Fortis Bank SA/NV

Fortis Bank SA/NV 

Fortis Bank SA/NV

Outline:  analysis of the judgment in the case of Fortis Bank SA/NV v
Indian Overseas Bank .

  1. Introduction: gives a history of the case and the judgment.
  2. Body:
  3. The reasoning applied by the judge to arrive at the ruling.
  4. Analysis of the law applied. 
  5. Examples of case studies where the same law was applied.
  6. Conclusion: a summary of the issues discussed above.
  7. Bibliography: a list of the references cited.

An analysis of the judgment in the Fortis Bank/Stemcor v Indian Overseas Bank case

Letters of credit have been in use for many years. There are two types of letters of credit: commercial letters of credit and stand by letters of credit. The purpose of commercial letters of credit is to ensure payment of goods in international trade.[1] Standby letters of credit are used to provide third party credit support.[2]Article 5 of the Uniform Commercial Code, applies to all types of letters of credit.  UCP set of rules have undergone several revisions to meet the demands that arise from transactions.[3]Following revision, UCP 600 was drawn up under the International Chamber of Commerce in 2006 and took effect in July 1, 2007.[4] It replaced UCP 500.[5] Its full name is 2007 Revision of Uniform Customs & Practice for Documentary Credits, UCP 600.[6]A letter of credit contains the independence principle. By the independence principle, payment is only done when all documents are received by the issuer.[7] This principle is found in article 4(a) and 5 of UCP 600. UCP 600 is only applicable where the both parties have agreed that is applicable.[8]  A number of issues have arisen from the interpretation and implementation of the set of rules.[9] However, with continued application and interpretation of UCP 600, the set of rules become clearer and clearer. One good example of a case that has contributed to the interpretation of UCP 600 is the Fortis Bank/Stemcor v Indian Overseas Bank.[10]

In August 2008, Stemcor signed five contracts for the sale of steel scrap to SESA in India.[11] Payment was to be by sight letter of credit (L/C) opened by a first class bank. This was advised by the first claimant bank in this case, Fortis. The applicant of the L/C was MSTC, a company that assisted SESA in doing the purchase. Indian Overseas Bank opened five letters of credit. These were subject to UCP600. Thereafter, IOB notified Fortis. Stemcor presented the relevant documents to Fortis including the bills of lading as was required. Fortis went ahead to make payments of letters of credit 1-3. Fortis forwarded the remaining two L/Cs to IOB. Market prices had fallen sharply by the time the shipment was done. For this reason, SESA declined to pay for the cargo. It then notified MSTC of discrepancies in the documents. As a result, IOB went ahead to reject the documents presented to it by Fortis. Thus, it refused to pay Fortis under letters of credit 1-3 or Stemcor under letters of credit 4-5. This forced Fortis and Stemcor to move to the Commercial Courts.[12]

Hamblen J held that IOB did not have any valid defense except for one point of discrepancy in the beneficiary’s consolidated certificate. The judge also decided that IOB had the responsibility to act in accordance with its statement on the notice with reasonable promptness. Failure to do this would trigger the preclusion rule that would require IOB to honor the letters of credit. IOB went ahead to appeal. The Court of Appeal gave the judgment ([2011] EWCA Civ 58)[13]that dismissed IOB’s claim. The court decision stood by the fact that sub-article 16 (c) of the UCP 600 gave a provision for what a bank ought to do, if it decides to reject the documents.[14] The provision states that the issuing bank must give a notice to the presenter. The notice should indicate that the bank is refusing to honor or negotiate, the discrepancy in respect to which the bank is refusing to honor or negotiate, the bank is holding the documents pending further instructions from the presenter, that the issuing bank is holding the documents until it receives a waiver from the presenter and accepts it or receives instructions from the presenter prior to agreeing to accept a waiver; or that the bank is returning the documents or that the bank is acting in accordance with the instructions previously received from the presenter. Based on this, the judge confirmed that IOB was in breach of the contract to Stemcor as it failed to return the documents to Stemcor. The limit of reasonable promptness was also defined. The period ought to be shorter than five banking days, i.e. the time taken to decide as to whether or not to return the documents. With reference to this case, the need for a quick return of documents is emphasized in Legal Matters.[15] The court determined that IOB returned the documents weeks later after having said that they had done so.[16]

With regard to L/Cs 1-3, the judge held that IOB acted in breach of the agreement between them and Fortis. Thus, it was obligated to reimburse Fortis. However, this did not extend to Stemcor. From article 7 (a) (ii) of UCP600, the issuing bank had the duty to honour the credit if there was a failure by the nominated bank to pay. Hence, once Fortis discharged its obligations to Stemcor, Indian Overseas Bank was not obligated to Stemcor.

