Event to Feature
Focus on Standbys and Guarantees; Changes to
Germany’s Transparency Register?; Prague to Host At its genesis in 1919, no functioning global
Trade Finance Workshops; International Updates;
Islamic Banking and Charter Party Bills of Lading system existed to advance development of
trade routes. At its centenary, no single
■ 12 LITIGATION DIGEST:
■ International Cards Co. v. Mastercard International comprehensive formula is available to rid
■ JFS Properties, Inc. v. SouthCrest Bank, N.A.
global trade of all obstinate inefficiencies.
■ 23 ARTICLES:
■ “Use of Non-Documentary Conditions Still a Endeavoring to chart an innovative and
Symptom of Poorly Drafted LCs” by HEI Zuqing
effective path toward furthering trade, the
■ “Demands to be Construed
International Chamber of Commerce held
‘Intelligently, not Mechanically’”
by Dr. Alan DAVIDSON its 2019 Banking Commission Annual
■ “Back-to-Back LCs in Commodity Meeting in Beijing. Plenary sessions
Financing” (Part II) by Barry CHIN
confronted challenging issues and
■ “The Dilemna on Enforcement of Indian Bank
Guarantees” by Rajesh Narain GUPTA and Sanjay circumstances facing the future of global
GUPTA
trade finance and explored promising
initatives and opportunities. Highlighting
its vital work to press forward with the
digitalisation of trade finance, the Banking
Commission announced voting results that
pave the way for eUCP Version 2.0 and
eURC text to enter into force July 2019.
Published in partnership with BAFT

Dr. Karl Marxen
D
ocumentary Credit World (DCW) Editorial Advisory Board
Ostfalia University of Applied
is published monthly by Sciences (Germany)
Lena Andersson
Documentary Credit World, Inc. Global Product Specialist
Opinions expressed in it do not SEB (Sweden) Khalil Matar
Assistant General Manager
necessarily reflect the official positions of Alinma Bank (Saudi Arabia)
Pavel Andrle
the publishers of DCW, its Editorial Trade Finance Consultant
Board, Editorial Advisory Board, or the Czech Republic David Meynell
Owner, TradeLC Advisory
organizations with which they are Hasan Apaydin (Turkey)
associated. Authors, editors, members of Neal Millard
Michael Evan Avidon, Partner Musick, Peeler & Garrett LLP
DCW’s Editorial Board and Editorial Adjunct Professor, USC Law School
Moses & Singer LLP (NY)
Advisory Board, and the institutions with
which they are associated often are Buddy Baker K. Nizardeen
VP, Investment Banking Division FIB (Dubai, UAE)
actively involved in the field as lawyers,
Goldman, Sachs & Co. (Chicago)
advisers, parties, consultants, or expert Vincent O’Brien, Technical Trade Advisor
James G. Barnes* China Systems Corporation
witnesses in many of the matters
addressed in DCW. The publication often Baker McKenzie (Chicago)
Janis S. Penton, Assistant General Counsel
reflects and sometimes adopts their Abdulkader Bazara MUFG Union Bank, N.A.
views. Notwithstanding positions Trade Finance Structuring Head
Abu Dhabi Islamic Bank (Abu Dhabi) Gabriel Sham
expressed in DCW, every effort will be Trade Finance Consultant
made to publish differing viewpoints and Jack Chan Singapore
contributions expressing such views are Hong Kong
Kim Sindberg
welcomed. Dr. Alan Davidson, Senior Lecturer Executive Adviser
TC Beirne School of Law Nordea Trade Finance (Denmark)
University of Queensland (Australia)
The support of the Journal of Donald R. Smith*
International Commercial Law Roger D. Fayers, LLB President,
Barrister (UK); Department of Trade Global Trade Advisory, Ltd.
is gratefully acknowledged.
& Industry, Soliciter’s Dept. (retired)
Soh Chee Seng, Technical Consultant,
Documentary Credit World Clyde Fletcher, Documentation Manager Trade Finance Issues, the Association
Fonterra Limited of Banks in Singapore (Singapore)
20203 Goshen Road., No. 343
Gaithersburg, MD 20879 USA Xiang Gao Chang-Soon Thomas Song, First Expert,
Dean & Professor of Law, China Univ. Trade and Services Department,
phone: +1-301-330-1970 KEB Hana Bank (Seoul)
of Political Science & Law (Beijing)
fax: +1-301-926-1265
Paula Greaves Lorna K. Strong
e-mail: info@doccreditworld.com SVP & Global Trade Operations Deputy General Counsel
website: www.doccreditworld.com Procedures & Technical Consultant HSBC Global Trade & Receivables
Bank of America Merrill Lynch (Seattle) Finance (London)
Founder Hugo Verschoren
Professor James E. Byrne A.T.M. Nesarul Hoque
Vice President, Consultant, goVer Trade Technologies
Mutual Trust Bank (Bangladesh) Belgium
Contributing Editors Jun Xu
Professor Katsuto Iida
Vincent Maulella (retired, Tezukayama Univ., Japan) Deputy General Manager
Vincent O’Brien Bank of China, Jiangsu Branch (China)
Soh Chee Seng Dean Rafael Illescas Ortiz
University Carlos III de Madrid (Spain) KK Yeung
Executive Editor Hong Kong
Christopher S. Byrnes Chris Jenkins
Chief Information Officer Alexander Zelenov, Director
Correspondent Editor Standard Chartered Bank (Thai) PCL Bank for Foreign Economic Affairs
Lisa V. Chin of the USSR (Moscow)
Jin Saibo, Partner
Case Editor Beijing Jincheng Tongda & Neal *Denotes Editorial Board member
Matthew J. Kozakowski Law Firm (China)
Carter Klein, Partner Emeritus Board Members
Scam Survey Editor
Jacob A. Manning Jenner & Block (Chicago)
DCW is grateful to prior members of
Michelle Kelly-Louw its Board and appreciates their past
Designers service. Emeritus Board Members are
Professor in Banking Law
Mario Escalera, Christopher V. Sandler University of South Africa recognized on the DCW website at:
www.doccreditworld.com
Published by Documentary Credit World, Inc. ISSN 1520-0221. Copyright © 2019 by Documentary Credit World, Inc.
All rights reserved. No part of this journal may be reproduced in any form, including microfilm, xerography or
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2 Documentary Credit World ■ May 2019
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UPDATES
UPDATES
Indian Guarantee Law & Claim Periods
I
t has been reported to DCW that the Indian Bank Association
(IBA) issued another clarification in December 2018
regarding how banks issuing guarantees might provide for
claim periods. where it stated:
“If a bank guarantee is issued with a claim period of less than

one year on top of the guarantee period, then such guarantee
will NOT have the benefit of Exception 3 to Section 28 of
Indian Contract Act,1872. In other words, the bank issuing
such guarantee could stand exposed to period of limitation
under the Limitation Act, 1963, which period is 30 years when
the Government is the guarantee beneficiary and 3 years when
any other party is the guarantee beneficiary.
In view of the foregoing, it will be a safer course in the interest

of the banks, though not obligatory, under law, to issue every
guarantee (regardless of the guarantee period) with a
minimum claim period of one year on top of the guarantee
period so as to avail benefit of Exception 3 to Section 28 of
Indian Contract Act,1872.”
The relevant portion of law – Indian Contract Act, 1872 –

states:
Section 28. Agreements in restraint of legal proceedings void.

Every agreement,
(a) by which any party thereto is restricted absolutely from
enforcing his rights under or in respect of any contract, by
the usual legal proceedings in the ordinary tribunals, or
which limits the time within which he may thus enforce his
rights, or
(b) which extinguishes the rights of any party thereto, or
discharges any party thereto from any liability, under or in
respect of any contract on the expiry of a specified period
so as to restrict any party from enforcing his rights,
is void to that extent.
…
Exception 3. – Saving of a guarantee agreement of a bank or a
financial institution. – This section shall not render illegal a
contract in writing by which any bank or financial institution
stipulate a term in a guarantee or any agreement making a
provision for guarantee for extinguishment of the rights or
May 2019 ■ Documentary Credit World 3

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UPDATES
UPDATES
discharge of any party thereto from any liability under or in respect of such guarantee or
agreement on the expiry of a specified period which is not less than one year from the date of
occurring or non-occurring of a specified event for extinguishment or discharge of such party
from the said liability.
The IBA’s recommendation that banks continue issuing every guarantee with a minimum claim
period of one year beyond the guarantee period in the instrument in order to benefit from Exception
3 provided for in Section 28 of the Indian Contract Act is posing quite a few challenges for banks
where underlying counterparties are not willing to bear the additional costs involved. According to
a Singapore-based source, Indian banks intend to take up the matter with the Central Government
for certain amendments to the relevant law.
For other views on Indian bank guarantees, see p. 42.
Standard Chartered Agrees to Settlement in US, Fine in UK
I
n separate actions announced on 9 April 2019 in the United States and the United Kingdom,
Standard Chartered Bank agreed to a settlement for apparent violations of specified US
sanctions regulations and to UK findings of shortcomings in its anti-money laundering controls.
The US Treasury Department’s Office of Foreign Assets Control (OFAC) announced a settlement
of more than USD 639 million with Standard Chartered Bank for apparent violations of US sanctions
relating to Burma, Cuba, Iran, Sudan, and Syria.
According to OFAC, over a five-year period beginning June 2009, Standard Chartered handled
9,335 transactions totaling over USD 437 million that were processed to or through the US. All of the
transactions involved persons or countries subject to sanctions programs administered by OFAC.
Most of the conduct involved Iran-related accounts maintained by the bank’s Dubai, UAE branches
(SCB Dubai). SCB Dubai processed USD transactions to or through US financial institutions “on
behalf of customers that sent payment instructions to SCB Dubai while physically located or
ordinarily resident in Iran.” OFAC determined that the Bank did not voluntarily self-disclose the
apparent violations and that the apparent violations constitute an egregious case.
The same day, the UK’s Financial Conduct Authority (FCA) announced it has fined Standard
Chartered Bank more than GBP 102 million (USD 130m) for “serious and sustained shortcomings” in
the bank’s anti-money laundering controls relating to customer due diligence and ongoing
monitoring. The FCA determined that “[t]hese failings exposed Standard Chartered to the risk of
breaching sanctions and increased the risk of Standard Chartered receiving and/or laundering the
proceeds of crime.” According to the FCA, the bank’s deficiencies “occurred in its UK
Correspondent Banking business during the period from November 2010 to July 2013 and in its UAE
branches during the period from November 2009 to December 2014.”
The FCA press release noted that the fine is the second largest financial penalty ever assessed by
the FCA for AML controls failings.

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IIBLP Asia Events Approaching

Annual Survey of LC
Law & Practice
The only truly global conference
devoted to letters of credit, the
Annual Survey of LC Law & Practice
brings together bankers, lawyers, and
corporates in interactive discussions
on critical topics in LC practice and
law.
Hong Kong | 13 July

Singapore | 15-16 July
Guarantee & Standby Forum

The definitive conference dealing with demand
guarantees and financial standbys, the Guarantee
& Standby Forum addresses drafting practices,
presentation, compliance, and much more.
Singapore | 17 July
Letter of Credit Law Summit

This session is ideal for lawyers working for firms
or banks, as well as bankers and corporate LC
users with an active interest in banking law and
a desire to further their knowledge of how legal
issues are impacting LC practice today. Law firms
which are serious about trade finance matters and
banks with significant LC portfolios will want to be
represented for this full-day program.
Singapore | 18 July
shop.iiblp.org/Asia2019
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UPDATES
Annual Trade Finance Compliance Conference Returns to London
On 16-17 May 2019, the London Institute of Banking & Finance, in partnership with IIBLP and
Coastline Solutions, hosted their Annual Trade Finance Compliance Conference in London. The
event marked an opportunity for trade professionals of all backgrounds to share insights and
discuss issues regarding ever evolving compliance regulations and their relationship to the health
of international trade.
The event began with Dr. Rebecca Harding and Jack Harding of Coriolis Technologies
delivering the Professor James E. Byrne Memorial Keynote Address. Their presentation discussed
the current realities of politics driving trade and particularly the weaponization of trade, drawing
from their 2017 book, The Weaponization of Trade: The Great Unbalancing of Politics and Economics. An
acclaimed and now prescient work, their presentation brought together economic theory and data
analytics to show how government rhetoric and conduct in pursuit of foreign-policy objectives
turns trade into a tool of coercion, fueling clandestine trade in arms and dual-use goods for use in
proxy wars, rendering havoc to otherwise beneficial trade and increasing migration. These
trends, the presenters argued, will continue until governments shift their rhetoric on trade and
work to responsibly promote trade finance.
Following the keynote address, presentations were offered on several timely topics including
“De-risking and the impact on trade finance”, by Hugo Verschoren; Joachim von Haenisch, as
manager of the product, presented on the SWIFT KYC Registry and its relation to corporates and
correspondent banks; and Dr. Maximilian Burger-Scheidlin, Executive Director of ICC Austria,
offered insights on the risks to banks financing contracts having come into effect due to
corruption. These presentations were capped with a panel discussion regarding current trends in
compliance regulation and trade finance gaps. The next panel addressed the current work of the
ICC Financial Crime & Risk Policy Group and highlighted the 2019 Wolfsberg Trade Finance
Principles paper that was updated to include guidance on open-account and supply-chain finance
compliance. Subsequent panels addressed trade finance issues involving ‘free-trade zones’, of
which there are roughly 3,000 globally; a presentation on ship-to-ship oil transfers by researchers
from the Royal United Services Institute for Defence and Security Studies (RUSI); and how
technology can help banks combat organized financial crime. Vincent O’Brien, Member of the
Executive Committee of the ICC Banking Commission, moderated a panel expanding on the issues
of digitization and compliance with particular emphasis on how the future of trade finance may
affect compliance costs for small and medium-sized banks in both developed and emerging
countries.
Additionally, Pottengal Mukundan, Director of the International Maritime Bureau, presented

on the evolution of trade finance schemes, particularly through forged bills of lading. Mukundan
directed that banks pay particular attention to the URLs of non-vessel owning common carriers
(NVOCCs) as fraudsters often create false domains to appear as legitimate carriers.
At the conclusion of the conference, attendees were informed that the London Institute of
Banking and Finance plans to host the event next year on 13-14 May 2020.

