Letters of Credit
Cases
Kolmar Group AG v Traxpo Enterprises PVT Ltd
[2010] EWHC 113 (Comm) , [2010] 1 CLC 256
Mr Justice Christopher Clarke:
In this action the buyer, Kolmar Group AG (“Kolmar”), a Swiss corporation, claims against the seller, Traxpo Enterprises Pvt Limited (“Traxpo”), an Indian corporation:
(i) restitution of US $ 1,495,566.61 which Kolmar claims was extracted from it by economic duress;
(ii) $ 691,708.73 for short delivery of cargo;
(iii) $ 356,424.60 for demurrage; and
(iv) $ 5,162 for shifting expenses.
The trial began on 17th December 2009. By then Traxpo had failed to serve any witness statements by 30th September 2009, the date provided for in a consent order of 8th September 2009, and had dispensed with the services of its former solicitors. It had not engaged in the mediation provided for by that order. On 9th December 2009 Gross J declined to adjourn the trial, not being persuaded by anything he had read that such an adjournment was appropriate. He indicated that it would be open to Traxpo to renew its application to the trial judge. Traxpo renewed its application on paper but I, also, saw no justifiable basis on which to adjourn a trial that had been fixed for some time.
The contract
On or about 27th and 28th August 2007 Kolmar agreed to buy and Traxpo agreed to sell (a) 15,000 m.t. methanol +/- 5% at Buyer’s option at $ 255 per metric ton and (b) an optional 2-3,000 metric tons of cargo +/- 5% in Buyer’s option at $ 265 per metric ton; in each case FOB Kandla for shipment within September 2007. The methanol was to be of Qatari or Russian origin. Payment was to be at sight against an irrevocable documentary letter of credit payable against presentation of specified documents. Under the heading “Maritime Conditions” the contract provided that laytime was to commence 6 hours from tendering Notice of Readiness or when the vessel was all fast at berth whichever first occurred. The laytime allowed and the demurrage rate were to be agreed upon vessel nomination. All other maritime conditions were to be in accordance with the Asbatankvoy Charter Party form.
The contract, which was expressly subject to English law and High Court jurisdiction, is contained in or evidenced by two faxes from Kolmar dated 28th August 2007. It also provided that Incoterms 2000 should apply where not in conflict with the other conditions of the contract.
Clause A4 of Incoterms 2000 provided that:
“The seller must deliver the goods on the date or within the agreed period at the named port of shipment and in the manner customary at the port onboard the vesselnominated by the buyer”.
On 27th August 2007 Mr Sudarshan Tapuriah (“Mr Tapuriah”), a director of Traxpo, the person with whom the contract had been agreed, e-mailed Ms Tara John (“Ms John”), the managing director of Meteor 5A Neelamber, Kolmar’s local representative in India, details of Traxpo’s stock position of methanol as at that day, giving details of the quantities landed from various vessels and the tanks into which the various quantities had been discharged. The total was said to be 29,211.636 m.t.
Kolmar wanted the methanol in order to sell it, via a sale to Kolmar Inc, to Methanex, an important customer in the United States of America and one of the world’s largest methanol companies. In August 2007 Methanex was experiencing production problems and had an urgent requirement for cargoes. The USA prohibits the importation of methanol originating from Iran or China.
On 29th August 2007 Mr Tapuriah e-mailed Ms John, requesting an amendment to provide that the quantities should be 15,000 m.t +/- 5% at Sellers’ option and 2-3,000 m.t. +/- 5% at Sellers’ option respectively; but this proposed amendment was never agreed to.
Nomination of the vessel
On 29th August 2007 Meteor Private Ltd forwarded to Traxpo Kolmar’s nomination of the vessel “Fairchem Mustang”. (Nothing turns on any distinction between one Meteor company and another and I shall refer to them simply as “Meteor”). The nomination provided for a cargo with a minimum quantity of 17,500 m.t up to a full cargo in charterer’s option of about 17,526 m.t., for laytime of 250 mt/hr shinc and for demurrage at $ 20,000 pdpr. Traxpo accepted this nomination subject to laytime being at 175 m.t./hr to which Kolmar was prepared to agree.
It seems that, when the contract was made, Traxpo did not have access to sufficient cargo at the same or a lesser price with which to be able to supply Kolmar at the contract price. After the contract was made the market price of methanol increased dramatically and, as will become apparent, Traxpo found itself driven to attempt to escape from its contractual obligations.
Intertek Caleb Brett (“Intertek”) was asked by Meteor to sample 8 tanks from two different terminals at Kandla – 2 at United Storage and Tank Terminals Ltd (“USTTL”) and 6 at Friends Salt Works and Allied Industries Ltd (“FSWAL”). These tanks had about 20,800 m.t. in them in all. When Intertek tested them the acidity in the methanol was found to be higher than the contract maximum of 30 mg/kg in all of the tanks. This was, however, a problem which could be addressed by the use of caustic soda. The potassium permanganate was found to be excessive in one of them. Intertek also tested a further 9 shore tanks including two tanks from another terminal – Friends Oil and Chemicals Terminal. The 17 tanks were tanks from among which it had been indicated to Mr Joseph, Meteor’s operations manager, that the methanol would be drawn.
On Tuesday 4th September, following the tank inspections, Ms Meyer of Kolmar gave Meteor a list of 15 of the tanks (2 of the 17 contained product which Meteor had learnt did not belong to Traxpo), specifying which tanks were unacceptable (3 in number), and which were Kolmar’s first, and which its second, choice. As a result Mr Joseph e-mailed to Mr Tapuriah a list of 12 out of 15 tanks containing 19,450.028 m.t which he asked to be earmarked for loading. One of them was USTTL 204, which at the time of inspection contained 4,718.039 m.t. He also pressed for a certificate of origin.
These arrangements, whereby the tanks at Kandla from which the methanol was likely to come were inspected on behalf of the buyer in advance to see whether their content was off specification, followed by a request to earmark those tanks that were satisfactory to the buyer, were a perfectly normal and sensible thing to do. They did not mean that there was an agreement between the parties that as a matter of contract the contract cargo had to come from those tanks. Nor was it agreed that the usual procedure of testing before and after loading would be dispensed with.
By Thursday 6th September Kolmar had updated their analysis of the relevant tanks and informed Meteor that only 10 of the tanks were acceptable (two of the 12 on the list referred to in para 11 above being unacceptable) and that, if the 10 acceptable tanks were loaded, the total cargo would be 16,619.834 m.t.. Since Kolmar did not want to pay deadfreight Ms Meyer asked Meteor to get Traxpo to allocate about 900 m.t. from a different tank.
Monday 10th September
On Monday 10th September J.M. Baxi & Co (“Baxi”) , the vessel’s agents, gave notice that the vessel was now due at Kandia on around 19th or 20th September and would be ready for loading on arrival. Ms Meyer replied to Mr Joseph’s e-mail forwarding the notice to inquire about progress in respect of the additional 900 m.t. She also said that she awaited details from Traxpo for the Letter of Credit.
Negotiations about the letter of credit
On 10th September Ms John, who was from Meteor’s Calcutta office, phoned Mr Tapuriah to ask him about the details of the letter of credit. He said he would send them shortly. Mr Tapuriah then e-mailed to say that Traxpo wanted the letter of credit to be established in favour of an Indian company called PEC Ltd, which was Traxpo’s financier, and to be advised through the State Bank of India, permitting negotiation of third party documents as the invoice and other documents would be issued by Traxpo. His message was passed on to Ms Meyer.
On 11th September Kolmar sent Meteor a draft letter of credit to be forwarded (as it was) to Traxpo for review.
Wednesday 12th September
On 12th September ING in Geneva opened a letter of credit on behalf of Kolmar, advised through the State Bank of India, in favour of PEC Ltd in respect of 17,500 m.t +/- 5% at $ 255 per m.t. with a latest date for shipment of 30th September. The letter of credit did not state that 3rd party documents were acceptable. A copy of the letter of credit was e-mailed by Meteor to Traxpo on that day.
The Letter of Credit was subject to UCP 600 which provides:
“Article 1.
Application of UCP
The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no 600 (“UCP”) are rules that apply to any documentary credit …. when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereby unless expressly modified or excluded by the credit.
Article 14
k The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit”.
Article 18
Commercial Invoice
a a commercial invoice:
i must appear to have been issued by the beneficiary…”
At this stage Kolmar had heard from the inspection company that Traxpo may have been using cargo earmarked for Kolmar to deliver to other customers. Kolmarwished, by opening the letter of credit, to make it clear that they were going to comply in full with their contractual obligations.
On 13th September Mr Joseph discussed with Traxpo the possibility of using products from two further tanks (USTTL-202 and 303) for the balance of 900 m.t. and he instructed Intertek to draw samples from those two tanks and analyse them.
On Monday 17th September Mr Samudra Dasgupta of Meteor advised Ms Meyer that he understood that both PEC and Traxpo would be having several amendment requests.
Tuesday 18th September
On 18th September the vessel’s agents advised that she would be due at Kandla at 1500 hours on 19th September and was likely to be ready for loading from 21/22nd. They asked for cargo readiness documents to be submitted by 21st September a.m. in order for them to be able to declare the vessel ready for export cargo in order to obtain a berth allotment. They said they would await copies of the shipping bills and wharfage paid challan (receipt).
By now Intertek had tested the other two tanks which were potential sources of cargo. On this date Meteor reported to Kolmar that one of them with 1,866.561 m.t. was satisfactory but that the other was outwith the specification in terms of potassium permanganate and acidity. The total quantity in the tanks then approved was 18,486.395 m.t.
At 1750 Mr Tapuriah sent Ms John, following her telephone prompting, an e-mail detailing the amendments to the Letter of credit which Traxpo sought. These included an amendment to the description of the goods so as to read:
“15,000 MT +/- 5 % sellers option at $ 255 PMT FOB
2,500 MT +/- 5% sellers option at $ 265 PMT FOB”
and the elimination of any reference to a certificate of quality. The e-mail also sought an amendment to specify that “only Bill of Exchange to be drawn by the beneficiary and documents presented other than [by] the beneficiary are acceptable”.
Wednesday 19th September
On 19th September Traxpo asked that the L/C should in addition provide that:
“Third party documents including the invoice except bill of exchange are acceptable”.
By now, as the agents advised, the vessel had anchored at 1350 and was likely to berth at an oil jetty that day and to be ready for the export cargo on 23rd . Accordingly resolution of the terms of the letter of credit and tank allocation in respect of the remaining 900 m.t. needed to be determined.
Ms John and Mr Joseph met Mr Tapuriah at Traxpo’s offices. He told them that he did not now wish to include three particular tanks (USTTL-204, FOCT-109 and FSWA1-15[1]) but that he would load from 9 specified tanks. The total cargo in those tanks was 11,145.601 m.t. Meteor agreed to sample 4 other tanks.
Thursday 20th September
Ms John forwarded to Traxpo proposals she had received the previous evening from Kolmar in respect of amendments to the Letter of Credit. These included acceptance of the description of the goods as in para 25 above.
Friday 21st September
On 21st September 2007 Mr Mehta of Meteor had a discussion with Mr Sharma of PEC Ltd when they agreed on the terms of the letter of credit proposed by Kolmar subject to Traxpo’s agreement on certain matters. Mr Sharma insisted the letter of credit state that all third party documents including invoices were acceptable.
On the same date Kolmar confirmed their agreement that a third party named Rahul Sales Ltd (“Rahul”) would load approximately 6,600 tons of the cargo and Baxi gave notice that discharge from the vessel was slightly delayed and she was now tentatively estimated to be able to start loading at 0800 LT on 24th September.
Also on this date Meteor received the analysis report in respect of the four further tanks which showed that three of them comprising 2,400 m.t. were on specification with the exception of the acidity levels and one appeared to be in order save for the potassium permanganate figure, although the final analysis indicated that that was within acceptable limits.
Letter of credit – Amendment No 1
On 21st September ING issued its first amendment to the letter of credit. The amendments included provision that the description of the goods should be as in para 23 above and also that:
“Third party documents allowed, except commercial invoice”.
Monday 24th September
On 24th September 2007 Mr Joseph, the operations manager of Meteor, spoke to Mr Tapuriah. He mentioned that he would load only on the minus 5% side, in other words he would only load with a quantity of about 16,850 m.t. He also suggested to Mr Joseph that Kolmar should only load 15,000 m.t. and pay the deadfreight on the balance on the basis (as he claimed) that that would be more economical for them than loading the full cargo. Ms Meyer spoke to him on the telephone and told him that he should not do that because it would cause serious problems.
Tuesday 25th September
Traxpo advised Meteor that PEC had not as yet received the amendment to the letter of credit. A copy of the SWIFT document with the amendments was sent to PEC.
Wednesday 26th September
At 0100 LT on 26th September Baxi gave notice of readiness to load.
Letter of credit – Amendment No 2
On 26th September Mr Tapuriah complained to Ms John that the amendment to the letter of credit should read:
“Third party documents including commercial invoice allowed except bill of exchange”
and indicated that PEC Ltd needed this amendment before the issue of the delivery order.
Letter of Credit – Amendment No 2
On the same day ING issued a second amendment which read:
“Third party documents allowed including commercial invoice”
Also on the same day Intertek inspected the vessel’s tanks and certified them clean and suitable for a cargo of methanol. A surveyor for the shipper issued a certificate to similar effect.
In the afternoon Mr Tapuriah met Mr Joseph and said that he had incurred a lot of expenses in transferring material from one tank to another because Meteor had rejected some of the tanks on the basis of Intertek’s quality report which were subsequently found to be okay, and that he was visiting New Delhi the next day to meet up with PEC in connection with the methanol shipment.
Thursday 27th September
On 27th September Mr Tapuriah indicated to Baxi and to many others to whom the e-mail was sent that Traxpo had no objection to their bringing the vessel for loading “subject to confirmation from the surveyors as well as the charterers that the tanks are clean and the LC has been perfected as per requirements of PEC Limited.” He stated that, pending his surveyors’ report, Traxpo had informed its clearing agents to process the documents for the export of the cargo.
In a later message Mr Bisht of Baxi indicated to Mr Tapuriah that the vessel was next in line for berthing, that cargo readiness documents (shipping bills and wharfage paid challan and a letter saying that the cargo was ready for shipment) were awaited, and that the vessel would lose her berthing turn if the required documents were not provided by the time of the berthing meeting at 1100.
Later still Baxi informed Mr Tapuriah that that day’s berthing meeting was over without the cargo documents having been submitted and that the vessel was now waiting on account of non-readiness of cargo. They asked again for the documents, failing which the vessel would have to wait at the outer anchorage on Traxpo’s account.
At some stage during the day Mr Tapuriah told Ms John that he wanted a further amendment to the letter of credit so as not to require a certificate of quality from an independent surveyor detailing all the contractual specifications but to require a certificate that the specification of the loaded goods were as per the contract dated 28th August 2007. In order to avoid any risk of Traxpo reneging on the contract Ms John reluctantly agreed.
Friday 28th September
On 28th September Mr Tapuriah e-mailed Ms John to tell her (a) that PEC Ltd had received the amendments to the Letter of Credit and had confirmed that the same appeared to be OK; and (b) that there would be a shortfall of 3,500 m.t. in the quantity to be exported because the material which Traxpo had intended to load from the vessel Star Drem was to be imported by PEC Ltd. He added:
“Since the L/C has been received in workable condition only yesterday by PEC Ltd, we will need a undertaking from you that we or PEC Ltd will not be liable for any demurrage owing to delay in berthing the vessel”.
Saturday 29th September
Mr Bisht of Baxi e-mailed Traxpo and others to inform them that because of the non submission of cargo documents (i.e. shipping bill and port wharfage paid challan) Baxi was not in a position to meet the Traffic Manager to ask for a berth. He requested the documents by Monday 1st October.
Monday 1st October
During the course of the day Mr Tapuriah, who had been being pressed by Ms John and Mr Joseph over the previous days to provide the necessary documents, told Ms John that he expected them to be ready in the afternoon at around 1500 to 1600 LT. Baxi were so informed. Meanwhile the 1100 berthing meeting passed without the documents being presented.
A further problem arose when Traxpo’s clearing agents indicated to Meteor that the wharfage had only been paid on 6,300 m.t. of cargo and the balance was to be paid later. In the course of the day Traxpo’s clearing agents had provided Baxi with a receipt for wharfage in respect of 6,300 m.t. and what they described as “wharfage applications” and export orders in respect of 13,406.06 m.t. Traxpo appear later to have paid wharfage for a further 3,500 m.t, making 9,800 m.t. in all; and the agents gave an undertaking to Baxi that wharfage would be paid for the balance of 3,606.06 m.t. on 3rd October (making 13,406.06 m.t. in all) as appears to have occurred. An approach was made to the Traffic Manager on the basis of those documents to secure a berth. He, however, demanded a letter from the shippers or their agents confirming that wharfage for the balance of 17,500 m.t. would be paid upon berthing (a letter which Baxi had previously sought to obtain from the shippers or their agents).
Tuesday 2nd October
Tuesday was a public holiday. Nevertheless Baxi managed to persuade the Traffic Manager on the basis of the documents it had secured (received at least as to some of them at 1830 the previous day) to arrange that the vessel would berth on 3rd October.
Wednesday 3rd October
The vessel berthed at oil jetty No 3 at 0920 LT but loading did not commence.
Ms John had returned to Mumbai from Berlin in the early hours. She went to see Mr Tapuriah in his office. He told her that over recent weeks there had been a substantial increase in the price of methanol in the domestic market. He explained that Traxpo was having to purchase cargo from the domestic market in order to fulfil its obligations to Kolmar on a piecemeal basis. It would suffer large losses if it purchased at the market price and sold to Kolmar at the contract price. At the end of the discussion he told her that he would not keep his commitment but was only prepared to deliver 13,365.48 m.t. (derived from various different vessels and of Russian or Chinese origin) at the contract price of $ 255 per metric ton together with 3,500 m.t (derived from two vessels and of Qatar or Chinese origin) at a new price of $ 467 per metric ton. Kolmar would have either to take only the 13,365.48 m.t. and pay deadfreight for the shortfall or take the full quantity offered on those terms, which would have worked out at $ 305 per m.t. overall.
In the evening Ms John e-mailed Kolmar to tell them that these were the only two options given.
Letter of credit – Amendment No 3
During the course of the day PEC requested that the letter of credit be amended to allow for partial shipments; and that amendment, together with the amendment in respect of the surveyor’s certificate, was arranged. As is apparent Kolmar was able to arrange an amendment to the letter of credit very speedily.
PEC also released delivery orders for 6,100 m.t. on Traxpo’s account. But no orders were released in respect of the methanol which was to come from Rahul. Mr Tapuriah claimed that Rahul was seeking a higher price and that if Rahul was to produce the material he had to be compensated for a difference in price of almost $ 100 a ton. Mr Tapuriah told Ms John he was being encouraged by many in the industry to pull out of the deal.
Meanwhile Kolmar/Meteor faced the prospect of the vessel being ordered off the berth. During the day the Traffic Manager asked Mr Bisht why, if the vessel was not ready for loading, he had been disturbed on the public holiday the day before and threatened to pull the vessel off the berth if loading was not commenced by 1500 LT. At some stage after that he issued a warning that, if the vessel did not start loading within 15 minutes, she would be pulled off the berth. Later he gave orders for the vessel to leave the berth at around 2100.
In the end the vessel began the loading operation at 1840 LT with inspection and flushing of shore lines.
Thursday 4th October
Loading began at 0400 LT but had to be suspended almost immediately due to a leakage in the shoreline. A separate shoreline had to be made ready and loading re-commenced at 0900. Mr Tapuriah later telephoned Ms John to complain that Mr Berkhout, a surveyor instructed on behalf of Kolmar, had stopped the loading at first foot in order to draw another sample at 0935. In fact he had merely performed a routine first foot sample but this had caused the terminal manger to be livid.
When the sampling was over Traxpo – for some reason – told the terminal not to resume loading without their prior approval. When Ms John learnt of this she hurried to Mr Tapuriah’s office. He told her that, aside from the fact that he felt that Kolmar’s surveyor was proving difficult, he had had an enormous argument with his brother from whom he had requested a bridging loan to cover the price difference of the Rahul cargo. He said that his family were pressing him to back out of the contract with Kolmar because of the money they could make by reselling in the local market. Ms John tried to persuade him that it would be wholly improper to stop loading at this stage, would lead to adverse publicity in the local market for both companies, and would have huge financial implications as the product had been sold in the US and the sub-buyers would file a law suit. At about 1500 he finally asked the terminal manager of FSWAI, who was in a nearby room, to resume loading. Thereafter he kept telling her that he was still in two minds as to whether to perform the contract at all given the financial implications. He then went out of the office to meet someone (as he said) and did not return until 1800.
Later that day he called her to say that he would be coming to her office to discuss the matter further. When he arrived he said that it was becoming even more difficult for him to perform now as part of the cargo was to be shipped by Rahul who had heard that the market had gone up substantially. He said that only if Kolmar were to pay more for the cargo would he ship the entire cargo and do so promptly. He promised to think about it overnight but also said several times that he saw no future with Kolmar, particularly given what had happened and that for that reason he did not consider it of utmost importance to deliver for the sake of the relationship. She tried to make clear that Kolmar was very much interested in the future relationship (although in truth Kolmar did not at that stage think that any future relationship was likely). He said he would try and sort matters out generally and with Rahul and call back.
Friday 5th October
Letter of credit – Amendment No 4
The letter of credit was amended again, pursuant to PEC’s request of 4th October to provide for expiry on 7th November and a last date of shipment of 7th October.
By 0900 2,776 m.t. had been loaded at an average rate of 154 m.t. per hour. Ms John telephoned Mr Tapuriah. He said that he had agreed a price with Rahul for their 6,000 m.t. of $ 380 per m.t. Later that day she met him at his office and he said that he wanted to incorporate further amendments into the letter of credit. She asked him for a list of them. He said he was busy with someone else and kept her waiting for about an hour.
The bombshell
When he returned at about 1500 he presented her with a “take it or leave it” proposal. Traxpo would ship the balance of 6,143 m.t. at $ 255 per m.t. Rahul would supply 7,094 m.t. which would have to be paid for at $ 380 per m.t. Traxpo would also ship another 3,500 m.t. at $ 465 and a further 453 m.t. also at $ 465. The average for the total would be $ 352.84 per m.t [2].
Ms John was dumbfounded. If the vessel left without further cargo there would be a huge claim for deadfreight. Kolmar had already incurred about $ 140,000 in demurrage. Most importantly of all the US receivers were very important customers of Kolmar and Kolmar needed to provide them with a full cargo as soon as possible. Mr Tapuriah’s attitude was that, if Kolmar wanted this cargo and for the ship to continue to load, Kolmar had no choice but to accept. He said that the letter of credit would have to be amended to $ 350 per metric ton for 16,850 m.t. or, if Kolmar did not want the additional quantities (3,500 and 453 m.t.), the price would amount to $ 321.99 per m.t. Ms John complained that this was an exorbitant price which was being forced upon them. Mr Tapuriah said that nothing could be done about that at the moment although he might consider returning part of the extra amount at a later date.
By now it was 1600. PEC would close at 1700. PEC would only release the cargo once they had received the letter of credit amendment for the new prices. Mr Tapuriah said that at the very least Kolmar should provide a letter immediately confirming that the letter of credit would be amended to accept the new prices.
Ms John then called Mrs Sandelowsky, the Chief Executive Officer of Kolmar, in Switzerland to tell her of the position. She asked whether it was possible that Ms John had misunderstood the proposal because she had thought that the increase in price being demanded would only reflect the increased cost to Traxpo of purchasing from Rahul and that Kolmar would in effect be providing a bridging loan to cover that difference. Ms John asked Mr Tapuriah to clarify his proposal which he did in an e-mail to Kolmar.
Mrs Sandelowsky telephoned Mr Tapuriah back (Ms John being with him in his office) and protested that the proposal was unreasonable and that the new price would be about $ 1.7 million higher. He said that was not so because he was taking a quantity of 13,850 m.t. and not the contracted quantity of 17,500 m.t. He said he would give the matter some thought and phone back in ten minutes.
Once he had put the phone to Mrs Sandelowsky down he told Ms John that he had had enough and was throwing up his hands; the contract would not go through and, even if Kolmar submitted to the demands, nothing would happen as PEC would not receive the amendment to the letter of credit in time. He made it clear that his proposal was non negotiable. Mr Sharma of PEC then telephoned Mr Tapuriah and said that he was leaving for the weekend and would only take the matter up on Monday.
Ms John phoned up Ms Jubb of Kolmar and told her that Mr Tapuriah was unlikely to call Mrs Sandelowsky back and that the contract was in deep trouble again. Ms John asked if Ms Jubb could send a letter or do something to win some time by at least saying that Kolmar was preparing the necessary amendments. Ms Jubb sent a letter but Mr Sharma of PEC said that the wording was not to their satisfaction.
