trade finance in corona times - webinar.rbinternational.com
TRANSCRIPT
Trade Finance in Corona Times
Andrea HauptmannChristine WidyElitza KavrakovaMartina Zimmerl
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Today‘s panelists
Andrea HauptmannSenior Global Consultant onTrade Finance
Martina ZimmerlHead of Trade Finance
Christine WidyHead of Team Letters of Credit
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Elitza KavrakovaHead of IC East
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The Covid-19 crisis
What has the current pandemic to do withunfair calling under a guarantee ?
As we already learnt during the financialcrisis 2008/2009, beneficiaries are temptedto present unjustified claims underguarantees to
a) avoid/reduce increasing risks with theircounterparties
b) improve their own liquidity situation
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Complying Demand
The Fraud Exception
Temporary Injunctions around the World
Case Studies
AGENDA
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Complying Demand
Complying demand means a demand that meets the requirements of a complying presentation.
The guarantor shall determine, on the basis of a presentation alone, whether it appears on its face to be a complying presentation.
When the guarantor determines that a demand is complying, it shall pay.
unless . . . . . . . it is FRAUD
Pay First, Argue Later
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The Fraud Exemption
Account party must provide evidence of fraud Very clear and conclusive evidence, so no doubt remains for the
guarantor (a mere statement, that there is fraud, is definitely not enough)
Evidence must be available immediately (within the short examination period under the guarantee)
Extremely difficult especially with regard to the timeline Most cases are rejected because of lack of evidence
So if the guarantor has KNOWLEDGE of fraud, he is obliged not to pay But how can he know ? The guarantor must retain a neutral position, he owes no duty to the
applicant to investigate fraud and he is not obliged to take a position with regard to fraud allegations
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Misuse of Rights – Unfair Calling
Misuse of rights is a fact if the claiming party´s only interest is to cause damage to his partner or at least he accepts this damage by honouring that the claim is illegal.
A temporary injunction may only be granted in case beneficiary misuses his rights when claiming a guarantee.
Applicant must be able to solventlyproof the (asserted) misuse of rights
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The Rules
Temporary Injunctions and other courtmeasures in the rules:
UCP 600 not dealt with
ISP98 not dealt with
URDG 458 not dealt with
URDG 758 not dealt with
Only the UN Convention on Independent Guarantees and Standby LCs is dealing with theissue in Art 19
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UN Convention (1/2)
Art 19 Exception to payment obligation
(1) If it is manifest and clear that:
(a) Any document is not genuine or has been falsified;
(b) No payment is due on the basis asserted in the demand and the supporting documents; or
(c) Judging by the type and purpose of the undertaking, the demand has no conceivable basis,
the guarantor/issuer, acting in good faith, has a right, as against the beneficiary, to withhold payment.
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UN Convention (2/2)
(2)For the purposes of subparagraph (c) of paragraph (1) of this article, the following are types of situations in which a demand has no conceivable basis:
(a) The contingency or risk against which the undertaking was designed to secure the beneficiary has undoubtedly not materialized;(b) The underlying obligation of the principal/applicant has been declared invalid by a court or arbitral tribunal, unless the undertaking indicates that such contingency falls within the risk to be covered by the undertaking;(c) The underlying obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;(d) Fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the beneficiary;(e) In the case of a demand under a counter-guarantee, the beneficiary of the counter-guarantee has made payment in bad faith as guarantor/issuer of the undertaking to which the counter guarantee relates.
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Temporary Injunction
Characteristics of a TemporaryInjunction:
No final judgement, only a courtmeasure to prevent further damage
Proceedings at a very short notice
No in-depth investigation on the case
Limited time of validity
Recently some disturbing developments!