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OFAC Announces Settlements for Apparent US Sanctions Violations
T
he US Treasury Department’s Office of Foreign Assets Control (OFAC) released details of
settlement agreements with three banks of the UniCredit Group for apparent violations of
specified United States sanctions programs. The banking group includes: UniCredit Bank
AG in Germany; UniCredit Bank Austria AG in Austria (Bank Austria); and UniCredit S.p.A. in Italy
According to news released by OFAC on 15 April 2019, settlements totaling USD 611 million
resolve OFAC investigations into apparent violations of US sanctions programs relating to Burma,
Cuba, Iran, Libya, Sudan, and Syria.
From 2007 through 2011, UniCredit Bank AG processed over 2,000 payments totaling more than
USD 500 million through US-based financial institutions in apparent violation of multiple US
sanctions programs. According to OFAC, UniCredit operated US dollar accounts on behalf of the
Islamic Republic of Iran Shipping Lines (IRISL) and companies owned by or affiliated with IRISL.
OFAC contends UniCredit “managed the accounts of those companies in a manner that obscured the
interest or involvement of IRISL in transactions sent to or through U.S. intermediaries.” All three
banks processed payments in a way that “did not disclose underlying sanctioned persons or
countries to U.S. financial institutions which were acting as financial intermediaries.”
OFAC determined that the apparent violations largely constituted egregious cases and that the
banks did not voluntarily self-disclose the apparent violations.
The Settlement Agreement between OFAC and UniCredit Bank AG detailed that certain oil-
related transactions “involved letters of credit issued by HVB AG to enable its Swiss customer to
take delivery in Kazakhstan of oil purchased from suppliers in Kazakhstan, Turkmenistan, or
Azerbaijan. Despite references to the oil’s onward shipment by the Swiss customer to Iran in
documents available to HVB AG, the bank submitted payment instructions through the United States
or U.S. financial institutions that did not contain any references to Iran.”
Among content of the Settlement Agreement between OFAC and Bank Austria, it stated: “The
majority of trade finance transactions subject to this investigation were processed by Bank Austria
pursuant to letters of credit it had issued or confirmed on behalf of its customers Liechtenstein
Corporate I …, an exporter of cotton from suppliers in Central Asia to “Far East countries,”
including Bangladesh, Pakistan, China, and Turkey. Correspondence with clients and trade
agreements between Bank Austria and Liechtenstein Corporate 1 as early as 2010 documented the
transshipment of goods through Iran. As a result, Bank Austria had knowledge or reason to know of
the Iranian nexus to these transactions prior to processing them.”
The Settlement Agreement between OFAC and UniCredit S.p.A. included, in part: “The majority
of transactions at issue in this case related to one customer and its partially owned subsidiary.
UniCredit S.p.A. structured a business arrangement in which the bank issued letters of credit on
behalf of the company for the delivery of goods to Cuba, processed transactions pursuant to the
letters of credit as well as commercial transactions to third-party exporters for the delivery of goods
to Cuba, and received reimbursement of such payments from the partially owned subsidiary. It
appears that UniCredit S.p.A. processed the payments through financial institutions in the United
States without including any references to the underlying trade with OF AC-sanctioned countries.”

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UPDATES
UPDATES
Serious Issue with Compliance Checks at Deutsche Bank
D
eutsche Bank has admitted that their computerized compliance checks for financial
transactions had a serious software glitch. The software problems affected the post-
transaction review phase relating to business clients. A spokesperson for Deutsche Bank
confirmed to journalists on 21 May 2019 that “two out of 121 parameters were not correctly defined”
so that a regular second compliance check to identify financial crime incidents was insufficiently
performed. The newspaper Süddeutsche Zeitung reported that Deutsche Bank is “in close contact with
regulators” who the newspaper believes to be the German Federal Financial Supervisory Authority
(BaFin) as well as the US Federal Reserve.
FELABAN Event to Feature Focus on Standbys and Guarantees
S
tandby letters of credit and demand guarantees are expected to figure prominently in an
interactive session scheduled for the upcoming XXXV CLACE (35th Latin American Foreign
Trade Congress) organized by FELABAN (the Latin America Banking Federation), in
Buenos Aires, Argentina, 6-7 June 2019.
During the Congress, banking consultant Miguel Angel Bustamante from Mexico will lead a one-
hour segment: “Ask the expert about demand guarantees, standby letters of credit, Incoterms 2010
and the new eUCP and eURC rules”. Approached by DCW about the nature of his role in the event,
Bustamante offered a preview of the session.
“Although the audience may ask about any of these bank products and rule sets, I think that the
discussion will be focused more on standby LCs and demand guarantees”, said Bustamante, who
explained that he will first provide a 5-10 minute introduction to highlight some specific inquiries
and cases on standbys and guarantees before giving way to attendees. “The format will be ‘open
microphone’ to the audience to let them ask me specific questions and I am committed to providing
the best answers I can.”
Bustamante, who has regularly participated in FELEBAN Congresses since 2006, is anticipating
questions such as:
• What is the applicable law in a standby letter of credit?
• Can a standby contain provisions of exclusion?
• Can a standby be transferred to another beneficiary by endorsement?
• What is and how does an assignment of proceeds in a standby work?
• Could there be several beneficiaries in a single standby?
• What is the difference between a standby and a demand guarantee?
• What is and how does a counter guarantee subject to URDG work?
• What might the risks be for a bank to receive, as beneficiary, a counter-guarantee subject to
URDG758 for which I issue a local guarantee subject to my local law or subject to ISP98?

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“Well, these are the (types of) questions and doubts that are regularly made to me, as trade
advisor, by banks in Latin America and that I am assuming will come up at CLACE”, Bustamante
said. “To be honest with you, I like that format, because it allows interaction with the participants
and makes the session much more attractive.”
Changes to Germany’s Transparency Register?
G
ermany is considering making changes to its transparency register to fight financial crime
such as money laundering. Since 2017, the German government is operating a so-called
transparency register in which beneficial owners of companies and general business
partnerships have to be listed. Failure to register and provide accurate data can result in fines and
prosecution. However, entries from this database can only be accessed, regularly, by certain
government departments and law enforcement agencies. Members of the public, on the other hand,
need to prove a legitimate interest relating to specific companies or businesses in order to gain
insight to the register. According to news reports, Germany’s finance minister is contemplating a
statutory amendment so that access can be granted to the public more regularly and with less
hurdles. The German transparency register was introduced in an effort to satisfy a European Union
directive (2015/849, dated 20 May 2015) which requires EU member states to operate such a register
to combat financial crime.
Prague to Host Trade Finance Workshops
I
CC Czech Republic has announced it will conduct “International Workshops on Trade Finance
Operations”, 30 Sept-1 Oct 2019, in Prague. The two-day event will offer focused attention on
documentary credits and bank guarantees, with particular emphasis on the law and practices in
Bangladesh and China. Other topics projected for discussion include new developments regarding
the digitalization of trade finance and matters relating to the Incoterms 2020 revision. Further
information is available from ICC Czech Republic.
International Updates
GHANA: Africa China Agent Proposition (ACAP), an initiative introduced by Standard Bank in
partnership with the Industrial and Commercial Bank of China (ICBC), is intended to provide more
favorable positioning for African importers regarding pricing, quality, and efficiency of importing
products from China. According to Dr. Manessah Alagbaoso, Head of China Africa Integration at
Standard Bank, the ACAP offering underpinned by LCs will deepen trust in Africa-China trade
relationships.
MALDIVES: Bank of Maldives (BML) Islamic has announced launch of a range of Shariah-
compliant financing products, including LC and Bank Guarantee services, that were developed in
accordance with the international standards of Islamic banking and finance.
ZIMBABWE: In order to confront chronic foreign currency shortages, the Reserve Bank of
Zimbabwe (central bank) has stepped up efforts to provide LCs to local companies for the
importation of fuel and other critical goods and materials. According to The Herald, the LCs are
guaranteed by the central bank that the companies are permitted to pay in RTGS (Zimbabwe’s new
currency introduced in February 2019). The central bank will then pay later for the fuel. ■

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Islamic Banking and Charter Party Bills of Lading
Question: Can an Islamic bank call for a Charter Party Bill of Lading under a Murabaha Letter
of Credit and what are the Shariah risks that Islamic banks face? In the event the risks are
mitigated, can we call for such a B/L and how? One of our top customers has asked for such a
requirement!
Answer: I will not explain what is a Murabaha Letter of

Credit in detail as I have covered this in a previous DCW issue.
As we know, under a Murabaha LC, an Islamic Bank buys the
goods from the seller under a Letter of Credit arrangement and
sells them to the ultimate buyer (its customer) with a profit
markup which the customer can settle with a suitable short-term
payment plan.
Now let us consider a Bill of Lading (B/L). A Marine B/L is a

receipt issued by a carrier which serves three purposes: (i)
receipt of goods/cargo for shipment; (ii) an evidence of contract
of carriage; and (iii) tittle to the goods to the consignee or the
holder of the B/L. In other words, the B/L provides a
constructive position to the holder in due course. Moreover, it
will enable the transfer of goods/cargo by way of an
endorsement or delivery to buyer/consignee upon submission Nizardeen
of the B/L being a negotiable instrument in general. Therefore,
a marine B/L is a document of title issued by the carrier and the
holder of the Bill of Lading will have title to the goods/cargo.
A Charter Party Bill of Lading (CPBL) is an arrangement between a charterer and a vessel
owner and is subject to a charter party agreement between them. CPBL is issued by a charterer
(who has chartered the vessel under a Charter Party contract from a vessel owner) to the shipper
(seller) once the goods are shipped on board. The CPBL will also serve as a receipt for the goods
shipped on board and evidence of contract of carriage. However, it does not constitute a
document of title to the underlying goods in a fully clear way as the owner of vessel may retain
the right to lay claim on the vessel and the cargo therein in case of a dispute between the owner
and the charterer. This fact renders CPBL loss of its negotiability, which is used to retain control
and transfer title over the shipped goods.
Due to this reason, banks do not call for a CPBL under a normal import LC as they may not
fall back on such goods in the event of non-payment by their customer. In the event that such LCs
are issued, they are classified as clean LCs (high/clean risk) unless secured against any other
identified collateral.
Islamic Banks should identify and classify each LC transaction based on the product and risk
associated with them. Given the requirement for inspection of the goods under local LCs for local
delivery and CPBL, they should both be classified under similar lines with a different coding.

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From a Shariah perspective, a Murabaha LC issued under a B/L will have the title of goods as
it is made out to the order of Issuing Islamic Bank which can release the goods by itself or by
merely endorsing and transferring the title to its customer to clear the goods after concluding the
Murabaha financing sales agreement.
In case of a CPBL, the Shariah risk that Islamic banks face in a Murabaha LC would be that, in
the event there is a dispute between ship owner and charterer, the Islamic bank will not have
access to the goods to sell them to its customer since the Islamic bank deals in goods instead of
only in documents as conventional banks do. Unless otherwise adequate and appropriate pre-
shipment measures have been taken to cover such risks and the bank has a direct agreement with
the charterer, the bank should not enter into such shipping arrangements.
To answer your second question, as an Islamic Bank, you need to understand the nature of
your customer’s business and based on the requirement, you have to structure the Murabaha
facility accordingly. I suggest you to take appropriate advice from the respective Relationship
Manager and the Transaction Banking team who have better understanding of the customer.
First, you need to understand why your customer is insisting on a CPBL? With the advent of
containerized shipments, it is not viable/profitable to ship bulk cargo in containerized ships or in
such shipping lines. Therefore, bulk-cargo is always transported in specialized vessels built for
such transportation which is usually carried out under a CPBL agreement.
We have structured such transactions and have completed them successfully. However, as we
do not have constructive position of the goods, an inspection must be carried out on the goods
prior to delivery/handover of goods. What is Islamic inspection of goods? it is not merely
checking the goods as per the specification of goods with the invoice. In addition, it is carried out
to ensure that such goods are available in possession of the bank prior to transferring/delivering
the goods to the buyer.
One other option available – although some of scholars and Islamic banks do not prefer it — is
to import the goods under a normal LC and enter into a Thawarruq based Murabaha facility to
avoid all such risks and complexities.
I take this opportunity to thank Brother Abu Shoaib, Al Hilal Bank, UAE for reviewing this
article from a Shariah perspective.
Hope this clarifies your query in the event you need further clarification do not hesitate to
contact me at nizardeen@hotmail.com
— K. Nizardeen, COO, FIB, Dubai/Malaysia and
EXCO Member of the ICC Banking Commission

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LITIGATION DIGEST
LITIGATION
International Cards Co.

v. Mastercard International Inc.
741 F. App’x. 41 (2d Cir. 2018) [USA]
Prior History: International Cards Co. v. Mastercard International

Inc., No. 13 Civ. 2576 (LGS), 2017 WL 3575254 (S.D.N.Y. Aug.
17, 2017), 2018 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW &
PRACTICE 519. See also International Cards Co. v. Mastercard
International Inc., No. 13 Civ. 2576 (LGS), 2016 WL 3039891
(S.D.N.Y. May 26, 2016), 2017 ANNUAL REVIEW 529.
Topics: Breach of Contract; Conversion; Proceeds; Use, as

Collateral
Note: In 1999, International Cards Co. Ltd. (Applicant)

contracted with MasterCard International Inc. (Beneficiary) to
become a “member” of Beneficiary’s credit card network and to
forward payments to merchants in Jordan and Palestine for
acquired transactions on behalf of Beneficiary. Subsequently,
Applicant obtained a USD 2,780,000 letter of credit as collateral
for its performance in favor of Beneficiary. Following continuous
and unresolved complaints from local merchants regarding
untimely payments between 2010 and 2013, Beneficiary made a
full demand on the LC, claiming the proceeds were “due and
payable” to Beneficiary or its merchants, which was honored. The
next day, Beneficiary terminated Applicant’s membership citing
breach of the underlying agreement.
Applicant sued Beneficiary alleging breach of contract, breach

of the implied covenant of good faith and fair dealing and
“conversion of the [USD]2.78 million collateral letter of credit.”
Beneficiary counterclaimed for breach of contract. Prior to trial,
the court granted Beneficiary’s motion for summary judgment
regarding breach of the implied covenant of good faith and fair
dealing, but denied the motion as to breach of contract and
conversion. The jury returned a verdict in favor of Applicant on
its conversion claim, awarding Applicant USD 2,780,000. The jury
also found for Beneficiary on its breach of contract claim but
awarded no damages. Beneficiary motioned for judgment as a
matter of law (JMOL) regarding the conversion verdict, which
the trial court denied. Applicant appealed the trial court’s partial
denial of summary judgment and Beneficiary cross-appealed its
denial of JMOL. The United States Court of Appeals for the
Second Circuit, Cabranes, Parker and Matsumoto, JJ., affirmed.