Following a further conversation with Ms Jubb, Ms John arranged for a copy of Kolmar’s request to ING for a further amendment to the letter of credit, incorporating Traxpo’sproposed payment terms in respect of the 6,143, 7,094 and 3,500 m.t. parcels, to be sent to PEC and Traxpo. The fax enclosing the request to ING said that it was “as per your request, which we have no other alternative but to accept”.
By the time that this was received it was 2130 and Mr Tapuriah said that it was too late. By now Mr Sharma had stopped picking up his phone. Mr Tapuriah called Mr Ravi, a director of PEC and asked him to intervene. Mr Ravi agreed to release 1,000 m.t. provided that he was shown a copy of the amendments. By now it was 2230 LT. At close to midnight he released 1,000 m.t and a delivery order was submitted to the Terminal Manager which prevented the vessel being ordered off the berth.
Saturday 6th October
The shipowners urged Kolmar to organise concurrent loading of the 3,500 m.t, which would save 1 – 1.5 days loading. At this stage the port was heavily congested with over 15 vessels awaiting orders at anchorage. On the same day Ms John e-mailed Mr Tapuriah to tell him that 8,737 m.t still needed to be released immediately for loading and that if the vessel did not maintain its loading rate the vessel would be forced off the berth, which would lead to a minimum 6-7 days further delay before reberthing, which would lead to a stockout situation at the ultimate buyer’s end. He did not respond. At this stage the loading rate was an average of only 150 m.t. per hour.
Sunday 7th October
On this day the vessel was ordered to vacate the berth at 0630 LT the next morning.
Monday 8th October
At around 0630 the vessel was moved from the berth having loaded only about 9,898.918 m.t. (shore figures) or 9,865.413 m.t. (per ship’s ullage) and there being no further product available to be loaded. During the day Mr Tapuriah informed Mr John and Mr Varghese of Meteor that he had delivery orders for 1,418 m.t. leaving (out of the 16,850 m.t. figure) a balance of 5,441.783 m.t. of which 3,908.951 m.t. was supposed to be available by transfer from the USTTL terminal which he thought could be released by Tuesday evening.
Tuesday 9th October
Letter of credit – amendment No 5
The fifth amendment to the letter of credit came though. Under it the amount was to be
“Min/Max 16,737 m.t at $ 350 per m.t
Valued at $ 5,857,950 being
6,143 m.t at $ 255 per m.t.
7,094 m.t. at $ 380 per m.t.
3,500 m.t at $ 465 per m.t”[3].
Mr Varghese and Mr John went to Mr Tapuriah’s office again when he told them that he had delivery orders for 2,200 m.t. and outlined to them a plan to transfer product from tanks US-TTL 301 and 303 to the FSWAI terminal.
Wednesday 10th October
No transfers from tank no 301 could take place because the only line was in use.
Thursday 11th October
The pump-over from tank no 301 began. When Ms John went to his office Mr Tapuriah asked for the letter of credit to be further amended in relation to the latest date for shipment and expiry time.
Friday 12th October
Letter of credit – amendment No 6
The Letter of Credit was amended to provide for a latest shipment date of 16th October and a validity until 6th November and for a description of goods which read:
“Min/Max 16,700 m.t as per contract No 2006872 between [Traxpo] and [Kolmar] at a revised price of USD 350 PMT valued at $ 5,845,000 with partial shipment allowed in two lots as follows: 14,800\MTS Min/Max and 1,900 MTS Min/Max”.
Monday 15th October
By this date Kolmar had decided to go ahead with a purchase of about 2,500 m.t from BK Sales Ltd, one of the largest and most reputable importers of methanol at Kandla to replace the shortfall arising as a result of Traxpo’s failure to supply the contract quantity. When the berthing meeting took place Meteor had received letters of confirmation from Traxpo and BK Sales’ forwarding agents addressed to the Traffic Manager advising that they were ready in all respect to load the balance of the cargo and requesting the Port Authorities to bring the vessel to the berth. As a result the terminal allocated a berth to the vessel – Oil Jetty No 2 – after the vessel currently there completed discharging which was estimated to be at around 2200 LT.
Tuesday 16th October
The vessel finally re-berthed at 0410 at Oil Jetty No 2. Loading resumed with the BK Sales parcel at 0620. Mr Tapuriah made a further request for the extension of the letter of credit.
Letter of Credit – amendment No 7
An amendment was effected that day and notified to Traxpo extending the shipment date to 18th October and the expiry date to 7th November. Loading was suspended at 1600 because no cargo was ready.
Wednesday 17th October
Kolmar nominated two vessels to Traxpo for the loading of the balance of the cargo – 1900 m.t. Mr Tapuriah told Ms John that he could not accept either vessel as he had no cargo and he had a problem with a Special Investigation Bureau inquiry.
Thursday 18th October
The vessel completed loading at 0635 and left the berth at 1500. The Mates’ Receipts covered 14,795.438 m.t.
Monday 22nd October
Ms John spoke to Mr Tapuriah several times trying to persuade him to give her a reply on the vessel nomination for the balance of the cargo. He said that Traxpo could only accept a vessel with a loading period after 20th November.
Tuesday 23rd October
During conversations between Mr Tapuriah and Mrs Sandelowski and Ms John Mr Tapuriah accepted that morally he was obliged to pay Kolmar the price difference between $ 350 and $ 465 per m.t. for the unshipped quantity. He advised that he had no objection to providing the outstanding balance of the cargo but was not willing to make any transfers between tanks in order to avoid any quality issues; nor was it possible to do any book transfer (i.e. a stock transfer from one terminal to another without any physical transfer) because of the SIB inquiry. He also said that he had a shipment due from Iran in mid November from which he could provide the outstanding quantity.
Tuesday 30th October
PEC Ltd forwarded to Kolmar the documents which they had lodged for negotiation with SBI which included the Mates’ Receipts). The letter invited acceptance of the documents despite discrepancies (of which there were several).
Wednesday 31st October
Kolmar e-mailed to Traxpo complaining that Traxpo’s actions had been wholly unlawful and amounted to economic duress giving Kolmar no alternative but to submit to them in order to receive a cargo to satisfy their customers under their own sale. The e-mail also referred to demurrage incurred of $ 381,101 and shifting expenses and claimed damages of $ 323,000. Ms John discussed this message with Mr Tapuriah urging him to agree to ship the outstanding balance and to discuss the return of funds which Traxpo had extorted from Kolmar. Mr Tapuriah declined to be pushed into any agreement.
Monday 5th November
Mr Tapuriah replied to Kolmar claiming that the price had been re-negotiated; and that such re-negotiation could have been stopped at any stage. His e-mail rejected the allegation of economic duress as baseless. He contested demurrage on the ground that no copy of the charter had been provided and the voyage had not come to an end.
Various discussion took place between Ms John and Mr Mehta of Meteor, Mr Sharma of PEC and Mrs Sandelowsky and Mr Tapuriah the upshot of which was that PEC would not guarantee the balance of Traxpo’s shipment nor would they be prepared to hold the disputed amount in escrow. If the documents were not to be accepted by Kolmar they would be withdrawn and Traxpo would interfere with the discharge of the cargo. By now the vessel was due to arrive at the discharge port around 15th November. Kolmar decided that it had no option but to accept the documents and pay in order to prevent any risk of Traxpo delaying the delivery of the cargo.
Tuesday 13th November
On this day ING authorised the State Bank of India to negotiate the documents.
On 17th December these proceedings were started.
Economic duress
Mr Michael Ashcroft for the claimants submitted, and I agree, that the authorities (summarised in Goff & Jones, The Law of Restitution (17th Ed) 10-025 to 10-51 and Chitty on Contracts (30th Ed) 7-014 – 7-055; and in DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530 para 131) establish the following principles:
(i) Economic pressure can amount to duress, provided it may be characterised as illegitimate and has constituted a “but for” cause inducing the claimant to enter into the relevant contract or to make a payment. See Mance J in S.L. Huyton S.A. v Peter Cremer GmbH & Co [1999] 1 Lloyds Rep 620;
(ii) a threat to break a contract will generally be regarded as illegitimate, particularly where the defendant must know that it would be in breach of contract if the threat were implemented;
(iii) it is relevant to consider whether the claimant had a “real choice” or “realistic alternative” and could, if it had wished, equally well have resisted the pressure and, for example, pursued practical and effective legal redress. If there was no reasonable alternative, that may be very strong evidence in support of a conclusion that the victim of the duress was in fact influenced by the threat.
(iv) the presence, or absence, of protest, may be of some relevance when considering whether the threat had coercive effect. But, even the total absence of protest does not mean that the payment was voluntary.
Economic duress
I am quite satisfied from the evidence as to the history of events which I have summarised above that Kolmar agreed to amend the letters of credit to increase the price and reduce the quantity and to accept and pay for the documents tendered as a result of illegitimate pressure amounting to economic duress on the part of Traxpo which left Kolmar with no practical choice but to agree to pay an increased price for such methanol as it did receive. Kolmar had purchased the methanol at an agreed price in order to supply it to Methanex, a very important customer. Traxpo’s refusal to supply the quantity which it contracted to deliver at the agreed price placed Kolmar in a position in which it had no real alternative but to submit to Traxpo’s demands and claim redress later. For every day that the cargo was not loaded Kolmar was exposed to ever increasing claims from the shipowners in respect of demurrage on the vessel it had chartered at $ 20,000 per day. Arguing with Traxpo would be likely to delay the loading of the vessel still further with an increasing likelihood that the vessel would be taken off the berth again and only allowed back after several days had elapsed.
If a full cargo was not loaded Kolmar faced a very large claim for deadfreight. If the vessel had sailed on 5th October the deadfreight would have been about $ 1,075,000. Kolmar desperately needed the cargo in order to supply Methanex, and, if it failed to do so, would not merely suffer a severe loss of reputation with a client of great potential importance but would in all probability be exposed to very large claims. The price under the Methanex contract was $ 394 CIF Houston. The market price was $ 520. So the claim would be for over $ 2 million. If Kolmar did not procure the cargo from Traxpo the only alternative would be to try to purchase an alternative in the open market. If this had been possible at all, which, in the then state of the market was doubtful, it would have been at a very high price. The prospect of speedy legal redress was remote and any obligation of Traxpo was unsecured.
Kolmar, through Ms John, made contemporaneous protests which fell on deaf ears. On 5th October Kolmar provided amendments to the letter of credit on the basis that it “had no other alternative but to accept”. Ms John protested verbally to Mr Tapuriah about Traxpo’s threatened non-compliance in her discussions with him. There was, however, a practical limit to the extent that Kolmar could protest having regard to the possibility that Traxpo would walk away from the contract completely, which it had threatened to do. Mr Tapuriah cannot have thought that there was any legal or moral justification in the stance that he was taking. He must have sensed Kolmar’s increasing desperation. So soon as the cargo was finally secured, Kolmar promptly asserted its legal rights and began these proceedings.
In those circumstances, subject to the putative defences that have been raised by Traxpo, Kolmar is, in my judgment, entitled to restitution of the increased payment which it has been forced to pay by the economic duress constituted by Traxpo’s illegitimate threat of breach of contract.
Provision of a letter of credit
Traxpo contends that it was not obliged to perform the contract at all because Kolmar failed to provide an acceptable letter of credit. Kolmar agrees that it was bound to provide a letter of credit which complied with the terms of the contract and which was fair and reasonable in its terms as a condition precedent to Traxpo’s obligations to perform any part of the loading operation: Kronos Worldwide Ltd v Sempra Oil Trading SARL [2004] 1 Lloyd’s Rep 260.
The question arises as to the time by which Kolmar was bound to provide such a letter. I understood from Mr Ashcroft’s submissions at the hearing that there was no authority on the point and none was cited to me. Authority is not, however, lacking.
In Ian Stach v Baker Bosley Ltd [1958] 2 Q.B. 130 the contract was for the sale of ship plates f.o.b. Benelux port for shipment to Canada in August-September 1956 with payment to be by confirmed irrevocable credit. The buyers failed to open the credit either by August 1st or by August 8th when the sellers called for it to be opened immediately. Diplock, J, as he then was, held that it was the duty of the buyers to establish the credit by August 1st at the latest and that, although the sellers had waived their right to treat the contract as repudiated by reason of their failure to do so until such time had elapsed after August 8th as could be regarded as “immediately”, on August 14th the sellers had been entitled to accept, as they did, the buyers’ breach as a repudiation of the contract.
Diplock, J considered himself bound by the decision of the Court of Appeal in Pavia & Co S.P.A v Thurmann-Nielsen [1952] 2 QB 84 that in c.i.f. contracts the credit must be opened at the latest at the beginning of the shipment period. In such a case, the seller is entitled, before he ships the goods to be assured that when he does so, he will get paid. He also referred to what he regarded as obiter observations of Denning LJ in Sinason-Teicher Inter-American Grain Corporation v Oilcakes and Oilseeds Trading Co Ltd [1954] 1 WLR 1394 that the correct view, if nothing is said in a c.i.f. contract as to the time for opening a letter of credit, is that the buyer must provide the letter of credit within a reasonable time before the date of shipment.
He then referred to five cases on f.o.b. contracts where it was either held or assumed that the credit had to be opened at the latest by the shipment date. But, as he observed, none of those cases were cases of a classic f.o.b. contract where the buyer was entitled to call for shipment at any time within and up to the end of the shipping period.
In the absence of authority on the matter he determined that the credit must be opened at the latest by the earliest shipping date. He rejected the suggestion that it had to be opened only a reasonable time before the actual shipping date, a result which he regarded as giving rise to great uncertainty undesirable in a commercial contract.
This is not, however, the way in which the matter was pleaded in the defence, where Traxpo’s contention was that Kolmar was bound to open the letter of credit within a reasonable time after the contract was made, alternatively in good time to allow the cargo to be prepared for loading and loaded within the contractual period for shipment. Kolmar’s reply asserts that its obligation was to provide a letter of credit a reasonable time before shipment was to occur.
Mr Ashcroft submitted that it was sufficient if the credit was opened within such time as would enable the vessel to load the contractual quantity within the shipment period.
Even if it stood alone, I would be minded to follow Diplock J’s decision in Ian Stach. His conclusion produces commercial certainty and results in the credit being available to pay the price at whatever date the buyer chooses to call for shipment during the shipment period. An obligation to open the letter of credit within a reasonable time after the contract date introduces an element of uncertainty and might have the result in a case where the contract date is, as here, very close to the commencement of the shipment period that the credit was not open when the seller was called upon to ship them or when he was reasonably preparing to do so.
In a classic f.o.b. contract the duty of the buyer is to nominate a ship at such time as will enable the seller to put the goods on board before the end of the shipment period: J J Cunningham Ltd v Robert A Munro & Co Ltd (1922) 13 Ll .L. Rep 216. But that does not, as it seems to me, determine when the buyer is bound to provide the letter of credit. An obligation to provide the credit within such a time as would enable the vessel to load the contractual quantity within the shipment period or within a good time for that purpose would, if the buyer called for the goods at the beginning of the period mean that he was not guaranteed a credit until the end. An obligation to open a credit within a reasonable time before shipment leaves the seller without the security of a credit at the beginning of the shipment period which he may need in order to open a letter of credit in favour of his supplier.
It seems to me, however, that the issue is concluded by the decision of the Court of Appeal in Glencore Grain Rotterdam B.V. v Lebanese Organisation for International Commerce [1997] 2 Lloyd’s Rep 386. In that case the sale was an f.o.b. sale for shipment in March (subsequently varied to April), payment to be by confirmed letter of credit. The Court held that that the buyers were obliged to open a letter of credit in accordance with the contract requirements before the shipment period began i.e. by April 1st at the latest. Terms of the letter of credit notified on March 24th and March 29th were not as required by the contract. On 1st April the sellers refused to ship the goods in accordance with the contract, giving an inadequate reason for doing so. Instead they demanded a price increase and insisted on more onerous payment terms. But they were held to be entitled to treat the contract as repudiated by reason of the absence on 1st April of a letter of credit conforming to the contract.
The letter of credit in the form in which it was on 21st September after the first amendment was in my judgment acceptable. The incorporated UCP provided that the shipper or consignor did not have to be the beneficiary but that the invoice must appear to have been issued by the beneficiary. Neither PEC nor Traxpo was, as it seems to me, entitled to insist on the letter of credit specifically providing that all third party documents including invoice were acceptable. If that be wrong the letter of credit in the form in which it was on 26th September was acceptable, as Mr Tapuriah confirmed on 28th September.
An acceptable letter of credit was not, therefore, opened by the beginning of the shipment period. But Traxpo waived Kolmar’s obligation to open an acceptable letter of credit by that date.
It did so (i) by asking, on 10th September for the letter of credit to be established in favour of PEC Ltd; (ii) by detailing, on 18th September, the amendments to the existing Letter of Credit that it sought; (iii) by asking for further amendments on 19th and 26th September; (iv) by saying on 27th September that it had no objection to the vessel being brought for loading subject to confirmation, inter alia, that the letter of credit had been perfected in accordance with PEC’s requirements; (v) by confirming on 28th September to Ms John that PEC has received the latest amendment to the letter of credit and had confirmed that the same appeared OK; and (vi) by never suggesting that the contract was to be regarded as at an end or that it was not obliged to ship for want of a satisfactory letter of credit or that it would be so regarded if a satisfactory letter of credit was not produced within some specified period. Throughout the period Kolmar continued to perform its side of the contract by making the vessel available for loading and (but against its will) amending the letter of credit. After 28th September Traxpo continued to seek and obtain further amendments to the letter of credit, which amendments included extensions of the shipment and expiry dates.
If the relevant question is whether or not a letter of credit conforming to the contract was produced within a reasonable time after the contract, then that obligation was, in my judgment satisfied, whether one takes 21st or 26th September as the date.
Although it had taken over three or four weeks to produce the letter of credit, it seems to me that in determining what is a reasonable time it is legitimate to take into account the facts (a) that Traxpo had made no demands for the opening of a letter of credit prior to 12th September; (b) that Mr Tapuriah had e-mailed brief details of what he wanted in the letter of credit on 10th September and that thereafter there had been negotiations between the parties with a view to accommodating Traxpo’s requests; (c) that there had also been extensive discussions as to the tanks from which the methanol might be supplied; and (d) that at no time before 26th September did Kolmar seek to have the cargo shipped nor did Traxpo have a full cargo which it was prepared to make available.
If the test is whether an acceptable letter of credit was opened within such a time as would enable the vessel to load the contractual quantity within the shipment period, then, if one is to take the loading rate taken in the contract for the purpose of calculating laytime, there was plenty of time for loading if the relevant date is 21st September. If the relevant date is 26th September then there was just sufficient (17,500 m.v. @ 175 m.t. per hour = 100 hours = 4 days and 4 hours).
If the test is whether the letter of credit was opened a reasonable time before shipment, the answer is that it was because the parties extended the letter of credit shipment date to cover the shipment that was to take place.
In any event, even if Kolmar was in breach of its obligations in respect of the opening of a letter of credit because it failed to open a letter of credit in time, Traxpo waived that breach for the reasons set out in paragraph 109 above.
Tank USTTL 204
The second point upon which Traxpo has sought to rely is that Kolmar wrongly rejected cargo from tank USTTL 204. It is, however, apparent from the evidence of Ms John, Mrs Sandelowski, and Mr Berkhout, Kolmar’s surveyor, that Kolmar did no such thing. Tank 204 was originally approved for loading. Traxpo then decided not to use it, presumably because they wanted it for another customer. In the event loading did take place from that tank on 17th October, presumably after it had been refilled. At no stage was the product in the tank rejected.
Agreed amendments to the letter of credit
Lastly Traxpo relies on the contention that the increased prices were paid pursuant to agreed amendments to the letter of credit. But those amendments, which were the security for payment of an increased price for a lesser amount of cargo, were themselves procured by economic duress. They were the means by which Traxpo, by threatening breach of contract, extracted more than the contract price.
The claim under this head is for $ 1,405,566.61 calculated as follows:
Payment made $ 5,178,403.30
Less
Price due under the contract
14,795.438 m.t. x $ 255 $ 3,772,836.69
$ 1,405,566.61
Restitution and want of consideration
In my judgment Kolmar is entitled to recover that sum by way of restitution since it has been deprived of it by Traxpo’s economic duress. Further that sum represents an amount that Kolmar has paid out for a consideration which has wholly failed. Traxpo gave no consideration for that payment except a promise to perform a contractual obligation to which it was already subject accompanied by a threat of non-performance of that obligation which amounted to economic duress. That is not good consideration: South Caribbean Trading Ltd v Trafigura Beheer BV [2005] 1 Lloyd’s Rep 128.
Intimidation
The tort of intimidation is established where (i) the defendant makes a demand backed by a coercive and unlawful threat; (ii) the claimant complies with that demand because of the coercive and unlawful threat; (iii) the defendant knows or should have known that compliance with its demand will cause loss and damage to the claimant and (iv) the defendant intends its demand to cause loss and damage to the defendant: Clerk and Lindsell (19th Ed) 25-65 – 25-87.
Those requirements are, as it seems to me, satisfied. Mr Tapuriah made demands for price increases which were backed by coercive and unlawful threats that Traxpo would not perform its obligations. Mr Tapuriah intended that Kolmar should comply with those demands in a way which would, as he knew, cause it loss. Kolmar did comply with those demands as a result of those threats.
Accordingly, Kolmar is entitled to $ 1,405,566.61 as damages for intimidation.
Short delivery
Kolmar claims that it was entitled to, and did call for delivery of 17,500 m.t., whereas Traxpo only supplied 14,795.438 m.t – a shortfall of 2,704,562 m.t. Accordingly it claims damages for short delivery as follows:
(1) Contract price
204.562 m.t*. x $ 255 + 2,500 m.t. x $ 265 $ 714,663.51
* 15,000 – 14,795.438
(2) Market price
2,704,562 m.t. x $ 520** $1,406.372.24
** The undisputed market value at the material time
(3) Difference $ 691,708.73
The only defence raised in respect of this claim is that Kolmar agreed to vary the contract so as to accept a lesser quantity of cargo in full discharge of Traxpo’s obligations.
In this respect there was no amendment effected by Mr Tapuriah’s request of 29th August 2007: see para 8 above. Nor can Traxpo rely upon its insistence on Kolmar making amendments to the letter of credit so as to reduce the quantity of cargo which the letter of credit was to cover. These were variations to facilitate payment of the quantity of cargo that Traxpo was willing to provide at the prices which it demanded. Kolmar’s agreement to open letters of credit for amounts lesser and prices higher than the contract was the result of Traxpo’s economic duress and voidable (and avoided) by Kolmar. It does not represent a freely agreed renegotiation of the contract.
The contract originally provided for 15,000 m.t. +/- 5% in Buyer’s option and an optional 2,000 – 3,000 +/- 5% in Buyer’s option. Kolmar nominated the vessel to carry a minimum cargo of 17,500 and that nomination was accepted by Traxpo. But then Traxpo asked Kolmar to make amendments to the letter of credit which provided for the 5% to be at Traxpo’s option and Kolmar agreed to do so. That agreement was not the result of any form of duress. In those circumstances it seems to me that the parties have agreed a variation in respect of the contractual quantity so that Traxpo would be entitled to deliver only 95% of 17,500 i.e. 16,625.As Evans LJ said in Glencore v Lorico, the parties’ agreement as to the terms of the letter of credit “may result in a letter of credit agreement which supplements or even varies the terms originally agreed”: p 394.
In those circumstances Kolmar’s damages are as follows:
(1) Contract price
204.562 m.t*. x $ 255 + 1,625 m.t. x $ 265 $ 482,788.31
* 15,000 – 14,795.438
(2) Market price
1,829.562. x $ 520** $ 951,372.24
** The undisputed market value at the material time
(3) Difference $ 468,583.93
Demurrage
The loading rate was agreed as 175 m.t/hr and the demurrage rate as $ 20,000 pdpr. On that footing the demurrage due is in the sum of $ 356,424.60. The vessel was on demurrage for 17.82123 days calculated in the manner set out in paragraph 35 of the Points of Claim at $ 20,000 per day.
The documents evidencing the demurrage claim were presented to Traxpo on 22nd October. The only point raised contemporaneously was that the claim was premature because a copy of the charterparty had not been provided and the voyage had not been completed. The voyage has now been completed. The former point is irrelevant because the contract simply referred to the standard form not to any actual charterparty. The pleaded defence sets out no particular reasons for denying or disputing the claim. It denies that it was a term of the contract that Traxpo would pay demurrage. But, as appears from clause 9, the laytime and demurrage were to be agreed (as they were) on the vessel’s nomination and the other maritime conditions were to be in accordance with the Asbatankvoy form, which by clause 8 requires the payment of demurrage.
In my judgment Kolmar is entitled to recover $ 356,424.60 under this head.
Shifting expenses
Kolmar is entitled to recover $ 5,162.13 for the expenses, payable to the shipowners, of shifting the vessel off the berth on 8th October due to the total lack of any cargo for loading, which was the result of Traxpo’s breaches of contract in failing to load the cargo within the shipment period and in falling and refusing to make cargo available unless Kolmar paid an increased price.