Two causation issues were raised in the case. The first one dealt with Stemcor’s failure to establish on the balance of probabilities that had Indian Overseas Bank honoured the five letters of credit, SESA or MSTC would have paid for or taken the cargo. Thus, port and detention charges would not have been incurred. Secondly, Stemcor was seeking payment not on wrongful detention of the documents. Rather, their claim was based on failure to make payment. For this reason, the judge expressed doubts regarding an effective cause of the loss.

Further judgment saw the judge reject arguments brought forth by Indian Overseas Bank. The judge held that Stemcor did not have the documents of title in its possession and it could not assert any control over the goods. By asserting control over the goods, Stemcor would have lost its claim against IOB or SESA. The judge asserted the validity and fairness of the deals between Stemcor and the carrier. Indian Overseas Bank also argued that Stemcor was arguing repudiation.  However, the judge pointed out that it would be commercially unwise for Stemcor to adopt this proposal in light of the risks involved in the law. Based on this, Indian Overseas Bank failed to prove that Stemcor had breached its contract.

The judge’s conclusion didn’t express clearly whether Stemcor was expected to mitigate the loss. However, this aspect was implied in the judgment. This may be deemed to be contrary to the suggestion in by Gutterage and Megrah.[17] They suggest that the beneficiary isn’t obligated to mitigate the losses incurred in a transaction.

Further analysis of this case shows that Stemcor could have taken a different approach with regards to the letters of credit. Stemcor would have argued that there was wrongful detention of the documents by IOB. Moreover, Stemcor also has a basis to seek damages from SESA in relation to letters of credit 1-3. This may be based on the CFR sale contract.[18]

As mentioned earlier, the UCP 600 is subject to different interpretations. Nevertheless, the ruling made in this case acts as a precedent especially with regards to obligation of an issuing bank to return documents if there are any discrepancies within them.[19]

L/C Consultancy Services highlights some of the risks involved in a letter of credit transaction.[20] The applicants risk non delivery, exchange rate risk or goods delivered being of inferior quality. In this particular case, SESA declined to take the goods due to poor market prices following the delay by the banks.

In conclusion, this case highlights the importance of a timely response. Due to failure by Indian Overseas Bank to notify and send back the documents to Fortis in time, it was forced to reimburse the claiming bank. Also, payment is only done upon receipt of the letter of credit. In addition to this, the letters of credit carry much weight in determining whether one of the parties is paid or not.

BIBLIOGRAPHY

Book sources:

Andrle .P, ‘Ambiguities in the new UCP’, DC Insight, Vol 13, pp.17-18                 

Cheung, Louise, ‘Contract Law’,” Legal Matters” Summer 2011.

Commentary on UCP 600, International Chamber of Commerce. Paris, France: ICC Services, 2007.

Dolan, F. John, Letters of credit A.S.Pratt, 4th Ed., 2007, pp 1-31.

DPP Fortis Bank/Stemcor v Indian Overseas Bank,  [2011] EWCA, Civ 58.

Gutteridge & Mgrah, Law of Bankers’ Commercial Credits, 8th edn, 2001

Xiang Gao and Buckley Ross C., The Unique Jurisprudence of Letters of Credit: Its Origin and Sources, 4 SAN DIEGO INT’L L. J. 91 (2003).

Journals and other publications:

‘Current legal developments at IMO’, “Shipping & Trade Law”, Informal Law & Finance, 1-2 Bolt Court, London Vol.11 no. 5 June 2011, p.6

Gallagher,Jr.P. Daniel ; Brown, Michael J.; Parson, Robert“Fortis Bank/Stemcor v Indian 

Overseas Bank: Article 16 under scrutiny March 03, 2011.

Goode Roy, Guide to the ICC uniform rules for demand guarantees, International Chamber of Commerce, Publication No. 510, 1992

ICC, “International Standard Banking Practice for the Examination of Documents under Documentary Credits,” No. 681, 2007.

