Payment Instruments and Other Trade Documentation An ... · obligation) on presentation of...

Payment Instruments and Other Trade Documentation – An Overview and Some Current Issues

Presented by Simon Cook Partner, Sullivan & Worcester UK LLP 28 February 2019 New Broad Street House 35 New Broad Street London EC2M 1NH

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What will this talk cover?

Introduction and overview

› Issues/characteristics of payment instruments

› Other trade documentation

› Eg B/Ls, warehouse receipts, B/Es

Negotiable instrument vs contract receivables

E-regimes/fintech

Recent cases/ICC opinions

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Independence from underlying trade

To what extent might a future dispute between the buyer and seller in the underlying transaction prevent payment of the receivable?

Some payment instruments are more “independent” than others

› Bills of exchange, promissory notes and letters of credit create independent payment obligations

› Invoices issued pursuant to a commercial contract – the debtor may assert defences under the contract (e.g. set off, not the right quality of goods)

Solutions?

› Buyer accepts payment obligation as unconditional

› Recourse to the seller?

› Fintech – the “ecosystem” of platforms?

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Letters of Credit

Issues for documentary and standby

› The same?

UCP 600 and ISP 98 are still the current uniform rulebooks

› Both require unconditional payment upon “complying presentation”

Should issuing bank protect itself further?

› e.g. right not to pay

Risks for confirming banks

Fraud risk

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Documentary letters of credit and deferred payment undertakings

Characteristics

› Irrevocable undertaking to pay (or incur deferred payment obligation) on presentation of documents/claim

› Discharges payment obligation in underlying commercial contract

› Subject to uniform rules (e.g UCP 600/ISP98)

› Can be entered into on paper or electronically

Transferability

› Assignment of deferred payment obligation

› Transfer of draft accepted by issuing bank

Credit enhancement techniques

› Confirming bank (documentary letter of credit)

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Documentary Credit - Issuance

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Documentary Credit - Claim

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Letter of Credit – Recent cases

Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64

February Taurus obtained international arbitration award against SOMO ($8,716,477); heard in London but official seat in Baghdad

SOMO refused to honour the award or any part (despite participating in the arbitration)

Taurus applied to High Court for leave to enforce as a judgment under the Arbitration Act 1996 (Iraq not contracted to the New York Convention) and applied, without notice, for an interim third party debts order and for appointment of a receiver over debts payable by Crédit Agricole London Branch in relation to LCs they issued at the request of Shell following the purchase of crude oil by Shell from SOMO

The LCs were unconfirmed and subject to UCP600

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Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (continued)

Main issues that were decided by the High Court:

› Where should the situs of a debt owed by the issuing bank under an unconfirmed letter of credit under UCP 600 be?

› Under what circumstances ought a receivership order ought to be made

Court of Appeal :

› Bound by decision in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 – the situs of the debts owed by Crédit Agricole was the place of payment, i.e. New York, as opposed to the residence of the debtor, i.e. London

› Receivership order not granted because the connection between SOMO and the jurisdiction was tenuous and, if granted, would interfere with the Central Bank of Iraq’s collateral right

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Supreme Court

› Unanimous decision – Overruled decision in Power Curber – ruled the situs of the debt owned under unconfirmed LCs is where the issuing bank resides, i.e. London

› Majority decision – Receivership order restored (as ruled in the High Court). Lord Clarke held that:

“Since the situs of the debts was London, whereas Moore-Bick LJ [the Court of Appeal Lord Justice) had been bound to find that the situs was New York, it was open to the Supreme Court to consider the matter afresh” and

“International trade, and particularly the international oil trade, is conducted predominantly by means of letters of credit. London is one of the two major financial centres of the world and enormous numbers of letters of credit are issued by international banks from their London branches. It would have been entirely foreseeable by SOMO that a majority of the letters of credit against which they sold oil would be issued out of London and subject to English law. SOMO’s trade therefore involved a long term connection with the jurisdiction.”

