## Facts

- Stemcor UK Ltd (Stemcor) sold steel under five contracts to an Indian buyer, with payment to be made by 100% sight letters of credit.
- Indian Overseas Bank (IOB) issued the five letters of credit in August 2008 in Stemcor’s favour. Fortis Bank SA/NV (Fortis) acted as advising bank and, on some credits, as confirming bank.
- Each letter of credit was expressly subject to UCP 600, including Article 16 (rules governing examination, refusal, and the consequences of an ineffective refusal).
- Stemcor shipped and presented documents for payment through Fortis. IOB refused to honour in November 2008, citing discrepancies.
- A main discrepancy concerned a requirement that Stemcor certify it would bear the cost of sending the documents to IOB; the certificates stated that IOB was being charged for the transmittals.
- IOB’s refusal notices stated it was returning the documents (save for limited instances of holding documents pending instructions), but IOB did not return the documents until February 2009.
- Earlier rulings in the same dispute held (i) the certificates did not comply with the credits, but (ii) because IOB had elected to return the documents yet failed to do so with reasonable promptness, UCP 600 Article 16(f) precluded IOB from relying on the discrepancies and IOB was bound to honour despite them.
- This Commercial Court judgment addressed the remaining question of remedy: whether Stemcor could recover damages for IOB’s failure to honour, and whether restitution was available as an alternative.

## Issues

1. After IOB became bound to honour by reason of UCP 600 Article 16(f) preclusion, what monetary remedy was available to Stemcor for IOB’s failure to pay under the letters of credit?
2. Was Stemcor entitled to a restitutionary remedy (unjust enrichment) instead of, or in addition to, contractual damages for non-payment under the credits?
3. How should the court approach measure of recovery where the bank’s obligation is to pay under autonomous credit instruments but the claim is framed as damages for non-honour?

## Decision

- The court held that, given the established Article 16(f) preclusion and IOB’s resulting obligation to honour, IOB’s continued refusal to pay amounted to a wrongful failure to honour the letters of credit.
- The court held Stemcor was entitled to monetary recovery for that wrongful non-payment, analysed primarily through compensatory damages for breach of the obligation to honour.
- The court treated restitution as an alternative analysis, but did not treat it as displacing the ordinary contractual remedy where the payment obligation arose under the credit relationship.
- The court proceeded on the footing that the consequence of Article 16(f) preclusion is that the issuing bank must honour notwithstanding the underlying discrepancies, and that non-payment attracts a money judgment (with interest) reflecting the payment that should have been made.

## Legal Principles

- Letters of credit create autonomous payment obligations; once an issuing bank is obliged to honour, failure to do so is a breach giving rise to a monetary remedy.
- Under UCP 600 Article 16, if an issuing bank gives notice of refusal and elects the option of returning documents, it must act consistently with that election; failure to return with reasonable promptness can trigger Article 16(f) preclusion.
- Article 16(f) preclusion bars the issuing bank from relying on documentary discrepancies as a defence to non-payment, even where the presentation was in fact non-complying.
- Where a valid contractual framework governs the payment obligation under a credit, compensatory damages are the primary remedy; restitution may be considered only as a fall-back and will not usually be used to re-write the contractual allocation of risk and remedies.
- The monetary response to wrongful non-honour is directed to placing the claimant in the position it would have been in had honour occurred, commonly producing an award equivalent to the amount that should have been paid under the credits (plus interest), subject to ordinary limits applicable to damages.

## Conclusion

In Fortis Bank v. Indian Overseas Bank, the Commercial Court addressed Stemcor’s recovery after IOB refused to honour five UCP 600 letters of credit and, because it failed to return rejected documents with reasonable promptness after stating it would do so, became precluded by Article 16(f) from relying on discrepancies. Treating the obligation to honour as established, the court held Stemcor could recover a money remedy for wrongful non-payment, with damages as the primary route and restitution considered only in the alternative.


Fortis Bank v. Indian Overseas Bank, [2011] EWHC 538 (Comm) (2011)