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Applicant argued that the trial court erred in its denial of summary judgment regarding breach of
contract and breach of the implied covenant of good faith on the basis that the agreement between
Applicant and Beneficiary provided an “exclusive list” of grounds for terminating membership. The
appellate court disagreed, however, noting that the agreement allocated “explicit reservation of
termination authority” with Beneficiary. Moreover, because Beneficiary was authorized by the
contract to terminate Applicant’s membership and Applicant “alleged no separate injury” resulting
from the breach of the implied covenant of good faith, denial of summary judgment was
appropriate. In affirming the trial court’s denial of Beneficiary’s motion for JMOL, the appellate
court noted the “ample evidence” available to the jury, principally that Beneficiary claimed the LC
proceeds were “due and payable” to it despite at trial “admit[ing] that it knew of no such accounts
when it made this certification.”
Comment: It is unclear to what law the LC was subject, but one presumes Applicant could have
pursued Beneficiary under U.S. UCC § 5-110 (Warranties). Indeed, one wonders how a claim for
conversion could be stated since the funds paid under the LC were the funds of Issuer and not
Applicant. ■
[MJK]
JFS Properties, Inc. v. SouthCrest Bank, N.A.

A17A2078, Slip Op. (Ga. Ct. App. Mar. 9, 2018) [USA]
Topics: Independence; Standing; U.S. UCC 5-103; U.S. UCC 5-109
Note: The Georgia Court of Appeals dismissed an appeal by JFS Properties, Inc. (Applicant) from
an order granting summary judgment in favor of Environmental Protection Division (Beneficiary) on
Beneficiary’s counterclaim solely against SouthCrest Bank, N.A. (Issuer). Issuer argued that
Applicant lacked standing to pursue the appeal. The appellate court agreed, citing Georgia’s
adoption of U.S. UCC 5-103(d) (Scope) which provides:
Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit
are independent of the existence, performance, or nonperformance of a contract or arrangement
out of which the letter of credit arises or which underlies it including contracts or arrangements
between the issuer and the applicant and between the applicant and the beneficiary.
In light of the independence principle, the appellate court noted that Applicant could not
“intervene” in the relationship between Issuer and Beneficiary, “except as provided by [Georgia’s
adoption of] U.S. UCC 5-109 (Forgery and Fraud). The appellate court concluded that “[a]ny
assertion by [Applicant] that it is an aggrieved party is foreclosed by our opinion issued in Case No.
A18A0028.”
Comment: Despite the appellate court’s reference to its opinion in “Case No. A18A0028”, there is
no published text. Furthermore, the appellate court does not mention U.S. UCC 5-110(b)(1) or (2)
(Warranties) or 5-117(b) (Subrogation of Issuer, Applicant, And Nominated Person) as grounds by
which Applicant could “intervene in the relationship that the letter of credit created between
[Beneficiary] and [Issuer].” ■
[MJK]

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SUMMARY OF APRIL 2019 ICC BANKING COMMISSION MEETING

“LEADING THE WA
WAYY IN GLOBAL TRADE”
10-11 APRIL 2019 • BEIJING, CHINA
During this 100th year of ICC’s existence, the 2019 ICC Banking Commission Annual Meeting was
held in Beijing. Hosted by China Chamber of International Commerce and ICC China, the event
attracted an announced record attendance of over 700 people.
Welcome Remarks – Chen Zhou and Gao Yan of the China Council for the Promotion of
International Trade (CCPIT) offered opening remarks, followed by Bank of China President Liu
Liange. ICC Banking Commission Chair Daniel Schmand then informed that ICC deliberately chose
China – one of the world’s leading economies – to host this year’s landmark event and proceeded to
reflect on the past, present, and future of ICC. After World War I, ICC started in 1919 at a time when
no global system was in place to govern trade. By 1927, ICC laid the foundation for what became the
World Trade Organization (WTO) and in 1930 commenced drafting of UCP rules. ICC’s global
footprint currently reaches over 100 countries. Possessing UN Observer status, ICC is distinguished
as the only private sector organization with a permanent seat. Moving forward, ICC seeks to expand
its utility to the business community, push boundaries, and pursue ways to facilitate practical rules.
ICC at 100 Years of Achievement and Looking Beyond – ICC Secretary General John Denton
highlighted the long-standing spirit of ICC and its ongoing purpose. As the merchants of peace, ICC
endeavored to bring
businesspeople together for trade
and commerce. Today, an
estimated one-third of workers
worldwide rely on ICC and its
members. Maintaining that
functioning trade is not possible
without arbitration, Denton noted
that ICC gave birth to the New York Convention and its effective dispute resolution procedures.
ICC’s role is to preserve the business system and ensure it is fit for the 21st Century while harboring
a spirit of modernity.
CEO Question Time – Denton then moderated a discussion with senior financiers, first asking
each to explore their perspectives on global market trends. Since 2008, financial executives have seen
banks endure added pressure as regulation has picked up, central banks deal with liquidity issues,
technology development, and geo-political challenges as prevailing trends. As market infrastructure
matures, there is an increased role for SWIFT to play. Others have observed a period of uncertainty
characterized by an eroding of global trade patterns and a rise in regional trade. Cross-border e-
commerce has become increasingly important to China. According to one estimate, 25% of the
Chinese population will be purchasing globally by 2020. Comments then shifted to perceived

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disruptions to the market. Clearly, there has been massive disruption at the retail level. SWIFT is
attempting to confront frictions through introduction of its global payment innovation (gpi).
Although blockchain and other initiatives offer considerable promise, scale is not yet there. In China,
many initiatives are underway but regulations are providing short-term pains, according to one
commenter. Still, technology has proven a great enabler and as banking has become simpler and
more efficient, how to look at privacy ethics has entered into the picture. Panelists then offered
perspectives on how to strike the proper balance between short-term strategic thinking and long-
term vision. Advice included the need to embrace technology, be mindful of the basics, pursue social
responsibility measures such as green lending, help clients work through inertia, and focus on
functionality and employees.
The Outlook for Global Trade Finance – Asian Development Bank Deputy Chief Economist
Joseph Zveglich Jr. opened by presenting a 2019 outlook on Asian development. As Developing
Asia’s growth projections are dampened due to weaker global demand, the greatest risk is
prolonged US/PRC trade tensions which will mute growth and heighten uncertainty. Taking a more
optimistic view, panel discussion focused on the positives. Free trade agreements signed within the
Asian area and the accelerated growth of e-commerce have contributed to relative stability. Regional
blocks for open account are also emerging. Credit availability is important and whether banks are
doing enough for corporates is key. The influx of liquidity into the financial system also presents an
opportunity; the challenge being how to optimally channel it. From a corporate perspective, advice
was offered to SMEs that they choose their banking relationships wisely and widely. Potential exists
within the Chinese market regarding FinTechs, development of the import sector, and capitalizing on
the Belt & Road Initiative.
Breakout Sessions – Two discussion streams were held simultaneously during the afternoon of
Day 1. One examined technical aspects and the future of trade finance; the other focused on the
strategic/market outlook for trade.
Access to Trade Finance – According to percentages cited by ICC Banking Commission Project
Manager Doina Buruiana, 80% of businesses depend on trade finance and more than 90% of
businesses say that compliance and regulations are impediments to trade growth. To confront the
oft-mentioned USD 1.5 trillion trade finance gap, what actions can be taken? Five areas which can

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move the needle: 1) Urge national regulators to pursue international alignment and recognize trade
finance as a lower asset class; 2) Banks should not work in isolation, but with customers and
FinTechs to solve issues; 3) Develop future-oriented platforms and greater digitization; 4) Augment
use of supply chain finance tools; and 5) Support rise of sustainable financing. Regarding measures
for supporting SMEs, governments should do more to encourage them to improve their product
competitiveness and financial management. Amid trying circumstances in countries like Zimbabwe,
Eritrea, and South Sudan, the African Export-Import Bank is exploring alternative means of financing
such as factoring. Within China, applications of blockchain for domestic LCs, factoring, and forfaiting
have proven successful. A recent paper on overcoming the trade finance gap offers further insights.
Attendees commented on the need for more coordinated governance in the Asian region and
breaking reliance on the US dollar.
Changes in the Regulatory and Compliance Landscape – Regulation and compliance issues
continue to be major areas of concern for the banking community. The onus remains squarely on
banks to document and explain their business, produce data, and demonstrate that trade finance is
low risk. Banks also need to engage with regulators in more collaborative work. In China, banks are
seeking ways they can reduce paperwork and the number of documents required by Chinese
regulators. Asked about opportunities for joint training among banks and regulators, panelists
commented that it appears ICC has a role to play in this area although it requires working with
different central banks. The dual challenges of data management and privacy concerns are
formidable. Data handling and storage are global issues for global banks, but they need to comply
with different regulatory regimes. ICC needs to be engaged in WTO matters impacting data storage
and privacy.
Shifts in Supply Chain Patterns – Changes in manufacturing, sustainability, and demographics

are altering supply chain financing in Asia. Corporates are adapting to customer needs and there are
big opportunities for banks involved in supply chain financing. Regarding expectations on fulfillment
of environmental, social, and governance (ESG) standards, panelists contend this needs to be
incentivized (resulting in lower capital); otherwise it is a hollow promise. For instance, it is difficult
to know if an LC is attached to a sustainable source. Traceability is very important to sustainability,
however panelists expressed skepticism on application of blockchain technology.
Trade and the RMB Market – The Chinese renminbi (RMB) continues to evolve from domestic to
global currency. Chinese banks are playing a more active role in the global market and recent
findings suggest more corporates are using the RMB currency. Within the commodities sector, there
is increased use and more banks are seeking to provide RMB clearing services. In February 2019,
China introduced its Greater Bay Area development plan. Comprised of four core engines (Hong
Kong, Macao, Shenzhen, Guangzhou), the Greater Bay Area is another opportunity to expand cross-
border RMB usage.
URDG and Guarantee Laws – Increased use of URDG has inspired jurisdictions – most notably
Russia and China – to develop new laws governing bank guarantees in recent years. Among the
significant changes to Russian law on bank guarantees which took effect 1 June 2015: a guarantee is
an independent obligation; corporate guarantees are permitted; amendments, are allowed; and the
instructing party of a guarantee may or may not be the applicant. Certain elements (extend or pay

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provisions; treatment of open-ended guarantees) are missing and still need to be addressed in future
Russian legislation. Indicative of the influence of URDG, Russia’s Supreme Court in a 2017 decision
relied on URDG758 Article 24 (Non-Complying Demand, Waiver, and Notice) in ordering a
guarantor to pay under a guarantee.
In Mainland China, ever-increasing court cases involving demand guarantees suggests that
demand guarantees are being used more frequently in the country. Since the PRC Independent
Guarantee Provisions came into effect 1 December 2016, the PRC Supreme People’s Court has
decided 22 cases. Of note, two key trends have emerged: Demand guarantee terms and conditions
are independent of the underlying transaction; and An order of suspension of payment should not
be issued absent a finding of independent guarantee fraud. With the PRC Independent Guarantee
Provisions adopting such a high standard for proof of fraud, Chinese applicants claiming fraud have
reportedly managed to obtain a permanent injunction order in just four cases. PRC Independent
Guarantee Provisions Article 3(2) establishes that a guarantee issued subject to URDG is
independent.
Seminal cases in which courts applied URDG even though the disputed instrument in question was
not issued subject to the rules include S.A. Fabricom and S.A. Laurent Bouillet Ingénierie v. Générale de
Banque and ACEC Union Minière (Commercial Court of Brussels, 15 December 1992) [Belgium] and
Banca Commerciale Italiana v. Jiangsu Liyang Shafeite Non-woven Co., Ltd., (Civil Ruling (1998), Jing
Zhong Zi No.289 (Sup. People’s Court, 1998) [China].
Belt & Road Initiative – The second day of the Banking Commission Meeting opened with a
panel discussion of China’s Belt & Road Initiative (BRI). Launched in 2013 and expected to last some
30 years, BRI is a massive USD 8-10 trillion infrastructure investment plan to construct and further
develop trade routes connecting China with the rest of the world. BRI presently involves dozens of
countries and is still expanding. It will have several stages of development to address infrastructure
needs, industrial sectors, and consumer markets. BRI also has a digital dimension and more FinTech
companies are going into countries to assist with manufacturing projects. Asked if the banking
industry is sufficient for funding BRI, panelists indicated it is not. That there is a huge gap in
funding presents opportunities for others, but there are challenges regarding information sharing
among funding entities and insufficient integration of resources. To address risk tolerance, funding
organizations need to play a role as well. For such a massive initiative, cooperation and integrated
solutions are vital. Panelists expressed the notion that banks cannot be everything to everyone and
that certain projects are becoming too complex for individual countries. Joint ventures have been
popular and there is need for more. Amid the widespread optimism surrounding BRI, this will
undoubtedly give rise to major disputes attributed to parties, projects, and countries. Already some
projects have been cancelled or delayed. Banks and countries (Malaysia, for instance) are reassessing
their risk appetite. Banks want to be water-tight in their contracts. Law firms are setting up
arbitration services for BRI matters and certain venues (China, Hong Kong, Singapore) are vying to
become hubs for BRI dispute resolution. There is reportedly a big push among Chinese entities to
not simply defer to arbitration, but have mediation as an option for resolving disputes. During
Q&A, the panel was asked what will be the risk weighting for BRI lending. One offered response
suggested that there will be no difference between Chinese financial institutions and others who are
bound by Basel and local regulations.