Conclusion
Accordingly Kolmar is entitled in my judgment to recover as follows:
(a) In restitution or as damages for intimidation: $ 1,405,566.61
(b) As damages for short delivery $ 468,583.93
(c) For demurrage $ 356,424.60
(d) Shifting expenses $ 5,162.13
Total $ 2,235,737.27
I shall hear counsel on the questions of interest and costs.
Note 1 The latter two were not on Kolmar’s approved list. [Back]
Note 2 The mathematics is wrong. The true figure is $ 351.9. [Back]
Note 3 The actual wording is more elaborate but the content is as set out. [Back]
Standard Chartered Bank v Dorchester LNG & Anor (Rev 1)
[2014] EWCA Civ 1382 [2014] WLR(D) 440, [2014] 2 CLC 740, [2014] EWCA Civ 1382, [2015] 2 All ER 395, [2015] 1 Lloyd’s Rep 97, [2015] 2 All ER (Comm) 362, [2015] 3 WLR 261
MooreBick J
Payment under the settlement
The judge proceeded on the footing that even on 7th July 2010 the obligation contained in the letter of credit still remained open for performance. In paragraph 63 of his judgment he held that the payment by SCB of the face value of the credit, together with interests and costs, implicitly amounted to an admission that the documents were compliant, that they were being taken up and that the letter of credit was being honoured. His reasoning reflected the argument put forward by Mr. Tselentis to the effect that SCB had finally been compelled to accept the documents and satisfy the debt that had arisen under the letter of credit. He also held that, because SCB had become the holder of the bill of lading pursuant to the letter of credit (which was issued before a right to possession of the goods had ceased to attach to possession of the bill), it had become the holder of the bill under a transaction effected in pursuance of an arrangement that satisfied the requirements of section 2(2)(a) of the Act.
These submissions were also made in support of SCB’s case on the appeal. Mr. Tselentis submitted that Gunvor had continued to press for payment pursuant to the letter of credit and by implication had invited SCB to accept the documents. It had brought proceedings claiming the amount due under the letter of credit as a debt and had eventually received it, together with interest and costs. Although SCB did not expressly say that it was taking up the bill of lading, that was the necessary effect of its actions. On making payment it ceased to hold the bill of lading to the order of Gunvor and held it in its own right. At that point the indorsement was completed by delivery. The fact that the cargo had been discharged some weeks earlier did not matter, because the case fell within section 2(2)(a) of the Act.
Mr. Foxton submitted that once SCB had rejected the bill of lading it could not unilaterally change its mind and decide to accept it. It remained open to Gunvor to make a further presentation, but it never did so. Throughout its exchanges with SCB Gunvor had insisted that the original presentation of the documents on 4th June 2010 had been valid and effective. No further presentation was necessary and none had been made. Although the claim had been pleaded in debt as well as damages, it was properly to be characterised as a claim in damages for failing to honour the contract contained in the letter of credit. Once the documents had been rejected the bill of lading was never subsequently delivered to SCB with the intention of completing the indorsement. Indeed, it would have been pointless for Gunvor to have done so, since that would have opened the door to a claim by SCB against Dorchester which would inevitably have found its way back to Gunvor itself under the letter of indemnity.
It is, perhaps, hardly surprising that the communications between the parties following the rejection of the documents had more of a commercial than a legal flavour about them. Mr. Tselentis sought to persuade us that during the last week of June 2010 SCB’s attitude had softened and that it had attempted to find a solution to the problem by negotiation, thereby suggesting that it had not taken a final decision one way or the other. As far as it goes, that appears to be correct, but it is also clear that SCB had by that stage recognised internally that the problems were of its own making. A negotiated solution was therefore attractive, but, the judge’s finding that it had rejected the documents was not challenged. The fact is that SCB was unwilling to meet Gunvor’s demands and did not do so until after proceedings had been issued.
SCB’s argument has the attraction of simplicity, but in my view Mr. Foxton was right in saying that once SCB had unequivocally rejected the bill of lading it could not unilaterally change its mind and decide to take it up. That could be done only with the consent of Gunvor, but whether that technically required a fresh presentation does not in my view matter. All that was necessary was for Gunvor to make it clear that it was willing for SCB to take up the documents and accept liability for payment of the amount stipulated in the letter of credit. If SCB had done so, it would not have been open to Gunvor to argue that it had not become the holder of the bill of lading.
Until the point at which proceedings were issued Gunvor, not surprisingly, did not formally characterise its claim as one in debt or damages; it took the straightforward position that it had made a valid presentation of documents under the letter of credit and that SCB was liable to it. If it be necessary to do so, I would accept Mr. Foxton’s submission that Gunvor relied throughout on the presentation made on 4th June, but since SCB did not agree to Gunvor’s demand, it is necessary to consider what happened thereafter.
After proceedings had been issued things moved quickly. SCB indicated that it was willing to pay the full amount claimed together with interest and costs. It asked to whose account the funds should be paid and was told to pay the principal sum with accrued interest to the account of Société Générale designated in the letter of credit and the sums in respect of costs to Gunvor’s solicitors. At that point there appears to have been no discussion about the nature of the liability or, more importantly, about what should happen to the bill of lading. In those circumstances Mr. Foxton submitted that the letter of credit mechanism for payment had not been operated in the true sense; SCB had simply asked where to make the payment and had been given the necessary directions. There would have been no need for further directions in order to enable SCB to comply with the letter of credit. The fact that it was asked to pay the principal and interest to Société Générale was simply a matter of practical convenience. He submitted that the parties had done no more than compromise the claim brought against SCB in the proceedings. In the absence of any agreement to the contrary SCB continued to hold the bill of lading to the order of Société Générale and Gunvor. He accepted, however, that neither of them had asked for it to be returned.
In the absence of any unequivocal demand by Gunvor for payment against acceptance of the documents, or of a clear agreement either about the basis on which the payment was being made or about the right to possession of the bill of lading, it is necessary to ascertain the parties’ rights by applying general principles of law. In order to do so it is necessary to have regard to their rights and obligations immediately before the payment was made. Perhaps the first question to consider is whether Gunvor’s demand for payment against the backdrop of the particulars of claim amounted to an implied request to SCB to perform the contract contained in the letter of credit by remitting its face value (together with interest representing damages for delay in payment) or whether it amounted to no more than a claim for damages for breach of the obligation contained in the letter of credit.
One might have expected that the clearest statement of Gunvor’s position immediately before the payment was made would be contained in the particulars of claim, but in my view that document is equivocal. Although the primary way in which the case is put is as a claim in debt, it is also pleaded as a claim for breach of contract in failing to honour the letter of credit. If the matter had proceeded to trial, the parties might well have given greater thought to the correct basis of the claim and its implications, but because of the rapid capitulation of SCB it was unnecessary for them to do so. One is therefore left with proceedings in which claims are made on alternative bases and a settlement which does not involve a necessary choice between them. In those circumstances it is necessary to consider the true nature of Gunvor’s cause of action. If it was to recover a debt, there was a corresponding obligation on Gunvor to transfer the documents, including the bill of lading, to SCB, since presentation and transfer of the documents was a condition of the existence of the debt, just as in a contract for the sale of goods transfer of property and payment of the price are co-ordinate conditions. If, on the other hand, the claim was for damages for breach of contract, presentation of the documents was necessary before the obligation to pay arose, but, payment having been refused, transfer of the documents was not necessary to give rise to a claim for damages.
The distinction between a claim in debt and a claim for damages is described in Chitty on Contracts, 31st ed., vol. 1, paragraph 26-008 as follows:
“A debt is a definite sum of money fixed by the agreement of the parties as payable by one party in return for the performance of a specified obligation by the other party or upon the occurrence of some specified event or condition; damages may be claimed from a party who has broken his contractual obligation in some way other than failure to pay such a debt.”
The corresponding passage in the 27th edition of Chitty, which was in materially identical terms, was approved by this court in Jervis v Harris [1996] Ch 195, per Millett L.J. at page 202G. This suggests that a claim for money due under a letter of credit following presentation of conforming documents sounds in debt rather than damages and although the judge did not say so in terms, I think it is clear that he proceeded on the basis that Gunvor’s claim was properly to recover a debt. However, the earlier authorities do not entirely support that conclusion.
The nature of the obligation constituted by a letter of credit depends, of course, on its terms, but where, as in this case, the credit is subject to UCP 600, that provides a useful starting point for the analysis. Article 2 of UCP 600 contains various definitions. It defines “credit” as any arrangement which constitutes a definite undertaking “to honour a complying presentation”, and for these purposes “honour” is defined as meaning to pay at sight (if the credit is available by sight payment), to incur a deferred payment undertaking and pay at maturity (if the credit is available by deferred payment) or to accept a bill of exchange and pay at maturity (if the credit is available by acceptance). In the minds of those responsible for framing UCP 600 the concept of honouring a letter of credit appears, therefore, to have been similar to that of honouring a bill of exchange.
In the case of a bill of exchange section 57 of the Bills of Exchange Act 1882 (which reflected the position at common law) prescribes the measure of damages for dishonour, which includes the amount of the bill, interest and the expenses of noting. The damages are to be deemed to be liquidated damages and accordingly no question of mitigation arises. Section 57 makes it clear, therefore, that a claim for dishonour of a bill of exchange sounds in damages, not debt, a view which appears to reflect the understanding of earlier commentators, including Chalmers himself (see Chalmers, A Digest of the Law of Bills of Exchange, Promissory Notes and Cheques, 1878, pages 163 & 166 – 167, Chitty on Bills of Exchange (11th ed., 1878, Ch. XXVII and Byles on Bills of Exchange (13th ed., 1879), Ch. XXXIII). That also appears to have been accepted as axiomatic by Morris J. in N.V. Ledeboter and Van Der Held’s Textielhandel v Hibbert [1947] 1 K.B. 964 at page 967, where he described the claim for dishonour of a bill of exchange as one sounding in damages.
There is surprisingly little authority, however, on the nature of a claim for dishonour of a letter of credit. In Belgian Grain & Produce Co. Ltd v Cox & Co. (France) Ltd (1919) 1 Ll. L. Rep. 256 the defendant opened a letter of credit in favour of the claimant in respect of the price of a parcel of Japanese green peas. The defendant declined to accept the documents on the grounds that one of the policies of insurance did not cover transhipments and the claimant sued for the face value of the credit. As well as contesting the adequacy of the policy, the defendant argued that the claim lay in damages, which were to be measured by the amount which the claimant could have recovered from the buyer for non-acceptance of the goods. That argument was rejected. Bankes L.J. (with whom Warrington and Scrutton L.JJ. agreed) said:
“Now, no authority has been cited for that proposition, and, speaking for myself, and as far as I know anything of such letters of credit as this, it would seem to me that the contention, if sound, would defeat the object of letters of credit in this form, which, as I understand it, is to secure payment of the amount of the purchase price of the goods, or of the actual amount named in a letter of credit, in exchange for the particular document mentioned therein, and one of the objects is to avoid any controversy in reference to the amount of damage and to secure that, as against the documents, if they are in order, the amount of money named in the letters of credit should be paid over.” (Emphasis added.)
The court gave judgment for the face value of the credit in exchange for the documents.
Two things emerge from that decision. The first is that, although the nature of the claimant’s cause of action was not central to the dispute, the court appears to have accepted that the claim sounded in damages measured by reference to the face value of the credit. Mr. Tselentis submitted that the court rejected the contention that the claim could sound only in damages, but in my view the issue to which the judgment was directed was simply whether the claimant could recover the face value of the credit or a lesser sum calculated by reference to the loss of bargain under the contract of sale. The second is that the court required the claimant to deliver the documents to the defendant. It appears that the goods were still being held to the order of the claimant, but the ability to give delivery of the goods does not appear to have been regarded as essential to the success of the claim.
Stein v Hambro’s Bank of Northern Commerce (1921) 9 Ll. L. Rep. 433. 507 concerned a claim for money due under a letter of credit, the issue being whether the claimant could recover damages in the amount of the face value of the credit or was limited to the loss sustained on the contract of sale. On presentation of the documents they were rejected and were taken away by the claimant who sued the bank for the face value of the credit. Having decided that the documents had been wrongfully rejected, Rowlatt J. heard argument on the measure of damages and reserved judgment. On giving his decision he said (page 507):
” . . . I took time to consider whether the damages which the plaintiff was entitled to recover were simply the money equivalent of the bill or whether they were the same damages as he would be entitled to as against a buyer for non-acceptance of the goods.
. . . The question is whether the plaintiff is suing upon a contract to pay money upon the fulfilment of certain conditions which have not been fulfilled, or whether he is suing for the breach of an obligation to carry through a transaction under which something has still got to be done by the plaintiff on the analogy of the position which arises where a buyer refuses to accept goods the property in which has not yet passed.
It seems to me that this is clearly a case of a simple contract to pay money upon the fulfilment of conditions which have been fulfilled. The bank had simply to accept the bill when the proper documents were brought to them. They were brought to them. The plaintiff in effect put them down on the counter of the bank, asked for acceptance, and the bank would not give acceptance. Plaintiff rather than leave the documents there took them away again. There is no question arising as between buyer and seller as to the buyer having some opportunity of inspecting the goods or anything of that sort. The obligation of the bank is absolute, and is meant to be absolute, that when the documents are presented they have to accept the bill. . . .
. . . if the bank want the documents they have got to pay the charges . . . “
Despite the judge’s description of the credit as “a simple contract to pay money upon the fulfilment of conditions”, I think it is clear that he proceeded on the footing that the claim properly sounded in damages rather than debt. It is clear that, as in the previous case, the real issue between the parties was whether damages were to be measured by the face value of the credit or the loss of bargain on the contract of sale. The nature of the contract pointed in favour of the former. Once again, however, the court appears to have accepted that the bank had a right to take up the documents on payment of the charges.
In Urquhart Lindsay & Co. Ltd v Eastern Bank Ltd [1922] 1 K.B. 318 a letter of credit covering the payment of the price of goods deliverable by instalments was repudiated by the opening bank. Rowlatt J. again expressed the view that the claim sounded in damages. He considered it elementary that “as a general rule the amount of damages for non-payment of money is only the amount of the money itself.” A similar view was expressed by Greer J. in Dexters Ltd v Schenker & Co. (1923) 14 Ll. L. Rep. 586, another claim under a letter of credit, as follows at page 588:
“It is common practice that where a sum of money has become due and has not been paid under the terms of a document the claim is framed in the form of a claim simply for the money provided by the undertaking contained in the document, but I suppose, strictly speaking, after the date of payment has passed and payment has not been made, the way to read a claim of this sort is that it is a claim for damages for the non-payment of money, and in ninety-nine cases out of a hundred the amount of damages will be the sum which there has been an undertaking to pay.”
Mr. Tselentis submitted that this passage was contrary to principle and in any event obiter. Moreover, later authorities to which he drew our attention proceeded on the basis, some more explicitly than others, that on presentation by the beneficiary of conforming documents an obligation sounding in debt is created in his favour.
Power Curber International Ltd v National Bank of Kuwait Ltd [1981] 2 Lloyd’s Rep. 394 concerned a letter of credit opened by the defendant bank in favour of the plaintiff in respect of the price of goods sold to a third party in Kuwait. It incorporated the Uniform Customs and Practice for Documentary Credits (1974 Revision). Documents were to be presented to the bank at its offices in North Carolina, where the plaintiff carried on business. The bank paid the first instalment, but refused to pay the balance on the grounds that the courts of Kuwait had made an order forbidding any further payment. The plaintiff sued the bank for the outstanding amount due under the letter of credit and obtained summary judgment on the grounds that there was no defence to the claim. It appears to have been accepted by all concerned that the claim sounded in debt, because the defendant argued, among other things, that the lex situs of the debt was Kuwait and that for that reason payment was unlawful. Lord Denning and Griffiths L.J. rejected that submission on the grounds that the lex situs of the debt was North Carolina. Waterhouse J. did not take that view, but he did not think that the order of attachment made by the Kuwaiti court affected the existence of the debt which he considered had been created by the letter of credit.
I do not think that any further assistance is to be derived from the decision of the House of Lords in United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] A.C. 168, to which Mr. Tselentis drew our attention, although it is fair to say that the way in which Lord Diplock expressed himself is entirely consistent with the submission that the claim in the present case sounds in debt. That also appears to have been the assumption in Floating Dock v The Hong and Shanghai Banking Corporation [1986] 1 Lloyd’s Rep. 65, in which, following a successful claim against the defendant for failing to honour a letter of credit, Evans J. gave judgment in favour of the plaintiff for the face value of the credit and ordered a separate enquiry as to damages.
In Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1999] 1 Lloyd’s Rep. 36 the defendant, acting through its agent Bank Melli, rejected a tender of conforming documents leading to a claim under the letter of credit. Sir Christopher Staughton observed (at page 38, col.1) that:
” . . . instead of leaving the documents with Bank Melli and suing for the amount payable under the credit, Seaconsar took them back. Hence their claim against Bank Markazi is not in debt, for the amounts which were due under the credit if the documents were not validly rejected; it is a claim in damages for wrongful failure to honour the credit.”
Finally our attention was drawn to the case of Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2014] 1 Lloyd’s Rep 432, in which, in an attempt to enforce an arbitration award in its favour, the claimant sought a third party debt order under CPR Part 72 in respect of amounts due under two letters of credit of which the defendant was the beneficiary. CPR Part 72 allows the court on the application of a judgment creditor to make an order requiring a third party to pay the judgment creditor “the amount of any debt due or accruing due to the judgment debtor from the third party.” Although he set aside an interim third party debt order made earlier, Field J. appears to have accepted that in principle the obligations under the letters of credit constituted debts for the purposes of the rules.
Whatever view may have been taken at the time when letters of credit were in their infancy, in my view the modern cases support the proposition that if the opening or confirming bank fails to pay against presentation of conforming documents under a letter of credit payable at sight, the beneficiary may sue in debt to recover the value of the credit, provided he is willing and able to transfer the documents to the bank against payment. That is consistent both with the essential nature of the undertaking contained in the letter of credit and with the expectation of those who make use of such instruments to finance international trade. It has been said on many occasions that letters of credit are the life-blood of international commerce and are intended by those who use them to be “as good as cash”. In the words of Lord Diplock in United City Merchants v Royal Bank of Canada at page 183F, the whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods. If the beneficiary is willing and able to transfer the documents to the bank, therefore, he is entitled to recover the face value of the credit as a debt. If he is not willing or able to hand over the documents, the position is different, as Sir Christopher Staughton pointed out in Seaconsar Far East v Bank Markazi. Since the contract provides for payment against documents, the beneficiary is not entitled to recover the full value of the credit otherwise than on surrender of the documents.
It follows that in my view the judge was right to proceed on the footing that Gunvor’s claim to recover the face value of the credit properly sounded in debt rather than damages (subject to the right to recover any consequential losses as damages). Gunvor had no right to recover the full value of the credit otherwise than against transfer of the documents. It did not ask for the documents to be returned and by accepting payment of the face value of the credit necessarily accepted that SCB was entitled to take them up. Whether that is characterised as a further presentation or merely an insistence that SCB accept the documents pursuant to the original presentation seems to me not to matter. Either way there was an unconditional transfer of the documents sufficient to constitute SCB the holder of the bill of lading and it is not open to Gunvor to say that it did not intend to transfer the documents or to complete the indorsement by delivery. If Gunvor had retained the documents and had sued SCB to recover damages for breach of contract in wrongfully rejecting the documents, it would have been obliged to give credit for their value, but that did not happen.
The effect of the transfer to SCB
It was common ground below that by 7th July 2010, when Gunvor accepted payment from SCB, the bill of lading no longer gave a right as against Dorchester to possession of the goods to which it related because that right had been lost once discharge began on 15th June 2010. In my view that was not in fact the case, because the rights under the contract of carriage, including the right to obtain delivery of the goods from the carrier, did not cease when the goods were discharged against the letter of indemnity. They remained in existence and were capable of forming the basis of a claim against Dorchester for misdelivery. Nonetheless, the action was fought on the basis I have described and neither party suggested that we should depart from that concession at this stage.
The judge therefore had to decide whether the transfer of the documents to SCB involved a transaction effected in pursuance of any contractual or other arrangements made before the time when a right to possession of the goods ceased to attach to possession of the bill under section 2(2(a) of the Act. Having considered the decisions in The David Agmashenebeli [2003] 1 Lloyd’s Rep 92, The Ythan [2006] 1 Lloyd’s Rep 457 and The Pace [2010] 1 Lloyd’s Rep 183, he held that the proper approach was to identify “the real and effective cause” of the transfer to SCB of the bill of lading, since that would enable him to determine whether the case fell within section 2(2)(a). On that basis he held that the transfer to SCB of the bill of lading had been made pursuant to the letter of credit and that therefore, even if Dorchester were right in saying that SCB did not become the holder of the bill of lading until 7th July 2010, it nonetheless satisfied the requirements of section 2(2)(a) of the Act and obtained title to sue.
Dorchester did not initially obtain permission to appeal against that part of the judge’s decision, but on the hearing of its renewed application, which was made on a more limited basis, it was granted permission to amend its grounds of appeal to contend that this was not a case in which the requirements of section 2(2)(a) of the Act had been satisfied so as to transfer to SCB rights of suit under the contract of carriage. Mr. Foxton submitted that even if there had been a further presentation of the documents on 7th July 2010, the delivery of the bill of lading to SCB on that occasion did not constitute a transaction effected in pursuance of a contractual or other arrangement made before it had become spent, because the letter of credit had expired on 12th June 2010.
I do not myself think that it is helpful to seek to identify the “real and effective cause of the transfer”. Given that section 2(2)(a) refers to a transaction effected in pursuance of a contractual or other arrangement, I think it is preferable simply to identify the arrangement, if any, pursuant to which the transfer was made. It is common ground that the letter of credit expired on 12th June 2010. Once the letter of credit has expired the beneficiary is no longer entitled to require the issuing bank to honour it, since the obligation to do so has lapsed. However, in my view Mr. Tselentis was right in saying that, if documents are presented out of time, it remains open to the bank to waive the expiry date and accept them against payment of the face value of the credit. For obvious reasons the bank is unlikely to take that step without first obtaining the agreement of its own customer, but that is a matter for the bank itself. In the present case the documents were presented before the letter of credit expired and if Gunvor’s actions are to be interpreted as insisting on the validity of that presentation, as I think they are, there is no difficulty in accepting that the transfer of the documents occurred pursuant to the original terms of the letter of credit, apart, that is, from the wholly unjustifiable delay on the part of SCB in honouring its obligation. The alternative view is that the documents were transferred to SCB pursuant to a fresh tender made after the letter of credit had expired, which the bank chose to accept. Mr. Foxton submitted that that is what occurred and that it constituted a transaction effected in pursuance of a fresh arrangement made after the time when the right to possession of the goods ceased to attach to possession of the bill of lading. In my view, however, that does not reflect commercial reality. The fact is that, if the documents were transferred to SCB against payment of the face value of the credit, as was the case, the transaction was one which in real terms was effected pursuant to the letter of credit, despite the fact that it did not occur at the time, or under the precise circumstances, envisaged by it. In my judgment, therefore, the judge was right to hold that if SCB became the holder of the bill of lading on 7th July 2010, it did so in circumstances under which the rights under the contract of carriage were transferred to it.
It may seem surprising at first sight that Gunvor, which at the time when it asked the vessel to deliver the goods to its new sub-buyers was the owner of those goods and entitled to recover the bill of lading relating to them, should have incurred a liability to indemnify the vessel’s owners in respect of a misdelivery of the goods, and all as a result of the actions of a bank which had dishonoured its obligation to it under the letter of credit. The explanation lies, however, in the way Gunvor chose to procure the discharge of the cargo. It could have called for the return of the bill of lading from SCB, cancelled the indorsement and presented it to the vessel itself. Had it done so, however, it would have been left with nothing more than a claim for damages against the bank. Instead it chose to leave the bill of lading with the bank and obtain delivery of the goods under a letter of indemnity, all the while pressing SCB for payment. By obtaining delivery otherwise than against the bill of lading Gunvor took the risk that SCB would accede to its demand, accept the documents and thus acquire the right as holder of the bill of lading to demand delivery from the vessel’s owners. When that eventually occurred, the delivery of the goods constituted an interference with the rights which had passed to SCB at a later date.
For those reasons, although I respectfully differ from the judge in relation to the meaning and effect of section 5(2)(b) of the Act, I think that he was right to hold that SCB became holder of the bill of lading on 7th July 2010 and that as a result the rights of suit under the contract of carriage became vested in it. I would therefore dismiss the appeal.
Lord Justice Briggs :
I agree.
Sir Bernard Rix :
I also agree.
