Letters of credit: Issuer reimbursement obligation (Deutsche Bank AG v CIMB)

Letters of credit: Issuer reimbursement obligation (Deutsche Bank AG v CIMB)

This case considers the rights and obligations that arise between an issuer of a letter of credit and a confirming party that makes payment to a beneficiary.

Original news

Deutsche Bank AG, London Branch v CIMB Bank Berhad 

[2017] EWHC 1264 (Comm), [2017] All ER (D) 171 (May)

Why is the case of interest?

Letters of credit are in widespread use as a means of financing international trade.Deutsche Bank AG, London Branch v CIMB Bank Berhad clarifies the scope of the principle of autonomy and whether it is applicable in relation to the obligation of an issuer of a letter of credit to reimburse a confirming party who has made payment to a beneficiary.

The principle of autonomy operates to keep the letter of credit separate from the sale or other commercial contract underlying it. It is a fundamental rule of trade finance designed to facilitate the smooth operation of the market. It ensures financing parties are insulated from disputes between a buyer and a seller in an international sale transaction.

What were the facts?

Cashcot Industries Pte, a Singaporean company, bought cotton from Global Tradinglinks Limited (the beneficiary) a company based in Hong Kong. Cashcot asked its bank, CIMB Bank Berhad (the issuing bank), to issue a series of letters of credit to the beneficiary. CIMB did so and nominated Deutsche Bank AG, London Branch (the confirming bank) as the confirming bank. The confirming bank would make payment to the beneficiary upon presentation of specified documents. The beneficiary was also a borrower from Deutsche Bank with outstanding loans.

Cashcot went into liquidation meaning that the issuing bank’s right of reimbursement against it was worthless. Global was also in financial difficulties. The confirming bank 'made payment' by asserting a right of set off against Global’s loan liabilities. It then claimed reimbursement from the issuing bank for the $10m value attributed to the beneficiary because of the set off. The court accepted

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Meet Neil:

1. Banking and finance lawyer with particular experience in asset finance

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Neil specialises in banking and asset finance transactions with a particular emphasis in finance for shipping, aviation and renewable energy, as well as providing corporate transactional support. He trained and qualified at TLT LLP and spent a further four years working as a finance solicitor, acting for borrowers and lenders before joining the Asset Finance team at DLA Piper (UK) LLP.