[2011] 1 CLJ 615 (CA)
A Letter of Credit may be described as an instrument issued by an issuing bank at the request of its buyer customer whereby the bank promises to pay the seller beneficiary provided the latter presents the documents called for, exactly as stipulated in the LC and meet all the other terms and conditions set out in the LC. The first principle of an LC is thus it is documentary. The complaint of defects in documents and demand for refund was made by the issuing bank after the documents had been accepted and payment made to the beneficiary of the LC. Assuming there were indeed defects in the documents submitted for the respondent, the release of payment was on account of the issuing bank’s own decision to accept the defect, or an error. However, be it acceptance or error, it is internal to the issuing bank and involves neither the respondent nor the appellant. Having accepted the documents and made payment, without reservations, the issuing bank is estopped from demanding the return of the payment made on the grounds of alleged defects. The respondent is not obliged to refund to the issuing bank or the reimbursing bank whose problem would arise if, and only if the buyer refuses to pay the issuing bank, or the issuing bank disputes with its reimbursing bank. The parties in such an action are the issuing bank against a negotiating bank, an advising bank and the applicant for the LC. For an issuing bank to be able to reverse its position after acceptance of the claim and the completion of the process of payment under an LC would defeat the goals of certainty, promptness and finality of payment which letters of credit serve to provide to sellers in the context of an international trading system with minimal cross-border litigation. The appellant in this case had acted as the respondent’s bank, and not a mere negotiating bank. The fact the appellant took the respondent’s documents to the issuing bank to seek payment for the respondent does not metamorphose it into a “negotiating bank”. It was a bank which accepts the documents for examination and, if these are found in order, credits the due amount to the beneficiary. It has no authority to conduct any negotiation. In the circumstances, the appellant erred in acting on its own to refund to the issuing bank and then to debit the respondent’s account, without being specifically authorized to do so by the respondent. The appellant cannot make the respondent bear the burden of its own error. Recovery of monies paid under a mistake under s. 73 of the Contracts Act 1950 is a matter that can be raised by the issuing bank against the respondent and appellant. The factual basis to such right has to be established by the issuing bank, which the appellant might choose not to dispute if it bears the cost itself, but is not entitled to do so without prior notice of the respondent if the appellant intends to pass the cost of it to the latter. Where it fails to do so, it runs the risk of an action as in this case. Datuk Ganesan acted for the Respondent/Plaintiff.