Den Danske Bank A/S & Ors v Surinam Shipping Ltd (Mauritius)
[2014] UKPC 10
Lord Toulson
UCP 500 (or to use its full title “The Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No 500”) included the following provisions:
“Article 1 – application of UCP
The Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No 500, shall apply to all Documentary Credits . . . where they are incorporated into the text of the Credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the Credit.
Article 7 – advising bank’s liability
a. A Credit may be advised to a Beneficiary through another bank (the ‘Advising Bank’) without engagement on the part of the Advising Bank but that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay.
b. If the Advising Bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the Credit and if it elects nonetheless to advise the Credit it must inform the Beneficiary that it has not been able to establish the authenticity of the Credit.
Article 9 – liability of Issuing and Confirming banks
a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:
i) if the Credit provides for sight payment – to pay at sight;
b. A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
i) if the Credit provides for sight payment – to pay at sight…”
Under UCP 500 the duties of an advising bank are thus clearly defined and do not include responsibility to the beneficiary for payment of sums due under the documentary credit from the issuing or confirming bank. In the present case the letter of credit and the letter from MCB to the appellants dated 6 September 1996 made it clear that MCB’s role was that of an advising bank.
The trial judge said:
“In the present case the MCB took a more proactive role in the transaction. According to the letter of credit the DDB requested the MCB to advise the Credit to Beneficiary No 2 ie Surinam Shipping ‘without adding your confirmation’, and the MCB in turn informed Plaintiff of the letter of credit by way of letter and does mention therein that neither the credit nor the attached advice ‘conveys any engagement on our part’. However it did not limit itself to checking the authenticity of the credit. It gave advice to the effect ‘the description of the relative goods has to correspond exactly to the description in the credit’ and urged Plaintiff to ‘pay special attention to the terms and conditions’ which it underlined. It further invited Plaintiff not to have any hesitation ‘in contacting us for guidance, if need be’. When the DDB highlighted discrepancies in the documents, the Defendant, on 30 October 1996, wrote to Plaintiff informing it of same and stating ‘we hold documents at your disposal, at your request we shall be quite prepared to contact the first beneficiary’. Subsequently the MCB was actively involved in the long exchange of correspondence between the parties communicating the DDB’s demands and reservations to Plaintiff, holding the Plaintiff’s documents in its possession, seeking instructions from Plaintiff and acting in accordance. Further the representative of Plaintiff testified to the effect that when the matter dragged on, the Defendant advised Plaintiff to submit all the documents under both B and D to ensure that payment would be effected.
As such it cannot be said that the MCB’s participation was restricted to checking the authenticity of the credit as advising bank. Its involvement went beyond that of an advising bank as per the UCP DC500.”
The Court of Appeal rejected the judge’s reasoning. It examined the correspondence between the parties and concluded:
“There is no evidence to indicate that the MCB had in any way added its confirmation to the documentary credit that it was asked by DD Bank to advise to SS Ltd. Nowhere in the long exchange of correspondence that ensued between the parties is there any indication that the MCB was conveying any engagement on its part. On the contrary that correspondence shows beyond any doubt that the MCB was no more than an advising bank and DD Bank was the bank that had confirmed the Credit. In the circumstances any claim in relation to the documentary credit should have been directed against DD Bank. As no claim could in law lie against the MCB, the action of SS Ltd against MCB should have been set aside. And as no action could lie against the MCB, the question of DD Bank . . . taking up the defence of MCB and indemnifying it could not arise.
It is also relevant to state that the action of SS Ltd against the MCB is based solely on the letter of credit. It is neither an action for damages for negligence against the MCB nor the equivalent of an action for damages for breach of warranty of authority…”
Ms Mootien-Rogbeer endeavoured to persuade the Board that the trial judge’s analysis was right and the Court of Appeal were wrong, but it was an impossible task. The suggestion that by its letter to the appellant dated 6 September 1996, enclosing the letter of credit, MCB undertook a role beyond that of an advising bank, and accepted responsibility for the payment of sums due under the credit, is contrary to the entire language and tenor of the letter. Throughout the correspondence which followed between the parties, regarding both tranches of the credit, MCB acted as a channel of communication between the appellant and the respondent, but the trial judge did not identify and Ms Mootien-Rogbeer was not able to identify any letter which showed a change in MCB’s role from that of advising bank to that effectively of a confirming bank. The Board has examined the correspondence and can see no basis for finding that MCB accepted direct liability for payment of the credit.
Procedure before the Court of Appeal
The trial judge delivered her judgment on 20 May 2009. The (present) respondent’s notice of appeal, dated 8 June 2009, did not challenge the judge’s conclusion about the role of MCB. The grounds of appeal related to her finding that the appellants had presented all the necessary documents within the period of validity of the letter of credit (which the judge found to have been extended). MCB did not appeal against the judgment but on the contrary it gave notice, dated 11 June 2009, that it intended to resist the respondent’s appeal.
The respondent served a skeleton argument on 1 November 2010, which was confined to the grounds set out in its notice of appeal.
The appeal was heard on 18 November 2010. The transcript of the hearing shows that counsel for the respondent began his submissions by taking the point that MCB was merely an advising bank and that it was therefore not under any liability to the appellant so as to give rise to a right of indemnity against the respondent. He developed his argument by reference to the language of the letter of credit, the correspondence and the provisions of UCP 500, without interruption by Ms Mootien-Rogbeer. His submissions took him some time and continued into the afternoon.
When Ms Mootien-Rogbeer came to address the court, she began by observing that there was no appeal by MCB and she submitted that the court should disregard any submission made on behalf of the (now) respondent that MCB was not liable to the appellant. However, she made no reference to the fact that this point had not been raised in the respondent’s notice of appeal, nor did she suggest that she was not in a position to argue the point.
The court heard next from counsel for MCB. He submitted that the respondent was right in its argument that there was no liability on the part of MCB. At this point Ms Mootien-Rogbeer intervened to remind the court that MCB had not appealed against the judgment. The court indicated that it was fully aware of this and invited counsel for MCB to continue, as he did. It was therefore apparent that the court was allowing the point to be argued. The position taken by Ms Mootien-Rogbeer in the Court of Appeal was that the court ought not to entertain it, because the respondent was not entitled, in her words, to “step into the shoes of the defendant” (MCB), which had not itself appealed against the trial judge’s finding of liability.
Before the Board, Ms Mootien-Rogbeer submitted that the respondent was precluded from challenging MCB’s liability to the appellant before the Court of Appeal by its failure to raise the point in its grounds of appeal. She also repeated her submission before the Court of Appeal that the respondent was not entitled to put itself in the place of MCB so as to dispute the liability of MCB.
As to the first point, it would have been open to Ms Mootien-Rogbeer to have objected in the Court of Appeal to the respondent raising a point which was not in its grounds of appeal without obtaining leave to amend, and to have opposed any grant of leave or to have submitted that any grant of leave to amend should have been on terms, for example, that the hearing was adjourned. She did not take that course. The Board has some sympathy with Ms Mootien- Rogbeer’s submission that she was caught by surprise, but even so she had time (for example over the mid-day adjournment) to consider her response. The Court of Appeal had a discretion whether to allow the respondent to argue a point which it had not originally raised in its notice of appeal, and the Board would not interfere with its decision on a procedural matter of that kind unless it considered that there had been a real miscarriage of justice. This is not such a case, and in any event Ms Mootien-Rogbeer had a full opportunity to present her argument on the role of the MCB to the Board (as she had done to the trial judge).
The argument which Ms Mootien-Rogbeer made to the Court of Appeal, and repeated before the Board, that it was not open to the respondent to challenge the trial judge’s finding of liability on the part of MCB, which had not itself appealed against the decision of the trial judge, is unsound. A defendant which is entitled to indemnity from a third party may have no interest in disputing its own liability. Indeed, in the present case MCB adopted the position in its skeleton argument before the Court of Appeal that it was indifferent as to the outcome of the appeal, because if the present respondent’s appeal was successful, both the claim against itself and the respondent would fall, but if it was unsuccessful, MCB would be entitled to indemnity. One of the purposes of a defendant who claims an indemnity from a third party being able to join the third party in the action is precisely in order that the third party should be bound by any findings made by the court between the claimant and the defendant. The corollary is that a third party who is joined in an action, and will therefore be bound by findings made between the claimant and the defendant, is entitled to advance any defence which may be available to the defendant.
For those reasons the Board dismisses the appeal.
WJ Alan & Company Ltd v El Nasr Export & Import Co
[1972] EWCA Civ [1972] 2 QB 189, [1972] EWCA Civ 12, [1972] 2 All ER 127, [1972] 1 Lloyd’s Rep 313, [1972] 2 WLR 800
Master of the Rolls
THE ISSUES
The buyers say that the sterling credit was decisive: because, at the time it was given and accepted, it amounted to payment of the price. Alternatively they say that the money of account was varied by agreement, or that the sellers waived payment in Kenyan currency and accepted sterling instead.
The first point, whether the Letter of Credit amounted to payment, is of much importance: but it does not arise if the second point is good, we are all agreed that the second point is good. So it is not strictly necessary to go into the first point. But both Counsel have done much research on it. They presented their arguments in full before us and with great ability. They invited us to express our views, whatever the outcome. I propose to do so. In any case, the discussions have helped me in coming to a decision. And I think it would be a pity if the work of Counsel were lost and forgotten. There is a good precedent, too. In the Hedley Byrne case ( [1964] AC 465 ), it was unnecessary for the House to consider whether there was a duty to use care in making statements: but they did so. So I will try, albeit on a lower level, to do likewise.
THE MEANING OF THE COMMERCIAL TERMS
In any consideration of letters of credit, it is important to know the meaning of the terms used by commercial men. I can do this best by explaining the course of business here. This is a typical case of the use of commercial letters of credit. Here we have a seller of Coffee in Kenya. He sells it to a buyer in Tanzania. That buyer resells it to a second buyer in Spain.
The Kenyan seller is not willing to part with the goods or the documents relating to them unless he is assured of payment. So, he stipulates with his Tanzanian buyer that payment is to be made by “confirmed irrevocable letter of credit”: see Trans Trust SPRL v. Danubian Trading Co. [1952] 2 Q.B. 297 /304. That means that the Tanzanian buyer must establish in favour of the Kenyan seller a Letter of Credit by which a banker promises to pay the price – or to accept drafts for the price — in exchange for the shipping documents relating to the goods, i.e. the Bill of Lading, Invoice and so forth. The Letter of Credit must, of course, be “irrevocable”. A “recovable” Letter of Credit is not of much use to the seller, because the banker, on the buyer’s instructions, might then revoke it at any time. The Letter of Credit must, in addition, be “confirmed”. That is to say, it must be confirmed by a banker who is readily accessible to the seller (e.g. in Nairobi or Dar-es-Salaam): because the seller wants to be able to go to such a banker and get payment against documents. The seller may stipulate for payment in cash or by drafts accepted by the confirming banker. Such drafts may be “at sight”, that is, payable on demand, or after a fixed period, such as ninety days after sight.
The Tanzanian buyer did not himself go to his own banker to establish the credit. He resold the coffee to a Spanish buyer and stipulated that the Spanish buyer should establish a “transferable” letter of credit in his favour. The intention of the Tanzanian buyer was, of course, to transfer so much of it as was necessary to meet his obligations to the Kenyan seller. The Spanish buyer then went to his bank in Madrid and asked them to issue a transferable irrevocable letter of credit in favour of the Tanzanian buyer. The Madrid Bank would, of course, insist on the Spanish buyer providing them with the necessary funds or otherwise giving them security to back the credit. On being so satisfied, the Madrid Bank issued their own transferable irrevocable letter of credit in favour of the Tanzanian buyer. The Madrid Bank were the “issuing bank” and, by issuing the Letter of Credit, they gave their own promise to honour it in exchange for documents in accordance with its terms.
The Tanzanian buyer, armed with that credit from the Madrid bank, went to his own bank in Dar-es-Salaam and told them that he wanted to “transfer” to the Kenyan seller so much of it as was necessary to meet his obligations to the Kenyan seller. He also asked them to “confirm” it; that is to say, to add to it (in addition to the promise of the Madrid bank) a promise on their own account that they would honour it on presentation of the documents. The Tanzanian bank would, of course, require the Madrid Bank to put them in funds or otherwise satisfy them that their “confirmation” would be backed by the Madrid bank.
The Tanzanian Bank then issued their confirmation to the Kenyan seller. They were the “confirming” bank. By it they promised to pay the Kenyan seller the price of the goods against delivery of documents in accordance with the terms set out therein. The payment was to be cash or by drafts payable at sight.
These promises by the issuing banker and by theconfirming banker are, of course, enforceable against the bank by the seller.
It turned out, however, that the credit (as issued by the Madrid Bank and confirmed by the Tanzanian Bank) was not in conformity with the contract of sale made by the Kenyan sellers with the Tanzanian buyers. It was a “non-conforming” credit. It did not fully conform in regard to the first shipment. But the sellers shipped 279 tons, presented the documents to the “confirming bank” and obtained payment in sterling. The letter of credit did not conform at all in regard to the second shipment. It did not, for instance, conform as to the date of shipment or the name of the vessel. Nor was it expressed in Kenyan currency (which was the currency in the contract of sale). It was expressed in Sterling. In consequence, arrangements were made so as to get over the non-conformity. All concerned agreed in the arrangements. The date of the shipment was extended: and another vessel was named. But no one asked for the currency to be altered so as to conform. The price stated in the credit was expressed in sterling and remained in sterling throughout. The Kenyan sellers shipped the goods in that knowledge, and obtained the documents relating to them. All this was done before sterling was devalued.
But, before the Kenyan sellers presented the documents for the second shipment to the confirming bank, sterling was devalued. The Kenyan sellers then presented the documents to the confirming bank and obtained payment in sterling in accordance with the credit. Now they claim to be entitled to more. They say that they were and are entitled to have the price measured in Kenyan currency: that the proceeds of the credit go in reduction of that price: but do not discharge it altogether: and that they are entitled to the balance.
THE EFFECT OF A LETTER OF CREDIT
When an irrevocable Letter of Credit is issued by one bank and confirmed by another, it may be a “conforming” credit; that is, one which conforms exactly to the contract of sale: or it may be a “non-conforming” credit; that is, one which does not conform exactly to the contract of sale, but is afterwards modified or accepted as being satisfactory to all concerned. It then becomes equivalent to a ”conforming credit”. In any such case the question arises whether the credit is to be regarded as absolute payment of the price, or as conditional payment of it, or as no payment at all but only a means by which payment may be obtained; i.e. as collateral security.
This must be a matter of the true construction of the contract: but, in order to construe it, it is important to bear in mind what the consequences are in each case.
ABSOLUTE PAYMENT
If the letter of credit is absolute payment of the price, the consequences are these: The seller can only look to the banker for payment. He can in no circumstances look to the buyer. The seller must present the documents to the banker and get payment from him in cash or get him to accept sight or time drafts. If the banker does not take up the documents, the seller will retain them, resell and sue the banker for damages. If the banker takes up the documents in exchange for time drafts, and the banker afterwards becomes insolvent, the seller must prove in the liquidation. He cannot sue the buyer.
There is an observation in the High Court of Australia which suggests that a confirmed irrevocable Letter of Credit may amount to absolute payment. In Saffron v. Societe Miniere Cafrika (1958) 100 C.L.R. at page 243, the High Court said that: “a provision for payment by irrevocable and confirmed letter of credit……..might not unreasonably be regarded as a stipulation for the liability of the confirming bank in place of that of the buyer”. And in Soproma S.p.A v. Marine & Animal By-Products Corp.[1966] 1 Lloyd’s Rep. 367 at page 386, Mr Justice McNair said:
“Under this form of contract, as it seems to me, the buyer performs his obligation as to payment if he provides for the sellers a reliable and solvent paymaster”.
Mr. Justice McNair did not however, have all the arguments before him.
In my opinion a letter of credit is not to be regarded as absolute payment, unless the seller stipulates, expressly or impliedly, that it should be so. He may do it impliedly if he stipulates for the credit to be issued by a particular banker in such circumstances that it is to be inferred that the seller looks to that particular banker to the exclusion of the buyer. There are some cases in the United States which are to be explained in this way, such as Vivacqua Irmaos, S.A. v. Hickerson (1939) 190 Southern Reporter 197; Ornstein v.Hickerson (1941) 40 Federal Supplement page 305. And in the Soproma Case [1966] 1 Lloyds; there was a stipulation for a particular banker, which may account for Mr. Justice McNair’s observation.
CONDITIONAL PAYMENT
If the letter of credit is conditional payment of the price, the consequences are these: The seller looks in the first instance to the banker for payment: but, if the banker does not meet his obligations when the time comes for him to do so, the seller can have recourse to the buyer. The seller must present the documents to the banker. One of two things may then happen: (1) The Banker may fail or refuse to pay or accept drafts in exchange for the documents. The seller then, of course, does not hand over the documents. He retains dominion over the goods. He can resell them and claim damages from the buyer. He can also sue the banker for not honouring the credit: see Urquhart Lindsay & Co. v. Eastern Bank Ltd. [1922] 1 K.B. 319. But he cannot, of course, get damages twice over. (ii) The bank may accept time drafts in exchange for the documents, but may fail to honour the drafts when the time comes. In that case the banker will have the documents and will usually have passed them on to the buyer, who will have paid the bank for them. The seller can then sue the banker on the drafts: or if the banker fails or is insolvent, the seller can sue the buyer. The banker’s drafts are like any ordinary payment for goods by a bill of exchange. They are conditional payment, but not absolute payment. It may mean that the buyer (if he has already paid the bank) will have to pay twice over. So be it. He ought to have made sure that he employed a “reliable and solvent paymaster”.
There are several cases which show that in the ordinary way a letter of credit is conditional and not absolute payment. But, as Mr. Tapp properly observed, they are all concerned with time drafts. Thus in New Zealand Hindley v. Tothill [1894] 13 NZLR 13 at page 23, the Court of Appeal said that the seller had the liability “of the bank in the first instance, and on the bank’s default, that of the defendants (the buyers)”. In the United States Greenough v. Munroe (1931) 53 Fed. Reports. 2nd Ser. 362 at page 365, the United States Court of Appeal for the 2nd Circuit (New York) said that:
“the authorities favour the view that there is no presumption that the seller takes a draft drawn under a letter of credit in absolute payment of the buyers’ obligation to pay for the merchandise: hence upon default by the bank upon its draft, the seller may look to the buyer”.
Finally in England in Newman Industries Ltd V. Indo-British Industries Ltd. [1956] 2 Lloyd’s Rep. 219 at page 236, Lord Justice Sellers said in regard to a time draft:
“I do not think there is any evidence to establish, or any inference to be drawn, that the draft under the letter of credit was to be taken in absolute payment. I see no reason why the plaintiffs should not look to the defendants as buyers, for payment”.
Many of the textbooks treat a letter of credit as conditional payment. Thus Professor Davis in 1953 said that:
“such authority as there is supports the view that the letter of credit constitutes conditional, and not absolute, payment. Therefore, should the issuing bank fail to honour the seller’s drafts, drawn in conformity with the terms of the letter of credit, the rights of the seller against the buyer will revive”,
see his book on commercial credit, 2nd edition (1953) at page 46; 3rd edition (1963) at page 48; Mcgrath in the 4th edition of Gutteridge (1968) pages 29 to 33; and in 7th edition of Paget (1966) page 620-2 is to the same effect.
NO PAYMENT AT ALL
If the letter of credit is no payment at all, but only a means by which payment may be obtained, i.e. if it is only collateral security, the consequences are these: The seller ought to present the documents to the banker. If the seller does not do so, he will be guilty of laches in enforcing his security and the buyer will be discharged — see Peacock v. Purcell (1863) 14 CB., NS. 728.
But if on presentation the banker fails or refuses to take up the documents, then (if the letter of credit is only collateral security) the seller will be entitled to take the documents round to the buyer (or send them to him) and demand that he take them up and pay the price. This situation finds no place in any of the authorities. There is a statement in an old case in Pennsylvanian Bell v. Mors (1839) 5 Wharton 189 at page 203, when it was said that
“a credit with a banker is not payment, but a means of payment, more or less secure according to the solidity of the depositary; and the greater or less certainty of the security cannot affect the question of its character: it is but a security still”.
That statement was quoted with approval by Finckalstein in 1930. (Commercial Letters of Credit) at page 156, who says that the seller “desires additional security without the surrender of anyrights that he may have against the buyer”. But the complete answer was given by Mr. Justice McNair in Soproma S.p.A. v. Marine & Animal By-Products Corporation [1966] 1 Lloyd’s Rep. 367 at page 386;
“It seems to me to be quite inconsistent with the express terms of a contract such as this to hold that the sellers have an alternative right to obtain payment from the buyers by presenting the documents direct to the buyers. Assuming that a letter of credit has been opened by the buyer (for the opening of which the buyer would normally be required to provide the bank either with cash or some form of authority) could the seller at his option disregard the contractual letter of credit and present the documents direct to the buyer? As it seems to me, the answer must be plainly in the negative”.
CONCLUSION AS TO PAYMENT
As a result of this analysis, I am of the opinion that in the ordinary way, when the contract of sale stipulates for payment to be made by confirmed irrevocable letter of credit, then, when the letter of credit is issued and accepted by the seller, it operates as conditional payment of the price. It does not operate as absolute payment.
It is analogous to the case where under a contract of sale, the buyer gives a bill of exchange or a cheque for the price. It is presumed to be given, not as absolute payment, nor as collateral security, but as conditional payment. If the letter of credit is honoured by the bank when the documents are presented to it, the debt is discharged. If it is not honoured, the debt is not discharged: and the seller has a remedy in damages against both banker and buyer.
VARIATION OR WAIVER
All that I have said so far relates to a “conforming” letter of credit; that is, one which is in accordance with the stipulations in the contract of sale. But in many cases – and our present case is one – the letter of credit does not conform. Then negotiations may take place as a result of which the letter of credit is modified so as to be satisfactory to the seller. Alternatively, the seller may be content to accept the letter of credit as satisfactory, as it is. without modification. Once this happens, then the letter of credit is to be regarded as if it were a conforming letter of credit. It will rank accordingly as conditional payment.
There are two cases on this subject. One is Panoutsos v. Raymond Hadley Corporation of New York [1917] 2 K.B. 273, but the facts are only to be found fully set out in 22 Commercial Cases 207. The other is Enrico Trust v. Fisher ( [1960] 2 Lloyds 340 ). In each of those cases the letter of credit did not conform to the contract of sale. In each case the non-conformity was in that it was not a confirmed credit. But the sellers took no objection to the letter of credit on that score. On the contrary, they asked for the latter of credit to be extended; and it was extended. In each case the sellers sought afterwards to cancel the contract on the ground that the letter of credit was not in conformity with the contract. In each case the Court held that they could not do so.
What is the true basis of those decisions? Is it a variation of the original contract? or a waiver of the strict rights thereunder? or a promissory estoppel precluding the seller from insisting on his strict rights? or what else?
In Enrico Trust, Mr. Justice Diplock said it was a “classic case of waiver”. I agree with him. It is an instance of the general principle which was first enunciated by Lord Cairns, Lord Chancellor, in Hughes v. Metropolitan Railway Co. [1877] 2 A.C. 439, and rescued from oblivion by Central London Property Trust Ltd. v. High Trees House, Ltd. [1947] K.B. 130. The principle is much wider than waiver itself: but waiver is a good instance of its application.
The principle of waiver is simply this: If one party, by his conduct, leads another to believe that the strict rights arising under the contract will not be insisted upon, intending that the other should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on the strict legal rights when it would be inequitable for him to do so – see Plasticmoda Soc. per Azioni v. Davidsons Manchester Ltd. [1952] 1 Lloyd 527 , 539. There may be no consideration moving from him who benefits by the waiver. There may be no detriment to him by acting on it. There may be nothing in writing. Nevertheless, the one who waives his strict rights cannot afterwards insist on them.
His strict rights are at any rate suspended so long as the waiver lasts. He may on occasion be able to revert to his strict legal rights for the future by giving reasonable notice in that behalf, or otherwise making it plain by his conduct that he will thereafter insist upon them — Tool Metal Manufacturing Co. v. Tungsten Electric Co. [1955] 1 WLR 761 But there are cases where no withdrawal is possible. It may be too late to withdraw: or it cannot be done without injustice to the other party. In that event he is bound by his waiver. He will not be allowed to revert to his strict legal rights. He can only enforce them subject to the waiver he has made.