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Overview of ICC Banking Commission Current Priorities – Introduced a year ago, ICC’s
Successors in Trade (SIT) programme is an effort to identify and empower future leaders in trade.
The initial 8-member SIT group produced a paper on “ICC in the Digital Market” and one SIT
representative presented key findings and recommendations from the paper. Digitisation should not
be forced, but encouraged in the financial sector. In this regard, the group suggests that ICC should
continue expanding its role toward FinTechs by better understanding them, offering ICC
membership to certain FinTechs on more favorable terms, and setting up joint programmes with
FinTechs. Another current priority for ICC is mapping out the future of rule-making in trade finance.
Specifically, how ICC develops UCP, other rule sets, and guidance as it advances into the digital age.
Regarding development of the next generation of trade professionals, ICC recognizes the need to
understand their motivations and how to use their talents. In the past, professionals have spent their
entire career in trade finance. Now, professionals want diverse work experiences and skills.
Additionally, ICC officials indicated that the Banking Commission still has considerable work to do
on the regulatory side and in the area of compliance.
ICC Trade Register Report – Summary findings of the 2018 Trade Register Report suggest that the
report is in line with the results of previous editions. Default rates remain low which further
reinforces the low-risk nature of trade finance products. ICC Trade Register Chain Krishnan
Ramadurai is upbeat about the report since banks are using its data and going to regulators with it.
As the report continues to assist the industry in making its case to the Basel Committee, the scope of
the 2018 Report expanded to include data on supply chain finance products and from non-OECD
export credit agencies. Typically, data is garnered from operations but most of it resides within
banks’ risk departments. Moving forward, those responsible for analyzing data for the report say
they need these departments to supply more detailed information for greater risk modeling.
Moreover, not all banks contribute data to the effort and broader participation is needed,
particularly from additional Asian banks, for the good of the industry.
Blockchain Consortia – In order to unlock the true practical potential of blockchain for trade
finance, it has become increasingly apparent collaborative efforts are needed. Many banks,
companies, and other entities have formed various consortia to pool their talents and resources
together. In the past, banks and partners have struggled with information sharing and in an industry
like trade finance, there needs to be certain areas of confidentiality. Consequently, some consortia
are striving to transform the way they construct trust. Because trade is multi-party, consortia need a
wide ecosystem. At present, panelists emphasized the importance of establishing business standards.
For instance, data elements that belong in an invoice and other documents. Once determined, the
technology can be worked out. In addition to privacy and confidentiality issues, other challenges for
consortia partners include how to control their investment, evaluate different platforms, and
address regulatory matters. Consensus on terminology is also needed to advance efforts. Consortia
should determine what infrastructure they can build today for interoperability tomorrow. Thierry
Roehm informed that we.trade decided to start simple and focus on the open account trade
transactions of SMEs in Europe. Other panelists reported that other blockchain-enabled transactions
are happening, however critical scale will not be achieved in the next 3-5 years. Blockchain is still at
an early stage and education of the market is needed. In some cases, regulators have been invited to
participate and see how blockchain consortia are working from the inside. In certain markets,
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Basel IV – In updating attendees on Basel reforms, Krishnan Ramadurai framed his presentation
as “The Good, the Bad, and the Ugly”. The Good: The banking industry has had since 2008 to make
its case for appropriate treatment of products and has no appetite to do more. While regulators refer
to this set of reforms as Basel III, the market calls it Basel IV. In 2022, it will enter into force. In the
post-crisis era, emphasis has been on risk-weighted assets (RWAs). Among the high-level changes,
Ramadurai categorized reforms to credit risk and operational risk as “bad” and those to capital
floors as “ugly”. In the case of capital floors, Basel IV limits the benefit of IRB financing which
Ramadurai contends will be a game-changer. The biggest change of all will be reflected in the
product pricing impact caused by Basel reforms. The regulations are final, although there may be
changes at the fringes. While there is the possibility that implementation dates may slip, the
recommendation given to banks is to be prepared for the announced start dates.
ICC Working Group on Digitalisation in Trade Finance – Following a 16-month process and four
rounds of comment on draft texts, the ICC Banking Commission announced that its National
Committees had overwhelmingly voted in favor of the final eUCP revision text (eUCP Version 2.0)
and final supplemental text of the URC 522 to allow for electronic records to be submitted under a
collection instruction (eURC Version 1.0). Of 82 ICC National Committees, 49 ICC National
Committees cast votes before the 22 March deadline. eUCP Version 2.0 gained 100% approval and
eURC Version 1.0 received 97.5% approval, with only India dissenting. Austria and Lebanon
abstained. The text of eUCP Version 2.0 and eURC Version 1.0 will be available for free and both
supplements will enter into effect 1 July 2019. This ICC Working Group is also at an advanced stage
in developing Uniform Rules for Digital Trade (URDT); release of a first draft text is projected for
late August 2019. Without infringing on the consortium space, the rules are slated to offer an overall
framework for digital trade and posit what a payment undertaking should look like. The ICC
Roadmap on Digitalisation of Trade Finance, intended as a communication tool for ICC advocacy of
action items to national governments, has been circulated to various regulatory bodies. From time to
time, it will be revised and evolve.
Controversy & Guidance in Documentary Credit Practices – The real problem plaguing
documentary credit practice stems from poor drafting and handling of credits by individuals who do
not adequately understand the business. Treatment of the situation must involve enhanced, effective
education and training of bank staff, clients, freight forwarders, and others in the DC process.
Moreover, CDCS certification is no substitute for hands-on, real world understanding of the
documentary credit business. By some estimates, half of the DC practice problems derive from
presented documents. Panel members then took up discussion of three specific questions.
1) Should the Application of ISBP 745 be Widened? Although International Standard Banking
Practice (ISBP) does not amend UCP, could an expanded ISBP foster better understanding of UCP?
One panelist opined that the industry does not want an instruction manual, but an ISBP that
provides guidance. Another panelist countered that as past iterations of standard banking practice
have gotten bigger and bigger, it has not made much of a difference. The idea of merging UCP and
ISBP together was also put forth.
2) Can the Existing ICC ‘Opinions’ Process be Improved? Yes, the thought was expressed that
the process is outmoded. The chief criticism centers on dissemination. Once final, ICC Official

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Opinions are sent to all ICC National Committees/Members and made available on restricted access
networks or for purchase. The sense is that the Opinions should be freely available.
3) Is There a Business Case to Develop a ‘Lite” Version of UCP600? For simple LCs calling for
presentation of an invoice and perhaps one other document, would it be appropriate to create a
“lite” set of rules to govern such LC use? Considerable discussion ensued and comments were
divided. Proponents of the idea contend that ICC is well-positioned to draft a set of rules no more
than 2-3 pages for LC users. Advocates pointed out that the current UCP600 and ISBP would be
untouched and left intact, while developing a simple “Lite” set of rules might preserve the
commercial LC product for another generation. Others echoed the sentiment, predicting that if
nothing is done, the LC will not survive another ten years. Simple rules could help users get back to
the basics of LCs. Dissenters said that a “Lite UCP” is unnecessary. A simple LC is already possible
through use of UCP600. For instance, it is common in South Korea. Others reinforced the stance that
the industry does not need new rules; rather education of existing rules is what’s wanted.
Update on International Standard Banking Practices for Demand Guarantees – Attendees were
informed that the group preparing International Standard Demand Guarantee Practice (ISDGP) is
nearing completion of a mature draft and that ISDGP draft text could be released in 6-8 weeks.
Unlike commercial LCs, demand guarantees are intended to be unutilized, not drawn on, and fall off
guarantors’ books. Consequently, guarantees have to be drafted well. ISDGP is to be informative
and break out elements of demand guarantee practice by stages. Portions of ISDGP’s current content
were primarily explained through questions stated by the presenters. Is there a strict compliance
standard? In demand guarantee practice, there is no need for mirror image and typos are allowed
(for instance, letter “O” used instead of zero). What is a demand? It is a statement, draft, or bill of
exchange. Must guarantors authenticate beneficiary signatures? If a guarantee contains no such
wording, then a guarantor has no liability to do so. When a demand guarantee is deemed issued has
generated considerable debate. When it leaves the control of the issuer is part of the answer, but
what does that mean? This includes, for instance, when an issuer hands a guarantee to a lawyer to
take to a closing. Given that use of automated processes is so widespread, issuance means when an
applicant can access the guarantee. Subrogation of rights is a difficult topic and considered not
appropriate for ISDGP, but practice rules address it indirectly. The audience was asked whether they
have any guarantee practice “pain points”. That some countries (such as the US) do not accept
guarantees, even if issued subject to URDG, is a problem for international guarantee practice. This
situation was explained as a limited education matter; with time and increased education,
independent guarantees will be more common in certain markets. Issuance of open-ended
guarantees in some countries is also a concern. It is a bank policy matter. If an open-ended guarantee
is issued under URDG, then it expires in three years.
ICC Opinions – Five ICC draft opinions were subject to discussion at this Banking Commission
Meeting.
ICC Draft Opinion TA.886 involved an LC with conditions requiring that all documents be issued
in English or, if in another language, also bear text in English. A nominated bank found complying a
presented invoice bearing a Chinese character stamp but lacking text in English language. After
receiving the documents, issuer refused citing the discrepancy that the invoice did not appear to

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have been issued by beneficiary, as per UCP600 Article 18(a)(i) and ISBP Para. A21(c)(i). Nominated
bank defended its stance, referring to ISBP Para. A21(e) that stamps may be in a language other than
that required by the credit. The Opinion determined that the LC’s conditions modified ISBP Para.
A21(e) and concluded that the discrepancy is valid. During discussion, some attendees commented
that the cited discrepancy was imprecise and not specific enough. Other commenters said the
discrepancy was correctly written, adding that the critical point is who issued the document and this
cannot be seen from the invoice. One ICC National Committee representative said the LC’s
conditions are ambiguous. Another ICC NC rep said they cannot understand why the issuer stated
such conditions, but the conditions must be followed. After discussion, no changes were made to the
Opinion.
ICC Draft Opinion TA.887 addressed the question whether or not a document presented by a
bank in London having a branch in Vietnam complies with an LC requirement that the document be
issued by an “international bank having a branch office in Vietnam”. The Opinion determined that
the presented document is valid. There was no actual requirement in the credit that the bank state
within its documentary presentation that it has a branch office in Vietnam. In its Analysis, the
Opinion referenced UCP600 Article 14(h) and its wording. During discussion, one commenter
expressed concern that the Analysis referring to non-documentary conditions could lead to incorrect
assumptions. ICC Technical Advisors indicated that UCP600 Article 14(h) wording was included in
the Analysis because the credit was so poorly issued.
ICC Draft Opinion TA.888 dealt with four examples of LC wording attempting to modify
UCP600 Article 16(c)(iii)(b) (Discrepant Documents, Waiver and Notice). Regarding use of such
clauses, the query sought to clarify when an issuing bank must honour and whether it is standard
banking practice to disregard such clauses. Responding to the Draft Opinion, some ICC NCs said it
should be an educational opinion, not an official opinion. ICC Technical Advisors disagreed, but
made a number of changes to the Draft Opinion. During discussion in Beijing, several ICC NC
representatives expressed with conviction that if a document is discrepant, it needs to be either
replaced or represented. A waiver of discrepancies does not make presented documents compliant.
On this point, the Analysis was adjusted to state: “By subsequently agreeing to accept a waiver of
the applicant, the issuing bank will no longer be in a position to refuse to honour the presentation.”
The Opinion’s Analysis and Conclusion underscored the stance that these types of clauses are
unnecessary and should not be used in LCs.
ICC Draft Opinion TA.889 involved a confirming bank’s reference to ISBP745 Paragraph Q9 in its
refusal of a EUR1 certificate containing a consignee field marked “to order” which confirming bank
indicated was inconsistent with consignee information on B/L. The Opinion’s Analysis determined
that “to order” consignee information appearing on the EUR1 certificate “is not indicating the
consignee as the beneficiary nor is it creating any conflict under” UCP600 Article 14(d). The
discrepancy is not valid.
ICC Draft Opinion TA.890 dealt with a presented bill of lading signed by “ROH on behalf of
HAP – the Carrier” that issuing bank refused due to “Bill of Lading: Signing capacity not specified”.
Referencing ISBP745 Paragraph E5(c) and UCP600 Article 20(a)(i), confirming bank contested the
discrepancy maintaining that “as agent for the carrier” is equivalent to “on behalf of the carrier” and

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allows for a B/L to be signed “ROH on behalf of HAP – the Carrier”. Citing the same ISBP
Paragraph and UCP600 Article, the Opinion’s Analysis stated that “or on behalf of” is alternative
wording to “for” and does not remove the requirement to indicate that an entity is “acting in the
capacity as an agent”. During discussion in Beijing, one ICC NC representative commented that some
lawyers and carriers consider that “on behalf of” denotes agency. However this is not so according
to UCP600 which requires use of the word “agent”. Others added that signing for the carrier is not
enough and suggested that UCP600 needs re-visited. ICC Technical Advisors admitted that they
debated this Draft Opinion quite a bit. Ultimately, the way that UCP600 is written means the correct
conclusion is that the bill of lading is discrepant.
Future ICC Banking Commission Meeting – Attendees were informed that the next ICC Banking
Commission Technical Meeting will take place in Paris, 7-10 October 2019. ■

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USE OF NON-DOCUMENTARY CONDITIONS

STILL A SYMPTOM OF POORLY DRAFTED LCS
by HEI Zuqing*
Letters of credit sometimes

contain non-documentary
conditions and UCP directs
banks to disregard such
conditions. Among the most
recent set of ICC Opinions
discussed at the April 2019 ICC
Banking Commission Meeting
held in Beijing, was ICC
Opinion TA.887. The query in
ICC Opinion TA.887 involved
an LC requiring presentation
of a performance bond issued
and sent by a Vietnamese bank
or “international bank having
a branch office in Vietnam”.
The presented document was
issued via SWIFT message by a bank in London which has a
branch in Vietnam, but the document contained no specific
indication that the bank maintained a branch in Vietnam.
Notwithstanding that ICC Opinion TA.887 did not expressly label
the LC term as a non-documentary condition, the Opinion’s
Analysis stated that the LC content “should have been clearly
stated within the credit as part of the documentary requirement.”
It is my view that the condition as stated in LC should be
considered a non-documentary condition and that this LC term
be disregarded. Properly recognizing that a condition is non-
documentary condition is an important determination for the
document examiner as it would otherwise create uncertainty. A
bank’s responsibilities with regard to examination of documents
may also be affected by a non-documentary condition and
unwary parties may be trapped by it. In this regard, to the extent
* HEI Zuqing is a Research Fellow with the Institute of Free Economic

Zone at Tianjin Normal University and Graduate Mentor at Nankai
University. He had worked at Bank of China and Societe Generale. He can be
reached at: heizuq64@163.com

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that LCs can include various types of non-documentary conditions,1 the topic deserves careful
analysis.
Addressing what constitutes a non-documentary condition, UCP600 Article 14(h) states: “If a
credit contains a condition without stipulating the document to indicate compliance with the
condition, banks will deem such condition as not stated and will disregard it.” ICC Opinion TA.689
(2009) involved interpretation of a condition in the LC stating that: “Goods must be shipped in
export standard packing and clearly marked country of origin and shipping marks in each and every
package/carton/bag/container”. ICC Opinion TA.689 Analysis determined that the LC term was
non-documentary as there was “no specific requirement in the credit as to how the goods were to be
packaged”.
ICC Opinion TA.799 (2014) involved an LC including a requirement for a guarantee “payable in
country X (the country of the LC issuing bank)”, but the actual guarantee that was presented was
issued by a bank in country Y and did not include an explicit statement or reference that the
guarantee was “payable in country X”. Among its concluding points, ICC Opinion TA.799 explained
that the LC requirement for the guarantee “clearly related to a requirement for an actual document”.
Therefore, this LC requirement was not a non-documentary condition and the guarantee document
presented was discrepancy.
In United Overseas Bank (Malaysia) Bhd v. Indian Bank,2 Field 46A of the LC required three
documents (an inspection certificate not among them), but Additional Condition in Field 47A
required an original clean inspection certificate issued by the applicant. Additional Condition did not
state which document would show the inspection certificate had been signed by the applicant. The
court concluded that the LC did not require presentation of an inspection certificate. In this case, the
additional condition was determined to be a non-documentary condition as an inspection certificate
was not required in the LC. In Jurisco, Inc. v. Bank South,3 the LC required that presentation be made
by an authorized officer of the beneficiary, but did not connect this requirement to any document.
The court concluded that the LC requirement was a non-documentary condition as the issuer could
not look beyond the face of the documents for compliance. In Kumagai-Zenecon Construction Pte Ltd. v.
Arab Bank PLC,4 a standby LC provided that the sums payable are pursuant to the judgment debtor’s
obligations for which the issuer had to determine the payment amount by reference to an outside
document rather than the documents presented. In my opinion, this LC requirement was a non-
documentary condition.
1. THE IMPACT OF INTERNATIONALIZATION OF TRANSNATIONAL COMMERCIAL LAW:

INTERNATIONALIZATION OF REVISED UCC ARTICLE 5 (LETTERS OF CREDIT) by James G. Barnes, 16 J. Int’l. L.
Bus. 215 (Winter 1995), reprinted at 1997 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 7.
2. United Overseas Bank (Malaysia) Bhd v. Indian Bank, Unreported Decision of Singapore High Court (9 January 2013)
[Singapore], abstracted at 2014 ANNUAL SURVEY 555.
3. Jurisco, Inc. v. Bank South, N.A., 492 S.E. 2d 765 (Ga. Ct. App. 1997), abstracted at 1998 ANNUAL SURVEY 448.
4. Kumagai-Zenecon Construction Pte Ltd. v. Arab Bank PLC, 1997-3 SLR 770 1997 SLR LEXIS 152 (Singapore Ct. App. 8
September 1997), abstracted at 1998 ANNUAL SURVEY 453.

