INTRODUCTION
 
The Federal Court in Malayan Banking Berhad v Punjab National Bank [2022] 6 CLJ 1 held that the Court of Appeal was wrong to impose a duty on banks to examine beyond the face of the documents presented under a letter of credit (“LC”) transaction incorporating the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600 (“UCP-600”).
 
KEY POINTS

a)	Must give a Notice of Refusal to the negotiating bank in accordance with Article 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 Article 16(c) & (d) UCP-600? (“1st Question”)

 
Answers to the Questions of Law
 
The 1^st and 2^nd Questions
 
The Federal Court answered the 1^st and 2^nd Questions in the affirmative. The Federal Court considered the relevant rules in UCP-600 which bound both parties under the LC. Firstly, pursuant to Article 4, the LC is a separate transaction from the underlying contract between the buyer and the seller. Secondly, pursuant to Article 5, banks deal with documents instead of goods, services or performance to which the documents may relate. Thirdly, under Article 7(b), an issuing bank is irrevocably bound to honour when it issues the LC. Fourthly, pursuant to Article 7(c), the issuing bank’s undertaking to reimburse the nominated bank is independent of the issuing bank’s undertaking to the beneficiary.
 
On the question pertaining to the duty and obligation of the issuing bank and the nominated bank when faced with LC transactions, the Federal Court highlighted that according to Article 14(a) of UCP-600, a nominated bank and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether the documents appear on their face to constitute a complying presentation. Pursuant to Article 14(b), the nominated bank and issuing bank each have a maximum of 5 banking days to determine if a presentation is complying. If a nominated bank or the issuing bank decides to give a Notice of Refusal, it must comply with the matters set out in Article 16(c)(i), (ii), (iii), and (d). If the issuing bank fails to do so, it shall be precluded under Article 16(f) from claiming that the documents do not constitute a complying presentation.
 
The Federal Court criticised the decision of the Court of Appeal on two grounds. Firstly, the Court of Appeal was wrong in holding that the requirement of a Notice of Refusal under UCP-600 was not applicable where the documents presented are in breach of the fundamental terms of the LC. The Federal Court held that this is contrary to the express provision of UCP-600 and applied the well-settled principle in China New Era International Ltd v Bank of China (HK) Ltd & Ors [2010] 5 HKC 82 that Article 16 of UCP-600 imposes a strict obligation on the issuing bank to give a Notice of Refusal if they refuse to honour their reimbursement undertaking on the ground that the documents do not constitute a complying presentation.
 
Secondly, the Federal Court was also of the view that the Court of Appeal had erroneously conflated the issues of strict compliance with the terms of a LC with the standard for examination of documents under UCP-600. The standard of examination of documents presented under a LC is only for the bank examining a presentation to examine whether the documents appear on the face to constitute a complying presentation pursuant to Article 14(a) of UCP-600. The Federal Court applied the case of Gian Singh & Co Ltd v Banque de L’Indochine [1974-1976] SLR(R) 83 and decided that it is sufficient for banks “to examine documents with reasonable care to ascertain that they appear on the face to be in accordance with the terms and conditions of the credit.”
 
In any event, the Federal Court said that a cursory look at the bills of lading does not show the bills of lading were issued and signed by a freight forwarder and rejected Punjab Bank’s contention that those documents were freight forwarder’s bills of lading, and not ocean bills of lading, as a bare assertion and misconceived. Further, the Court agreed with the High Court that Maybank was justified in asserting that the bills of lading presented by the Seller appear on their face to constitute a complying presentation.
 
The 3^rd Question
 
The 3^rd Question was answered in the negative. This question arises from the Court of Appeal’s decision pertaining the manner of negotiation of the Documents by Maybank.
 
First and foremost, an issuing bank must give a single notice of refusal to the negotiating bank pursuant to Article 16 of UCP-600 if they want to refuse to honour on the ground of non-compliance with the terms of the LC. In this instance, Punjab Bank was precluded from raising the issue on the manner of negotiation of the Documents to avoid reimbursing Maybank as they had failed to do so in their Notice of Refusal.
 
The Federal Court added that the negotiating bank is fully entitled to determine the manner of negotiation of the Documents. The Federal Court applied the case of China New Era International Ltd v Bank of China (HK) Ltd & Ors which held that “the precise manner of negotiation of the documents must be a matter for the negotiating bank; hence if it wishes to make payment under the credit in anticipation (as in the instant case) of submission of a compliant document in lieu of one that is not compliant (vide the two initially discrepant cargo receipts) it does so at its own commercial risk…”. Hence, Maybank, in anticipation of receipt of a complete set of the original Documents is entitled to pay the Seller in advance.
 
It was also held that the manner of negotiation was irrelevant as Punjab Bank’s witness admitted at the trial that they received the original Documents from Maybank on 3 December 2011. Pursuant to Article 7(b), Punjab Bank is obliged to reimburse Maybank upon receipt of the original Documents.
 
The Federal Court also criticised the Court of Appeal’s decision that the payment by Maybank to the Seller of USD 1,983,765.65 was a separate loan transaction between Maybank and the Seller and to invoke an adverse inference against Maybank for failing to call the Seller as a witness. The High Court’s decision which held that Maybank paid the said sum to the Seller pursuant to negotiation of the Documents under the LC as contemplated under Article 2 of UCP-600 was correct. Therefore, Maybank need not call the Seller as a witness.
 
For the reasons stated above, the Federal Court allowed the appeal by Maybank.
 
CONCLUSION
 
In a nutshell, the apex court stressed the importance of strict compliance with UCP-600 which is a set of comprehensive rules governing LC transactions published by the International Chambers of Commerce to promote uniformity in LC practice worldwide.
 
This case is important as it shows that our apex court recognises that it is not commercially justifiable for financial institutions to go behind LC transactions which are governed by the UCP-600, as delays caused by doing so would severely undermine the efficacy of LCs in international trade.
 
Hence, the nature and extent of the duty of the negotiating bank in examining the documents produced under a letter of credit is only to do so with reasonable care to ascertain that they appear on the face to be a complying presentation.