Instances of these principles are ready to hand in contracts for the sale of goods. A seller may, by his conduct, lead the buyer to believe that he is not insisting on the stipulated time for exercising an option – Bruner v. Moore [1904] 1 Ch. 305. A buyer may, by requesting delivery, lead the seller to believe that he is not insisting on the contractual time for delivery – Charles Rickards Ltd. v. Oppenheim [1950] 1 K.B. 616 , 612. A seller may, by his conduct, lead the buyer to believe that he will not insist on a confirmed letter of credit: Plasticmoda ( [1952] 1 Lloyds 527 ) but will accept an unconfirmed one instead – Panoutsos v. Raymond Hadley Corporation of New York [1917] 2 K.B. 273: Enrico Trust v.Fisher ( [1960] 2 Lloyd 340 ). A seller may accept a less sum for his goods than the contracted price, thus inducing him to believe that he will not enforce payment of the balance – Central London Property Trust Ltd. v. High Trees House Ltd. ( [1947[ 1 K.B. 150 ); D. & C. Bulders v. Rees [1966] 2 QB 617 In none of these cases does the party who acts on the belief suffer any detriment. It is not a detriment, but a benefit to him, to have an extension of time or to pay less, or as the case may be. Nevertheless he has conducted his affairs on the basis that he has that benefit and it would not be equitable now to deprive him of it.
The Judge rejected this doctrine because, he said, “there is no evidence of the buyers having acted to their detriment”. I know that it has been suggested in some quarters that there must be detriment. But I can find no support for it in the authorities cited by the Judge. The nearest approach to it is the statement of Viscount Simonds in the Tool Metal case ( [1955] 1 WLR 761) that the other must have been led “to alter his position”, which was adopted by Lord Hodson in Emmanuel Ayodeji Ajayi v. R. T. Briscoe (Nigeria) Ltd. ([1964] 1 WLR 1326 at page 1330 ). But that only means that he must have been led to act differently from what he otherwise would have done. And, if you study the cases in which the doctrine has been applied, you will see that all that is required is that the one should have “acted on the belief induced by the other party”. That is how Lord Cohen put it in the Tool Metal Case …[1955] 1 WLR 761 at page 799), and is how I would put it myself.
The Judge also rejected the doctrine because of something which was said in the recent case of Woodhouse & Ors. v. Nigerian Produce Marketing Board ( [1971] 2 W.L.R. 272) about estoppel: but no question of waiver arose there: no question of letters of credit; or anything of that kind. It has no application here and neither Counsel relied in any way upon it before us.
CONCLUSION
Applying the principle here, it seems to me that the sellers, by their conduct, waived the right to have payment by means of a letter of credit in Kenyan currency and accepted instead a letter of credit in sterling. It was, when given, conditional payment: with the result that, on being duly honoured (as it was) the payment was no longer conditional. It became absolute, and dated back to the time when the letter of credit was given and acted upon. The sellers have, therefore, received payment of the price and cannot recover more.
I would pay tribute to the judgment of the Judge – with which in great part I entirely agree. I only differ from him on the ground of variation or waiver, which does not appear to have been argued before him as fully as before us,
I would, therefore, allow this appeal and enter judgment for the defendants.
LORD JUSTICE MEGAW: The sellers, W.J. Alan & Co. Ltd., are merchants in Nairobi, and the buyers El Nasr Export & Import Company are an Egyptian state trading company. The sellers and the buyers, the latter through their Dar-es-Salaam branch, made two contracts on 12th and 13th July 1967, for the sale of coffee, F.O.B. Mombasa. The first contract was for 250 tons, with shipment date September/October 1967. The second contract, out of which the present dispute arises, was for a further 250 tons, with shipment date October/November 1967. Apart from the different shipment dates, the two contracts were in identical terms.
The price clause in each contract was:
“Price: Shs. 262/- (two hundred and sixty two) per cwt. of 112 lbs. nett F.O.B. Mombasa”.
The payment clause read:
“Payment: By confirmed, irrevocable letter of credit to be opened at sight one month prior to shipment as stipuled in this contract”.
It was provided in each contract that it was made under the terms and conditions of the London Coffee Trade Association. There is no doubt but that the proper law of the contracts was English law. The Association’s conditions expressly provided that English law should govern.
At the time when the contracts were made there was parity between sterling and Kenyan currency. Twenty Kenyan shillings were of identical value with one pound sterling. The dispute in this case has arisen because, while shipment of part of the coffee under the second contract was actually in process of being made, but before payment for that shipment had been made or was due, sterling was devalued, whereas Kenyan shillings were not devalued. Thereafter one pound sterling was not worth 20 Kenyan shillings, but was worth only 85.7% of 20 Kenyan shillings. It therefore becomes necessary to decide whether the money of account — that is, the currency by reference to which the amount of the contractual payment is to be calculated — is Kenyan shillings or sterling.
Meanwhile, before the devaluation of sterling, various relevant events had happened. The buyers, it would appear, had re-sold the coffee to sub-buyers in Spain. Those sub-buyers had established an irrevocable transferable letter of credit in favour of the buyers in a Spanish Bank in Madrid. It would seem that the credit had been established in sterling. The buyers, in purported performance of their obligations to the sellers under the contracts of 12th and 13th July, had arranged for the transfer of a part of that Madrid credit to the National Bank of Commerce, Tanzania, in Dar-es-Salaam. That bank, by letter of 20th September 1967, notified the sellers of the availability to them of that transferred letter of credit, and the Bank itself confirmed the credit. In so doing, the bank, of course, was acting on the buyers’ instructions.
Apart from any question as to the currency in which the credit was expressed, the credit fell short in various respects of compliance with the buyers’ obligations under the contracts of sale. It was established late. Each contract called for a separate letter of credit, not, as was offered, one single credit for the two contracts. The credit did not extend over the whole of the shipment periods. It stipulated for at least one certificate of quality which the contracts did not require. It might be construed as calling for the whole of the shipments under both contracts to be made by one named vessel. It is not necessary to consider these discrepancies further, because the sellers took no objection to them; though they did thereafter ask for and receive certain amendments, including an extension of date.
So far as concerns the currency involved, there can be no doubt whatever that the confirmed letter of credit was expressed to be in sterling and that the only obligation which it imposed upon the bank was an obligation to make payment in, and measured by, sterling. The confirming bank’s letter expressly stated that the credit was ”up to an amount of £131.000 (Sterling one hundred thirty one thousand pounds)”. Clause 7 of the letter may not be of much significance in other respects, since it relates merely to a cable to be sent to the buyers “for insurance purposes”. It is, however, of some significance, in respect of the currency question, that there is a reference in that clause, in the Spanish language, to “the price of Stg. £262 per long ton”. So the contractual 262 shillings per cwt. had become, at least, for purposes of the confirmed credit, £262 per ton. So far as that transaction was concerned, sterling was the money of account. Sterling had been made the money of account in the bank’s offer of payment. That offer was made by the bank on the instructions of the buyers. It was an offer for the purpose of providing the payment, and the only payment, stipulated by the contracts of sale.
The sellers did not raise any complaint as to the confiration of the letter of credit in those terms. They did not complain about the currency. Instead, they at once took advantage of the confirmed credit by operating on it. By 20th September 1967, 88 tons of coffee, under the first contract, had been shipped in the “Vinland Saga” at Mombasa. The sellers presented documents and obtained payment from the bank. The documents included an invoice, No. 17, dated 20th September. It expressly referred to the credit. It used the words “£262 per long ton”. While the resulting sum was initially shown in shillings, the total was expressed as “£23064 3. 9.” In other words, it was a sterling invoice. We have not seen the documents relating to payment, but it is safe to assume that the draft corresponded with the invoice total, showing pounds, shillings and pence: so that payment was by sterling draft. A further 191 tons were shipped on 20th September, further bills of lading for that quantity being issued on that date. This shipment completed the 250 tons of the first contract and also comprised 29 tons towards the fulfilment of the second contract. The invoice, No. 18, was unambiguously a sterling invoice, expressed in pounds, shillings and pence. Again, no doubt, the draft was in sterling to correspond with the invoice and the terms of the credit.
221 tons still remained to be shipped under the second contract. That quantity was loaded in the “Maria Teresa” and bills of lading were issued on 16th November 1967. An invoice for 221 tons (Invoice No. 28) had been prepared by the sellers with the date 18th November. Once again, it was a sterling invoice: the computation was expressed as “£262 per long ton”: it was all in sterling: the total was £57,877 15. 9. Before the documents were presented for payment came the news of the devaluation of sterling. It was still not known if Kenyan shillings would follow sterling. The sellers, leaving the invoice in other respects as originally prepared, added the words: “Part payment of balance due…..” As is clear from the terms of a letter dated 22nd November from the sellers’ bank in Nairobi, the Ottoman Banks to the confirming bank in Dar-es-Salaam, the sight draft which accompanied Invoice No. 28 was expressed as £57,877 15. 9. Payment in accordance with the draft was ultimately made to the sellers by the confirming bank. However, when it became known on 21st November, that the Kenyan currency was not going to be devalued, the sellers prepared a further invoice, No. 28B, in the sum of Shs. 165,530/45. This sum is the difference between the amount of Kenyan shillings referable to 221 tons at Shs.262/- per cwt. and the amount of Kenyan shillings which would have been realised in exchange for £57,877.15.9. after devaluation. Invoice No. 28B was accompanied by a sight draft, drawn, not on the confirming bank (who clearly could not be made liable to pay anything more) but on the buyers, for Shs.165,530/45. The buyers refused to accept or pay the draft on the ground that they did not owe the sellers anything. The sellers protected that refusal. Battle was joined.
The first issue is whether in the original contract, the contract of 13th July 1967, the money of account was initially Kenyan currency or sterling, to my mind, Mr. Justice Orr was right, for the reasons given by him, in holding that when that contract was made the money of account was Kenyan. The fact that it was expressed in a form which was appropriate for Kenyan currency and was not appropriate for sterling must outweigh, and far outweigh; the various indications relied upon by the buyers as pointing to sterling.
However, in my judgment the currency of account was subsequently varied from Kenyan currency to sterling. That being so, the sellers have been paid the full amount to which they are entitled and they have no valid claim against the buyers.
The contract of sale contained its own express provision for payment, which I have already quoted in full. I repeat the essential words: “Payment: by confirmed, irrevocable letter of credit…..”. There is nothing else in the contract, at least in its express terms, which adds to, subtracts from, or qualifies that contractual provision as to payment of the price. It was the buyers’ obligation to procure that a bank should offer to the sellers its confirmation of an irrevocable credit which would provide for payment of the contract price as specified in the contract of sale, against delivery to the bank of the proper documents.
The offer made by the confirming bank, as I have already said, did not comply, in several respects, with what the sellers were entitled to require. However, the only non-conforming aspect of the offer which I regard as relevant for the purposes of this appeal is the term of the offer in respect of currency. That, in my view, is not only relevant: it is vital.
The confirming bank’s offer, made to the sellers with the knowledge of, and on the instructions of, the buyers, was an offer which involved sterling, not merely as the currency of payment, but as the currency of account, in respect of that transaction. The sellers accepted the confirming bank’s offer, including its terms as to currency, by submitting invoices and drafts with the form and contents which I have already described.
As I see it, the necessary consequence of that offer and acceptance of a sterling credit is that the original term of the contract of sale as to the money of account was varied from Kenyan currency to sterling. The payment, and the sole payment, stipulated by the contract of sale was by the latter of credit. The buyers, through the confirming bank, had opened a letter of credit which did not conform, because it provided sterling as the money of account. The sellers accepted that offer by making use of the credit to receive payment for a part of the contractual goods. By that acceptance, as the sellers must be deemed to have known, not only did the confirming bank become irrevocably bound by the terms of the offer (and by no other terms), but so also did the buyers become bound. Not only did they incur legal obligations as a result of the sellers’ acceptance – for example, an obligation to indemnify the bank – but also the buyers could not thereafter have turned round and said to the sellers (for example, if Kenyan currency had been devalued against sterling) that the bank would thereafter pay less for the contractual goods than the promised sterling payment of £262 per ton. If the buyers could not revert unilaterally to the original currency of account, once they had offered a variation which had been accepted by conduct, neither could the sellers so revert. The contract had been varied in that respect.
The sellers, however, contend that they were, indeed, entitled to make use of the non-conforming letter of credit offered to them without impairing their rights for the future under the original terms of the contract, if and when they chose to revert. They seek to rely on the analogy of a sale of goods contract where the goods are deliverable by instalments, and one instalment falls short of the prescribed quality. The buyer is not obliged, even if in law he could do so, to treat the contract as repudiated. He is not, it is said, even obliged to complain. But he is in no way precluded from insisting that for future instalments of the goods the seller shall conform with the precise terms of the contract as to quality. That is not, in my opinion, a true analogy. The relevant transaction here is not one of instalments. It is a once-for-all transaction. It is the establishment of a credit which is to cover the whole of the payment for the whole of the contract. Once it has been accepted by the sellers, the bank is committed, and is committed, in accordance with its accepted terms, and no other terms. Once the credit is established and accepted it is unalterable, except with the consent of all the parties concerned, all of whose legal rights and liabilities have necessarily been affected by the establishment of the credit. Hence the sellers cannot escape from the consequences of the acceptance of the offered credit by any argument that their apparent acceptance involved merely a temporary acquiescence which they could revoke or abandon at will, or on giving notice. It was an acceptance which, once made, related to the totality of the letter of credit transaction; and the letter of credit transaction was, by the contract of sale, the one and only contractual provision for payment. When the letter of credit was accepted as a transaction in sterling as the currency of account, the price under the sale contract could not remain as Kenyan currency. For the buyers it was submitted further that, if there were not here a variation of the contract, there was at least a waiver, which the sellers could not, or did not properly revoke.
I do not propose to go into that submission at any length. On analysis, it covers much the same field as the question of variation. In my view, if there were no variation, the buyers would still be entitled to succeed on the ground of waiver. The relevant principle is, in my opinion, that which was stated by Lord Cairns in Hughes v. The Metropolitan Railway Company ( (1876-77) LR 2 App. Cas. 439 ), at page 448. The acceptance by the sellers of the sterling credit was, as I have said, a once-for-all acceptance. It was not a concession for a specified period of time or one which the sellers could operate as long as they chose and thereafter unilaterally abrogate: any more than the buyers would have been entitled to alter the terms of the credit or to have demanded a refund from the sellers if, after this credit had been partly used, the relative values of the currencies had changed in the opposite way.
We were invited to consider a large number of authorities cited from the Courts of Australia, New Zealand and the United States as well as of this country; and on the basis of those authorities to formulate propositions of general principle as to the effect upon a buyer’s liability of the establishment of a confirmed letter of credit. Does the mere establishment of the credit, completed by confirmation, discharge the buyer’s liability completely? Or does it discharge it provisionally, and, if so, subject to precisely what provision? With all respect, I do not think it is necessary, nor would it be helpful, to seek to formulate general principles on these fascinating topics. As became apparent from the numerous cases cited, the relevant factors, particularly as to the relevant terms of the individual sale contracts, vary so widely that it would be dangerous to state general principles, unless the statement were to be so hedged about with reservations and qualifications as to render the principles useless. However, without seeking to formulate general principles, I am satisfied that the discussion which we have heard on this topic, when it is related to the particular facts of this particular case, indicates an-other ground for deciding this appeal in favour of the buyers.
On the simple form of contractual provision for payment in this sale contract with which we are concerned, the sellers, in my view, have no right of requiring payment (i am not, of course, speaking of damages for breach) otherwise than in accordance with, and by means of, a confirmed irrevocable letter of credits so long, at any rate, as no default is made by the bank in its performance of the letter of credit obligations. There are cases in which a contract on its true construction imposes on the buyer a potential liability to make payment direct to the seller in certain circumstances, outside or in addition to payment by the bank under a duly established letter of credit. An example is to be found in the facts of Urquhart Lindsay & Co. Ltd v. Eastern Bank Ltd. ( [1922] 1 K.B. 318). But there is no scope for such an implication in the present contract of sale. Here the contractual obligation is “payment by confirmed, irrevocable letter of credit….”. If such a credit is duly established, and if payment is duly made in accordance with its terms, I see no scope for any liability on the part of the buyers to make, or on the part of the sellers to require, any other or additional payment. Here the credit was, it is true, not duly established. But the non-compliance of the credit with the contract of sale was, in my opinion, unquestionably waived, and irrevocably waived, by the sellers. On the facts of this case, then the credit which was established has to be treated as a conforming credit. On the terms of this contract of sale, there remains no obligation on the buyers to make any payment to the sellers, because they have discharged the whole of their contractual obligation as to payment when a conforming credit has been established and payment has actually been made under that credit, in accordance with its terms, to the full extent that the sellers have properly sought to draw upon it. It follows that, even if there were no variation or relevant waiver in respect of the terms of the con-tract of sale, I should hold that the sellers’ claim fails on that quite separate and independent ground.
It is apparent, and indeed we have been told, that some of the arguments before Mr. Justice Orr followed a very different line in certain respects from the arguments which have been presented to us. The learned Judge, in a very lucid and careful judgment, disposed of a difficult and complex question which has not been further argued on this appeal, the parties having accepted the Judge’s decision. He also dealt with the question of the original currency of account in a manner to which I should wish, respectfully, to pay tribute. Certainly no blame can attach to him because he did not, on some of the issues which have been put forward as being important in this Court, have the opportunity of considering the merits of the arguments now presented.
For the reasons which I have given, I am of opinion that the buyers have made all the payment which was due from them. I would allow the appeal
Credit Industriel et Commercial v China Merchants Bank
[2002] EWHC 973 (Comm) [2002] 2 All ER (Comm) 427, [2002] CLC 1263, [2002] EWHC 973 (Comm)
Steel J
Background
The underlying transaction is not directly pertinent to any issues arising under the L/C. However the details were put before the court so as to provide the full picture. The original sale contract between Lalanne and Jiangsu was dated the 16th July 1999 and related to “about 10,000 cbm Okoume logs +/- 10%”. The specified grades were C1 40%, CE 50% and CS 10%, at a price of US $197 per cbm C & F free out Zhangjiagang. The terms of payment were per irrevocable letter of credit “issued by an international prime bank acceptable to seller’s bank payable 100% at 90 days from Bill of Lading date.” The contract was amended on the 13th September to add a shipment of two parcels of African round logs totalling about 82 CBM +/- 10% on the same terms.
The L/C, expressly available at any bank in France, was advised to Lalanne through Credit Lyonnais in Paris. As finally amended it provided:
31F New date of expiry 10th October 1999
39A % tolerance 10
41D Available Any bank in France by negotiation
42C Drafts 90 days from B/L date for 100% of invoice value showing this L/C and date of issue
42A Drawee – CMB
45A Description goods – Fresh cut Okoume logs …
– Grade: C1 40%, CE 50%, CS 10%…..
-….African round logs
46A Documents required – Manually signed Commercial invoice in 3 originals and 3 copies.
– Full set (including 3 original and 3 non-negotiable copies) of clean on board ocean bills of lading…
– Packing list in triplicate issued by beneficiary.
– Certificate of quantity in three copies issued by beneficiary.
– Certificate of origin in 1 copy.
– Certificate of quality in 3 copies issued by beneficiary….
47A Additional conditions – All documents must be made in English.
– Both credit amount and shipment quantity 10% more or less are allowed.
78A Instructions to pay – Documents should be sent by courier service…
– Upon receipt of the documents in compliance with the terms and conditions of this credit, we will accept the draft and reimburse negotiation bank as per instructions.
The L/C and associated documents were presented to CIC for payment on 7th October 1999. The documents were accepted and, under cover of a letter dated the 11th October, they were forwarded by courier to CMB. DHL delivered the documents to CMB on Friday, 15th October, the last day of validity of the L/C. The bank was closed on the Saturday and Sunday. The documents were accordingly checked, by a Mr Fu Peng, on Monday 18th October. He identified what he regarded as some discrepancies and duly reported to his superior Mr Jian Kang Liu (who gave oral evidence at the trial) the deputy manager of the International Business Department of CMB Nanjing branch.
In the result, CMB sent the following SWIFT message to CIC on Tuesday 19th October:-
“Please be advised that the following discrepancies found:
+ Beneficiary’s draft not made in English
+ Irregular L/C No. shown on P/L.
+ Original of P/L Cert. of Quantity and Cert. of Quality not submitted.
+ Under invoice No. 1062 percentage of grade shown on invoice not complied with P/L.
We refuse the documents according to Art. 14 UCP no. 500. Should the disc. being accepted by the applicant, we shall release the docs to them without further notice to you unless yr instructions to the contrary received prior to our payment. Documents held at yr risk for yr disposal.”
The immediate response from CIC was that, as regards the drafts, the French language was “obligatory”; as regards the packing lists and other certificates, they were originals that had been signed “manually”; and, as regards the invoice, there was a 10% allowance. Vis a vis the incorrect L/C number in the packing list, the beneficiary was simply going to send a new version with the correct number. CMB were asked to review their rejection.
CMB were unmoved. In particular, the defendant insisted, in a message dated 21st October, that:-
a) The documents required by the L/C to be in English included the drafts;
b) The certificates had to be treated as copies since they were not marked as originals;
c) The percentage grades in the invoice were described as 40: 50: 10 but the percentage grades calculated from the packing list were 38.64: 51.13: 10.23; and
d) The new packing list could not be presented late.
The arguments have continued in this vein ever since.
In the meantime, the vessel had sunk. Lloyd’s Maritime Information Service has provided a summary to the effect that SANAGA was reported to have been taking in water off Durban on 11th October. In due course, the vessel was abandoned and left to drift. It reportedly sank on 18th October. There was some suggestion from CIC that the cargo had not been insured by Jiangsu and that this had prompted them to persuade their bank to take all possible steps to avoid liability under the letter of credit, persuasion all the more likely, it was said, because Jiangsu was a major customer of the bank, with the deputy governor of Chung Sui province appointed to a non-executive role.
However there was no convincing evidence to support the idea that there was no insurance cover. Indeed, Jiangsu had written to Lalanne on the 18th November seeking documentation to present to underwriters. Furthermore, Lalanne appeared to have learned of the casualty only on 22nd October, and there is no evidence that Jiangsu learned any earlier. Indeed, Mr Liu’s evidence was that he was told about it by Mr Ni Wein-Jun of Jiangsu on 10th November. Any suspicion of an ulterior motive in rejecting the documents on 20th October can be set aside.
The letter of credit matured on 13th December. No payment having been made, CIC threatened legal action. This prompted CMB to seek, anonymously, advice on the discrepancies from the ICC Banking Commission in Paris. The questions posed were as follows:
Q1. Do all documents herein include or exclude drafts?
In spite of the fact that a draft is called a financial document in URC 522, it is only regarded as “additional” documents if drawn on applicant according to UCP 500, can it imply that drafts drawn on the issuing bank is one “required” or “general” documents?
Q2. If the beneficiary’s country stipulates the drafts must be drawn in its mother language, whether the issuing bank and the applicant are bound by such a foreign law according to Art. 18 (d) (The Applicant shall be bound by and liable to indemnify the banks against all obligations and responsibilities imposed by foreign laws and usages)?
Q3. Whether or not it is material for the discrepancy of a slightly different L/C no on the P/L?
Q4. If the requirement of Grade: CI 40 pct, Ce 50 pct, CS 10pct means percentage of each grade of goods, can such percentages of grade be also increased or decreased within the tolerance stipulated for quantity and amount?
Notably, no query was posed as to the issue of originality. The response from the ICC was as follows:
“Conclusion
Q1. In principle drafts are included in the documents to be checked. However, it should be noted that the ICC Banking Commission itself was of the opinion that (see TA267 / query 2) “ the requirement for the presentation of a draft is usually at the insistence / request of the issuing bank and not the applicant. Therefore, a discrepancy involving a draft drawn on the issuing bank is of no concern of the applicant nor one on which they should arbitrate as to whether to accept or not”.
Q2: Neither the issuing bank nor the applicant are bound by such law in the beneficiary’s country
Q3: This is not a material discrepancy
Q4: The percentage of each grade of goods is subject to a tolerance of + / – 10%.”
Surprisingly, this response appears to have fortified CMB’s view that they were entitled to reject the documents. The impasse thus created stretched on into the summer. On the 5th June, CMB sent the following message:
“THOUGH WE HAVE DONE OUR BEST TO PERSUADE THE APPLICANT TO ACCEPT YOUR DISCREPANT DOCUMENTS, THEY INSIST ON THEIR POSITION OF REFUSING THE DOCS.
THE DOCS REMAIN UNPAID PENDING YR FURTHER INSTRUCTIONS.
PLS ADVISE US ASAP WHEN THE DOCS SHOULD BE RETURNED TO YOU FOR YR DISPOSAL.
BEST REGARDS.
INT’L DEPT.”
The reply from CIC dated the 8th June was:
“WE CONFIRM THAT MR PHILIPPE LEON DUFOUR OF OUR FOREIGN DEPARTMENT WILL ATTEND YOUR OFFICES FOR A MEETING ON 15TH / 16TH JUNE IN ORDER TO DISCUSS THE CURRENT DISPUTE.
WE NOTE YOUR REQUESTS CONCERNING THE DOCUMENTS. IF, FOLLOWING OUR MEETING, WE ARE UNABLE TO RESOLVE THIS DISPUTE TO OUR SATISFACTION, MR PHILIPPE LEON DUFOUR WILL TAKE THE DOCUMENTS WITH HIM. PLEASE ENSURE THE DOCUMENTS ARE AVAILABLE. THE TAKING OF THESE DOCUMENTS IS STRICTLY WITHOUT PREJUDICE TO OUR POSITION THAT THE DOCUMENTS COMPLY WITH THE TERMS OF THE LETTER OF CREDIT.”
