Arbitrator: B. van Marwijk Kooy (sole arbitrator)
Parties: Claimant: Spanish Company (agent)
Defendant: Kuwaiti Bank
Published: not (yet) published
Subject matter: - refusal to take delivery
- definition and interpretation of irrevocable credit
The Claimant, acting as agent for another Spanish company, had sold a quantity of food products to a Kuwaiti company. In return, the Kuwaiti company had opened at its Bank, on June 1, 1978, an irrevocable and transferable credit for the amount of US $ 76,244.00. The credit was in favour of Claimant's principal and was to be effectuated through a Spanish bank.
Shipment of the products was to be in two consignments with an interval of about 20 days, the last of which was to take place not later than September 20, 1978. The payment was also to be in two instalments. It concerned a C & F transaction, and the Uniform Customs and Practices for Documentary Credits (1974 Revision) of the ICC were to apply to the credit.
The conditions of the credit were, firstly, that the Spanish bank would make the payments against a complete set of clean shipped on board bills of lading, evidencing the shipment. Secondly, the Spanish bank would wait for the authorization of Defendant, which would be issued after notification by the Kuwaiti buyer that the goods had been received by them and had been approved by the Port of Kuwait Health Authorities.
Without objection by the beneficiaries, Defendant, on September 30, 1978, amended the conditions such that Defendant would issue its authorization within 75 days from the date of the bill of lading, "provided goods have been received by opener and same are approved by Kuwait Municipality Health Affairs Section of Govt. of Kuwait."
On November 25, 1978, the Spanish bank sent the documents for the second consignment to Defendant who refused, arguing that the interval between the two shipments had been longer than the stipulated 20 days. The Spanish bank rejected this.
Thereupon, the Kuwaiti buyer was persuaded by Defendant to accept this irregularity, but still awaited the approval of the goods by the Kuwaiti Ministry of Health to whom they had applied for examination.
Two days later, on February 13, 1979, Defendant announced that the Kuwaiti buyer had refused the goods because the Port of Kuwait Health Authorities had issued a certificate stating that the goods would be fit for human consumption for only two more months.
The Spanish bank argued that the Health Authority, in its certificate, had not rejected the goods. Defendant persisted, arguing that the goods had not been received by the Kuwaiti buyer, which was later, on August 27, 1979, further explained by the statement that "according to normal practice foodstuff must be liable for storage for twelve months".
Claimant, in the arbitration procedure, stated that Defendant had wrongly refused the documents, and demanded payment of US $ 38.112 plus annual interest of 13% as of February 5, 1979.
The arbitrator then defined the essence of an irrevocable credit, and how it should be interpreted:
"An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the terms and conditions of the credit are complied with: to pay or that payment will be made, if the credit provides for payment (article 3 Uniform Customs and Practice for Documentary Credits).
"The essence of this institution is the certainty for the benefeciary that if he presents the correct documents he will recieve payment.
"Another essence of a documentary credit is its formal character. The documents presented are sound or they are not sound. Gradations are not possible.
"A documentary credit should not be interpreted in accordance with specific national laws — on which the parties have not made any agreement — but in accordance with the practices that apply on this subject in international trade."
He then acknowledged that, if read literally, the will of the credit opener would determine whether the beneficiary would be paid: by refusing the goods he could ensure that the condition "goods received by opener" was not fulfilled.
"An interpretation of the condition as above is in conflict with the nature and the purpose of the documentary credit. Payment may not be dependent on the mere will of the credit opener, because this would mean that the documentary credit would not give the beneficiary the intended security at all.
"This is why the Arbitrator is satisfied that the condition 'goods received by opener' also covers the situation that the opener could have received the goods if he had wanted to. Thus the condition will have a significance that is understandable and acceptable in commerce and trade.
"It is probable that the beneficiaries have interpreted the condition in that sense, and the Defendants should have taken that into account when they imposed the condition. Since it has been established that the opener could have received the goods if the opener had wanted to, the said condition of the credit has been fulfilled, and the Defendants were wrong in refusing payment or authorization of payment to (Spanish bank).
"Claimant is therefore entitled to the amount of US $ 38,122."