ICC, The Uniform Customs and Practice for Documentary Credits, 2007 Revision,

ICC Publication no. 600 (“UCP”)

 Nielsen Dr. Jens; Nielsen, Nicolai, Standby Letters of Credit and the ISP 98:

A European Perspective¸ 23 Banking & finance L. REV 163 (2001), 

WoodJeffrey S., “Drafting letters of credit: Basic issues under article 5 of the uniform commercial code, UCP 600, and ISP98”.The Banking Law Journal, Alexesolutions,inc. Feb 2008p.2

Web sources:

Fortis Bank and Stemcor UK Limited v Indian Overseas Bank, 20 Essex street, <file:///D:/case%20raising%20issue%20eviednce.htm>, (accessed 22 Nov 2011).

‘International terms of trade explained’ International letter of credit, <http://www.creditmanagementworld.com/letterofcredit/lcinternationalterms.html> 2010, (accessed on 22 Nov2011).

Letters of Credit’, Propery Law Company-Trade Finance, Practical Law Publishing Limited. 

<finance.practicallaw.com/topic0-103-1109>, 2010, (accessed on 22 Nov 2011)

 ‘Risks of letters of credit’, L/C Consultancy Services, http://www.letterofcredit.biz/Risks_in_Letters_of_Credit.html>, 2009, (accessed on 22 Nov 2011).

Royal Courts of Justice, Strand, London, WC2A 2LL, 31/01/2011.

UCP 600, L/C Consultancy Services, <http://www.letterofcredit.biz/UCP600.htm>,2011, (accessed 22 Nov 2011).


[1] Jeffrey S. Wood, “Drafting letters of credit: Basic issues under article 5 of the uniform commercial code, UCP 600, and ISP98”.The Banking Law Journal, ALEXeSOLUTIONS,INC. Feb 2008p.2

[2]Dr. Jens Nielsen and Nicolai Nielsen, Standby Letters of Credit and the ISP 98:

A European Perspective¸ 23 Banking & finance L. REV 163 (2001), 

[3]Roy Goode, Guide to the ICC uniform rules for demand guarantees,International Chamber of Commerce, Publication No. 510, 1992

[4] Commentary on UCP 600, International Chamber of Commerce. Paris, France: ICC Services, 2007

[5]Gao Xiang and Ross C. Buckley, The Unique Jurisprudence of Letters ofCredit: Its Origin and Sources, 4 SAN DIEGO INT’L L. J. 91 (2003).

[6]UCP 600, L/C Consultancy Services,<http://www.letterofcredit.biz/UCP600.htm>,2011, (accessed 22 Nov 2011)

[7]John F. Dolan, Letters of credit A.S.Pratt, 4th Ed., 2007, pp 1-31.

[8]“The Uniform Customs and Practice for Documentary Credits, 2007 Revision,

ICC Publication no. 600 (“UCP”)

[9]P,  Andrle, ‘Ambiguities in the new UCP’, DCInsight, vol. 13, pp.17-18

[10] DPP Fortis Bank/Stemcor v Indian Overseas Bank,  [2011] EWCA, Civ 58

[11] ‘Current legal developments at IMO’, Shipping & Trade Law, Informa Law & Finance, 1-2 Bolt Court, London Vol.11 no. 5 June 2011, p.6

[12]‘ Letters of Credit’, Propery Law Company-Trade Finance, Practical Law Publishing Limited. 

<finance.practicallaw.com/topic0-103-1109>, 2010, (accessed on 22 Nov 2011)

[13] Royal Courts of Justice, Strand, London, WC2A 2LL, 31/01/2011.

[14] “International Standard Banking Practice for the Examination of Documents under Documentary Credits,” ICC, no. 681, 2007.

[15]Louise Cheung, ‘Contract Law’,” Legal Matters” Summer 2011.

[16] Daniel P. Gallagher,Jr., Michael J. Brown, Robert Parson,“Fortis Bank/Stemcor v Indian Overseas Bank : Article 16 under scrutiny March 03, 2011.

[17] Gutteridge & Mgrah, Law of Bankers’ Commercial Credits, 8th edn, 2001

[18] ‘International terms of trade explained’ International letter of credit, <http://www.creditmanagementworld.com/letterofcredit/lcinternationalterms.html> 2010, (accessed on 22 Nov2011)

[19]Fortis Bank and Stemcor UK Limited v Indian Overseas Bank,20 Essex street, <file:///D:/case%20raising%20issue%20eviednce.htm>, (accessed 22 Nov 2011)

[20]‘ Risks of letters of credit’, L/C Consultancy Services,http://www.letterofcredit.biz/Risks_in_Letters_of_Credit.html>, 2009, ( accessed  22 Nov 2011).

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