The meeting duly took place on the 15th June. The CIC delegation included M. Philippe Leon-Dufour, Senior Vice President of the bank’s international division. He was accompanied by Miss Hu Shan, CIC’s representative in Shanghai, who acted as interpreter. They both gave oral evidence at the trial. The representatives from CMB included Mr Liu. There were minor disputes as to the form and content of the meeting. It was common ground that, despite the inability to reach agreement on the issue of discrepancy, CMB made it plain that they were not disposed to hand over the documents to M. Leon-Dufour. The expressed justification for this stance was that the documents should be returned by courier, being the manner in which they had arrived. In his oral evidence, Mr Liu further sought to justify the refusal to hand over the documents to M. Leon-Dufour by reference to the fact that the message detailed above was coded 999 and was thus not authenticated. Accordingly, it was asserted, he and his colleagues could not be satisfied that M. Leon-Dufour had authority to take the documents.
The day after the meeting, CIC sent a further message, which was also coded 999, as follows:
“WE REFER TO THE MEETING TODAY BETWEEN PHILIPPE LEON DUFOUR AND YOURSELVES IN WHICH YOU AGAIN REFUSED TO MAKE PAYMENT UNDER THE ABOVE LETTER OF CREDIT. YOU ALSO REFUSED TO RETURN THE DOCUMENTS TO MONSIEUR PHILLIPE LEON DUFOUR AS WE REQUESTED. IN SUCH CIRCUMSTANCES, PLEASE RETURN THE DOCUMENTS TO OUR OFFICES AS SOON AS POSSIBLE BY DHL. THIS REQUEST FOR THE RETURN OF THESE DOCUMENTS IS STRICTLY WITHOUT PREJUDICE BOTH TO OUR POSITION THAT THEY CONFIRM WITH THE LETTER OF CREDIT AND TO ALL OUR RIGHTS UNDER THIS LETTER OF CREDIT.”
To this, CMB immediately responded on 20th June by returning the documents by courier.
The discrepancies.
One discrepancy at least, is no longer pursued. The packing list referred to L/C number 926400800215 when the true number was 9926400800215. Whilst there is “little scope for recognising the merits” in this field, there was some force in the claimant’s submission that the fact that such a minor typographical error was pursued as a justification for rejecting the documents evidenced an unduly technical approach by CMB.
Inconsistency
The defendant maintained that the commercial invoice and the packing list were mutually inconsistent. This reflected the outcome of a calculation made by CMB by reference to the packing list that the percentage of, for example, CI logs in the entire Okoume log parcel was 38.64 % whilst the commercial invoice, reciting the terms of the L/C, recorded a percentage of 40%.
Whilst I reject the submission that the objection was not put forward with sufficient clarity (indeed CIC’s immediate response demonstrates that it had hoisted in the point), I unhesitatingly hold that the documents were not thereby rendered discrepant.
The first point to be made is that I am not remotely persuaded that reasonable care on the part of CMB (or for that matter, CIC) required any such calculation to be made. The governing provision of UCP 500 is Article 13 (a):-
“Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face with being in compliance with the terms and conditions of the Credit… ”
This is supplemented by Article 21 which reads:
“When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented.”
Against that background, my approach is as follows:-
i) The obligation on the bank is to exercise reasonable care, as determined in accordance with international standard banking practice.
ii) The obligation is a passive one, in the sense of using reasonable care to assess the absence of any apparent inconsistency on the face of the documents as opposed to an active obligation to establish the existence of complete consistency on the basis of the material contained on the face of the document.
It follows in my judgment, that the checker of the documents was not required, in the exercise of reasonable care, to embark on the calculations relied upon. It is common ground that, absent those calculations, there was no inconsistency between the packing list, the commercial invoice and the L/C.
In any event, the commercial invoice complied with the terms of Article 37(c):-
“The description of the goods in the commercial invoice must correspond with the description in the Credit. In all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the Credit.”
This it did. The description in the commercial invoice expressly matched that in the letter of credit. The packing list set out the exact number and volume of logs shipped, matching the totals in the Bills of Lading. There was no percentage grade shown on the face of the packing list and no requirement that there should be. Absent further calculations, there was thus no inconsistency.
This conclusion is fortified by the opinion of the ICC dated 6th September 1999 in response to a query from another Chinese bank relating to packing lists:
“In previous opinions the ICC Banking Commission has stated that banks do not have a duty to carry out mathematical calculations or compute lists of individual items, weights or measurements to ensure consistency with other documents. If totals are declared on documents, then these should be in agreement with those shown on other documents presented. If the Credit did not specify the manner in which packing details were to be expressed, the packing list may show the individual or collective information of the packages shipped, subject to any totals agreeing with those shown on other documents.”
The defendant sought to argue in accordance with the views of their expert, Mr Claude Mifsud, that CMB were nonetheless entitled to perform the calculations if such was their own practice and then to rely on any inconsistency thus unearthed. I reject this submission. The issue of discrepancy cannot depend upon the degree of inquisitiveness within the bank. The identification of any inconsistency must flow from a consistency of approach, i.e. steps that no reasonable bank would fail to take.
In any event, the outcome of the calculations does not establish any inconsistency. The description of the goods in the L/C specifies various percentages for each grade, subject to a tolerance of plus or minus 10%. It was common ground that this tolerance applied to each grade as well as to the total (not surprisingly, since the task of shipping the precise percentages can be treated as physically impossible). The calculations based on the packing list revealed that the number of logs in each grade was within the permitted 10% tolerance. Accordingly, the suggestion of inconsistency (even if reasonable care called for the calculations actually to be conducted) is, in my judgment, based upon a misconception.
The drafts
The objection taken to the drafts was that printed parts were in the French language contrary, it is contended, to the terms of the L/C. On the assumption that these documents were within the compass of field 47A in the L/C, I reject the claimant’s submission that they were nonetheless “in English”. The fact that the checkers at CMB were aware of the nature of the documents and able to comprehend the significance of the entries is not to the point.
The short answer to the point, in my judgment, is that on a proper construction of the L/C, the documents required to be in English by virtue of Field 47A are those documents required for negotiation by virtue of Field 46A. They do not include the drafts. This distinction is made clear by Field 78 whereby the bank undertook that, on receipt of the “documents”, it would accept the draft.
This approach reflects the function of the drafts. They were not part of the commercial documentation, which, following negotiation, was to be passed on to the applicant Jiangsu. They were simply part of the process whereby CMB’s obligations to pay could be put in a form in which they could be readily discounted. Non-acceptance of the draft would not relieve CMB of its obligation to pay at maturity. It merely deprived CIC of the opportunity of going into the market.
Indeed Mr Mifsud, the defendant’s expert, made it clear in his oral evidence that he would have adopted the same approach even if the requirement for English included the drafts:-
“Question:
If you had come to the view that there were no discrepancies in the commercial documents but that the draft itself might be discrepant, you would have accepted the commercial documents and passed them on to the applicant?
Answer:
Yes. I would not have accepted a draft. In other words, the presenter would not have had the benefit of the draft if he elected to place it on the market, for instance.
Question:
So you would not physically have committed your bank to the capacity of acceptor with the result that the presenter loses the benefit of the more readily realisable embodiment of the payment obligation?
Answer:
Indeed.
Question:
But at the maturity date you would have paid the presenter?
Answer:
I would have, yes.”
This strikes me as an entirely realistic concession. The drafts had no bearing on the quality or value of the logs. They were drawn on CMB as issuing bank but they were for the exclusive benefit of the negotiating bank. The negotiating bank was to be “any bank in France”. It is thus not surprising that the drafts were drawn on a standard French form. Rejection of those drafts for that reason could not have conceivably justified treating the commercial documents as discrepant.
I should add that I derive no assistance from The Lena [1981] 1 Lloyd’s Rep 68 to which CMB referred where the relevant drafts were to be drawn on the applicant. On the facts, the drafts had not been drawn on the applicant but on another party and that, accordingly, the documents were not compliant. This situation is now expressly covered by UCP 500 Article 9(b) (iv):-
(iv) ….. A Credit should not be issued available by Draft on the Applicant. If the Credit nevertheless calls for Drafts on the Applicant, banks will consider such Draft as an additional document(s).
CMB also relied upon The Messiniaki Tolmi [1986] 1 Lloyd’s Rep. 455 where, despite the terms of the credit requiring drafts to be drawn on the defendants, none were tendered. In that sense the requirements of the credit were held not to have been satisfied. However, this does not bear, in my judgment, on the issue of construction in the present case as to which of the documents were to be in English. The alleged discrepancy is not made out.
Originals
I turn now to the principal field of battle between the parties as regards discrepancy, namely the alleged failure to tender an original of the packing list, certificate of quantity and certificate of quality.
The basic rule is that at least one original is required. So far as UCP 500 is concerned, the only relevant article is Article 20(b):-
“Unless otherwise stipulated in the Credit, banks will also accept as an original document, a document produced or appearing to have been produced:
i. by reprographic, automated or computerised systems;
ii. as carbon copies;
provided that it is marked as original and, where necessary, appears to be signed. A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication.”
The three documents in the present case had similar appearance, and, accordingly it is convenient to set out the format of one of them, namely the packing list:
JL Société J. LALANNE
PACKING LIST
CONTRACT No CHI84799GA
L/C No LC926400800215
VESSEL SANAGA
BILL OF LADING No 101 dated September 12th, 1999
LOADING PORT OWENDO, GABON
DISCHARGING PORT ZHANGJIAGANG, CHINA
ORIGIN OF GOODS GABON
DESCRIPTION OF GOODS FRESH CUT OKOUME LOGS
CI 413 Logs = 2 166,4 CBM
CE 655 Logs = 2 866,2 CBM
CS 138 Logs = 573,5 CBM
TOTAL 1206 Logs = 5606,1 CBM
BOULOGNE, September 12TH, 1999
Société Anonyme a Directoire et Conseil de Surveillance au capital de 1.054.690 F
Siege Social: 4, rue Danjou – Le Quintet – 92517 BOULOGNE Cedex-FRANCE
Tel: (33) 01.46 94 85 55 – Fax: (33) 01 46 09 04 45 – Tlx: 633745
R.C.S. Nanterre B 712061191 – N° Identification T.V.A. FR18 712061191
Beneath the place and date, Lalanne’s name, address and telephone number had been apparently stamped and, thereunder, an ink signature applied. There was no evidence as to the manner in which the documents had in fact been prepared prior to stamping and signature. As regards appearances:-
a) The documents did not appear to have been produced on a conventional type writer,
b) The documents may have been photocopied or may have been produced by a computer controlled printer,
c) The documents may not have been wholly produced at one time: the body of the document may have been inserted on a document already containing the details of name, address and so on beneath the pecked line.
In short, the documents demonstrate all the difficulties of grappling with the definition and identification of original, as opposed to copy, documents in the modern era with its word processors, laser printers, colour printers, scanners and so on. So ubiquitous has this machinery become that it must be rare indeed that any document is produced by some process other than a form of “reprographic, automated or computerised” system.
It may well be uncontroversial to state that the governing law of the L/C is French law. However, not only is there no evidence of any difference between French Law and English Law, it also hardly needs saying that this field affords a paradigm example of the need for avoidance of any difference in approach to UCP 500 as between different jurisdictions. Accordingly it is immediately necessary to revisit the recent decisions of the Court of Appeal which have grappled with the issue of originality and the requirements of Article 20.
In Glencore v. Bank of China [1996] 1 Lloyd’s Rep, 135, the relevant letter of credit required the presentation of a “beneficiary’s certificate…. certifying that one full set of non-negotiable documents have been sent to the buyer”. The documents were rejected inter alia on the ground that the beneficiary’s certificates “were neither original documents nor marked as original.” Strikingly, there was before the Court detailed evidence from the claimant as to how the documents were in fact produced. A word processor would produce “the original” version which would then be photocopied many times. The eye could not distinguish between the original printed version and the photocopies. The document presented was probably a signed photocopy.
Sir Thomas Bingham, giving judgment to the Court, expressed his conclusion as follows:
“Article 20(b) is, as it seems to us, designed to circumvent this argument by providing a clear rule to apply in the case of documents produced by reprographic, automated or computerised systems. The sub-article requires documents produced in a certain way (whether “original” or not) to be treated in a certain way. It is understandable that those framing these rules should have wished to relieve issuing bankers of the need to make difficult and fallible judgements on the technical means by which documents were produced. The beneficiary’s certificates in this case may, in one sense, have been originals; but it is plain on the evidence that they were produced by one or the other of the listed means and so were subject to the rule.
Even if it is true that the certificates did not appear to have been produced by one or other of these means (which must, we think, be very doubtful) that makes no difference if in fact they were: the sub-article is clear in its reference to “document(s) produced or appearing to have been produced….”
The original signature was of course a means of authenticating the certificates, and they were not required to be signed. But a signature on a copy does not make an original, it makes an authenticated copy; and art 20 (b) does not treat a signature as a substitute for a marking as “original”, merely as an additional requirement in some cases. ”
Some three and a half years later, the issue of originality re-surfaced in the Court of Appeal in Kredietbank Antwerp v. Midland Bank Plc [1999] 1 Lloyd’s Rep Bank 219. Here the document concerned was an insurance policy. Once again, there was direct evidence as to how the relevant document had been produced, namely by feeding headed notepaper into a laser printer, the document thereafter being signed. The defendant submitted that Article 20 (b) as interpreted in Glencore required the document to be marked as original in order to conform. Lord Justice Evans concluded:
“38. In my view, the purpose of the rule introduced as Article 22( c ) in 1984 and amplified in 1993 is clear. Previously, banks were entitled to reject documents which were not originals. The practice was established and it is recognised inferentially by the UCP. Henceforth they would accept certain documents which would previously have been rejected as non-originals, provided that specified safeguards were observed. This applied expressly to photocopies (“reprographic systems”) and to carbon copies. These two are by their nature copies of some other document which is their original, although this does not prevent them from being the original contract or document required by the credit, for the reasons suggested above.
39. The question is whether the accompanying reference to documents produced “by (in UCP 400 ‘by, or as the result of’,) automated or computerised systems” applies to all documents of that kind, even when they are not copies of any other documents and they could not have been rejected as non-original under the existing rules. If that is the effect of these words in Article 20 (b) (i), then the rule permits the bank to refuse original documents which otherwise they are bound to accept; a strange and paradoxical result if the object was to widen the category of documents which could be tendered. If on the other hand “produced by automated or computerised systems” refers only to documents produced by such means which are copies of other documents that can be regarded as their originals, then this reference is consistent with “reprographic systems” and carbon copies and with the objects of the rule.
40. It is consistent also with the introduction of the word “also” in 1993; “banks will also accept”. This shows that the intention was to widen the category of acceptable documents, by including some non-original (copy) documents, and there is no qualification, certainly no express qualification, of the existing duty to accept documents which clearly are the originals required by the credit.
41. In my judgment, as a matter of construction, there is nothing in Article 20 (b) which entitles the bank to reject an original document which previously was a valid tender under the credit. A document which clearly is the original, in the sense that it contains the relevant contract, and which is not itself a copy of some other document, is certainly an original for the purposes of the underlying rule.”
So far as to the implications of Glencore were concerned, Evans LJ continued:
“51. If, contrary to my understanding of the court’s judgment in Glencore, the passage quoted above does mean or imply that a document produced by word-processor and laser printer, and which is clearly the original document required by the credit, may be rejected unless “marked as original” and where necessary signed, then it was obiter because in Glencore the document itself was a photocopy, and therefore a copy of some other document, and in my respectful view, Article 20 (b) does not entitle the bank to reject an original document (not being itself a copy document) which otherwise it is bound to accept.”
There is no dispute that these two decisions, both of which are binding on me, sent sequential ripples of unease through the banking community. Views were divided between those concerned that Glencore, in the interests of certainty, required an unduly inflexible routine against the background of modern printing techniques and those concerned that Kredietbank, in the interests of flexibility, established an unworkable distinction between documents produced by electronic means which were obviously original and those which were not.
Before turning to the reactions of the ICC, it is desirable to seek to apply the principles to be derived from these two cases to the present case. Notably, as already observed, there was evidence before the court in both those cases as to how the relevant documents had been produced. In the present case, there is no such evidence. Indeed it might be arguable that such evidence is inadmissible since the standard of care imposed on the bank is to exercise reasonable care to ascertain compliance “on the face” of the document. It would be a rare case where a checker will have knowledge as to how a document was prepared or any source for extracting information in that regard. Somewhat surprisingly, the relevance of evidence as to how the document was in fact created was not an issue in either decision.
The explanation may well be that Article 20 (b) refers to documents “produced or appearing to have been produced”. This appears to be a genuine alternative. Thus, as appears in the decision in Glencore, even if it reasonably appeared to a bank that a document had not been produced by a computerised system, this would make no difference if in fact it had been. However, in the present case, it is only appearances that are material. It was Mr Liu’s evidence that the documents were rejected because they were or appeared to be “copies of the originals” but not carrying the word “original”. Quite what he meant by the words “copies” in the context of this case was not investigated.
The fact remains that the decision in Glencore is rendered the more complicated by the fact that the document involved was found in fact to have been a photocopy. The photocopy was “indistinguishable from the original” which was produced by a laser printer. Does it follow that the decision would have been the same if it had been “an original” that had been countersigned? There is one indication that it would not necessarily have given rise to the same end result (cf. “but a signature on a copy does not make an original; it makes an authenticated copy”). However this was all in the context of a finding that “the sub-article requires documents produced in a certain way (whether original or not) to be treated in the same way”. Yet it was this passage which, if taken literally, was regarded as obiter in Kredietbank.
The uncomfortable but logical conclusion was that the effect of Glencore was that a document which appears to have been or was in fact produced by a typewriter but not stamped “original” must be accepted but such a document which appears to have been or was in fact produced by a computer must be rejected. The implications are all the greater given the almost total demise of the typewriter and the use of computers for all forms of printing. (As for carbon paper, this may possibly only now be found in a museum.)
It was these concerns, or some of them, which informed the decision in Kredietbank to the effect that a document, despite being produced in one of the specified modes and not being stamped as an original, would nonetheless be acceptable as an original if it clearly was an original and/or would have been accepted as such prior to UCP 500. (In fact Article 20 (b) of UCP 400 was in material respects the same, save that the word “also” was omitted). This was on the basis that the only commercially sensible construction of the Article is that the reference to “automatic or computerised systems” encompasses only those documents produced by such means which are in turn apparently (or in fact) copies of other documents which can be regarded as their originals.
CMB submitted that there was no distinction between the documents in the present case and the beneficiary’s certificate held to be discrepant in Glencore. They appeared to be produced by automated or computerised systems (albeit it was not said that they appeared to be produced reprographically). Despite being original in one sense, they nonetheless needed to be marked as such (albeit that, ironically, CMB did not reject the most closely analogous document to that considered in Glencore namely the “shipper’s certificate”).
CIC contended, as an alternative to their primary case on the ICC’s 1999 policy statement (for which see below), that the matter was determinable in their favour by virtue of Kreditbank in that the documents were not produced by a reprographic system nor were they in any other sense a copy. The originals, as thus defined, had been authenticated as such by stamp and signature so that they would have been accepted as original before UCP 500.
The position is scarcely clear cut. But it seems to me that, loyally trying to follow both these decisions, I am driven to the conclusion that the ratio in Glencore was directed to the treatment of documents appearing or known to be copies or, in some analogous respect, of a class not prior thereto treated as originals. It was common ground between the experts that the certificates in the present case would have been accepted as originals prior to the introduction of UCP 400 / 500. It follows that I accept the submission of CIC that the certificates were not discrepant in the light of the two decisions.
I now turn to the steps taken by the ICC in the wake of Glencore to embark on a world-wide consultation process on the issue of the original documents. The initiating document to this consultation was a paper prepared in October 1998 for distribution to all 160 national committees:-
“Original documents –
What are they?
What is meant by ‘Reprographic’ documents?
Since the judgment in the Glenmore/Bayerische Vereinsbank versus Bank of China court case, the issue of which is an original document; when does a document need to be marked as “original” and what form of document represents a “reprographic” document (in the context of UCP 500) have been uppermost in the thoughts of documentary credit specialists world-wide.
Whist ICC have tried to respond to the issues when raised, we have also received a number of queries from various parts of the world which have been asked to refrain from offering an official opinion on, due to pending litigation in other court cases. The number of questions in relation to this “original” issue are not diminishing and the Officers of the Banking Commission believe that this is an important topic which requires discussion and the development of a consensus. The outcome will, hopefully, provide a clear position of ICC. Such a viewpoint will be based on future transactions and will not necessarily be capable of being used retrospectively.
To compile a question and provide a suggested response (opinion) would not necessarily achieve the result that we wish. The Officers request that attendees at the October Banking Commission meeting consider the following issues and be prepared to voice their views and/or opinions in an open forum – following which an opinion will be produced which will represent the views of the meeting. In the discussion that will ensue, it must be remembered that we are unable to amend UCP 500 – therefore the wording in sub-Article 20b must remain as it is but we can provide an opinion that would reflect ‘international standard banking practice’ in its interpretation.”
This paper was discussed at a meeting of the ICC Commission on Banking Technique & Practice in Florida that same month. (Notably amongst the delegates was Mr Jungzhi Shi, the Assistant President of the International Department of CMB.) Further discussion took place in a meeting at the ICC’s Department of Policy and Business Practice in Paris in April 1999, during the course of which the Kredietbank decision was handed down. The paper under discussion included the following passage:-
“ORIGINAL DOCUMENTS – THE WAY FORWARD
Following the Glencore decision, some banks in a few locations may have changed their practices from those that were administered previously. Other banks have ignored Glencore as incorrect in its interpretation of the UCP or inapplicable in their countries. Many have worried that they may be caught in the middle of a dispute over the scope and meaning of sub-Article 20(b). At the Banking Commission meeting held in Florida during October 1998 it was decided that a draft paper would be submitted for discussion at the 28 – 29 April 1999 meeting.
In order that the full effect may be given to the final decision of the Banking Commission, it is proposed that the published document be issued as a “Decision” of the Banking Commission that reflects the international standard banking practice as intended by the drafters of UCP 500.”
The final outcome was the policy statement or decision issued on the 12th July 1999:-
“This Decision emphasises the need to correctly interpret and apply sub-Article 20 (b) of UCP 500. Consequently, ICC national committees and associated organisations are strongly urged to distribute this decision as widely as possible to help ensure the correct interpretation in the evaluation of documents issued under letters of credit. This decision does not amend sub-Article 20 (b) of UCP 500 in any way, but merely indicates the correct interpretation thereof which has been adopted unanimously by the ICC Commission on Banking Technique and Practice on 12 July 1999.
Correct interpretation of sub-article 20(b)…..
General approach
Banks examine documents presented under a letter of credit to determine, among other things, whether on their face they appear to be original. Banks treat as original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not original. Accordingly, unless a document indicates otherwise, it is treated as original if it:
1. appears to be written, typed, perforated, or stamped by the document issuer’s hand; or
2. appears to be on the document issuer’s original stationery; or
3. states that it is original, unless the statement appears not to apply to the document presented (e.g. because it appears to be a photocopy of another document and the statement of originality appears to apply to that other document)
Hand signed documents.
Consistent with sub-paragraph (A) above, banks treat as original any document that appears to be hand signed by the issuer of the document. For example, a hand signed draft or commercial invoice is treated as an original document, whether or not some or all other constituents of the document are preprinted, carbon copied or produced by reprographic, automated or computerised systems. ….
4. What is not an “Original”?
A document indicates that it is not an original if it
1. appears to be produced on a telefax machine:
2. appears to be a photocopy of another document which has not otherwise been completed by hand marking the photocopy or by photocopying it on what appears to be original stationery; or
3. states in the document that it is a true copy of another document or that another document is the sole original.
5. Conclusion
Based upon the comments received from ICC national committees, members of the ICC Banking Commission and other interested parties, the statements in clauses 3 and 4 above reflect international standard banking practice in the correct interpretation of UCP 500 sub-article 20(b). ”
It is of course common ground that, if it is appropriate to apply this decision to the documents that are at issue in the present case, they were not discrepant on the ground of lack of originality. But it was the defendant’s submission that, despite the express recognition of the limitations of the consultation exercise, the decision did in fact purport to amend Article 20 or, in any event, the decision did not reflect existing standard banking practice, but merely sought to establish it for the future.
I am unable to accept the defendant’s submission:
a) UCP is a code produced and published by the ICC.
b) It is entirely legitimate for the ICC to seek to resolve any ambiguities in, or difficulties of interpretation of, the code.
c) The decision in 1999 involved discussion with local banking commissions throughout the world (to which all banks, including CIC and CMB were able to contribute).
d) When applied to the facts of the present case, the outcome of the consultation is not inconsistent with the decision on Glencore or Kredietbank, at least if my earlier analysis is correct.
e) The decision expressly states that it reflects international standard banking practice: at the least, no bank in following the decision could be said to be acting without reasonable care.
f) The consultation exercise began in earnest some 9 months prior to the presentation of the documents in the present case and the decision was promulgated some 2 months prior.