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In view of these cases, an LC obligation is conditioned on presentation of documents and whether

the LC terms and conditions are fulfilled should be determined from a review of the presented
documents. Otherwise they would be regarded as non-documentary conditions. As such, a non-
documentary condition can be viewed as requiring an issuer to investigate and evaluate extrinsic
facts rather than merely to examine presented documents.5 Regarding ICC Opinion TA.887, there
was no actual documentary requirement for the performance bond to be issued and sent by “a
reputable Vietnamese bank or international bank having a branch office in Vietnam”. It was not in
the issuer’s operational purview to fulfill the condition without stipulating the document to indicate
compliance with such condition. It is my view that the condition should be considered a non-
documentary condition.
A non-documentary condition also can be determined from an issuer’s own records or the
issuer’s normal operations. If an LC condition cannot not be determined from a review of presented
documents but fulfillment can be determined by the issuer from its own records or within its normal
operations, then the condition should not be considered as non-documentary. In Oliver v. Dubai Bank
Kenya Ltd.,6 a standby LC required presentation of an authenticated SWIFT message issued by the
issuing bank evidencing the beneficiary’s fulfillment of its commitments, but the issuer did not
receive instructions from the applicant requiring issuance of the telex and therefore it declined to do
so. The court concluded that the non-documentary condition rule did not apply in in this case, as the
LC obligation to pay was not “conditional upon anything other than a documentary condition”. The
court determined that the required condition was documentary. But in my opinion, the condition
was non-documentary as the decision to issue the SWIFT message was not documentary and
determination was outside the scope of the issuer’s business. In Korea Exchange Bank v. Standard
Chartered Bank,7 the LC provided that the LC amount shall automatically fluctuate to cover any
increase or decrease according to the price clause without further amendment to this LC. In this
case, the LC clause referred to an external source for determining the price fluctuation and
satisfaction of the clause could only be achieved by reference to extraneous factual matters rather
than the documents presented. However, it is practice that the issuer can refer to published indices
of such commodities prices, as the indices are well known, of public record, and readily available.8 In
view of this, the reference did not constitute a non-documentary condition as it was in the issuer’s
operational purview to refer to the published index. As such, whether or not a condition is
documentary can also be determined by the issuer from the scope of its business.
Regarding the situation where the beneficiary provides data that does not conflict with a non-
documentary condition, ICC Opinion TA.644 (2008) concluded that UCP600 “sub-article 14(h) is not
5. THE ESSENCE OF A LETTER OF CREDIT UNDER REVISED U.C.C. ARTICLE 5: PERMISSIBLE AND
IMPERMISSIBLE NON DOCUMENTARY CONDITIONS AFFECTING HONOR by Richard F. Dole, Jr., HOUSTON LAW
REVIEW, Vol. 35, No. 4, (Winter 1998), p. 1079, reprinted at 2000 ANNUAL SURVEY 94.
6. Oliver v. Dubai Bank Kenya Ltd., [2007] All ER (D) 135(Sep) [England], abstracted at 2008 ANNUAL SURVEY 308.
7. Korea Exchange Bank v. Standard Chartered Bank, Suit No. 162 of 2004 (REGISTRAR’S APPEAL No. 307 of 2004)
[Singapore], abstracted at 2006 ANNUAL SURVEY 377.
8. THE OFFICIAL COMMENTARY ON THE INTERNATIONAL STANDBY PRACTICE, by Professor James E. BYRNE, Institute of
International Banking Law & Practice, p.187.

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absolute and is qualified by the content of sub-article 14(d)” for which the data in other stipulated
documents will ensure that any data does not conflict with such condition stated in the LC. ISBP745
Paragraph A26 provides that a non-documentary condition is “a condition without stipulating a
document to indicate compliance”, but “data contained in a stipulated document are not to be in
conflict with the non-documentary condition.” That is to say that determining a non-documentary
condition is to the extent that information in any required document does not conflict with such
condition.9 The beneficiary could insert data in one or more stipulated documents, but data should
not conflict with the condition.10 However, as explained by Professor James E. BYRNE, the
conclusion has the most serious implications related to the interpretation of non-documentary
conditions in UCP600 Article 14(h), it is contrary to definition of the non documentary condition. It
would affect an issuer’s examination of a presentation and increase the possibility that it will refuse
the presentation.11 It also encourages applicants to insert non-documentary conditions in LCs.12
UCP600 Article 14 (h) also states that a non-documentary condition should be disregarded. A non-
documentary condition requires an investigation of facts that are not readily ascertainable from the
bank’s review of presented documents.13 It is incompatible with the LC independence principle14 as
the practice of incorporating such a condition into an LC contravenes the principle of independence.
In ICC Opinion TA.878 (2017), an LC included a clause that “in case of delay in delivery of design,
engineering and submission of drawings and documents and/or delay in commissioning period
beyond contractual period due to reasons not attributable to the applicant, beneficiary should attach
a credit note for this amount of liquidated damages as per clause No. 29.2 of GCC of the contract
and submit invoice along with credit note for payment”. ICC Opinion TA.878 concluded that the
clause was non-documentary and was to be disregarded. Its Analysis explained that whether or not
such credit note is to be presented cannot be determined by any bank from the presentation alone.
The condition requires the bank to investigate facts (for example, the wording of delay in delivery
of design is related to the underlying contract and not to the LC) and it disregards the irrevocable
and independent nature of the LC.
9. A US PERSPECTIVE ON THE NEW URDG758 COMPARED TO ISP98, UCP600, AND THE NY UCC by Michael
Evan AVIDON, 2011 ANNUAL SURVEY 41.
10. MORE UCP OPINIONS REVIEWED BY THE ICC BANKING COMMISSION by Gary COLLYER, Coastline
Solutions Newsletter, Issue 18, reprinted at 2009 ANNUAL SURVEY 98.
11. STANDBY & DEMAND GUARANTEE PRACTICE, by Professor James E. Byrne, Institute of International Banking Law &
Practice, p.153.
12. OVERVIEW OF INTERNATIONAL BANKING LAW & PRACTICE IN 2008 by Professor James E. BYRNE, 2009
ANNUAL SURVEY 8.
13. HOW TO GUARANTEE CONTRACTOR PERFORMANCE ON INTERNATIONAL CONSTRUCTION PROJECTS:

COMPARING SURETY BONDS WITH BANK GUARANTEES AND STANDBY LETTERS OF CREDIT, by David J.
BARRU, THE GEORGE WASHINGTON INTERNATIONAL LAW REVIEW, Vol. 37, No. 1, 2005, reprinted at 2006 ANNUAL SURVEY 42.
14. NON-DOCUMENTARY CONDITIONS AND THE LC INDEPENDENCE PRINCIPLE, by James BARNES, DCI Vol.
14, No.4, International Chamber of Commerce, reprinted at 2009 ANNUAL SURVEY 16.

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In Continental Grain Co. v. Meridien Int’l Bank,15 an LC contained a clause requiring that rice remain
under the beneficiary’s control after shipment and that it was to be released only after payment. The
court concluded that the LC requirement was a non-documentary condition and, in the event
conforming documents are presented, the failure to meet the non-documentary condition could not
relieve the issuer of its obligation to pay. In this case, the non-documentary condition required the
issuing bank to pay not upon the presentation of documents, but upon the determination of an
extrinsic fact. The condition would deny the undertaking the status of LC and it was to be
disregarded. Where a non-documentary condition is central to the issuer’s undertaking, the
undertaking is not an LC16 and instead it may be some form of suretyship or other arrangement as
such non-documentary condition strays from the independence principle and blatantly contradicts
the fundamental principle that parties in LC transactions deal only with documents.17 As such, the
undertaking including such condition would be governed by surety or contract law instead of LC
law.18 In view of this, an LC should not include any references that bring into question its irrevocable
or documentary nature as they will render it a secondary obligation.19 Therefore, the rules and laws
of UCP600, URDG758, ISP98, and US UCC Article 520 are intended to prevent an issuing bank from
deciding or even investigating extrinsic facts and to regard any non-documentary condition as not
stated, but do not permit disregard of LC terms of place, time, and mode or presentation.21
In Win Spark Trading Co. v. Periscope Sportwear,22 an LC provided that it would not be honored
unless the beneficiary first made the shipment available for inspection by one of the issuer’s officers.
The clause implied that the issuer should inspect the goods and it was deemed non-documentary. In
this case, the beneficiary did not comply with the clause and the issuer refused to honor the LC. The
beneficiary, however, conceded that it did not comply with the LC condition instead of insisting that
the non-documentary condition should be disregarded. Regarding ICC Opinion TA.887, it provided
that according to UCP600 Article 14(h), banks will deem a non-documentary condition as not stated
15. Continental Grain Co. v. Meridien Int’l Bank, Ltd., 894 F. Supp. 654 (S.D.N.Y. 1995), abstracted at 1996 ANNUAL SURVEY
427.
16. LETTERS OF CREDIT: A COMPARISON OF UCP 500 AND THE NEW U.S. ARTICLE 5, by John F. Dolan, Journal of
Business Law [1999 J. Bus.L. 521.], reprinted at 2000 ANNUAL SURVEY 82.
17. THE 1993 REVISION OF THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS, by Ross P.
Buckley, reprinted at 1998 ANNUAL SURVEY 66.
18. NEW RULES FOR STANDBY LETTERS OF CREDIT: THE INTERNATIONAL STANDBY PRACTICES by Paul S.
Turner, Banking & Finance Law Review, 14 B.F.L.R. 457, reprinted at 2000 ANNUAL SURVEY 221.
19. STAND-BY LETTERS OF CREDIT UNDER REVISED UCC ARTICLE 5 by Lawrence S. Hsieh, NEW YORK LAW
JOURNAL (Oct. 8, 1996), reprinted at 1997 ANNUAL SURVEY 123.
20. US UCC Article 5 (comments on 5-108(g)), “LC RULES & LAWS CRITICAL TEXTS FOR INDEPENDENT UNDERTAKINGS”, 5th
Edition, Professor James E. Byrne, Ed., IIBLP, 2018, p. 173.
21. LETTER OF CREDIT COMPLIANCE UNDER REVISED UCC ARTICLE 5 AND UCP 500 by Joseph D. Gustavus,
Warren, Gorham & Lamont. 114 Banking L.J. 55 (1997), reprinted at 1998 ANNUAL SURVEY 135.
22. Win Spark Trading Co. v. Periscope Sportwear, Inc., 62 Fed. Appx. 401; 2003 U.S. App. LEXIS 8615 [USA], abstracted at
2004 ANNUAL SURVEY 348.

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and therefore the LC term was to be disregarded. The Opinion further correctly explained that “it
cannot be considered international standard banking practice for the issuer of a performance bond ...
to list specific branch offices in each bond that it issues.” As such, the presented document was not
discrepant.
A non-documentary condition could be converted into a documentary condition. Non-

documentary conditions have no place in the LC regime and including a non-documentary condition
in an LC is undesirable23 as it causes a great deal of difficulty for LC parties.24 To avoid the problems
of non-documentary conditions and be protected from the risks arising, parties should properly craft
the LC and pay careful attention to details in the LC and any amendments. The beneficiary is in the
best position to do something about non-documentary conditions before receiving an LC and it
should insist on good LC practice that the issuing bank revise the LC to ensure that any non-
documentary condition is adjusted to a condition that is appropriately evidenced by documents. A
non-documentary condition may be troublesome for the issuer.25 The issuing bank could determine
the type of document required to remedy a non-documentary condition as only documentary
conditions for payment should be properly included in the LC.26 If the applicant believes that such
non-documentary condition is necessary for its protection in the LC transaction, it should also
request that the non-documentary condition be converted into a documentary condition to ensure
that any terms and conditions stated in the LC are clearly linked to stipulated documents.27 As
demonstrated in ICC Opinion TA.887, it is clear that LC parties should clarify LC terms prior to
issuance to ensure that any non-documentary condition is converted into a documentary condition.
Conclusion
An LC containing a condition without stipulating the document required for indication of
compliance with the condition is a non-documentary condition. Inclusion of a non-documentary
condition in an LC contradicts the fundamental principle of LC independence and such condition
should be ignored. It is my view that parties to a letter of credit should pay more attention to the
details of the LC before issuing or receiving the LC and convert any non-documentary condition into
a documentary condition. ■
23. THE DOCUMENTARY NATURE OF DEMAND GUARANTEES AND THE DOCTRINE OF STRICT COMPLIANCE,
by Michelle KELLY-LOUW, reprinted at 2010 ANNUAL SURVEY 196.
24. THE CASE OF THE “OILY” NON-DOCUMENTARY CONDITION, by Dennis L. Noah, Documentary Credit World,
June 2001, p. 35, reprinted at 2002 ANNUAL SURVEY 139.
25. THE UN CONVENTION ON INTERNATIONAL INDEPENDENT UNDERTAKINGS: DO STATES WITH MATURE

LETTER-OF-CREDIT REGIMES NEED IT? by John F. Dolan, Banking & Finance Law Review, reprinted at 1999 ANNUAL
SURVEY 100.
26. ABSTRACT PAYMENT UNDERTAKINGS IN INTERNATIONAL TRANSACTIONS, by Roy Goode, 22 Brooklyn J.

