2024 Americas LC Law Summit: Executive Summary

Trends in Trade and Capital

The opening panel began with discussion of the matter of digital presentations. For banks, the chief risk is paying a fraudulent beneficiary. How are documents presented: as attachments via email or password-controlled data? If an email presentation is misdirected, what would be the presentation date and when would the period for examination start? One panelist said legal regimes have determined a presentation “counts”, even if sent to a former address, thus shifting risk to the applicant. If the wrong party is paid, then the bank would need to pay again in most cases.

The panel then considered the aptness of a bank casually calling the applicant to ask whether they were expecting a drawing to be made. On one hand, this could expose a fraudulent drawing; on the other hand, banks may not want to alert an applicant who may pressure the bank to dishonor the drawing. Since all email can be faked, banks should have well-worded reimbursement agreements and insert the account number and name of the beneficiary in the LC. For beneficiaries who do not want to give out their wire account instructions, they should consider setting up and designating a unique account into which a specific payment is to be made.

Panelists referenced the hacking of Norfund loan documents which led to a bank’s disbursement of USD millions to a Norfund imposter’s email account. Applicants can protect themselves in many ways. One highlighted by the panel is the applicant asking the beneficiary to send back to the bank a copy of the LC to ensure it matches up with what the applicant actually asked to be issued.

Turning to electronic bills of lading (eB/Ls), the issue is that few countries recognize the legality of eB/Ls and other electronic transferable records which renders their use problematic on a broad scale. An ICC effort to elucidate what constitutes a reliable system is underway, but some of the largest trading countries like Bangladesh and India are lagging behind in pursuing adoption of MLETR, the 2017 UNCITRAL Model Law on Electronic Transferable Records. eB/Ls can be utilized for trade so long as the jurisdictions of all involved parties recognize the legal enforceability of eB/Ls. In the US, UCC Article 12 (Controllable Electronic Records) provides default rules to govern transactions involving new technologies, but all jurisdictions need to be aligned with law based on or influenced by MLETR. Among most Latin American countries, there is no legal mechanism to endorse an eB/L.

Panelists referred delegates to the multi-phased experiment conducted by ICC Banking Commission Senior Technical Advisor David Meynell regarding the feasibility of using AI for producing ICC Opinions. They also took up discussion of the Banking Commission’s Technical Advisory Briefing (TAB) No. 9 on direct presentation of documents to an issuing bank; an action which poses an enormous risk of double payment. The Briefing advises that an issuing bank receiving documents should contact the nominated bank to inform them of the direct presentation.

One panelist did quibble with the Briefing’s remark that although “the examination of the presentation must be concluded by the close of the 5th banking day following the day of presentation, settlement to the presenter can be delayed pending receipt of a response from the nominated bank.” Overall, TAB No. 9 is very helpful and valuable to the industry, especially given how frequently LCs are issued that fail to specify where documents are to be presented.

The proposed Basel III Endgame rules would significantly increase capital requirements for the biggest financial institutions in the US, but a flood of comments swayed regulators to withdraw the proposal. As proposed, the rules which do not differentiate among credit products would have substantially raised the capital requirements for trade finance products despite considerable data evidencing their low risk nature. As of October, the sense was the rules would be re-proposed no sooner than mid-2025 at the earliest. Panelists also noted that the EU has more favorable capital rules for LCs such that US banks and companies could be disadvantaged if the proposed requirements are not adequately adjusted.

Key Legal Rulings

In the US case, Consolidated Electrical Distributors, Inc. v. United Renewable Energy Co., a US-based buyer obtained a standby LC to support its purchase of solar panels from a seller based in Taiwan. An underlying transaction dispute ensued in which seller/beneficiary challenged buyer/applicant’s right to cancel an unpaid portion of the order for goods already shipped. Anticipating a demand on the standby, buyer/applicant filed for a temporary restraining order (TRO) against the standby issuer to prevent payment. Apart from an unsupported claim of material fraud, Applicant argued that Taiwan is not a party to the Hague Convention thus evidencing irreparable harm absent the TRO. Nonetheless, this does not mean that recognition of a US judgment cannot be attained through methods of service of process other than the Hague Convention. Ultimately, the judge denied the motion for a TRO.          

In another injunction case, Experior Global Warehousing, LLC v. BTC III Hamilton DC LLC, the tenant/applicant of an LC backing lease obligations of a commercial warehouse sought a preliminary injunction. When tenant/applicant could not demonstrate a likelihood of success on its breach of contract claim or show irreparable harm, the injunction was denied. In discussing the case, one panelist noted that the judge closely examined the terms and conditions of the lease agreement to consider the merits of the motion and not to issue an injunction lightly. Panel members found it remarkable that the court’s analysis contained no reference to US UCC Section 5-109 (Fraud and Forgery).