This conclusion is consistent with the commercially beneficial aim of reinforcing standard banking practice in regard to the “appearance” of documents and consequent reduction in the risk of inconsistent decisions, all in a field crying out for international consistency. Further, the conclusion I have reached receives some degree of support from the decision of United States District Court for the 5th Circuit in Voest-Alpine Trading USA Corps v. Bank of China 167 F Supp 2nd 940 (FD text 2000) where the ICC policy statement was accepted as determinative:-
“Third, the Bank of China claimed that the failure to stamp the packing list documents as an “original” was a discrepancy. Again, these documents are clearly originals on their face as they have three slightly differing signatures in blue ink. There was no requirement in the letter of credit or the UCP 500 that original documents be marked as such. The ICC’s policy statement on the issue provides that, “banks treat as original any document that appears to be hand signed by the issuer of the document….The failure to mark obvious originals is not a discrepancy.”
Whether or not there was any argument on the issue, it follows that the judge must have treated the decision as reflecting international standard banking practice. ”
The rejection issue
The governing Article in respect of this issue is Article 14:
“c. If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub-Article 13 (b).
d.i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.
ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
iii. The Issuing Bank and / or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to the bank.
e. If the Issuing Bank and / or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and / or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and / or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.”
The procedure is accordingly as follows:-
i) The bank must examine the documents for compliance with reasonable care – Article 13 (a).
ii) The bank has a reasonable time to determine whether to take them up or refuse them, such time not to exceed seven days – Article 13 (b).
iii) Prior to deciding whether to accept or reject, it is permissible to approach the applicant for a waiver in the event of any discrepancies – Article 14 (c)
iv) If in the light of its own examination of the documents (and the outcome of any approach to the applicants) the bank decides to refuse, it must give immediate notice within the seven day period identifying the discrepancies and stating that the documents are being returned or held to order – Article 14 (d).
v) Failure to comply with Article 14 (d) precludes reliance on the discrepancies – Article 14 (e).
It follows inexorably, in my judgment, that the rejection notice in this case was not in accordance with Article 14 (d) and that CMB cannot rely on any discrepancies. The SWIFT message ended:-
“Should the disc. being accepted by the applicant, we shall release the docs to them without further notice to you unless yr instructions to the contrary received prior to our payment.”
It follows that the documents were not to be returned to CIC or held to their order. They were to be released to the applicant, within some indefinite period, in the event of the applicant accepting the discrepancies, without any notice to CIC. The conditional nature of this rejection is not saved by the potential for acceptance of contrary instructions prior to payment, particularly where no notice is to be given. In short, the message constitutes a continuing threat of conversion of CIC’s documents.
The defendants relied upon the decision in The Royan [1998] 2 Lloyd’s Rep 250, where the relevant comment from the bank read: “Please consider these documents at your disposal until we receive our principal’s instructions concerning the discrepancies mentioned in your schedules….”. The observations of Lloyd LJ on that telex were as follows:
“The effect of that telex …was that the documents were being held unconditionally at the disposal of the sellers. The reference to “until we receive our principal’s instructions” was no doubt reflecting the hope that the buyers and sellers might come to some agreement, either by amending the credit or by tendering fresh sanitary certificates. I cannot read that expression of hope as meaning that the documents were not at the disposal of the sellers.”
This to my mind is wholly different from the present case. It merely concludes that, where the contracting parties are in negotiation, a statement by the bank that it will hold the documents at the disposal of the sellers pending a resolution of the dispute is not a conditional rejection.
The claimant’s submission is further fortified in three ways. First, the ICC Commission on Banking Technique and Practice produced a paper in November 2000 which discussed the steps prescribed for examination, waiver and notice under UCP and contained this passage:
“Bank practices outside the scope of UCP
The process outlined above and on Attachment A outlines the specific steps prescribed under the UCP for examination, waiver and notice. Unfortunately various practices have been implemented which are not in full compliance with the requirements of UCP. Issuing banks should be cautioned that practices of refusing documents, stating that they are seeking waiver and that if that waiver is received they will release the documents unless they have received instructions to the contrary does not comply with the UCP. Once documents are presented to the bank, those documents belong to the presenter until the documents are taken up. Should the presenter choose to dispose of the documents through other means once refusal is received and the issuing bank releases the documents it may place itself at risk since the documents belong to the presenter. Issuing banks perform when documents are presented in numerous ways. First, in total compliance with the UCP and secondly, based on business decisions made by the issuing bank. When issuing (or confirming) banks make business decisions to deviate from the rules it should do so only understanding the risks that it may be assuming.”
Second, a similar notice was tendered in Voest-Alpine (supra). The Bank of China’s telex notifying the discrepancies concluded: “we are contacting the applicant of the relative discrepancies. Holding documents at your risks and disposal”. The claimant asserted that the notice was ineffective;
a) Because there was no clear statement of refusal; and
b) Because notification of intention to seek a waiver rendered the communication ambiguous.
The judge concluded:
“Here, the Bank of China’s notice is deficient because nowhere does it state that it is actually rejecting the documents or refusing to honour the letter of credit or any words to that effect. Whilst it is true that under UCP 500 the notice must contain a list of discrepancies and the disposition of the documents and the Bank of China’s telex of August 11, 1995 does indeed contain these elements, this only addresses the requirement of Article 14 (d) (ii). A notice of refusal, by its own terms, must actually convey refusal as defined in Article 14 (d) (i). This submission is only compounded by the statement that the Bank of China would contact the applicant to determine if it would waive the discrepancies. As the Plaintiff’s expert, Professor James Byrn,e testified, within the framework of Article 14, this additional piece of information holds open the possibility of acceptance upon waiver of the discrepancies by JFTC and indicates the Bank of China has not refused the documents.”
This view was endorsed by the Court of Appeals for the 5th Circuit in an opinion handed down after the hearing before me :-
“We find ample evidence supporting the district court’s decision. The court’s determination that the August 11 telex did not reject the letter of credit is based primarily on the Bank of China’s offer to obtain waiver from JFTC. The offer to solicit waiver, the district court reasoned, suggests that the documents had not in fact been refused but might be accepted after consultation with JFTC. In reaching this conclusion, the district court relied heavily upon the testimony of Professor James Byrne (“Byrne”), Voest-Alpine’s expert witness on international standard banking practice and the UCP 500. Byrne testified that the bank’s telex would have given adequate notice had it not contained the waiver clause. The waiver clause, he explained, deviated from the norm and introduced an ambiguity that converted what might otherwise have been a notice of refusal into nothing more than a status report. Faced with this evidence, the district court correctly decided that the Bank of China noted discrepancies in the documents, and, instead of rejecting the letter ofr credit outright, contacted JFTC for waiver.
Byrne further explained that the Bank of China’s actions, viewed in light of standard banking practices, were ambiguous. The UCP 500 contemplates a three-step procedure for dishonouring letters of credit. First, the issuing bank reviews the documents presented for discrepancies. Second, if the bank finds problems, it contacts the purchaser for waiver. Finally, after conferring with the purchaser, the bank may issue its notice of refusal. This sequence ensures the issuing bank’s independence in making its decision while also giving the purchaser an opportunity to waive discrepancies, thus promoting efficiency in a field “where as many as half of the demands for payment under letters of credit are discrepant, yet, in the vast majority of cases, the account party waives the discrepancies and authorises payment.” Alaska Textile Co., Inc. v. Chase Manhattan Bank, NA., 982 F 2d 813, 824 (2d Cir. 1992). In light of the generally accepted procedure outlined by Byrne, we agree with the district court that the Bank of China’s notice of refusal was ambiguous and inadequate.”
Third, the claimant’s approach was endorsed by the defendant’s own expert in his oral evidence as follows:
“Question:
It must follow, must it not , that the disposal notice which says unequivocally, having refused the documents, should the applicant after the refusal waive the discrepancies, the document shall be released to the applicant, that cannot be in accordance with Article 14 d ii.
Answer:
Well, as I have said, it is not in accordance with the letter but it is in accordance with the spirit because it places the presenter in the same position. It safeguards his interests and that is what the Article has been designed to do.”
For my part, I am unable to accept the gloss put on Article 14 (d)(ii) by Mr Mifsud. His acceptance that the refusal was contrary to the letter of the article was in my view correct.
The refusal issue
The claimant had an alternative case arising out of the terms of Article 14 (e). Despite the SWIFT message sent on the 8th June to return the documents to M. Leon-Dufour in the event that the dispute could not be resolved at the meeting arranged, CMB in fact refused to do so. The only explanation voiced was the claimed need to return the documents by the same method in which they had been delivered.
According to the oral evidence of Mr Liu, unexpressed justification for the refusal was that there was some uncertainty about M. Leon-Dufour’s authority in that the 8th June message was a type 999 message, thus unauthenticated. It is clear that such is not a legitimate point. The later message of the 19th June requiring the return of the documents to which CMB did at last respond was also a 999 type. Absent any justification, there is no issue between the experts that CMB are precluded by virtue of Article 14 e from relying upon any discrepancy.
Conclusion
For all these reasons, I conclude that there must be judgment for the claimant.
Glencore Grain Rotterdam BV v Lebanese Organisation For International Commerce (“Lorico”) (Buyers)
[1997] EWCA Civ 1958 [1997] 2 Lloyd’s Rep 386, [1997] EWCA Civ 1958, [1997] 4 All ER 514, [1997] CLC 1274
Evan LJ
Letter of Credit
The Buyers having formally nominated the CHRISTINAKI (or sub) to load under the contract “ETA Iskenderun 28th March”, their bank on 24th March sent a tested Letter of Credit telex to the Sellers’. “It provided for shipment : “April 1993” and had a validity until 21st May. It required a full set of marine Bills of Lading marked (inter alia) “freight prepaid”. It also required various certificates …” (Award para.16).
On the following day, 25th March, “the Sellers (through the brokers) acknowledged receipt of the Letter of Credit that day which, however, was not (they said) in accordance with the terms of the Contract. They therefore prepared their own draft L/C, the text of which they were sending on by fax separately and they asked the Buyers to open the L/C exactly as per the Sellers’ draft”. The Sellers’ draft “differed from that drawn by the Buyers in a number of minor points and in the following principal respects :-
“(a) …..
(b) The Bills of Lading were to be marked “freight payable as per Charterparty” and
(c) It provided :- “Shipment Period : latest 30.04. 1993″.”
In addition, the sellers asked the Buyers to confirm that they had “given your instructions to the Owners and Master of the “CHRISTINAKI” to unconditionally release all original bills of lading to (the Sellers) ….. on completion of loading of the vessel as per the wording requested by (the Sellers) ….” (Award para.16).
The next communication between the parties regarding the letter of credit terms was on 29th March, when
“…. the Buyers advised the Sellers that they had instructed their bank : “To amend the L/C in a way to comply the maximum we can with sellers’ requirements without affecting our need for docs. to comply also with our receivers’ L/C requirements.
B/L shall be released immediately upon completion of load and shall show freight pre-paid without any problem. Freight shall be paid prior to completion of load”
(Award para.19)
Paragraph 20 of the award reads :-
20. Later that same day, 29th March, the Buyers advised their bankers of amendments required to their Letter of Credit, which had already been opened, to meet the Sellers’ requirements. These included deleting the requirements as to legalisation of certain documents by the Syrian Embassy and amending the shipment clause to read :
“Shipment : April 1993 from Iskenderun”
No change however was proposed to the endorsement to the bills of Lading as “freight pre-paid”.
A copy of these amendments was immediately faxed to the Sellers”.
The Sellers did not acknowledge this communication and there are no further findings which refer to the letter of credit or its terms. It continued to specify “freight pre-paid” bills of lading. The Board found as a fact “that the shipment period under The Contract was by mutual agreement amended to April 1993” (para.63). There is no finding that the Sellers accepted or the parties agreed that the letter of credit, as it was opened, was in conformity with the contract.
Other communications
These were concerned on a daily basis with two main topics : the expected arrival of the vessel, which was discharging a previous cargo at Nemrut Bay, and a projected visit by a Syrian delegation to inspect the goods intended for shipment at the loading port. The Sellers were also in communication with TMO as required by their contract with them. Additionally, on 26 March there was a telephone conversation between Sellers and Buyers which resulted in the following telex message sent by the Buyers :-
“We are ready to negotiate the request of Sellers for payment outside LC provided payment to be effected upon completion of loading and subject reaching an agreement with Sellers” [regarding inspection before loading]. (Award para.17).
On 29th March the vessel completed discharge and sailed from Nemrut Bay, the Master giving an ETA Iskenderun 31st March at 2000 hours. The Buyers advised the Sellers accordingly (Award para.22). The Buyers later encouraged the Master to arrive by 1700 hours on 31st March. This presumably was to enable him to give notice of readiness during working hours that day.
In the event, the vessel arrived on 31st March but not until 2315. She tendered notice of readiness which was endorsed as received by TMO on 1st April at 0900, and she was customs cleared between 09000 and 1000 that morning. However, she was rejected by SGS because of loose rust in all holds, which required sweeping, and she was not re-inspected and found ready to load until sometime on 2nd April, which was a Friday. TMO accepted the notice of readiness on Monday 5th April at 0800.
Meanwhile, there were further communications which have to be set out in full :-
26. Just before 1900 hours that evening the Buyers sent a further telex to the Sellers complaining that their delegates had been in Turkey for 2 days and the Syrian delegates for 3 days, only to be told that afternoon that T.M.O. advised everybody that only SGS delegates were allowed to enter the silos to effect sampling and analysis. The Buyers expressed their disappointment and thereby put Sellers on notice that :
“Unless the Syrian delegation/Buyers’ delegations are allowed same as SGS delegation, cargo cannot be loaded and all parties shall face a situation of impossibility of execution of Contract.”
27. On 31st March at 15.29 hrs. the Sellers telexed the Buyers stating that they had sold goods to be shipped with M.V. “CHRISTINAKI” vessel load ready in loadport on 29.03.93. Vessel (they said) did not arrive in loadport and the Sellers thereby informed the Buyers “that as per T.M.O. Contract conditions they have the option to debit us US $7-/mt or to cancel the Contract”. There was to be a meeting that day in T.M.O. office where they would make a decision about this, but the Sellers meanwhile held the Buyers responsible for all the costs and consequences that would result from late arrival of the vessel in loadport.”
31. On 1st April the buyers sent a telex reply to the Sellers’ telex of 31st March at paragraph 27 above advising them to :
“… note that M.V. “CHISTINAKI” arrived at Iskenderun and tendered its NOR on Wednesday 31.031993 at 23.15 local time which is as per contract terms.”
The Buyers therefore rejected the Sellers’ telex and asked the Sellers to advise urgently when they expected to load her “since as you know the Lebanese/Syrian delegation is already waiting to check the goods at loading since 2 days as per Contract/broker confirmation”. The Buyers alleged that the Sellers “did not instruct T.M.O. about loading operation and did not pass to them documentary instructions which will delay the commencement of loading.”
The teletex went on :
“Re your proposition through brokers for prepayments of goods against a discount in the price (after the goods are completely checked in the silo and analysed by the delegation) as you are aware T.M.O. still not authorize this delegation to enter the silo.”
They asked the Sellers to advise clearly their position towards the “CHRISTINAKI”.
33. Later on 1st April the Sellers telexed the Buyers, further to their telex of 31st March as paragraph 27 above, to say :
“T.M.O. decided that vessel will be loaded under the condition that Buyers pay the US $7,-/m ton penalty before loading.
Therefore we request you to arrange that you pay us, together with the prepayment of the goods, this USD 7,-/m ton penalty, otherwise vessel will not be loaded.”
35. The Buyers responded the same day to the Sellers’ above telex of 1st April, completely rejecting it because of the following :
(1) There was no clause in The Contract that price was to be increased by US $7,-/pmt if the vessel arrived after 31/3/93
(2) Vessel arrived and tendered its Notice of Readiness on 31/3/93.
(3) Until now the delegation was not authorised by shippers to inspect the cargo according to The Contract terms.
(4) If the vessel failed inspection, time of cleaning would not count, but vessel could not be rejected. It was understood that another inspection was ordered for the following morning.
(5) The purchase was payment by Letter of Credit which the Buyers opened in due time.
Consequently, the Buyers held the Sellers fully responsible for not loading the vessel and would consider them to be in breach of contract if by the following morning loading operations had not started. …..
36. The Sellers responded shortly on 2nd April stating :
“Please note that we are only prepared to load M.V. “CHRISTINAKI” in case prepayment has been effected.”
37. Later on 2nd April, solicitors acting for the Buyers sent an urgent letter to the Sellers referring to the Sellers’ telexes of 1st and 2nd April in which the Sellers complained that the vessel arrived too late, and that the Buyers must pay a penalty of US £7 pmt together with prepayment of the goods as otherwise the vessel would not be loaded. The buyers’ solicitors stated that these demands were completely in breach of contract and in their view amounted to a repudiatory breach of The Contract and the Buyers reserved all their rights. After dealing with the points raised in the Sellers’ telexes, the Buyers’ solicitors stated that, without prejudice to their position as explained in that letter, they called upon the Sellers as a matter of urgency to remedy their breaches by Tuesday 6th April 1000 hours local time Iskenderun by withdrawing their uncontractual demands on or before that deadline, time being of the essence, and by confirming the sellers’ agreement to load as per The Contract.
38. The deadline of 1000 hours of Tuesday 6th April local time Iskenderun came and went without any response from Sellers, whereupon the Buyers’ solicitors wrote again (6th April) to state that the Buyers accepted the Sellers’ repudiatory breach of contract, thereafter bringing The Contract to an end but under full reservation of the Buyers’ rights to claim whatever losses, costs and consequences arose out of the sellers’ failure to perform.”
Further negotiations followed, and a substitute shipment was made, but it is common ground between the parties that no goods were loaded under the relevant sale contract and that the contract was terminated on 6 April, if not before.
Appeal Award
This recorded that Arbitrators found the Sellers to be in breach of contract to the Buyers and that the parties were granted legal representation by counsel for the appeal (paras. 1 and 2).
The Board’s findings were these :-
66. ….. WE FIND that the Buyers as FOB Buyers under the contract, who had time chartered the “CHRISTINAKI”, to be perfectly entitled to demand that the Bills of Lading be issued as “freight pre-paid” provided that they did indeed ensure that such freight was paid by the completion of loading. Again, since the Sellers never began to load, the point never finally arose, but insofar as it is material, WE FIND as a fact that the Buyers were not in default of allegedly failing to open a contractual Letter of Credit. The Buyers had opened a Letter of Credit which was in conformity with the Contract, in so far as The Contract specified any terms for the Letter of Credit ; the requirement of Certification of Invoices was a minor detail and the fees for such were for Buyers’ account (see Payment terms, para 4 above) and it appears that freight pre-paid Bills of Lading were issued for the Rouen shipment without difficulty. The Sellers were wrong to refuse such Letter of Credit and in breach of contract for insisting instead on pre-payment of the goods.”
68. Consequently, WE FIND AND HOLD the Sellers to be in default and in breach of contract for making uncontractual demands on 1st April namely that the Buyers should pay a penalty of US $7-mt and pre-pay the value of the goods prior to loading, notwithstanding the Letter of Credit, and asserting that unless these conditions were complied with, the vessel would not be loaded.”
Two other passages for the Award were referred to in argument, but it is not necessary to quote them in full. Paragraph 59(b), under the heading ´Submissions and Contentions”, records Mr Havelock-Allan Q.C. for the Buyers as having made certain assertions of fact, and Mr Timothy Young Q.C. for the Sellers before us relies upon these either as admissions made by the Buyers or as findings of fact by the Board. I do not think that, given the context, it would be right to treat them as either of these. Secondly, in paragraph 67 the Board made findings as to the commercial factors which, as they put it, drove the Sellers to make the proposals which they did on 1st April and to claim that the Buyers were in default, when in the opinion of the Board it was the Sellers rather than the Buyers who were in default (para.68). These findings, however, in my view do not foreclose the questions of law which are raised by this appeal. If the letter of credit did not conform with the sale contract and the Buyers were thereby in breach of contract, then regardless of their commercial motives (though subject to any waiver of the breach) the Sellers were entitled by reason of that breach to make non-contractual demands, including pre-payment of the price and payment of an additional amount, corresponding to the penalty which TMO was claiming from them. If they were not so entitled, then again regardless of their motives or reasons for acting as they did they undoubtedly themselves committed a repudiatory breach of contract which the Buyers were entitled to accept, as they did on 6 April, so bringing the contract to an end. In law, this was an anticipatory breach ( Heyman v. Darwins Ltd. 1942 A.C. 356). The Board regarded it as a default (para.68) and Mr Young suggested that by reason of that finding it should be regarded as an actual rather than an anticipatory breach. The distinction may be relevant for the purposes of legal analysis, and if it is, then in my view the correct legal categorisation of the refusal on 1 April should be anticipatory breach, for the sellers refused rather than failed to load and the period for loading, if it had begun, certainly had not expired.
The Judgment
Longmore J. held :-
“….. I fear I cannot agree with the Board of Appeal that in the circumstances it is right to imply an entitlement on the part of the buyers that payment under the letter of credit need only be made if the bills of lading were marked “freight pre-paid”.
He said this for two reasons. First, because such a term would be inconsistent with the operation of a FOB contract. Applying Green v. Sichel (1860) 7 C.B.N.S. 747 and Mr Justice Devlin’s description of the parties’ duties under a FOB contract in Pyrene v. Scindia Navigation [1954] 2 Q.B. 402 at 424, he held that the seller is normally obliged to procure a bill of lading from the shipowner and present it to the buyer, but he is not obliged to pay the freight. “It is for the buyer to make and pay for such carriage arrangements as are made”. Therefore, the payment of freight was under the buyer’s rather than the seller’s control, and the buyer could not be entitled to insist upon the seller presenting a bill of lading “if it is necessary to pay freight, in order to get the bill of lading”. He also referred to Benjamin’s Sale of Goods (4th ed.) para. 20-020 where Green v. Sichel is so regarded.
The second reason was that the implied term found by the board, namely, that the buyers were entitled to demand freight pre-paid bills of lading” provided that they did indeed ensure that such freight was paid by completion of loading”, was inconsistent with the seller’s right to know that a letter of credit has been issued in accordance with the sale contract before he begins loading the goods. If the implied term was upheld, the seller would not know whether the freight had been pre-paid and whether the bill of lading would be endorsed accordingly until the loading was complete, and if the payment had not been made he would lose the security of the letter of credit for payment of the price.
The judge therefore turned to the second question, “whether the sellers are entitled to rely on the non-contractual letter of credit as a justification for their refusal to load the vessel”. He recognised the general principle that a party can justify his refusal to perform the contract on a ground which he did not specify at the time, but he noted also that this is subject to two qualifications which are set out in Chitty on Contracts (27th ed.) para. 24-012.
“However, a party cannot rely on a ground which he did not specify at the time of his refusal to perform ´if the point which was not taken could have been put right’ (cf. Heisler v. Anglo-Dal [1954] 1 W.L.R. 1273). Further, in Panchaud Freres S.A. v. ETS General Grain Co. [1970] 1 Ll.R. 53 it was suggested that the rule was subject to the qualification that a party who at first gives one ground for his refusal to perform may, by his conduct, be precluded from setting up later a different ground where it would be unfair or unjust to allow him to do so”.
Longmore J. held that the buyers could not rely on the first qualification in the present case. A contractual letter of credit had to be in place before the first day for shipment, which was April 1st., and the sellers’ refusal to perform was either on that date or later, when they “took no steps to conform to the requirements of the buyers’ solicitors’ letter on or about 6th April”. He concluded “In fact, therefore, the buyers could not have put the position right at the time when the point could have been but was not taken”.
He then accepted Mr Havelock-Allan’s submission that he should give effect to the “wider principle” set out in Chitty, and he held in the buyers’ favour that the principle applied, because :-
“….. although the seller raised the point now relied on, on 25th March the buyers attempted to meet the point on 29th March and there was never any reply to that attempt. The fresh ground that led directly to the sellers holding the buyers in repudiation was that the vessel arrived late. That was the reason used by the sellers …. This was held not to be justified. It would, in my view, be unjust to allow the sellers to go back to an old ground which was not pursued at the time when it might have been possible for the buyers to do something further about it.”