Int’l L. 1 (1996), reprinted at 1997 ANNUAL SURVEY 95.
27. COMMENTARY ON UCP 600, ICC Publication No. 680 (2007), p.66.

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DEMANDS TO BE CONSTRUED
“INTELLIGENTLY, NOT MECHANICALL
“INTELLIGENTLY Y”
MECHANICALLY”
by Dr. Alan DAVIDSON*
Recently, the Queensland Court of Appeal in Santos Limited v.

BNP Paribas1 ruled that a demand for 55,000,000 Australian
Dollars under a “performance security” failed because it did not
purport to be signed by an “authorised signatory”. It was not
disputed that the signor did in fact have authority when the
demand was made. However, the signor was merely described as
“General Manager Development”. The Court considered that such
demands should be construed “intelligently, not mechanically”.
The Court of Appeal approved the statement by the Judge at

first instance by appropriately describing the performance
security as “it was to operate as a bond by a financial institution
that it would unconditionally pay the promised amount, usually
without reference to the indemnifying party, immediately upon a
complying demand.” His Honour disregarded the generic title on
the instrument “Bank Guarantee”, describing the expression as
“misleading”.2
Santos Limited was the Beneficiary under the performance security and BNP Paribas was the
Issuer/Guarantor. The underlying transaction was in respect of an engineering procurement
construction and associated works, and stated that the “Financial Institution” (BNP Paribas):
unconditionally and irrevocably undertakes to pay on demand and without deduction or set off
any sum or sums which may from time to time be demanded by the Beneficiary up to a maximum
aggregate sum of ... (Security Amount).
The demand referred to the prime instrument and even appended a copy. It provided account
details, and was signed:
Santos Limited – GLNG Upstream Project
[signature]
Rob Simpson
General Manager Development
* Dr. Alan Davidson, Solicitor and Barrister, Australia, Faculty member, Law School, University of Queensland. He is
also a Fellow of IIBLP and Delegate at the Working Group IV (Electronic Commerce) UNCITRAL. Dr. Davidson is
author of several books and articles on Electronic Commerce Law and International Trade Law.
1. [2019] QCA 11 [Australia]
2. Ibid, para 7.

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BNP Paribas did not pay.
Santos Ltd claimed that the demand was in the correct form including the form annexed to the
instrument: “Authorised signatory of Santos Limited”. BNP Paribas denied that the demand
complied with the form, because the demand did not purport to be signed by an authorised
representative of Santos Limited.
The issue was not that signor, Rob Simpson, lacked actual authority to sign the demand. The issue
was that the demand did not expressly state that he was an “authorised signatory”. Neither parties
contended that any particular form of execution of the demand was required. Although the form of
execution can and does matter in some situations, neither party contended that this was one of them.
Both parties relied on paragraph (c) of the performance security that provided:
Should the Financial Institution receive a notice in writing in the form of the letter attached to this
Bank Guarantee (amended as applicable), purporting to be signed by an authorised
representative of the Beneficiary, that the Beneficiary desires payment to be made of any part of
or the whole of the Security Amount, the Financial Institution must make that payment to the
Beneficiary immediately without reference to the Contractor and notwithstanding any notice
given by the Contractor not to pay same. (emphasis added)
BNP Paribas uncontroversially contended that paragraph (c) required it to pay immediately on
receipt of a notice in writing in the form prescribed. However, it argued that the words “purporting
to be signed by an authorised representative of the Beneficiary” reinforced the conclusion that the
proper construction of the instrument was that the notice desiring payment had to state on its face
that the signatory was an “authorised signatory of Santos Limited”.
Santos Ltd contended that because Simpson’s signature appeared under the words “Santos
Limited” and gave his name and position, he did purport to sign as an authorised representative and
authorised signatory of Santos Ltd.
The Court of Appeal’s view was that in construing the performance security, it was important to
have regard to the commercial context in which such an instrument was issued and the purposes for
which such an instrument was issued.
In construing the requirements imposed by paragraph (c), it is relevant to consider its commercial
purpose of the performance security, that it is to be “as good as cash”, in the sense of being capable
of being honoured with similar expedition and ease on the presentation of a complying demand.
Hence the strict compliance principle, which relieves the issuer of the necessity to look beyond
whether the party making the demand has met the stipulations of the performance security.3
Hence the Court of Appeal stated that it is “essential” that the financial institution pay “only”
upon a complying demand. It regarded that the use of the word “purporting” in paragraph (c) made
3. Ibid, para 18.

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“it clear that the issuer need be concerned only with whether the required representation appears,
not with questions of actual authority”.4
The Court of Appeal agreed with the Judge at first instance that the signature by Simpson coupled
with the description of his position did not amount to a representation that he was an authorised
representative of Santos Ltd. The position and description did not represent anything about
Simpson’s authority, per se. It followed, in the Court’s view, that the demand did not constitute a
notice in writing purporting to be signed by an authorised representative in compliance with
paragraph (c), stating:
For BNP Paribas in the absence of such a statement to resort to inference would have been to
disregard the requirement for strict compliance.5
Rationale
In this case both parties relied upon the 2016 High Court of Australia decision in Simic v. New
South Wales Land and Housing Corporation.6 In that case the performance bond required that the
demand be made by, and payment to be made to, the “New South Wales Land and Housing
Department”. However, there was no such entity in existence. The actual body was the “New South
Wales Land and Housing Corporation”. The ultimate issue in that case was whether a performance
bond that had been issued mistakenly, with a non-existent party as the named beneficiary, could be
rectified.
In relation to the construction of the performance bond, the majority in the High Court
considered that the proper starting point is the wording used in the instrument. However, on the
“principle of strict compliance” the High Court elaborated:
… it is necessary to say something about the principle of strict compliance – that an issuer (like a
bank) should only accept documents that comply strictly with the requirements stipulated in an
instrument of this nature. The principle is fundamental to the efficacy and dependability of
banking instruments such as the Undertakings. As Viscount Sumner said in Equitable Trust Co. of
New York v. Dawson Partners Ltd:
‘It is both common ground and common sense that in such a transaction the accepting bank can
only claim indemnity if the conditions on which it is authorised to accept are... strictly observed.
There is no room for documents which are almost the same, or which will do just as well.
Business could not proceed securely on any other lines.’7
4. Ibid, para 20.
5. Ibid, para 22.
6. [2016] HCA 47. The case was heard at three levels: the NSW Supreme Court, the NSW Court of Appeal and the
High Court of Australia. See 2017 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 615.
7. Ibid, para 97.

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The majority8 of the High Court interpreted this be that:
the principle of strict compliance … it is not a rigid rule. It must be applied intelligently, not
mechanically; the issuer must exercise its own judgment about whether the requirements
stipulated in the instrument have been satisfied.9
In Santos Ltd v. BNP Paribas, the Court of Appeal similarly reached the conclusion that the
“principle of strict compliance was to be applied intelligently, not mechanically, requiring the issuer
of the performance bond to exercise its own judgement”.10 The Court expressed the opinion that the
absence of a statement that the signatory was the authorised representative or the authorised
signatory of Santos Ltd in the demand was “not a mere mechanical omission”.11 BNP Paribas was not
obliged to pay because the demand did not comply with the requirements of the performance
security.
Doctrine of Strict Compliance

The use of the expression “intelligently, not mechanically” to describe the standard for strict
compliance, was first used in the Court of Appeal decision of Simic before it proceeded to the High
Court.12 The Court of Appeal expressed the view that the principle of strict compliance is a
“fundamental aspect of the efficacy and dependability of instruments of the kind in question”.13 It
expressed the traditional view from Equitable Trust Co. of New York v. Dawson Partners Ltd.14 that there
is “no room for documents that are almost the same or which will do just as well”. Business could
not proceed securely on any other lines. The Court of Appeal in Simic referred to the unusual
example of “obvious typographical errors” and concluded that strict compliance does not require
“rigid, meticulous fulfilment of precise wording in all cases”.15 There must be a margin that banks
are allowed. The test is not the equivalent to a test of exact literal compliance. A bank must exercise
its own judgment and “the question of compliance should be considered intelligently rather than
mechanically.16
8. Gageler, Nettle and Gordan JJ.
9. [2016] HCA 47, para 99; (emphasis added).
10. [2019] QCA 11, para 14.
11. Ibid, para 8.
12. Simic v New South Wales Land and Housing Corporation [2015] NSWCA 413.
13. Ibid, para 70.
14. (1927) 27 Ll L Rep 49 at 52,
15. Simic v New South Wales Land and Housing Corporation [2015] NSWCA 413, para 71.
16. Ibid. Emphasis added.

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The expression “mechanical” was effectively first used in Fortis Bank v. Indian Overseas Bank17 where
the English Court of Appeal stated: “In determining whether there was compliance, the exercise of
judgment rather than a mechanistic approach was required”.
Santos Ltd. v. BNP Paribas is the latest case that uses these expressions. However, whilst bank
examiners may now be warned to examine documents “intelligently”, the courts have provided little
guidance on the meaning of this approach. Presumably the standard should be clear, sound and
reasonable, exercising a standard that reflects banking practice in independent instrument
transactions whilst maintaining the bank’s independence and instrument’s value as the “equivalence
of cash”. ■
17. [2009] EWHC 2303 (Comm). See 2010 ANNUAL REVIEW 491.
BACK-TO-BACK LCS IN COMMODITY FINANCING (PART II)

by Barry CHIN*
(Editor’s Note: This article continues the author’s in-depth treatment of

Back-to-Back LCs in Commodity Financing. For Part I addressing the
uniqueness, roles, matching, and analysis of SWIFT fields in the LC
format, see April 2019 DCW at page 14.)
Drawing
One of the peculiarities of commodity financing is the number
of drawings. There is the possibility that there can be more than
one drawing from the beneficiary, i.e. provisional or final. Of
course, as to how many claims are permissible from beneficiary
under a particular shipment would have to be explicitly stated in
the LC.
Provisional or Not Provisional?

In some situations, a provisional drawing is inevitable.
Situations warranting a provisional drawing are illustrated in the
following:
1. Meeting maturity
a. A shipment of oil is scheduled for delivery around the end of Feb 20xx. The pricing formula
is whole month average of shipment and the tenor is 30 days after B/L date (=0). If the B/L
is dated 28 Feb 20xx, the beneficiary will most likely claim on the LC using the final price
since the payment due date, 30 Mar 20xx, is still rather a long way off.
* Barry CHIN works at CIMB Bank Berhad, Singapore. He has been in the middle office function of commodity
financing since 2007. Any comments and feedback on the subject are welcome at: chinchoonghing@hotmail.com.

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b. However, if the B/L is dated 01 Mar 20xx and the payment due date is 31 Mar 20xx, clearly
the beneficiary will need to present a provisional invoice first, followed by the final
invoice, if any, before the LC expiry date.
2. Options to trigger
a. After contracting a price for the agreed quantity, the trading parties decided to allow the
option to roll over the pricing month repeatedly for a certain quantity until a certain date,
for example.
b. At time of LC issuance, the parties agreed to original pricing formula. At a later stage, if
the parties mutually agree to exercise the option, an addendum to the contract will be
drawn up to reflect the new pricing, followed by an LC amendment, where usually the
import LC (ILC) will only be amended following receipt of a corresponding amendment to
the export LC (XLC).
c. Meanwhile the shipment would have already taken place and the Beneficiary may want to
present a provisional invoice using the unit price reflected in the initial contract while the
trading parties decide whether to execute the option by the deadline.
d. The LC validity for this type of arrangement would usually be longer especially when the
price can be rolled over two or three times from the original pricing month.
e. In some cases, the provisional invoice may have already been settled. The only pending
drawing is the final invoice, when the final price exceeds the provisional invoice amount.
3. Quantity in question
a. A shipment of oil from South America to China, where the invoiced quantity is the
discharged quantity at the port of destination based on an analysis certificate by local
surveyor. But meanwhile, the parties agree to present a provisional invoice under the LC
based on the B/L quantity, i.e. the loading quantity.
b. Assuming no change in the pricing formula, beneficiary will present the final invoice if the
discharged quantity is greater than the B/L quantity.
After a provisional drawing, the final drawing will follow when the final price is higher or the
actual quantity is greater than the B/L quantity, as in case 3 above. While it is rare to see a refund
from the ILC Applicant to Beneficiary within the LC framework if the final price is less than the
provisional drawing, nothing prohibits the parties, including the banks, from agreeing to such a
term.
Unlike oil, in the case of iron ore, the number of drawings under an ILC for a shipment of ore
could be as many as four, i.e. a provisional invoice, price adjustment, or freight adjustment invoice
(which could be presented separately by beneficiary) and lastly, the final drawing. As mentioned,
buyer and seller would have been in communication beforehand as to how many drawings under
the LC were permitted. Ideally, the supporting XLC should have the same number of drawings.
It is also acceptable if the number of drawings under the XLC is more than the ILC. For instance,
only one drawing under the ILC while the XLC allows drawings for the provisional invoice and final

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invoice. After settlement of the provisional invoice, if the client makes a subsequent presentation
under the XLC, the proceeds will be excess funds1 for the client since the import liability would have
already been settled.
However if the number of drawings under the ILC exceeds those under the XLC, mitigation
would need to be in place. For example, the ILC allows provisional and final drawings while the
supporting XLC is silent on the
final invoice. Depending on the
Although the analysis and examples quoted
nature of the final invoice, which
could be arising from price or relate to commodity financing, the concepts and
adjustment due to quantity or
quality, the ILC allows the ideas are also applicable to other forms of trade
beneficiary to present a claim for
the second time. On the other that fall within the framework of a BTB LC.
hand, there is no similar
provision under the XLC that allows the beneficiary to present a second drawing. There is clearly an
exposure on the import leg. To deal with this situation, a few options are available:
1. The intervening bank requires the beneficiary to provide cash for the amount equivalent to the
undrawn ILC balance.
2. Depending on the facility structure, some banks transfer the entire undrawn LC balance to a
clean facility or unstructured line.
3. Mark-to-market (MTM) if the final drawing relates to pricing. As soon as the actual shipment
value exceeds the provisional value, the beneficiary would need to provide cash to cover the
difference.
Drawing Percentage
Another aspect that the intervening bank would have to take into consideration is the percentage
of the drawing. This is also common in metal financing. For example, the provisional drawing is
based on 95% of shipment value and the balance under the final invoice after cargo has been
discharged. Ideally, the supporting XLC should have the same percentage of the drawing.
Combining the number of drawings and percentage, possible scenarios include:
1. The ideal situation, i.e. same percentage and number of drawings under both LCs. For
example, 95% under the provisional invoice and final drawing is within the LC validity.
2. The ILC drawing percentage is higher and both ILC and XLC have two drawings. For
example, the ILC has 98% provisional invoice value and the final invoice is within the LC validity;
the XLC has 95% provisional invoice and the final invoice is within the LC validity.
a. The challenge is to ascertain whether 95% provisional invoice value under the XLC is
sufficient to cover the import. The intervening bank may require the borrower to provide
some cash margin for the difference.
1. “Excess Funds” here refers to sales proceeds that are not tied up to any import liability which is at the client’s
disposal.