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Supreme Court – Summary

The Supreme Court has overruled the unreasoned distinction for the situs of a debt owed under a LC decision in Power Curber and issued third party debts orders notwithstanding the collateral right of the Central Bank of Iraq under the LCs that payment would be made in a specific way

Interpreted the constraints to exercise the Court’s discretion, in a flexible manner, when considering if a receivership order should be issued, in a way that reflects the commercial reality

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Yuchai Dongte Special Purpose Automobile Company Limited v Suisse Credit Capital (2009) Limited (2018) – QBD High Court

Defendant, acting on it’s group’s instructions, sent a LC to a Chinese bank via SWIFT. The bank forwarded it onto the claimant, stating the defendant was the issuing bank. Claimant presented documents to another group company (the reimbursing bank under the LC). The group refused to pay and agreed a reduction in payment terms and cancellation of the LC

Second LC was drafted by the Group, issuer was SBOL (another group company). Defendant sent LC via SWIFT to another Chinese bank, who sent to claimant listing defendant as issuer. Claimant presented documents to SBOL. Group refused to pay due to discrepancies in documents. Claimant then sought payment from the defendant as issuer of this LC

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Yuchai Dongte Special Purpose Automobile Company Limited v Suisse Credit Capital (2009) Limited (2018) – QBD High Court

Suisse Credit Capital denied liability because:

1. Not the issuing bank;

2. The LC excluded the liability of an issuing bank under UCP 600; and

3. Argued estoppel by convention

High court held

› Extrinsic evidence could be relevant to LC – was held that the defendant was the issuer for the first LC, and there was no indication (no clear communication) that the issuer of the second LC would be different to the first

› The second LC contemplated that SBOL would pay as nominated bank. SBOL accepted documents and waived discrepancies where it became obliged to pay. Under UCP 600 the defendant was bound by SBOL’s waiver of the discrepancies in the documents and became liable to pay when the nominating bank did not

› There was no shared assumption that the defendant was not the issuer so no estoppel by convention

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Deutsche Bank AG, London Branch v CIMB Bank Berhad [2017] EWHC 1264 (Comm), [2017] All ER (D) 171

This case considers the rights and obligations that arise between an issuer of a LC and a confirming party that makes payment to a beneficiary

Cashcot Industries Pte bought cotton from Global Tradinglinks Limited (the beneficiary). Cashcot asked its bank (CIMB) to issue a series of LCs (UCP 600) to the beneficiary. Deutsche Bank was the confirming bank (relationship with the beneficiary)

Cashcot went into liquidation and the beneficiary was also in financial difficulty. Deutsche made payment by asserting a right of set off against the beneficiary’s loan liabilities

Deutsche claimed reimbursement for $10m value attributed because of the set off

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CIMB did not accept it was bound to reimburse, based on alleged discrepancies. CIMB wanted “strict proof” from Deutsche that it honoured the presentations under the LC and made a formal request to Deutsche for further information and for , amongst other things, the documents presented by the beneficiary prior to payment

Deutsche refused as a matter of principle – the issuing bank under a LC must accept on its face that a confirming bank has paid the beneficiary

Court was asked whether CIMB was entitled to ask for further information

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“the question being whether the confirming bank must have paid the beneficiary to have the right to reimbursement, or whether a statement to that effect is enough”

This point has not previously been considered at a binding court – leading textbooks supported CIMB and judge reluctant to construe UCP 600 in a manner that made an issuing’s banks obligation to reimburse a confirming bank first demand in nature

CIMB was entitled to further information from Deutsche, but warned that such requests should not be a fishing expedition in the hope of finding something that would allow it to refuse or delay its payment

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Promissory Notes and Bills of Exchange

Governed by Bills of Exchange Act 1882

A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer

A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer

An unconditional and independent payment obligation of the debtor in favour of the beneficiary

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The legal requirements (1)

Unconditional order or promise

“At 12 months I promise to pay A and B £500, to be held by them as collateral security for any moneys now owing to them by J.M., which they may be unable to recover on realising the securities they now hold and others which may be placed in their hands by him” (Robins v May (1839)

› Instruments payable on a contingency (e.g. I will pay subject to A putting me in funds) will not satisfy requirements

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In writing and signed by the drawer / maker (cont.)

› Physical only (see later)?

› What is the original instrument?

› How are endorsements added?

› How is the instrument presented for payment?

› Protesting?

› Double-selling

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Time for payment

› Likely to be unproblematic where on demand or fixed date

› Careful drafting needed where instrument payable at a “determinable future time” – if this relies on the occurrence of a specified event, this must be certain to happen

› The more certainty the better – for example, Court of Appeal held that a PN payable “on or before” a fixed date did not satisfy the requirements as to time of payment (Williamson v Rider [1963])

Sum certain

› Amount due under the instrument must be clear on its face

› Interest can be charged on the amount specified in the instrument provided (a) it is ascertainable and (b) the period that interest is payable for is certain

Fixed rate interest acceptable

Floating rate interest by reference to specified rate (e.g. LIBOR)?

› Default interest covered in the Act

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Negotiability

› Transferability and tradability

Can be transferred by delivery, or by endorsement and delivery

May be transferred without recourse

Parties may enter into separate agreement providing for some recourse to seller (for example, for breach of representation) – common practice in forfaiting arrangements

Tradable: secondary trading

› Holder in due course

Criteria?

What rights?

What if not a holder in due course?

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A couple of issues

› Governing law

Multiple

Silent

Express

Side letters?

› Authenticity of signatures

When bound

Agency

Forgery

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Promissory Notes – Recent case Golden Belt 1 Sukuk Company BSC(c) v BNP Paribas [2017] EWHC 3182 (Comm)

BNP Paribas acted as arranger, sole bookrunner and lead manager of a sukuk (Islamic financing – equivalent to a Sharia compliant Eurobond issue) to raise finance for Saad Trading (a Saudi Arabian company). Golden Belt was the SPV created to act as issuer of the certificates of $650 million

Most documents were under English law – a PN for $650 million (to protect investors if Saad defaulted) was issued in favour of Golden Belt governed by Saudi law

BNP Paribas co-ordinated signing arrangements for the PN with advice from English and Saudi counsel. Arrangements for execution changed several times and the bank did not ask for identity or contact details of the witnesses, and did not give them any instructions about the witnessing process or requirements

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Promissory Notes – Recent case

Golden Belt 1 Sukuk Company BSC(c) v BNP Paribas [2017] EWHC 3182 (Comm)

Golden Belt failed to pay under the sukuk certificates – the investors and Golden Belt claimed that BNP Paribas owed them a duty to take reasonable care that the promissory note was properly executed

By the time of trial it was apparent the PN had not been properly executed under Saudi law – expert evidence demonstrated that this required a handwritten signature and in this case the signature was laser-printed (although not apparent to naked eye) – therefore, witnesses could not have witnessed signing (by hand) as they had purported to do

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Court held BNP Paribas held a duty to investors (but not to Golden Belt) to take reasonable care to ensure the PN was properly executed and that it had breached this duty

Was reasonably foreseeable that if reasonable care was not taken, the investors would suffer loss

Investors entitled to recover damages between: 1) the recovery which they would have made if the promissory note had been valid; and 2) the recovery which they would in fact achieve

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Novel extension of the law in capital markets -before this case, it was generally thought that whilst there was a risk that an arranging bank may owe tortious duties to investors (which are typically addressed by disclaimers), that risk was thought to be quite low

For syndicated loans, although the duties, roles and disclaimers in loan facilities are different, this case indicates that reasonable care should be taken when arranging completions generally – this may result in a bank having to do more than what is legally required, particularly in certain jurisdictions or under specific circumstances

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Guarantees – payment and performance

What obligations are being guaranteed?

Ultimately guarantor will make a payment

Does URDG help or hinder?

› it has its place

Could guarantor’s obligation go beyond the primary obligor?

What is “first demand”

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Demand Guarantee

A demand guarantee (or demand bond) imposes a primary obligation on the issuer to pay the beneficiary on its first demand if the obligor fails to perform the contract

Independent of underlying contract and operates on its own terms

The obligation under a traditional guarantee is a secondary obligation (i.e. dependent on the beneficiary establishing the obligor is in breach of the underlying contract)

URDG 758 – ICC rules for demand guarantees – current version came into effect July 2010

Still not widely used and generally unpopular in market

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Demand Guarantee – Recent case

Tetronics (International) Ltd v HSBC Bank plc (BlueOak Arkansas LLC intervening) [2018] EWHC 201 (TCC)

Generally a court will not prevent a bank making a payment is respect of a call on a guarantee. Exception (as confirmed by Privy Council) is for fraud

BlueOak made a call on a guarantee provided by HSBC on behalf of Tetronics. The BlueOak Tetronic contract contained an arbitration clause. Tetronics subsequently applied for and obtained an ex parte injunction preventing HSBC making a payment in respect of the guarantee

Tetronics commenced arbitration proceedings against BlueOak, whilst BlueOak applied for the injunction against HSBC to be discharged

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Held that BlueOak had ignored “cogent and compelling” evidence of fraud and could not (honestly and in good faith) believe in the validity of the demand under the guarantee

HSBC were aware of the fraud (based on evidence provided) and therefore, the requirements for the fraud exception were satisfied

Tetronics argued that the injunction should be upheld, relying on evidence that suggested that a reimbursement request by HSBC would result in immediate insolvency of Tetronics. However, this evidence was inconsistent with what was provided in a related arbitration, where Tetronics has conceded that the shareholder’s would be able to make contributions to satisfy any reimbursement request from HSBC

The unavoidable insolvency would have favoured upholding the injunction, the absence of such a prospect meant the injunction was discharged

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This demonstrates that even when the fraud exception is satisfied, “extraordinary facts” are still required to satisfy a court that an injunction preventing payment under a guarantee by a bank is justified on the balance of convenience

Should be aware of the risk that any content in a private arbitration may be examined in parallel court proceedings, where the same/similar relief is sought from both arbitrator and court

Facts/evidence/documents relating to a confidential arbitration may fall within the scope of disclosure to a court when seeking injunctive relief from a court without notice to the respondent

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E-regimes - overview

Lots has been done, but…

What is needed to make them work?

› Effective legal regimes

› Physical infrastructure

› Joined up thinking

Current macro issues

› Lack of cohesive systems globally

› Lack of availability of systems throughout supply chain

› Legal regimes can be insufficient

› Contrasting views/support at global level

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E-regimes – some current developments Letters of credit

› eUCP version 2

Revised version?

Considering what?

› Electronic platforms

Voltron

Bolero

Open platforms

Documentary collections

› URC 522

The uniform rules on collection – latest version came into effect 1 January 1996

There is a supplement being considered in relation to issues around electronic presentation

Other?

› eBPO, eBoE, ePN, eBL etc

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E-regimes – continuing risks/issues (1)

Document of title not applicable everywhere

Not always a better option (availability, effect, expertise mismatch)

Number and ability of parties involved

Financer/corporate infrastructure and expertise

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E-regimes – continuing risks/issues (2)

Lack of clarity on who takes risk/responsibility

› Automation and fraud

› Data matching vs physical checks

› Inability to rely on rules by some parties

› Platform providers’ role

Legal regimes

› Can they support adequately?

› Example of English law issue…

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A note from the Law Society

Documents subject to a statutory requirement to be in writing and/or signed and/or underhand (e.g. statutory requirements for bills of exchange, guarantees or promissory notes):

› a contract executed using an electronic signature (and which may exist solely in electronic form) satisfies a statutory requirement to be in writing and/or signed and/or under hand

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Signatures and emails In Golden Ocean Group Limited v Salgaocar Mining Industries PVT

Ltd and another [2012] EWCA Civ 265 the Court of Appeal had to consider a chain of emails in which reference was made to the charter of a vessel being “fully guaranteed by” the Defendant

When the Claimant looked to recover from the Defendant under the purported guarantee, the Defendant claimed that the guarantee was unenforceable under s.4 Statute of Frauds 1677, which provides that guarantees must be in writing and signed

The CoA found that:

› the exchange of emails could lead to the conclusion of an agreement in writing for the purposes of the Statute

› the “signature” requirement was satisfied (even though the email in which the guarantee was concluded simply contained the sign-off “Guy” (being the Defendant's broker))

Prudent course of action may be to mark all email correspondence “subject to contract”

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Bills of Exchange (BoEs), Promissory Notes and Bills of Lading (B/Ls) (1)

Byles on Bills of Exchange and Cheques says that, for the purposes of the Bills of Exchange Act 1882, “in writing” cannot include something written electronically – our view differs to some degree:

› with BoEs, the difficulty is not whether they are “in writing”, but whether it is possible to determine the original for the purposes of it functioning as a document of title or negotiable instrument

› as such, we take the view that BoEs could not be created over email as at least two copies would exist at any time (i.e. inbox and outbox)

› Electronic BoEs could however exist within a secure platform that attached the “original” to a single user but it is difficult to see how an e-platform fits with the 1882 Act, which simply requires a BoE to be an original in writing (which can be on paper, parchment or linen, but not metal (!)) and signed in order to be negotiable

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E-promissory notes

› Gaining traction in a number of industries including trade

› Cannot have a negotiable e-PN due to the requirement for delivery (and delivery being defined as “transfer of possession…”)

UNCITRAL Model Law on Electronic Transferable Records – would solve issue if enacted and the Bills of Exchange Act 1882 was thereby disapplied. December 2018

› Bahrain became first state to enact model law but little done otherwise

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eB/Ls:

› as with BoEs, the difficulty with B/Ls is not whether they are “in writing”, but other issues:

whether it is possible to determine the original for the purposes of it functioning as a document of title or negotiable instrument

what if someone is not a member of the “club”

Can paper B/Ls from a “club” give the same rights as an original B/L would have done?

When is it dated?

How does this compete with the electronic system?

Can you create security over an eB/L or the printed paper version?

Will all relevant jurisdictions come to the same view on enforcement processes etc?

› ICC work in progress

In light of the above, and until a solution is found through the “clubs”, e-BoEs (and e-BLs) may need new laws

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A Few ICC Opinions

Rejection of presentation under letter of credit due to sanctions, regulatory reasons and internal policies

Deleted prohibitions in a letter of credit

Proof of honour or negotiation

Primacy of injunctions

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Simon Cook Partner

Simon Cook is a partner in the Trade & Export Finance Group in our London office. He has experience in a wide variety of banking and finance transactions, including in particular in relation to structured trade finance, trade finance, project finance, invoice discounting facilities and borrowing-base facilities in Africa, the Middle East, Asia and the CIS. His work in the structured trade area covers a range of pre-export and prepayment financings acting for both lenders and borrowers notably in oil, telecoms, soft commodities and metals sectors with particular experience in Africa and the Middle East.

Simon has worked and travelled extensively in Africa and the Middle East, having spent over three and a half years in Dubai. He has participated in a number of structured trade finance and project finance conferences and seminars throughout Europe, the Middle East and Africa, including speaking at conferences on PPP in South Africa; on project finance and structured trade finance at Afrexim's annual structured finance conferences in Egypt, Ghana, Zambia and South Africa; and at structured trade finance seminars and general finance in London, Paris, Lisbon, Geneva, Frankfurt, Amsterdam, South Africa, Zambia, Uganda, Ghana, Nairobi and Dubai.

Sullivan & Worcester UK LLP

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Awards & Recognition Trade Finance Global

Sullivan & Worcester were awarded “Best Trade Finance Law Firm” 2019 by Trade Finance Global

Chambers UK 2019

Chambers UK, 2019 ranks Sullivan & Worcester in its Commodities: Trade Finance (UK-wide) listing.

Partners Geoffrey Wynne and Simon Cook are Ranked Lawyers in Tier 1 and Tier 2 respectively by Chambers UK, 2019

The Legal 500 UK 2019

Sullivan & Worcester is ranked in Tier 1 for Trade Finance by The Legal 500 UK, 2019

Partners Geoffrey Wynne, Simon Cook and Mark Norris are listed as Leading Lawyers for Trade Finance by The Legal 500, UK 2019

Sullivan & Worcester is also ranked for Commercial Litigation by The Legal 500 UK, 2019

The Legal 500’s all new UK “Hall of Fame”

In 2018 Geoffrey Wynne was included in the Trade Finance section of the Legal 500’s all new UK “Hall of Fame”

TFR Fellowship Award 2017

Trade & Forfaiting Review (TFR) honoured Geoffrey Wynne with the TFR Fellowship Award in its 2017 TFR Excellence Awards

TFR “Best Law Firm in Trade Finance”

Trade & Forfaiting Review (TFR) named Sullivan & Worcester "Best Law Firm in Trade Finance" in its 2014, 2015 and 2016 TFR Excellence Awards

Global Trade Review “Best Trade Finance Law Firm”

Global Trade Review (GTR) named Sullivan & Worcester “Best Trade Finance Law Firm” in the GTR Leaders in Trade Awards 2016 and 2015

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Breakfast seminar dates for 2019

Thursday 28 February

Thursday 21 March

Thursday 25 April

Thursday 23 May

Thursday 20 June

Thursday 18 July

NO DATE IN AUGUST

Thursday 19 September

Thursday 17 October

Thursday 28 November

NO DATE IN DECEMBER

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www.sandw.com

Offices

Boston Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Tel: 617 338 2800 Fax: 617 338 2880

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New York Sullivan & Worcester LLP 1633 Broadway New York, NY 10019 Tel: 212 660 3000 Fax: 212 660 3001

Washington, D.C. Sullivan & Worcester LLP 1666 K Street, NW Washington, DC 20006 Tel: 202 775 1200 Fax: 202 293 2275

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