Süd Family Ltd. v. Otto Baum Co. involved alleged wrongful draws on a standby LC posted as supersedeas which led to claims of fraud, conversion, and breach of warranty under US UCC Section 5-110 (Warranties). Panelists walked delegates through the court’s rulings, dismissing each of the three claims. First, the conversion claim was not properly pled because the funds drawn under the LC did not belong to the applicant and were not under its control. The court then disregarded the fraud claim because the applicant alleged false statements made by beneficiary to issuing bank, but cited no false statement upon which it reasonably relied. One panelist suggested this claim was akin to trying to fit a round peg into a square hole. While the third claim of breach of warranty got a little closer, it too failed. The court said there were no damages because funds drawn were returned. A claim for attorney fees against the applicant under UCC Section 5-111 could be decided in 2025.

Front Row Motorsports Inc. v. DiSeveria was a court order providing for issuance of a standby LC as security for a judgment pending appeal. After outlining features of the supersedeas LC arrangement approved by the court, the panel reviewed key aspects of supersedeas LCs which may be approved in lieu of an appeal bond. Panelists noted that some of the largest LCs ever issued are supersedeas credits which are mainly between plaintiffs and defendants. Parties will want to ensure that a final, non-appealable judgment is what triggers the drawing. As for the possibility of credit downgrades, it is recommended they are addressed upfront in the underlying transaction.                                  

World Fuel Services, Inc. v. First Service Bank was a jurisdiction case involving a Texas corporation headquartered in Florida (beneficiary) extending credit to a gas station operator in Arkansas (applicant) which had an Arkansas-based bank issue a standby LC to back its purchase of products and to make improvements. After beneficiary presented a complying draw and issuer refused to pay, beneficiary sued issuer in Florida, alleging wrongful dishonor and breach of contract. In a motion to dismiss, Issuer contested jurisdiction.

The court stated a two-part test for exercising personal jurisdiction over a non-resident. It must: (1) satisfy Florida’s long-arm statute; and (2) be consistent with the requirements of the Fourteenth Amendment’s Due Process Clause. Beneficiary argued that issuer engaged in Florida business activity when it issued the LC, but the court said Florida law requires “something more” than a “one-off”. Panelists then drew attention to how infrequently banks insert forum selection clauses in their LCs. For many banks, this is done “on request” of their customer. Some panelists recommended banks ensure that they secure applicant approval of choice of law and choice of forum provisions from the outset.

One specialist noted that banks are unwisely putting such provisions in “Additional Conditions”, but added that SWIFT is adjusting to fix. Where a party prohibits an issuing bank from specifying governing law, governing law will be the issuer’s jurisdiction.

Sanctions & Fraud

The panel reviewed recent developments in several high profile court cases dealing with economic sanctions and fraud claims. The 2023 English High Court decision in Celestial Aviation Services Ltd. v. UniCredit Bank, London Branch upset many industry specialists. The case involved a series of USD-denominated standbys issued by a Russian bank on behalf of Russian companies leasing aircraft from Irish companies and the standbys were confirmed by a German bank’s London branch. The trial court decided that claims were independent of the underlying transaction between beneficiaries and issuer, UK and US law were not applicable, and no sanctions prohibited payment by the confirming bank.

On appeal, the court noted the importance of the independence principle and panelists highlighted key wording from the decision: “The claim on the letters of credit was a claim by the [Beneficiaries] against [Confirming Bank], pursuant to an obligation which had been undertaken by [Confirming Bank] wholly independently from any of the other elements of the transaction. Whilst a letter of credit transaction involves various interconnected strands, those strands all involve independent contractual obligations.” The appellate court, however, reversed the decision regarding the applicability of UK law as the sanctions regulations targeting Russia were broad enough to capture the aircraft leases. As for lessons learned, panelists suggested that banks thoroughly review possible limitations on their confirmations that could bind them and carefully consider use of sanctions clauses for confirming banks.        

In Kuvera Resources Pte Ltd. v. JPMorgan Chase Bank, N.A., an LC beneficiary sued a confirming bank that returned complying documents, citing the sanctions clause included in its confirmation. During its sanctions screening, confirming bank determined that the vessel on which goods were shipped was “likely” within the scope of US sanctions and justified its decision not pay due to an unresolved possibility that the vessel may fall under the “any applicable restriction” portion of the sanctions clause.