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b. If the provisional XLC value is sufficient to cover the provisional ILC despite a lower
percentage, it is likely that the final invoice will be enough if there is no pricing formula
mismatch.
3. The ILC drawing percentage is higher and the ILC has only one drawing but the XLC has
two drawings. For example, the ILC has 100% shipment value while the XLC has 98% provisional
invoice and the final invoice is within LC validity.
a. Since there is only one drawing under the import LC, the intervening bank would only
need to ensure the provisional invoice value of the XLC is enough to cover the full
shipment value of the ILC. Once again, some cash margin may be required from the client.
Any subsequent drawing by the client on the export leg will be excess funds to the client.
4. The ILC drawing percentage is higher and the ILC has two drawings, but the XLC has only
one drawing. For example, the ILC has 98% shipment value and the final invoice is within the LC
validity; the XLC has 95% shipment value and settlement of the final invoice is handled outside the
LC framework.
a. After the provisional drawing, the treatment of the ILC balance would be fully cash-backed
or using the remaining methods mentioned in previous paragraph.
b. In this scenario, the intervening bank may likely notice that the expiry date of the ILC is
later than the XLC’s expiry date. This is perhaps a rare exception from my analysis of Field
31D in Part 1 of this article. This is justifiable. For monetary reasons, the applicant may not
want to issue an XLC with a later expiry date when there is only one drawing. On the
other hand, the borrower needs an ILC with a longer validity period as the beneficiary
could only draw on the ILC when, for example, the final price is known or the final
quantity has been issued by the custom authority at port of destination, depending on the
triggering event of the final drawing.
5. The ILC drawing percentage is lower and both ILC and XLC have two drawings. For
example, the ILC has 95% provisional invoice value and the XLC is 98%; both LCs have final invoice
within the LC validity.
a. Potentially the final drawing value under the ILC could be higher especially if the profit
margin is thin. In an extreme case, there may be no claim under the XLC when the final
price is lower than 98% of provisional value. The intervening bank may earmark the profit
at time of settlement of the provisional invoice, coupled with MTM. Alternatively, the
situation could be treated as if a single drawing under the XLC and the entire undrawn
ILC balance is to be cash-backed.
6. The ILC drawing percentage is lower and the ILC has only one drawing, while the XLC has
two drawings. For example, the ILC 95% shipment value and settlement of final invoice will be
handled outside LC framework, while the XLC is 98% provisional invoice and the final invoice is
within the LC validity.
a. Similar to Case 3 above, since there is only one drawing under the ILC, the intervening
bank would only need to ensure that the provisional invoice value of the XLC is enough to
cover the ILC. The second drawing under the XLC is excess funds to the client.

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7. The ILC drawing percentage is lower and the ILC has two drawings, while the XLC has only
one drawing. For example, the ILC 95% shipment value and the final invoice is within LC validity,
while the XLC is 100% shipment value.
a. Like Case 4 above where the ILC allows the beneficiary to present a second claim under
the final invoice, while the XLC has only one drawing, the intervening bank may earmark
the entire the sales profit after settlement of the provisional invoice or require the
borrower to place cash for the entire undrawn balance of the ILC.
Different Undertakings
A mismatch of documents could also be due to use of different types of undertakings such as a
Documentary LC (DLC) and a Standby Letter of Credit (SBLC). A SBLC issued in the beneficiary’s
favour is common for oil trading. Beneficiaries prefer SBLCs over DLCs for several reasons,
including faster turnaround and cost saving as there is no requirement for documentary presentation
unless a claim arises due to default on the part of the applicant.
A SBLC usually requires no more than a claim statement from the beneficiary, an invoice copy, and
perhaps a copy of the B/L as evidence of shipment. In a usual flow, settlement of the underlying
shipment is outside the LC. The beneficiary invoiced the applicant. On the payment due date, the
applicant makes payment through the issuing bank, indicating in the remittance application that the
SBLC reference number along with a statement that the liability under the SBLC will be cancelled in
full or reduced accordingly by the same amount of the payment effected.
A beneficiary will only present documents to claim on the SBLC if the underlying payment is not
forthcoming. If the beneficiary does, this would have repercussions on the applicant such as
reputational loss. A SBLC in this case works like security for the underlying shipment. As an
independent undertaking, so long as the SBLC is still valid, the beneficiary can present documents to
the issuing bank for payment. For this reason in the oil industry, many banks will only issue SBLCs
to reputable parties such as major oil traders, national refineries, or state-owned oil producers.
Different undertakings can have the following combinations:
1. Import SBLC against Export Documentary LC. For example, a client requests issuance of a
SBLC in favour of an oil trader in Singapore supporting sale backed by a Documentary XLC issued
by a bank in China.
a. Because they are two different undertakings, the intervening bank will find mismatches
such as different documents required; the SBLC did not indicate shipment details,
including description of goods, pricing formula, shipment date, and many more.
b. Unless the shipping documents flow through the banking channel, the challenge for the
intervening bank is controlling the flow of documents, especially the B/L which represents
the title of the cargo, to be made available to the intervening bank, plus other shipping
documents required under the XLC. This could be achieved separately if through the SBLC
text is not possible. As for the intervening bank to approve the transaction, the supporting
XLC would likely need to allow presentation of an invoice and LOI in lieu of original
shipping documents.

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2. Import Documentary LC against Export SBLC

a. This may not be as complicated as the above since the requirement under the XLC is less
stringent than the ILC. However, to control sales proceeds, the intervening bank may still
require a copy of the sales invoice from the client indicating a higher sales value and that
the sales proceeds are channelling to the client’s account with the intervening bank.
Field 47A Additional Conditions

In a BTB LC transaction, payment for one LC from proceeds of another could be achieved despite
being two separate independent undertakings thanks to the underlying terms and conditions. When
shipping documents are presented under the XLC, certain information appearing on the presented
documents will cause the documents to be discrepant if the text of the ILC is not well structured. For
instance, reference to the beneficiary or seller, the applicant or buyer, issuing bank, LC value,
insurance value or percentage of coverage if both legs of the transaction are on CIF terms, of which
such information is different in the XLC. To help make for a complying export presentation, a clause
should be used in the ILC to the effect: “Unless otherwise specified, all documents except draft and
invoice, must not indicate invoice number, invoice value, invoice date, unit price, trade term,
contract number, purchase order number, name of the applicant, LC number/issuing date/issuing
bank or any bank’s name, LC tenor, percentage of insurance coverage, and must not identify any
party as the applicant and the beneficiary.” In my experience, this clause is commonly found in a
BTB transaction or in an LC where the applicant is usually not the ultimate purchaser of the goods
but instead another party. The clause may conceal who the actual seller is to some extent, but
importantly prevents the ILC beneficiary from stating information that would later cause
presentation under the XLC to be discrepant.
For other clauses, the intervening bank is to identify which XLC clauses are more stringent or to
take note of special requirements under the XLC. For example:
1. (XLC) All documents to be dated and issued in English.
2. (XLC) Partial shipment allowed but restricted to two partial shipments only.
3. (XLC) Shipment must not be effected by [specified name] shipping line.
For any of these examples, the ILC will need to have similar clauses.
The clauses under Additional Conditions could offer options and flexibility. For instance:
1. (XLC) Port of Discharge: Any port in Taiwan or Thailand. In this case, the borrower could
mirror and include the clause in the ILC or choose one and stick to it.
2. (XLC) Typographical and spelling errors, with the exception of figures, dates, or description of
goods are not to be considered as discrepancies. In this case, the ILC could have the same clause or
omit mention of the clause under the ILC, making the ILC more stringent, i.e. no leeway for spelling
errors.
3. (XLC) Documents issued prior to LC issuing date are acceptable. Again, client can either choose
to insert the same clause in the ILC or disregard it. In any case, the condition is allowed under
UCP600 Article 14.

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The ILC should not have any provision that is not in the XLC. For example, (ILC) charter party
B/L allowed; while XLC has no similar provision. Other points to take note are when clauses make
reference to issuing dates. For example, both LCs state shipment effected before LC issuance date is
not acceptable. Clearly, the date of issuance is different for ILC and XLC, unless it is a chained deal
where the borrower’s buyer is also the customer of the intervening bank and both LCs are issued
simultaneously by the intervening bank. Another easily overlooked clause involves the presentation
period. Some LCs are issued without mentioning any presentation period, for which a default period
of 21 days will apply if there is a requirement for original transport documents.
One to Many; Many to One

There are situations where one LC supports/is supported by more than one LC for reasons such
as different buyers, suppliers, discharging ports, or simply due to facility limit constraints with the
issuing bank. When it is not on a one-on-one basis, some conditions have to be taken into account.
For instance, partial shipment. Different ports of loading under same the carrying vessel that bound
for the same destination does not constitute partial shipment. However, loading onto different
carrying vessels at the same port on the same day is partial shipment. Others are presentation period
(which is based on the earliest shipment date). For an ILC supported by more than one XLC of
different quantity and by different issuers, use of some special clauses are preferred such as “all
shipping documents required under 46A are to be presented in two lots, i.e. first lot for xxx quantity
and second lot for yyy quantity” and/or “shipping documents showing quantity different from B/L
are acceptable”.
Transferable LCs
Occasionally, clients request issuance of a transferable LC or ask if the bank is willing to accept the
supporting XLC being a transferable LC. For instance:
Transferable ILC against non-transferable XLC

Issuance of a transferable LC may fall back on the individual bank’s policies and procedures
especially in terms of compliance and due diligence checks on any party unknown to the bank. The
matching process of this issuance should be the same as usual.
Non-transferable ILC against transferable XLC

This is trickier. There are two situations, depending on whether the XLC is received from the
issuing bank or the transferring bank.
In the first scenario, the intervening bank receives a transferable LC from the issuing bank
favouring the borrower/first beneficiary. The intervening bank is nominated by the issuing bank to
transfer the LC to a second beneficiary. If the second beneficiary is not named, combined with the
borrower’s declaration that they are the ultimate beneficiary and confirmation that the LC will not
be transferred to any second beneficiary, a reason for the intervening bank turning down a request
from the borrower to issue an underlying ILC if both LCs have matching clauses would purely be an
internal decision.
The second scenario, which is more common in my experience, is that the borrower is the second
beneficiary and the XLC received is a transferred LC from the transferring bank. In this case, the

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intervening bank received a transferred XLC and documents are presented to the transferring bank.
The risk is obvious, i.e. payment from the issuing bank is subject to the performance of the first
beneficiary. Put differently, payment is not guaranteed even if clean documents are presented to the
transferring bank. Unless the transferring bank undertakes to honour a complying presentation
which, sadly, is often not the case in current market practice.
Conclusion
Every line of the LC is carefully checked during the matching process. The result is a BTB LC with
unambiguous terms and most importantly, both ILC and XLC are on similar terms where repayment
from the sales leg is not undermined by mismatched conditions. This article outlines the mismatches,
the associated risk and, in some cases, the causes and mitigations, supported by real life situations.
Comparing the clauses of both ILC and XLC can be dismissed as a mundane and mindless exercise,
but it should not. A good BTB LC requires logical thinking throughout the review process and sound
understanding of the underlying trade. Although the analysis and examples quoted relate to
commodity financing, the concepts and ideas brought out in this article are also applicable to other
forms of trade that fall within the framework of a BTB LC. It is hoped that this introduction will
benefit people in the banking industry, especially those in the middle and back offices, as well as
those segments of the business community using BTB LC facilities. ■

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THE DILEMNA ON ENFORCEMENT

OF INDIAN BANK GUARANTEES
by Rajesh Narain GUPTA and Sanjay GUPTA*
This article will present a

comparative analysis of two
important amendments to
Section 28 of The Indian
Contract Act, 1882 (The Act).
This law was first amended by
Act No.1 of 1997, followed by
the Banking Laws
(Amendment) Act, 2012, passed
on 5 January 2013, which
introduced a new exception
(Exception No. 3) to Section 28
of The Act. The question is
often asked whether a bank
guarantee can or should have a
limitation clause and, if so, Rajesh Narain GUPTA Sanjay GUPTA
what is the legal position.
Let us first examine Section 28 of The Indian Contract Act, 1882 as it stood prior to amendment.
Section 28 of The Act stated:
“Agreements in restraint of legal proceedings void
‘Every agreement, by which any party thereto is restricted absolutely from enforcing his rights
under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or
which limits the time within which he may thus enforce his rights is void to that extent’.”
After amendment in 1997, The Act stated:

“Agreements in restraint of legal proceedings void
‘Every agreement,-
(a) by which any party thereto is restricted absolutely from enforcing his rights under or in
respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits
the time within which he may thus enforce his rights, or
(b) which extinguishes the rights of any party thereto, or discharges any party thereto from any
liability, under or in respect of any contract on the expiry of a specified period so as to restrict any
party from enforcing his rights, is void to that extent.’”
* Rajesh Narain Gupta is Managing Partner and Sanjay Gupta is Senior Partner at SNG & Partners, an Indian law
firm with offices in New Delhi and Mumbai. The authors acknowledge the assistance of DCW Executive Editor
Christopher Byrnes in preparing this article.