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Supreme Court‘s Ruling
Misuse of rights is a fact if the claiming party´s only interest is to cause damage to his partner or at least he accepts this damage by honouring that the claim is illegal
A temporary injunction may only be granted in case beneficiary misuses his rights when claiming a guarantee
Applicant must be able to solventlyproof the (asserted) misuse of rights (liquid evidence)
The issuance of a preliminary injunction is only acceptable, if the beneficiary is misusing his rights or is at least acting „grafty“
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Global View
UK A temporary injunction is a court order prohibiting an action by a party to a lawsuit until there has been a trial or other court action. The purpose of a temporary injunction is to maintain the status quo and prevent irreparable damage or preserve the subject matter of the litigation until the trial is over. After the trial the court may issue a permanent injunction or dissolve the temporary injunction.
USA A preliminary or temporary injunction is a provisional remedy that is invoked to preserve the subject matter in its existing condition. Its purpose is to prevent dis-solution of the plaintiff's rights.Preliminary or temporary injunctions are not conclusive as to the rights of the parties, and they do not determine the merits of a case or decide issues in controversy. They seek to prevent threatened wrong, further injury, and irreparable harm or injustice until such time as the rights of the parties can be ultimately settled.
Stop Payment Order
(Freezing) Injunction
Ingiunzione
Ordonnance provisoire
Immediate Measure
Interdicto
sudebnyy zapret
Einstweilige Verfügung
föreläggande
tydelike interdik
'amr qadayiyin muaqatinjunksi sementara
Khả s̄ạ̀ng
nakaz tymczasowy
διαταγή
'iindhar qadayiyin إنذار قضائي
Temporary Injunction around the World
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Temporary Injunction around the World
English (UK / US)
Italian
Russian
Indonesian
Polisch
Arab
German
French
Swedish
Afrikaans
Thai
Greek
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Temporary Injunction
How can a Temporary Injunction look like:
Preliminary injunction based on non-performance of effecting execution
Preliminary injunction based on non-performance of debiting funds
Preliminary injunction based on non-performance of disbursing funds
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Indirect Guarantees
The guarantor (local bank) is responsible for examing beneficiary‘sdemand. He alone takes the final decision, whether to honour or rejectsuch a demand.
The counterguarantor may only examine the demand made by theguarantor, which is normally short and dry („we have received a complying demand and have to pay“)
Any documents the beneficiary might have been presented under theguarantee remain with the guarantor (unless otherwise stated in thecounterguarantee)
Misuse of rights by the beneficiary is hardly to be proved by thecounterguarantor.
Temporary injunction against counter-guarantor very difficult due to(normally) lack of place of jurisdiction.
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Case Study I
Czech Republic vs. Romania
Due to disputes in the underlying business (construction project) the Czech applicant applies for a temporary injunction against the counterguarantor(Czech bank) as well as the guarantor (Romanian bank).
The Czech Court issued a temporary injunction in time (within the 5 daysperiod for examination of the claim), but the Romanian court took noaction at all, as they were in the 2 months summer holidays. Result: the Romanian guarantor had to pay under the guarantee and nowis under risk to not getting reimbursed by the counterguarantor.
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Case Study II
Slovakia - Austria - Egypt
A Slovak bank instructed an Austrian bank to further instruct a bank in Egypt to issue a performance bond (chain of counter- guarantees) Massive problems in the underlying business (the delivered machineexplodes and now experts are in dispute, whether this explosion is in theresponsibility of the seller or if it has been caused by wrong handling of thebuyer).
The seller applies for a temporary injunction against all 3 banks at a court in Bratislava.
The court issues an „immediate measure“ against all 3 banks.
Definitely the Slovak bank is bound by this act, not so clear whether theAustrian bank is bound, the Egyptian bank surely is not.