The Singapore trial court decided that the sanctions clause was valid, however the Singapore Court of Appeal reversed, concluding that the confirming bank could pay but did not due to internal policies. In its reversal, the appellate court said confirming bank’s “approach is not permissible as it is not in accordance with the terms of the Sanctions Clause.” The court awarded damages to beneficiary, including refund of confirmation charges. One panelist labelled the outcome a “good loss” for the confirming bank as “anything is better than an OFAC violation”. Among the lessons learned, banks must fully understand the scope of their sanctions clauses and have sufficient evidence that a payment would involve a sanctioned country, person, entity, or vessel.         

In Banque De Commerce Et De Placements S.A. v. China Aviation Oil (Singapore) Corp., six parties were involved in a dispute centering around “circular trade transactions” of gasoil. Among its terms, the LC stipulated that in the event original bills of lading were unavailable at the time of presentation, the seller/beneficiary could present in lieu of the B/Ls a letter of indemnity (LOI) in a form prescribed by the LC. After the beneficiary drew on the LC by presenting an LOI and other required documents to the confirming bank which forwarded the documents to the issuer, issuer paid the amount drawn and caused the confirming bank to then honor beneficiary’s drawing.

Thereafter when the issuer could not recover its amount paid under the LC due to applicant’s insolvency and suspected that it had financed a “sham or fraudulent transaction”, issuer sued beneficiary to recover the LC proceeds. Ultimately, the High Court of Singapore determined that there was no evidence that the underlying contract was fraudulent.

The panel steered attention to another Singapore case, Inter-Pacific Petroleum Pte Ltd v. Goh Jin Hian, to point out that company directors can be held liable for breaches of professional duty. Inter-Pacific Petroleum, a company in insolvent liquidation, brought claims against Goh, its former director. Goh was found liable to pay over USD 146 million in compensation for losses the company suffered after borrowing large sums from banks on the pretence of financing commercial transactions which were shams.

Although Goh was not a direct perpetrator of the fraud itself, the Court held that he was still responsible for its “disastrous consequences”. For one panelist, the case sends the message that a director cannot “put their head in the sand” and simply rely on delegating their functions to management. Rather, directors need to be continuously aware of any “red flags” and seek appropriate legal and financial advice early on to navigate financial and operational difficulties.

The panel also addressed ICC Opinion TA942rev (July 2024) that involved a demand under a URDG758 guarantee by a beneficiary via its bank based in a country sanctioned after issuance of the guarantee and the sanctions were applicable to the guarantor. Among its conditions, the guarantee required beneficiary’s bank to confirm that the beneficiary’s signature on their payment request was authentic.

Although the requirement did not mandate that the demand and signature confirmation be made by an authenticated SWIFT message, the guarantor relied on URDG758 Article 14(c) that the demand received by courier service and beneficiary bank’s unauthenticated SWIFT message did not constitute the final demand. On this point, the ICC Opinion determined that Article 14(c) does not apply as the guarantee provided for a written demand. As regards sanctions, the ICC reiterated that all parties must follow applicable mandatory law.        

Real Estate Standbys

The panel began by stating some of the reasons LCs are used: as pre-payment; security deposit; or cash collateral. If a tenant goes bankrupt, cash is property of the estate so a landlord would prefer an LC. For commercial leases, LCs often get categorized as security deposits and issuing banks typically next hear when they are to pay, told not to pay, or when a drawing is going to happen. The panel considered some recent lease provisions they have seen. Landlords have striven to structure provisions such that LCs will not be treated as a security deposit and will not be subject to security deposit law.

Landlords may ask for a 12-month security deposit and a six-month LC. In bankruptcy cases, a court will first calculate the cap on tenant damages, then there could be claw-back. To safeguard their interests and classify LCs away from rent, a landlord could require an LC for broker’s fees instead of it being a backstop for rental payments. Panelists also discussed whether such LCs would be categorized as performance standbys or financial standbys. In considering what appetite tenants will have for LC fees, panelists referenced Redback Networks, Inc. v. Mayan Networks Corp., a 2004 case which determined the financial standby in question to be in the nature of a security deposit and should be treated as such for purposes of the cap on allowed damages for future rent under US Bankruptcy Code.

Following the decision, some California banks ceased issuing LCs for tenants at all. What about banks issuing LCs that are larger than the cap? Some panelists said this was done in the early 2000s, then the practice faded. Landlords became less aggressive and banks less vigilant. At present, panelists noted this is not a landlords’ market but very much a tenants’ market.                