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Following this amendment, the restrictive clause in a bank guarantee wherein a beneficiary was
required to enforce its claim within a stipulated period after expiry of a bank guarantee was subject
to Section 28 of The Act. Thus, the clause in a bank guarantee which provided that “unless a suit or
action to enforce claim under the guarantee is filed against us within six months from the date of
expiry of the guarantee, all your rights under the said guarantee, shall be forfeited” was determined
to be subject to Section 28 of The Act.
COMMENTARY ON THE INDIAN CONTRACT ACT by Pollock & Mulla (14th Edition, Volume I, p. 676)
makes reference to this. It reads:
“A distinction must also be made between an agreement restricting any party from enforcing his
right, and one requiring him to make a claim or assert his right within a specified time, or
prescribing a period for operation of the contract. Thus, a contract requires that a party to it
assert his rights or requiring a party to make a claim within a certain time, will not be affected by
the amendment viz a clause in a bank guarantee given for a term and requiring the beneficiary to
make a claim within the term of the guarantee. Such agreements cannot however, affect the right
of a party enforce his rights by approaching any court or other forum within the normal period of
limitation if and after the party has asserted the right or made the claim within the period
stipulated in the contract”.
The 1997 amendment came up for interpretation before the Delhi High Court in Explore Computers
Pvt. Ltd. v. CALS Ltd. (131 (2006) DLT 477) and also in Pandit Construction Company v. DDA (2007 (3)
ARBLR 205 Delhi) where the Courts held that the time prescribed within which the beneficiary can
lodge a claim under a bank guarantee will not be subject to Section 28 of The Act but any curtailment
of right on the enforcement of claim will be offending the provisions of Section 28 of The Act. The
relevant portion of the judgment in Explore Computers stated:
“From the case law referred to above the legal position that emerges in that an agreement which
in effect seeks to curtail the period of limitation and prescribes a shorter period than that
prescribed by law would be void as offending Section 28 of the Contract Act. That is because such
an agreement would seek to restrict the party from enforcing his right in Court after the period
prescribed under the Agreement expires even though the period prescribed by law for the
enforcement of his right has yet not expired. But there could be agreement which does not seek to
curtail the time for enforcement of the right but which provides for the forfeiture or waiver of the
right itself if no action is commenced within the period stipulated by the agreement. Such a clause
in the agreement would not fall within the mischief of Section 28 of The Act. To put it differently,
curtailment of the period of limitation is not permissible in view of Section 28 but extinction of the
right itself unless exercised within a specified time is permissible and can be enforced. If the
policy of insurance provides that if a claim is made and rejected and no action is commenced
within the time stated in the policy the benefits flowing from the policy shall stand extinguished
and any subsequent action would be time barred. Such a clause would fall outside the scope of
Section 28 of The Act. This in brief, seems to be the settled legal position. We may now apply it to
the facts of this case.”

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The Judgment of the Delhi High Court in Explore Computers was quoted by the Division Bench of
Bombay High Court in M/S. Indusind Bank Ltd. v. Union of India (Appeal No. 258 of 2008) decided on
20 April 2011. In this case the Court considered whether due to the provisions of Section 28 of The
Act, the term in the bank guarantee that the claim should be made with the Bank on or before 30
April 1997 is void or not.
After dealing with various case law, the Division Bench of the Bombay High Court quoted from
the Supreme Court of India’s conclusion in M/S. Indusind Bank Ltd. v. Union of India:
“Thus, the Supreme Court has held that the term in the contract which deals with assertion of
right is in no way connected with what is contemplated by section 28 of the Act. The term in the
bank guarantee requiring the respondents to make their claim or demand with the Bank on or
before 30th April 1997 does not affect the right of the respondents to enforce their rights by
approaching the court of law within the normal period of limitation if the respondents assert their
right or make a demand or claim with the Bank within the period mentioned in the bank
guarantee. In our opinion, really speaking, in view of the law laid down by the Supreme Court in
its judgment in the case of Food Corporation of India, there does not remain any possibility of
any debate whether a term in the bank guarantee requiring beneficiaries of the bank guarantee to
make claim under the bank guarantee within the stipulated period would be void because of the
provisions of section 28 of the Act because such a term in the agreement is relatable to the
assertion of right so as to perfect that right and not in relation to enforcement of that right in the
court of laws.”
This judgment has been challenged before the Supreme Court and is pending consideration.
Thus, it can be concluded that by virtue of the 1997 amendment (i) normal clauses appearing in a
Bank Guarantee whereby time was prescribed within which the claim was to be lodged by the
beneficiary with the bank was held to be valid, but (ii) curtailment of right so as to enforce the same,
was held to be invalid and void.
To further clarify, the following clauses appearing in bank guarantees show what was held to be
valid and invalid after the 1997 amendment.
Valid Clause
“Our liability under the Bank Guarantee is restricted to Rs._____ (Rupees ______ only); and this
bank guarantee will be alive for a period of one year till ______ (Expiry date). Unless we receive
a claim before expiry date, upon the expiry of this Guarantee, all of the (Beneficiary’s) rights
under this Guarantee shall be forfeited and the Bank shall be relieved and discharged from all our
liabilities there under.”
It is important to note that this clause of the bank guarantee does not prescribe any time for the
enforcement of the claim. Often, a clause appearing in a bank guarantee in addition to the period of
validity also prescribes time for enforcement of the claim. The further clause which provides time for
enforcement of the claim becomes relevant only in the event where the beneficiary of the bank

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guarantee has made a claim under the bank guarantee during the period of validity but for some
reason, the bank refuses to pay the amount and then the only option left with the beneficiary is to
enforce the claim by filing a civil suit before the court of law. Therefore, the question which arises is
as to whether the bank can restrict the right of the beneficiary to enforce its claim.
Conversely, there is a clause which commonly appears in many bank guarantees and prescribes
time for enforcement of the claim.
Invalid Clause
“This guarantee will remain in force for a period of one year from the date hereof and unless a
suit or action to enforce claim under the guarantee is filed against us within six months from the
date of expiry of the guarantee all your rights under the said guarantee shall be forfeited and we
shall be relieved and discharged from all liability thereunder.”
This clause has two options: one relates to the period of validity of the bank guarantee, i.e. a
period of one year; and the other option is the period of enforcement which is six months. The
clause so far as it prescribes the period of validity of the bank guarantee was held to be valid,
however, the clause which restricts the right to enforce the claim was held to be hit by Section 28 of
The Act as it extinguishes or restricts the right to enforce a claim as provided for under the
Limitation Act, 1963.
Based on this interpretation of Section 28 of the Act as it stood after the 1997 amendment, banks
were exposed to a situation where the bank guarantee was invoked during the period of its validity
but for some reason, banks were unwilling to pay and this led to a situation where banks were
keeping the claim in a bank guarantee alive for a period of 3 years for non-Government
organizations. In cases where the bank guarantee was given in favour of the Government, the claim
was kept alive for a period of 30 years. We emphasize here that this situation emerges only where
the beneficiaries have invoked the bank guarantee during the period of its validity. Any invocation
after the period of validity has no force and banks were relieved of their obligations under the bank
guarantee.
It is our understanding that banks took up the matter with Indian Bank Associations and the Law
Commission of India which led to a further amendment.
By virtue of the Banking Laws (Amendment) Act, 2012 which entered into force in 2013, The Act
was further amended and an Exception has been carved out which states:
“Exception 3. — Saving of a guarantee agreement of a bank or a financial institution. — This

section shall not render illegal a contract in writing by which any bank or financial institution
stipulate a term in a guarantee or any agreement making a provision for guarantee for
extinguishment of the rights or discharge of any party thereto from any liability under or in
respect of such guarantee or agreement on the expiry of a specified period which is not less than
one year from the date of occurring or non-occurring of a specified event for extinguishment or
discharge of such party from the said liability.”

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Banks, as well as Financial Institutions, were further defined in the explanation to Exception 3 as
to mean a Bank, Multi State Coop. Banks etc. and Financial Institutions to mean any Public Financial
Institution within the meaning of Section 4A of the Companies Act, 1956.
As of 1 May 2019, we are not aware of any judgment on the interpretation of Exception 3 as it
relates to Section 28 of the Act.
In our understanding and in the light of past difficulties faced by banks, by virtue of this
amendment, Banks can now restrict the right of the beneficiary to enforce its claim, but not for less
than one year. However, if the time for enforcement has been restricted in the bank guarantee for a
period not less than one year then in view of the amendment carried out in 2013, the same will be
valid and will not be subject to Section 28 of The Act.
We are conscious of the fact that in Exception 3 to Section 28, the expression ‘enforcing his rights’
has not been used, although the expression is used in Section 28 of the Act. In our opinion, looking
into the background and the necessity for introducing Exception 3 to Section 28 of the Contract Act,
any other interpretation does not merit justification. The only reasonable interpretation of Exception
3 which can be made is that Banks and Financial Institutions as defined in explanation to Exception 3
are now within their rights to restrict the time for enforcement.
Yet there is another school of thought on the interpretation to Exception 3. It has been debated
that Exception 3 can be interpreted to mean that the Legislature has now given an extended window
of at least one year to beneficiaries to invoke the bank guarantee even after the period of expiry of
the bank guarantee. We do not subscribe to this view. In our understanding, the correct view is that
banks and financial institutions are now within their rights to restrict the time for enforcement of the
claim in respect of a bank guarantee and the said time has to be a period of one year or more.
Whether our view is correct or the other view is correct will be determined as and when there is
any effective judicial pronouncement on this issue. Until such time, we conclude:
1. A bank guarantee can be invoked during the period stated in the guarantee. For the purpose of
invocation of the bank guarantee, the beneficiary can file the claim with the bank for payment and
upon receipt of such demand for payment the bank is obliged to pay;
2. In case the bank does not make payment upon receipt of a valid demand, the beneficiary shall
have legal recourse against the bank to initiate a lawsuit which can be filed within three years (30
years for government) from the date the cause of action arises (for example, from the date of
invocation of the guarantee);
3. In case the text of the bank guarantee provides for a claim period (which is filing of the claim
with the court), then (in view of the recent amendment) such claim period cannot be less than one
year from the date of expiry of guarantee;
4. In case a guarantee does not have a claim period then the legal recourse shall be as per point
(2) above.
5. In case there is a claim period of at least one year then the period available for filing a claim
with the court gets restricted (this is the recent amendment). ■

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REFERENCE MATERIALS
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conducts seminars on topical issues, general educational forums, and custom training for bankers, lawyers
and corporate financiers. All of these products are designed to assist the letter of credit professional with the
practical issues you face on a daily basis. Its newest and most popular reference materials include:
2018 SUPPLEMENT TO UCP600: TRADE BASED FINANCIAL
AN ANALYTICAL COMMENTARY CRIME COMPLIANCE
Drawing on recent ICC An in-depth look at how
Opinions and judicial decisions, specialists can
this Supplement updates monitor, detect,
the industry’s definitive and prevent
analysis of the UCP. instances of financial crime.
LC RULES & LAWS STANDBY AND DEMAND

CRITICAL TEXTS FOR GUARANTEE PRACTICE:
INDEPENDENT UNDERTAKINGS UNDERSTANDING UCP600,
Revised 7th edition contains ISP98, & URDG758
everything you need: Your all-in- Feel you know two of these
one reference guide for LCs and rule sets, but unsure about
guarantees. the third? The world’s only
comparison of all 3 will help!
2019 EDUCATIONAL CALENDAR
Annual Survey of Letter of Credit Law & Practice
AMERICAS: Tampa – 21-22 March 2019
The World’s HONG KONG: 13 July 2019
Premiere LC Event of the Year! SE ASIA: Singapore – 15-16 July 2019
CHINA: Shanghai – 20-21 July 2019
Guarantee & Standby Forum

World’s Only Event
SE ASIA: Singapore – 17 July 2019
for Interactive Discussion
of Guarantee & Standby Topics AMERICAS: New York – October 2019
Letter of Credit Law Summit

Full Day Focus on LC Practice, SE ASIA: Singapore – 18 July 2019
Forms, and Litigation Issues AMERICAS: New York – October 2019
Annual Trade Finance Compliance Conference

Confronting Topics at the Intersection MIDDLE EAST: Dubai – 12-13 March 2019
of Trade Finance & Compliance EUROPE: London – 16-17 May 2019
Additional 2019 events, dates, and locations are pending and will be announced. For the most current
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Volume 23, Number 5 May 2019

I n This Issue... 14 FEATURE

Published in partnership with BAFT

Indian Guarantee Law & Claim Periods

“If a bank guarantee is issued with a claim period of less than

In view of the foregoing, it will be a safer course in the interest

The relevant portion of law – Indian Contract Act, 1872 –

Section 28. Agreements in restraint of legal proceedings void.

May 2019 ■ Documentary Credit World 3

For other views on Indian bank guarantees, see p. 42.

Standard Chartered Agrees to Settlement in US, Fine in UK

4 Documentary Credit World ■ May 2019

IIBLP Asia Events Approaching

Hong Kong | 13 July

Guarantee & Standby Forum

Letter of Credit Law Summit

Annual Trade Finance Compliance Conference Returns to London

Additionally, Pottengal Mukundan, Director of the International Maritime Bureau, presented

6 Documentary Credit World ■ May 2019

OFAC Announces Settlements for Apparent US Sanctions Violations

May 2019 ■ Documentary Credit World 7

Serious Issue with Compliance Checks at Deutsche Bank

FELABAN Event to Feature Focus on Standbys and Guarantees

8 Documentary Credit World ■ May 2019

Changes to Germany’s Transparency Register?

Prague to Host Trade Finance Workshops

May 2019 ■ Documentary Credit World 9

Islamic Banking and Charter Party Bills of Lading

Answer: I will not explain what is a Murabaha Letter of

Now let us consider a Bill of Lading (B/L). A Marine B/L is a

10 Documentary Credit World ■ May 2019

May 2019 ■ Documentary Credit World 11

International Cards Co.

Prior History: International Cards Co. v. Mastercard International

Topics: Breach of Contract; Conversion; Proceeds; Use, as

Note: In 1999, International Cards Co. Ltd. (Applicant)

Applicant sued Beneficiary alleging breach of contract, breach

12 Documentary Credit World ■ May 2019

JFS Properties, Inc. v. SouthCrest Bank, N.A.

Topics: Independence; Standing; U.S. UCC 5-103; U.S. UCC 5-109

May 2019 ■ Documentary Credit World 13

SUMMARY OF APRIL 2019 ICC BANKING COMMISSION MEETING

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May 2019 ■ Documentary Credit World 15

Shifts in Supply Chain Patterns – Changes in manufacturing, sustainability, and demographics

16 Documentary Credit World ■ May 2019

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18 Documentary Credit World ■ May 2019

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22 Documentary Credit World ■ May 2019

USE OF NON-DOCUMENTARY CONDITIONS

Letters of credit sometimes

* HEI Zuqing is a Research Fellow with the Institute of Free Economic

May 2019 ■ Documentary Credit World 23

1. THE IMPACT OF INTERNATIONALIZATION OF TRANSNATIONAL COMMERCIAL LAW:

24 Documentary Credit World ■ May 2019

In view of these cases, an LC obligation is conditioned on presentation of documents and whether

May 2019 ■ Documentary Credit World 25

13. HOW TO GUARANTEE CONTRACTOR PERFORMANCE ON INTERNATIONAL CONSTRUCTION PROJECTS:

26 Documentary Credit World ■ May 2019

May 2019 ■ Documentary Credit World 27

A non-documentary condition could be converted into a documentary condition. Non-

Exp. Date: / 3-Digit Security Code: