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2022 MarsdenLR 2788
FEDERAL COURT PUTRAJAYA
MALAYAN BANKING BERHAD – Appellant
Versus
PUNJAB NATIONAL BANK – Respondent
[Civil Appeal No: 02(f)-75-11-2020(W)]
Issuing banks must issue a notice of refusal to avoid reimbursement obligations under Article 16 of UCP-600; failure to do so binds them to reimburse for compliant documents.
Headnote:(A) Uniform Customs and Practice for Documentary Credits, 2007 - Articles 4, 5, 7(b), 7(c), 14, 16 - This appeal concerns the obligations under a letter of credit where the issuing bank claims non-compliance with document presentation. The High Court originally ruled in favor of the negotiating bank, but the Court of Appeal set aside the decision. (Para 4)
(B) Ambit of Notices - An issuing bank must adhere to the requirement of providing notice of refusal to avoid reimbursement obligations cited under Article 16, failing which they are bound to honor their reimbursement commitment. (Para 26)
Facts of the case: Maybank claimed reimbursement from Punjab Bank under a letter of credit after paying the seller, contingent on the documents presented being compliant. Punjab Bank’s refusal was based on allegations of discrepancies in the documentation presented. (Paras 2-3)
Findings of Court: The Court upheld that Punjab Bank must honor the reimbursement obligation as the required notice of refusal had not been provided, and the essential terms of the credit were complied with. (Paras 34-35)
Issues: Key issues included the validity of the notice of refusal, the standard for document examination under a letter of credit, and whether the manner of negotiation affects reimbursement obligations. (Paras 3, 20)
Ratio Decidendi: The court concluded that strict compliance with Article 16 of UCP-600 is essential, whereby an issuing bank is precluded from disputing compliance of documents if they fail to issue a timely and proper notice of refusal. (Paras 26, 32)
Result: The appeal was allowed, restoring the High Court's judgment with costs. (Paras 41)
JUDGMENT
[1] This appeal concerns an issue of some importance to the banking industry. The primary question for our consideration is this: under what circumstances can a bank issuing a letter of credit avoid its obligation to reimburse the negotiating bank. A further inquiry which must follow is the nature and extent of the duty of the negotiating bank in examining the documents produced under a letter of credit. In a nutshell, therefore, this appeal turns on issues concerning letter of credit transactions and the rights and obligations of the parties involved.
[2] In the present case, the appellant ("Maybank") commenced an action against the respondent ("Punjab Bank") for reimbursement of the sum paid under a letter of credit issued by Punjab Bank. After a full trial, the High Court on 13 August 2018 entered judgment against Punjab Bank for the sum of USD1,983,765.65 together with interest at 5% per annum until date of full payment. On 18 June 2020, the Court of Appeal allowed Punjab Bank's appeal and set aside the High Court judgment.
[3] Maybank was, however, successful in obtaining leave of this Court to file an appeal on the following questions of law:
Question 1:
Where an issuing bank of a letter of credit governed by UCP-600 determines documents presented do not constitute a complying presentation, whether the issuing bank-
(a) Must give notice to the negotiating bank in accordance with art 16(c) & (d) UCP-600, irrespective of the nature of the non-compliance;
(b) Is precluded from claiming the documents presented do not constitute a complying presentation, and obliged to honour their reimbursement undertaking, if notice is not given in accordance with art 16(c) & (d) UCP-600?
(Question 1 - Notice of Refusal)
Question 2:
In determining whether documents presented under a letter of credit governed by UCP-600 constitute a complying presentation, whether a negotiating bank is only required to examine whether or not the documents appear on their face to constitute a complying presentation within the meaning of UCP-600?
(Question 2 - Standard for examination of documents presented under letter of credit)
Question 3:
Where a letter of credit governed by UCP-600 expressly provides it is available for negotiation by any bank in Malaysia, whether an issuing bank can avoid its obligation to reimburse the negotiating bank on grounds not stated in the notice of refusal, and which relate to the manner of negotiation of the documents presented under the letter of credit?
(Third Question - Grounds for refusal to reimburse on a letter of credit)
[4] The appeal was heard on 22 September 2021. After considering the submissions put forward by the parties, we came to the unanimous view that the appeal should be allowed. The order of the Court of Appeal was accordingly set aside and the order of the High Court was restored with costs. We had indicated to the parties that a full judgment will be prepared in due course. These are now our reasons for our decision.
The Salient Facts
[5] The salient facts leading to the commencement of the action in the High Court are well stated in the judgments of the courts below and by the parties in their submissions. For the purposes of the present appeal, it will suffice for the relevant facts to be restated as follows.
[6] On or around 18 November 2011, Punjab Bank, at the request of Sara International Limited ("Buyer"), issued the Letter of Credit ("LC") in favour of SIMS Copper Sdn Bhd ("Seller") to finance the purchase of goods by the Buyer from the Seller. The LC was conveyed by Punjab Bank through a SWIFT message (a messaging service provided by the Society for Worldwide Interbank Financial Telecommunication) dated 18 November 2011 to the Royal Bank of Scotland ("RBS"), which was forwarded by RBS to Maybank on 22 November 2011. The terms of the LC were duly communicated by Maybank to the Seller.
[7] The terms of the LC inter alia expressly provided:
(a) It is irrevocable and governed by t