Before concluding, the panel fielded a question about dealing with a residential apartment building whereby 95% of tenants pay on time and 5% do not. One panelist suggested that if the amounts are high enough, an LC could be structured in a way to make it happen.    

ISP98: Influencing the Next Generation

Observing the 25^th anniversary year since ISP98 came into existence, panelists reviewed key cases impacting standby practice and areas where the rules could evolve or change to keep up with trends.   

In BasicNet S.p.A. v. CFP Services. Ltd. (2014), a non-bank issuer of an ISP98 standby refused to pay when the wording of the beneficiary’s draw did not exactly match up with a standby requirement. On appeal, the New York court decided in favor of beneficiary and determined that ambiguous presentment requirements are construed against the issuer. The judge correctly cited ISP98 Rule 4.09 and gave great respect to the rules. Commenting further on the perils of ambiguity for issuers, another panelist urged bankers to carefully review wording provided by applicants. Once an LC is issued, if an applicant complains or pressures the issuer to dishonor a complying presentation, the bank pays and is entitled to reimbursement. Said one banker: “We don’t have extended conversations.”        

The 2000 case, Nissho Iwai Europe plc v. Korea First Bank, appealed in 2002, illustrates the vital importance of proper wording of an LC. After applicant missed a payment, beneficiary drew down on the LC that “shall be revolved and reinstated every three months within the period of validity” and issuer paid the amount of that installment as demanded. Korean authorities, which controlled the issuer, informed the beneficiary that it interpreted the LC to require reimbursement by applicant before further payments were due. When the beneficiary made another drawing, issuer refused to pay, claiming that it had not been reimbursed by the applicant for the previous payment. Beneficiary sued for wrongful dishonor.

Deciding in favor of beneficiary, the court determined that the standby’s wording provided that it revolves and is reinstated automatically and is not subject to replenishment by the applicant. Although the standby was issued subject to UCP, the court referenced ISP98 Rule 1.10 that the term “revolving” has no single accepted meaning and its meaning should be derived from the context in which the term in used. Nissho Iwai is thought to be the first judicial recognition of ISP98 and first interpretation of the rules. How could the issuer have been protected? It could have inserted a maximum aggregate amount into the standby and if it wanted conditions other than the plain language, they needed to be so stated.

The panel then briefly referenced Natixis Funding Corp. v. GenOn Mid-Atlantic, LLC (2020) which also featured a terrible misstep by an issuer. Natixis Bank issued 11 LCs to 11 beneficiaries and each LC had a schedule on which they could be drawn. After the bank paid on a first set of drawings, it refused to pay on subsequent drawings, claiming that it did not have to pay more. The bank later changed its argument to claim it had erroneously drafted the LCs so that they could be drawn on in the total amount of USD 286 million when the total should have been USD 130 million and that the obvious drafting error was known to the beneficiaries. The judge rejected the bank’s claim that it had made a unilateral mistake by failing to include an aggregate USD 130 million cap across the LCs, holding that each beneficiary was entitled to enforce its individual LC as written.

In Continental Casualty Co. v. SouthTrust Bank (2006) the Supreme Court of Alabama determined that a required draft need not contain the beneficiary’s address unless the standby expressly required the address be included in the draft. Panelists stated their contention there is no need to have drafts under standbys. Following the Continental Casualty decision, James Byrne commented on the issuer’s unstated expectation that the draft required the beneficiary’s address: “This case provides an object lesson that not all ‘practices’ are reasonable and that banks cannot expect courts to rubber stamp their peculiar notions about implied LC terms. For standbys, the good news is that such nonsense is not acceptable even under the UCP. There is no room whatsoever for such an argument under ISP98 although a future revision may do well to codify this result.”       

In a recently-decided case, Shinetec (Australia) Pty Ltd v. The Gosford Pty Ltd (2024), riddled and bogged down with civil procedure, the New South Wales (Australia) Court of Appeal dismissed standby applicant’s appeal of claims against beneficiary. One day before expiry of the ISP98 standby, receivers of the insolvent beneficiary presented a demand signed on behalf of beneficiary to issuer, Bank of China, for the full amount of the standby. Suit was filed in Australia to enjoin the receivers from pursuing their draw as well as in China against the issuer to prevent it from honoring the draw.  A temporary injunction was obtained in China.

Among its findings, the Australian Appeals Court determined that ISP98 Rules 6.11-6.13 on transfer by operation of law did not apply because the demand was made by the named beneficiary through its receivers and was supported by advising bank authentication. In discussion, panelists stated that the Australian courts did an excellent job on addressing the applicability of the rules and the extent to which the ISP98 Official Commentary can be used to construe the ISP98 rules.