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Case Study III (1/2)
Turkey vs Turkmenistan
Underlying relationship: huge construction project in Turkmenistan
Advance Payment Guarantee issued in the amount of € 23.400.000,--
Disputes in the project, ending with agreement on a compromise settlement over € 15.000.000,--
However, the beneficiary presented a demand over the full guarantee amount
Applicant applied for a temporary injunction
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Case Study III (2/2)
Quote from the judge‘s ruling
The mere fact, that the applicant contradicts the payment under theguarantee does not entitle the guarantor to reject the demand
It must be solvently prooved, that there is no event of default under thisguarantee and that the beneficiary – in the moment of presenting thedemand – knows about this fact. There must be clear evidence about thismisuse of rights without anticipating a regular court proceeding
To not endanger the independent nature of a guarantee and its use as a security instrument, strong requirements for granting a temporary injunction are indispensable
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L/C transactions under the impact of COVID-19 and under consideration of article 35 of UCP 600
Legal interpretations versus pragmatic solutions
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Article 35 – Disclaimer on Transmission and Translation A bank assumes no liability or responsibility for the
consequences arising out of delay, loss in transit, mutilationor other errors arising in the transmission of any messages ordelivery of letters or documents, when such messages, lettersor documents are transmitted or sent according to therequirements stated in the credit, or when the bank mayhave taken the initiative in the choice of the delivery servicein the absence of such instructions in the credit.
If a nominated bank determines that a presentation iscomplying and forwards the documents to the issuing bankor confirming bank, whether or not the nominated bank hashonoured or negotiated, an issuing bank or confirming bankmust honour or negotiate, or reimburse that nominatedbank, even when the documents have been lost in transitbetween the nominated bank and the issuing bank orconfirming bank, or between the confirming bank and theissuing bank.
A bank assumes no liability, or responsibility for errors in translation or interpretation of technical terms and maytransmit the credit terms without translating them.
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Art. 35 – From an unnoticed existance to a threat? ICC Guidance paper on the impact of COVID-19 on trade finance transactions issued subject to ICC rules
Protection of nominated banks under article 35 if the delivering courier service fails to transmit or even loses documents
Several different scenarios – from handing over documents to courier service and documents cannot be delivered over documents are returned by courier service up to courier service does not accept documents for transmittance
According to article 35 and as per interpretation of ICC issuing banks are always obliged to effect payment as soon as a nominated bank has determined a complying presentation
Article 7 c of UCP 600
An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank …
Strongly recommended
Seek the advice of your legal colleagues and find your own interpretation.
Local differences might be possible.
As per article 7c an issuing bank is only obliged to reimburse after documents have been forwarded.
Observe L/C wordings carefully resp. rethink you own wordings if you are acting as issuing bank - UCP may be amended, articles may be deleted.
As issuing bank clarify if you are allowed to debit the L/C applicant without presentation of documents?
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Pragmatic approachAs nominated/confirming bank stay in contactwith issuing bank – inform about thetransmittance of documents even if not required.
Strictly follow the sending instructions given underthe L/C.
Do not send documents in 1 lot if 2 lots arerequired under the L/C.
Clarify if documents may be sent to an alternative address if the courier service cannotdeliver documents to issuing/confirming bank.
Ask for the acceptance of pdf documentsinstead of originals.
Consider the possibility of the presentation ofelectronic documents under eUCP – maybe nowis the chance to change old habits.
Legal interpretations versus pragmatic solutions
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Learnings from the crisis
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Learnings we want keep even after Corona
Daily stand-ups in all teams (sales, product development and operational teams)
Pulse checks
Switch to electronic signatories & archive
Usage of online collaboration tools such as Microsoft Teams, including recording of team meetings
Regular calls with relationship managers both corporate and institutional clients in order to update each other about recent developments
Information to corporate clients about digital services, such as digital channels, digital instructions to issue guarantees, digitally issued guarantees and eDox
New model of sales: virtual meetings / virtual business trips / virtual pitchings
Increased risk awareness across all functions (counterparty and non-financial risks)
New criteria to assess risk (e.g. exposure to high risk industries)
Direct information from top-management to both employees and the market
Ad-hoc offerings based on immediate client needs (cash delivery or edox)
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