LC COURT CASES: Banco Santander SA Vs Banque Paribas (England 2000)

Banco Santander SA Vs Banque Paribas (England 2000)

“In a deferred payment credit, is the Issuing Bank obliged to reimburse the confirming bank, which chooses to discount the presented documents, but where fraud is discovered before the maturity date?”

Summary of facts
Issuing Bank - Banque Paribas (Paribas)
Confirming Bank - Banco Santander (Santander)
Beneficiary - Bayferm Ltd (Bayferm)

On 5 June 1998 Paribas issued a 180-day deferred payment LC for USD18.5 million (±10) and authorised Santander to confirm the LC. On 8 June 1998 Santander confirmed the LC and also offered to discount the export documents for Bayferm. On 9 June 1998, Bayferm accepted the discount offer in writing. On 15 June 1998 Bayferm presented compliant documents to Santander, which undertook to pay Bayferm USD20.3 million on 27 November 1998. On 16 June 1998 Santander credited the discounted sum of USD19.6 million to Bayferm’s bank account and LC proceeds were assigned to Santander. No notice of assignment was given by Santander to Paribas, but the documents were forwarded to Paribas on 17 June 1998. On 24 June 1998
Paribas informed Santander that the presented documents included false or forged documents. Santander then obtained a freezing order on Bayferm’s account, freezing about USD14 million. On 27 November 1998 Paribas refused Santander’s demand for payment on the grounds that Santander could have no better right to payment than Bayferm.

Key Issue
What precisely did Paribas request Santander to do under the relevant deferred payment LC? The Court had to determine a fundamental issue i.e. whether Santander was entitled to be reimbursed under the deferred payment Credit or Santander had not acted within the authority granted by Paribas, and would not have been entitled to be reimbursed by Paribas.

The Court stated
“The Issuing Bank has requested the Confirming Bank to give its own undertaking to pay on 27 November 1998, in addition to that, the Issuing Bank has promised to reimburse the Confirming Bank when it pays on that deferred payment undertking i.e. pay USD20.3 million on 27 November 1998. There is no request from Paribas that Santander should discount or give value for the documents prior to 27 November 1998 and albeit it may not be a breach of mandate for Santander to do so, it is upto Santander whether it does so or not. In my view the position is that Santander had no authority from Paribas to discount and did not seek it. It was something they were entitled to do on their own account. If they had not chosed to discount and waited
until 27 November, they would have had a defence and it is in those circumstances not open them to claim reimbursement from Paribas”. Based purely on UCP500, the above appears to be a logical conclusion. Had Santander not effected payment until the maturity date, it would have had the same defence of Paribas against Bayferm i.e. no obligation to pay on the grounds of fraud.

Comments
US position:
Interestingly, if the LC was subject to US Law, the decision could have been totally different from the English Court’s decision. The US Uniform Commercial Code provides for an exception to the fraud defence, and considers that the position of an assignee of a deferred payment credit is equivalent to that of a holder in due course of a negotiable instrument.