ISP98 Official Commentary

Rule by rule analysis, comparison, and recommendations for the ISP

Read it Here

ANZ Manila Branch v. China National Electric Engineering Co. (2023) involved demands by a counter standby beneficiary which did not constitute fraud and did not excuse counter standby issuer from payment. In this case from China, the court discussed how it views a standby subject to ISP98 and governed by the PRC Independent Guarantee Provisions. Because China does not have standby law, panelists noted that trade finance experts in China have conflicting viewpoints on how standbys should be categorized. Some legal experts insist that a Chinese court should characterize a standby as a letter of credit and apply the PRC LC Rules as governing law, while other contend a standby should be treated as an independent guarantee and governed by the PRC Independent Guarantee Provisions. In this case, the court said the standby functions as a demand guarantee and is governed by the PRC Independent Guarantee Provisions.      

Supply Chain & Receivables Finance

Given the steady emergence of supply chain finance, specialists need to be familiar with how these financing arrangements operate. Because some small suppliers do not function on 90-day payment terms, they take their promise to pay to a bank which agrees to take it as an account receivable. The panel discussed supply chain finance via an electronic platform which can serve as a real-time clearing house for the purchase and sale of receivables on a discounted basis. After a buyer uploads invoices to the platform which may be bank-owned or operated by a fin tech, a supplier selects invoices for which it wants early payment and sells the invoices at a discount. The bank then accepts the early payment requests and pays the supplier directly the discounted invoice amount. The buyer pays the full invoice amount to the bank. For any unpaid amount, a multilateral or other third party can provide the bank a guarantee or risk participation coverage.

The panel then discussed considerations regarding whether banks should treat such supply chain finance operation as a treasury/trade/LC arrangement or as a loan. It will vary based on jurisdiction. As a bank’s payment source is the buyer, banks want to make sure the payable would not go to the estate of the bankrupt seller. Because the payment sidesteps the seller, it is considered a “true sale” and there are certain rules to determine that the true sale actually occurred. A panelist added that accounting requirements commonly drive the need for a true sale and will often necessitate a legal opinion to assert it is a true sale for its proper accounting.

Other commenters stressed the importance of banks knowing what engagements they are dealing with in order to obtain the correct insurance. In addressing risks and problems, panelists noted instances of double invoicing and suppliers resorting to fake invoices during lean times with the intention of “catching up” eventually. In Hong Kong, heavy KYC requirements make it difficult to do certain types of SCF.

Next, the panel briefly turned to inventory finance programs. For example, an intermediary would purchase carburetors before an auto manufacturer needs them and the intermediary charges a tolling fee. It is relatively risk-free, so the profit margins are low. Under the arrangement, a bank takes a lien on the inventory, but problems can arise when banks do so without checks on the inventory.

Ask the Experts

In a concluding Q&A session, one delegate asked about LC text imposed by a US state government whereby the credit is subject to UCP600 except Article 38(c). If meant to be a transferrable credit, one panelist noted that the applicant should certainly be informed that if the credit is transferred, they would be agreeing to pay the fees. Another commenter cited UCP600 Article 38(b) wording that a transferrable credit means a credit that specifically states it is “transferable”. With that in mind, if the credit had no indication it was transferrable, the commenter said they would ignore the omission of Article 38(c) and not transfer the credit. Another panelist reminded that anytime a sub-article is excluded, it creates a void and should be replaced with some other provision.

Another delegate explained their bank is receiving proposed standby wording that the bank “waives all rights of objection and defense” and “except only in clear case of fraud, no party shall restrain the bank from making payment under this bond on any other ground” and “the bank’s obligation shall not be discharged, including any other provision of statute or law”. The beneficiary wants this LC to be transferrable and assignable without the bank’s consent, and there’s no sanctions clause. Experts said they would forcefully push back against requests to issue such a credit.

As a would-be advising bank, another delegate said their financial institution is consistently being asked by issuing banks in Europe to validate beneficiary signatures; some wanting the advising bank to certify the signature is binding on the beneficiary. The institution is adamant it will not do so and sends back the credit. Additionally, some issuing banks are requiring that draws be presented through the advising bank, or another bank, stating that any draw presented by beneficiary directly to them, as issuing bank, will not be honored. Experts suggested that it could be done by modifying UCP accordingly and under sensible circumstances, but would be extraordinary.  

The banker indicated these trends first emerged out of Asia and now European banks are increasingly inserting similar requirements in their LCs. The commenter suggested these practices should be discouraged and said it would be desirable if the ICC Banking Commission would offer guidance.