Federal Court in Malaysia rules on issuing bank’s undertaking to reimburse negotiating bank
30 August 2022
Malayan Banking Berhad v Punjab National Bank  6 CLJ 1
In Malayan Banking Berhad v Punjab National Bank, the Federal Court in Malaysia ruled that Article 16 of the Uniform Customs and Practice for Documentary Credits (“UCP-600”) imposes a strict obligation on an issuing bank to give notice of refusal to the negotiating bank if it refuses to honour its reimbursement undertaking on the ground that the documents do not constitute a complying presentation.
Punjab National Bank (“PNB”) issued a letter of credit (“LC”) in favour of a buyer to finance the purchase of goods from a seller. The LC was conveyed by PNB to the Royal Bank of Scotland which forwarded the LC to Malayan Banking Berhad (“Maybank”). The terms of the LC were communicated by Maybank to the seller. The LC expressly incorporated the UCP-600.
Maybank, relying on the reimbursement undertaking, negotiated the documents and paid a sum of almost US$2 million to the seller under the LC. Maybank sought reimbursement from PNB of the sum paid to the seller. However, PNB refused, alleging discrepancy in the bills of lading presented under the LC.
The Court of Appeal set aside the decision of the High Court which was decided in favour of Maybank. Maybank filed an appeal to the Federal Court on the following questions of law:
- Where an issuing bank of an LC governed by the UCP-600 determines that documents presented do not constitute a complying presentation:
- whether the issuing bank must give notice to the negotiating bank in accordance with Articles 16(c) and 16(d) of the UCP-600, irrespective of the nature of the non-compliance; and
- if notice is not given in accordance with Articles 16(c) and 16(d) of the UCP-600, whether the issuing bank is precluded from claiming that the documents presented do not constitute a complying presentation, and is obligated to honour its reimbursement undertaking.
- Whether a negotiating bank is only required to examine if the documents appear on their face to constitute a complying presentation within the meaning of the UCP-600; and
- Where an LC governed by the UCP-600 expressly provides 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 LC.
Federal Court’s decision
In allowing the appeal, the Federal Court ruled as follows:
- Article 16 of the UCP-600 imposes a strict obligation on an issuing bank to give notice of refusal to the negotiating bank if it refuses to honour its reimbursement undertaking on the ground that the documents do not constitute a complying presentation.
- The bank examining the presentation is only required to examine whether the documents appear on the face to constitute a complying presentation. To insist that the bank should be concerned with whether the goods under the LC had been shipped or delivered to the buyer is contrary to the well-established rule that in LC transactions, banks deal with documents and not with goods.
- PNB’s sole reason for rejecting the documents was due to the alleged discrepancies. PNB also did not raise any issue on the manner of negotiation of the documents. In any case, this issue could not be raised as Maybank, as the negotiating bank, was fully entitled to determine the manner of the negotiation of documents and was fully entitled to pay the seller in advance in anticipation of receipt of the original documents.