Issues
It is convenient to begin with a summary of the essential facts. The sale contract, as amended, called for shipment during April. The buyers were obliged to open a letter of credit in accordance with the contract requirements before the shipment period began, that is, by 1 April at the latest. The terms of the letter of credit which were notified on 24 March were not as required by the contract, and the sellers proposed different terms on 25 March. On 29 March the buyers said that they had instructed their bank to make certain amendments “in a way to comply the maximum we can with sellers’ requirement” without affecting their own position vis-a-vis their own buyers. The amended terms were such that the sellers could not obtain payment under the letter of credit unless they presented bills of lading endorsed “freight prepaid”. The vessel named in the sale contract failed to arrive at the loading port until 2315 on 31 March which was after business hours. It gave notice of readiness on 1 April but was not ready to load in fact until the following day, a Friday, and the notice was not accepted until Monday 5 April. Meanwhile, on 1 April the sellers under pressure from their own suppliers TMO made extra-contractual demands for pre-payment of the price and for an additional payment of $7 per ton. They gave as their reason the late arrival of the ship, which was rendered invalid as an excuse for their refusal and failure to ship the goods on and after 1 April by the Board’s other findings. They relied in the alternative on the fact that the letter of credit opened by the buyers called for “freight pre-paid” bills of lading. That was not a reason which they gave at the time nor was raised until, at the earliest, during the appeal hearing before the Board.
The contractual analysis in my judgment is clear. The buyers claim damages for the sellers’ refusal and failure to ship the contract goods, which under the contract as amended they were required to do in April. They refused to do so on 1 April, when they demanded payment on extra-contractual terms, and if their refusal was not justified then the buyers were entitled to accept it as an unlawful repudiation – strictly, an anticipatory breach – of the contract on 6 April, as they purported to do. But if the buyers were already themselves in repudiatory breach on 1 April, by reason of their failure to open a letter of credit which guaranteed payment in accordance with the agreed payment terms, then (subject to waiver) the sellers were entitled to refuse to perform the contract, as they did by refusing and failing to ship the goods (except at a later date and upon other terms, with which this dispute is not concerned).
The first issue, therefore, is whether the buyers under a sale contract on what are described as normal f.o.b. terms are entitled to open a letter of credit which requires the sellers to present “freight pre-paid” bills of lading if they are to receive payment from the buyers’ bank. Absent any special agreement, the sellers are entitled to see a conforming letter of credit in place before they begin shipment of the goods, and then their obligation is to ship the contract goods on board the vessel provided by the buyers, for carriage on whatever terms as to freight and otherwise the buyers have agreed with the shipowner. The sellers are expressly free of any obligation to pay freight (special terms apart, f.o.b. is the antithesis of c and f – cost and freight) and in the normal course they cannot be sure before shipment that the shipowner will issue freight pre-paid bills of lading, unless they are prepared if necessary to pay the amount of freight themselves, or unless some other guaranteed payment mechanism is already in place. I would put the matter broadly in that way, because it may be that an undertaking from the shipowner himself, or a third party guarantee of the payment of freight following due shipment of the goods, would suffice. It is unnecessary to consider that aspect further in the present case, because all that was offered by the buyers was their own assurance that the freight would be paid, by them or on their behalf. It is abundantly clear, in my judgment, that the buyers’ own assurance cannot be enough to serve as a guarantee to the sellers that “freight pre-paid” bills of lading will be issued when shipment is complete. That would mean, as the judge pointed out, that the security of a bank guarantee for the payment of the price, which is what the letter of credit mechanism provides, would be destroyed. I therefore agree with the judge’s observations that the buyers’ contention, that the letter of credit terms were in conformity with the contract, is contrary both to the underlying concept of the f.o.b. contract (subject always to what special terms may be agreed in a particular case) and to the essential commercial purpose of the letter of credit machinery.
The buyers’ submission is that there were special features which entitled the Board to reach the conclusion that the buyers were entitled to require freight pre-paid bills in this case. In my judgment, the Board’s conclusion that the buyers were so entitled “provided that they did indeed ensure that such freight was paid by the completion of loading” is open to the objections set out by the judge. More generally, Mr Havelock-Allan refers to certain specific facts. The sellers knew that Hoboob, the receivers and sub-buyers, had bought on c and f terms and themselves required freight pre-paid bills. The named vessel was time-chartered to the buyers, and so they were entitled to instruct the master to issue “freight pre-paid” bills ( The Nanfri [1979] 1 Lloyd’s Rep. 201). The buyers gave their assurance (though not until 29 March, after the dispute had arisen) that the freight would be paid before the bills were issued “without any problem”. But none of this, in my judgment, justifies the implication of a term which, for the reasons stated above, would be wholly at variance with the express terms of the f.o.b. sale in fact agreed.
In this context, the buyers referred to the judgment of Robert Goff J. in Ficom v. Sociedad Cadex Ltda . [1980] 2 Lloyd’s Rep. 118 at 131, which was quoted by the judge. This judgment distinguishes between implying a term in the sale contract and, on the other hand, establishing what the parties agreed should be the terms of the letter of credit issued or to be issued under that contract. The latter process may result in a letter of credit agreement which supplements or even varies the terms originally agreed. This is demonstrated in the present case by the agreement to vary the shipment date to include the month of April. But I do not consider that it is relevant to the question in issue. The freight pre-paid requirement, unless it was a term of the sale contract itself, was introduced by the buyers and immediately rejected by the sellers. The buyers maintained their requirement on 29 March and it is of the essence of their case that the sellers made no further reference to it before the contract came to an end. The sellers thereafter did not act inconsistently with their previous refusal, and their silence on this matter cannot be regarded as an acceptance of the buyer’s demand : The Leonidas D [1985] 1 W.L.R. 925 per Robert Goff L.J. at 936-7. In short, the buyers cannot allege that there was a fresh agreement as regards this term of the letter of credit which had the effect either of supplementing or varying the requirements of the sale contract.
For these reasons, as well as those given more succinctly by Longmore J., in my judgment the buyers were not entitled to require the sellers to procure and produce freight pre-paid bills of lading in order to receive payment under the letter of credit opened by them. It follows that the buyers failed to open a letter of credit conforming with the sale contract and, subject to the question of waiver considered below, they were thereby in breach of contract. The second issue is whether the sellers can rely on that breach to justify their own refusal and failure to ship on the contract terms. They did not assert that they were relying on it at the time.
Basic rule
“It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not”. (per Greer J. in Taylor v. Oakes,Roncoroni & Co. (1922) 127 LT 267 at 269.
First qualification – Heisler v. Anglo-Dal Ltd.
“The rule is, however, subject to a proviso. If the point not taken is one which if taken could have been put right, the principle will not apply”. (per Somervell L.J. in Heisler v. Anglo-Dal Ltd . [1954] 1 W.L.R. 1273 at 1278).
The buyers’ duty was to open a conforming letter of credit by the beginning of the shipment period (this is the prima facie rule : Ian Stach Ltd. v. Baker Bosley Ltd. [1958] 2 Q.B. 130). Under the sale contract as varied, therefore, they were required to do this by 1 April. The sellers demanded a price increase and insisted on more onerous payment terms on that day. Undoubtedly, the buyers were entitled to regard this demand as a refusal by the sellers to ship goods on the contract terms. They contend, however, that the sellers “did not convey any acceptance of a termination. It made an extra contractual demand based on a false premise (that the vessel was late)” (Skeleton argument para. 4.2), and that if the sellers had specified the letter of credit defect as a reason for their attitude, then they would or might have been able to dispense with the freight pre-paid requirement, after making some further arrangements with the receivers. The correct legal analysis, Mr Havelock-Allan submits, is that the contract remained in existence after 1 April, because it was not terminated; the sellers waived the buyers’ breach, or alternatively they extended the time within which the buyers might open a conforming letter of credit ; therefore, they could or might still have remedied the defect, if it had been relied upon by the sellers in their message of 1 April.
Longmore J. rejected this submission, on the ground that a contractual letter of credit had to be in place “strictly before the first day for shipment …. In fact, therefore, the buyers could not have put the position right at the time when the point could have been but was not taken”. He also said, however, that “the refusal to perform was as early as 1st. April, or (perhaps more likely) when the sellers took no steps to conform to the requirement of the buyers’ solicitors letter on or about 6th. April”. Mr Havelock-Allan submits that the later date, 6 April, should be preferred, and that the judge’s conclusion therefore is not inconsistent with his waiver submission, as set out above.
In my judgment, however, the submission falls at the first hurdle. The sellers’ demand for an increased price etc. on 1 April was undoubtedly a refusal to perform the contract, even though if viewed in isolation from the buyers’ previous failure to open a conforming letter of credit it was an anticipatory rather than a actual breach . If the buyers’ breach is included in the perspective, the refusal was justified by it and the sellers’ failure to refer to it then does not necessarily preclude them from relying on it now (the basic rule). The Heisler v. Anglo-Dal qualification in my judgment does not apply, because by 1 April the time for contractual performance of the buyers’ letter of credit obligation had passed. I do not see how the sellers’ refusal to perform the contract could either extend the time for performance by the buyers or amount to a waiver of their right to refuse performance, if such a right existed.
I would add that in any event the buyers’ language in their response on 29 March was peremptory (“the maximum we can”) and there was no further indication from them, either before or after 1 April, that the freight pre-paid terms of the letter of credit could or might be deleted. On the Board’s findings, therefore, the possibility of such a change was entirely speculative, and both Longmore J., and Colman J., when giving leave to appeal, decided against remitting the Award for further reasons (judgment p.15F).
Second qualification – waiver and estoppel
There has been much debate as to the basis of the Panchaud Freres judgment, which may represent a species of estoppel, perhaps embracing the broad “requirement of fair conduct” referred to by Winn L.J., or the application of the common law rule regarding the acceptance of non-contractual goods delivered under a sale contract which is now embodied in section 35 of the Sale of Goods Act. No one doubts, however, that what may be called the classic rules of estoppel and waiver can apply in circumstances such as these, so as to prevent a party who fails or refuses to perform the contract from relying upon conduct by the other party which would otherwise justify his doing so. The occasions when these rules may be invoked in these circumstances are limited, for example, by the fact that it is rarely if ever possible to imply an unequivocal representation of fact from a party’s silence on the relevant issue. The buyers do not suggest that these rules apply in the present case, and therefore I need say no more about them.
Third qualification – acceptance of goods (s.35 S.G. Act)
This explanation of Panchaud Freres was adopted by Robert Goff J. in B.P. Exploration v. Hunt (No.2) [1997] 1 W.L.R. 783 and it is preferred also by the editors of Benjamin’s Sale of Goods (4th ed.) para. 19-139. Section 35 reads as follows :-
“35(1) The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or …. when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.”
The authorities cited in Chalmers Sale of Goods (18th. ed. p.195) for the last proposition include Fisher Reeves & Co. v. Armour & Co. [1920] 3 K.B. 614 where Scrutton L.J. said this :-
“When one party to a contract becomes aware of a breach of a condition precedent by the other he is entitled to a reasonable time to consider what he will do, and failure to reject at once does not prejudice his right to reject if he exercises it within a reasonable time” (p. 624).
(This was an obiter dictum but nevertheless it is of undoubted authority, more particularly because it is the rule enacted in section s.35.)
It should be noted that the deemed acceptance under section 35 is based simply on the buyer’s retention of the goods which have been delivered to him and his failure to intimate to the seller that he has rejected them. If these facts are established, then the buyer cannot thereafter raise a ground for rejection, however valid it may be, and the “basic rule” in Taylor v. Oakes Roncoroni does not save him. He is precluded from raising even a valid ground, not because he failed to raise it at the time but because he retained the goods and did not reject them on any ground. (The basic rule could apply, of course, if he did reject the goods, though giving an invalid reason for doing so.)
The facts in Panchaud Freres were that c.i.f. buyers accepted the documents of title to goods, by retaining them without claiming to reject them on the grounds of late shipment which appeared sufficiently from the documents themselves, and subsequently they claimed to reject the goods on that same ground. The c.i.f. buyer has a separate right to reject the goods when they are physically delivered to him (Kwei Tek Chao v. British Trades and Shippers Ltd. [1954] 2 Q.B. 459 at 480-1). The decision of the Court of Appeal was that the buyers could not reject the goods for a reason which had been available to them when they accepted documents which disclosed a non-contractual shipment.
I would hold that “acceptance” of goods in the circumstances specified in section 35 may bring about a further (third) qualification to the basic rule that a party can rely upon a matter which he did not raise at the time. I would also hold that this provides an acceptable basis for the decision in Panchaud Freres . The effect of the decision is that the c.i.f. buyer’s right to reject non-contractual goods is not entirely separate from his right to reject the documents, if they are non-contractual also.
A further qualification – “unfair and unjust”?
Giving the leading judgment in Panchaud Freres , Lord Denning M.R. based the decision squarely on the principle of estoppel by conduct, which he stated as follows :-
“The basis of it is that a man has so conducted himself that it would be unfair or unjust to allow him to depart from a particular state of affairs which another has taken to be settled or correct” (p.57).
He applied the principle to the particular facts of that case by reference to the c.i.f. buyer’s acceptance of documents which gave him “the full opportunity of finding out … what the real date of shipment was”. He could not thereafter reject the goods by reason of their late shipment. Cross L.J. saw it as a question of fact and degree, and pre-eminently one for the Board of Appeal to decide (p.61). Winn L.J. expressed his entire agreement with Lord Denning, adding :-
“In my own judgment it does not seem possible in this case to say affirmatively that there was here … anything which, within the scope of the doctrine as hitherto enunciated, could be described as an estoppel … what one has here is something perhaps in our law not yet wholly developed as a separate doctrine – which is more in the nature of a requirement of fair conduct – a criteria of what is fair conduct between the parties. There may be an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs, negativing any liberty to blow hot and cold in commercial conduct” (p.59).
What Winn L.J. saw as an emerging “separate doctrine” has received no support, in my judgment, from any of the later authorities. Counsel have tended to invoke this passage from his judgment, as Robert Goff J. noted in B.P. Exploration v. Hunt , “as an argument of last resort when they find it difficult to bring their case within the established principles of estoppel, waiver or election” : [1979] 1 W.L.R. at 811F.
Lord Denning referred to it subsequently as “a kind of estoppel. He cannot blow hot and cold according as it suits his book” ( Toepfer v. Cremer [1975] 2 Lloyd’s Rep. 118 at 123), where Orr and Scarman L.JJ. agreed with him. (126,128). Lord Denning held that a similar estoppel by conduct arose in different circumstances in Ismail v. Polish Ocean Lines [1976] 1 Q.B. 893 at 903C. In Berg v. Vanden [1977] 1 Lloyd’s Rep. 499 he referred to Panchaud Freres as “a case where there was a waiver by one person of his strict right – or an estoppel – whatever you like to call it – whereby a person cannot go back on something he has done” (pp. 502-3). The same case gave Roskill L.J. an opportunity to comment on what he called “the so-called principles laid down by this Court in the Panchaud …. . this Court then laid down no new principles of law. It merely applied well-established principles of law to the particular facts of that case, and those principles …. are no more than if in the course of the working out of a contract one party by his conduct leads the other party to think that he will not insist on the strict performance of a particular term in the contract so that the other party alters his position, the former party will not be permitted to resile and to seek to insist upon strict performance – at least without notice” (p.504). Lawton L.J. supported these remarks, adding trenchantly that merchants and brokers in the international grain trade should not be regarded as “fragile characters”, and “There must be more robustness in the application of the Panchaud principle” (p.505).
In the leading case of Bremen v. Vanden [1982] 2 Lloyd’s Rep. 109 the House of Lords upheld Mocatta, J.’s judgment, including his finding that a plea of waiver was established. There is no express reference to Panchaud Freres in the judgment or in any of the speeches, and the decision turned on the questions whether an unequivocal representation could be spelled out a series of “no less than 10 communications” between the parties and whether the other party had acted upon it (per Lord Salmon at 126-7). This is the conventional analysis of estoppel and waiver, and soon afterwards it was hailed by Lord Denning as “a most important decision on waiver. As Mr Davenport said, it is the final step in the series”, citing High Trees House [1948] KB 130 and Panchaud Freres . He stated the principle as applied to GAFTA cases thus :-
“If a buyer, who is entitled to reject goods or documents on the ground of a defect in the notices or the timing of them, so conducts himself as to lead the seller reasonably to believe that he is not going to rely on any such defect – whether he knows of it or not – then he cannot afterwards set up the defect on a ground for rejecting the goods or documents when it would be unfair or unjust to allow him to do so”
(Bremer v. Mackprang [1979] 1 Lloyd’s Rep. 221 at 226).
In that case, Stephenson L.J. dissented on the question whether an unequivocal representation had been made (p.229), but Shaw L.J. agreeing with Lord Denning saw no difficulty “in distilling from the stream of telexes sent by the buyers in the circumstances which then obtained coupled …. with their delay in rejecting the documents a strong indication that they waived their right to treat the sellers as being in default” (p.230).
These authorities were reviewed and extensively quoted by Hirst J. in The Manila (Proctor & Gamble v. Peter Cremer) [1988] 3 All E.R. 843. He concluded :-
“Perhaps the best lesson to be drawn from all this subsequent commentary is that no distinctive principle of law can be distilled from the Panchaud case …. Counsel for the sellers invited me to accept the interpretation in BP exploration Co. (Libya) Ltd. v. Hunt , but if I have to choose, I should feel bound to prefer the estoppel explanation, since it has the greater weight of authority behind it.” (p.852g).
In my judgment, the following conclusions can now be drawn :-
(1) Panchaud Freres is authority for the application of the common law rule of acceptance, now established in section 35 of the Sale of Goods Act, in the comparatively limited circumstances of a case where a c.i.f. buyer accepts documents but rejects or purports to reject the goods.
(2) The decision can equally be said to represent a form of “estoppel by conduct”, but there is no “separate doctrine” derived from Panchaud Freres alone.
(3) Like all other forms of estoppel or waiver, the facts must justify a finding that there was an unequivocal representation made by one party, by conduct or otherwise, which was acted upon by the other.
(4) When the facts do justify that finding, it is likely to be regarded as “unfair and unjust” for the party which made the representation to a contrary effect, to rely upon its contractual rights.
(5) Without such a representation, no estoppel or waiver can arise, and there is no general rule that what the Court or Tribunal may perceive as “unfairness or injustice” has the same effect.
(6) Panchaud Freres and subsequent cases illustrate the possible scope of an estoppel or waiver in circumstances such as these, but they do not reveal a further exception to the basic rule, that a party is entitled to rely upon his contractual rights.
(7) Unfairness and injustice, however, will always be relevant where the Court is required to exercise a discretionary power e.g. where a party seeks leave to raise a fresh matter by way of amendment or at a late stage of the proceedings before it (see the example given by Lord Denning M.R. in Panchaud Freres at p.57).
Conclusion
The judge held that it would be unjust to allow the sellers (appellants)” to go back to an old ground which was not pursued at the time when it might have been possible for the buyers to do something about it” (page 19B). This conclusion might be criticised on the narrow semantic ground that it does not sit easily alongside the judge’s earlier finding that the Heisler v. Anglo-Dal qualification did not apply because “the buyers could not have put the position right at the time when the point could have been but was not taken” (page 17B). I would however put the matter more broadly. There was no finding by the Board or by the judge of any unequivocal representation by the sellers that they relinquished or would relinquish their rights arising out of the buyers’ failure to open a letter of credit in the form required by the sale contract. Nor in my judgment could any such finding be justified by the facts found by the Board. The buyers made their position clear on 29 March, saying that no further changes were possible. This was immediately over-shadowed by the ship’s failure to meet the contractual e.t.a. on 29 March and, in the event, to arrive and give valid notice of readiness before the amended loading period began on 1 April. The fact that the sellers made no further reference to the letter of credit issue after 29 March cannot be said to have misled the buyers into believing that the “freight pre-paid” requirement was no longer important to them, nor so far as we know is there any evidence to that effect.
In my judgment, the judge was wrong to hold that the sellers were unable to rely upon the buyers’ breach as a defence to the claim for damages for refusal and/or failure to load. I would answer the certified questions of law accordingly, and as stated in this judgment, and I would allow the sellers’ appeal, and dismiss the cross-appeal.
SIR RALPH GIBSON:
I agree that the appeal of the sellers should be allowed, and that the cross-appeal should be dismissed, for the reasons given by Lord Justice Evans.
LORD JUSTICE NOURSE:
I also agree.
Order: appeal allowed and cross-appeal dismissed with costs; counsel to lodge an agreed minute of order; leave to appeal to the House of Lords refused.
The British Linen Company v. The Caledonian Insurance Company
[1861] UKHL 4
Letter of Credit — Forgery.
On payment of a sum of money by the Respondents into the Appellants’ bank, a letter of credit for the amount was given by the Bank in favour of one Andrew King. It was presented to the bank agent at Irvine with the name Andrew King, a forgery, endorsed on it. Held, by the House (affirming the judgment of the Court of Session), that payment upon this forgery did not discharge the Bank.
Per the Lord Chancellor: Here the Bank has paid upon the forged signature of Andrew King. That is no payment at all; therefore, things are in the same situation as if the money were still in the till of the Bank; p. 112.
Per Lord Wensleydale: This is the case of money paid to the bankers for the purpose of being paid out upon Andrew King’s draft. But the true draft of Andrew King was never given; consequently the money remains in the hands of the Bank for the use of the Respondents the moment they choose to demand it; p. 115.
The Appellants are the well-known bankers in Edinburgh. The Respondents are a Fire and Life Insurance Company incorporated by Royal Charter and Act of Parliament, and also carrying on their business in Edinburgh.
On the 22nd of June 1853, one Harvey, a solicitor at Dairy in Ayrshire, acting as local agent for the Insurance Company, sent to their manager in Edinburgh a proposal for an insurance of 800 l. on the life of an individual named Andrew King, described as a “farmer, Brackenhills, Beith.” The proposal was accompanied by a report from the medical officer employed by the Company in the district. There was also transmitted with the proposal a “private friend’s report,” signed “John Allan,” and an extract from the Beith parish register, showing the dates of the birth and the baptism of King.
Transmitting these documents, Harvey, on the 22nd June 1853, addressed to the manager of the Insurance Company a letter in the followng terms: —
Sir,
I beg to send herewith an order for an assurance on the life of Mr. Andrew King, and for which, if approved, you will please forward a policyas soon as possible.
The applicant proposing this assurance is a most correct and steady person, and his health is good, and I consider his life a safe one for the Company. I have known him personally for at least twenty years, and I never knew him confined to the house for an hour with sickness during that period.
The applicant proposes borrowing 450 l. stg. upon the policy when issued. And he offers as his sureties James Cochran, Esq., of Barcosh, Dairy; Hugh Barr, Esq. of Dykehead, Dalry; and Robert Kerr, Esq. of Wattiston, Dairy, for the payment of the premiums, interest, and principal sum, the said principal sum to be repaid as follows, viz., by an instalment of 150 l. sterling at the end of two years from the date of advance, 150 l. sterling at the end of two years thereafter, and the other 150 l. sterling at the end of two years thereafter.
I may mention that the security offered is first class, any one of the parties being sufficient of himself for the amount, being all possessed of considerable property both in land and otherwise.
The loan is such an one that I can with confidence recommend it to the Company, and as most undoubted.
I am, Sir, your most obedient servant,
Wm. Harvie, Agent.
A policy of insurance for 800 l. was in due time granted by the Insurance Company on the life of “Andrew King,” and a bond for 450 l., assigning the policy in security, was prepared and sent to Harvey for the signature of King and the proposed sureties. Harvey returned the bond to all appearance duly executed by the proper parties.
Having received the bond, the Insurance Company, on the 7th July 1853, paid to the British Linen Company, at their head banking office in Edinburgh, 436 l. 7 s. 5 d., to be paid by them at Irvine to “Andrew King.”
In return for this payment the Insurance Company received from the British Linen Company a “letter of credit” in the following terms: —
To the Agent for the British Linen Company at Irvine.
No. 270. British Linen Company’s Bank, Edinburgh,
Sir, 7th July 1853.
Please to honour the drafts of Mr. Andrew King on account of this Company, four hundred and thirty-six pounds 7 s. 5 d., on advice.
I am, Sir, your most obedient servant,
£436:7:5. Archid. Nimmo, Manager.
The Manager of the British Linen Company, on the same 7th of July 1853, despatched a letter to their agent at Irvine, announcing the letter of credit payable to “Andrew King” on demand for 436 l. 7 s. 5 d.
The Insurance Company forwarded the letter of credit to Harvie, to be delivered by Harvie to King. On the 8th July 1853, Harvie presented the letter of credit with the forged signature “Andrew King” endorsed thereon, to the bankers’ agent at Irvine. Upon being asked who Andrew King was, Harvie represented him to be a client of his, a frail old man, who could not come personally to get the money. Upon this representation the amount was paid to Harvie, who endorsed his name upon the letter of credit.
At Whitsunday 1854 the interest on the loan of 450 l. was duly paid by Harvie, but the premium on the policy not having been paid when due, the Insurance Company, on the 20th July 1854, applied by letter to “Andrew King” for satisfaction. They also on the 24th July 1854, addressed the sureties. King and the sureties denied the signatures to the bond, and King for himself denied the receipt of the 436 l. 7 s. 5 d. In July 1854, Harvie absconded, leaving his affairs in a state of insolvency.
The signatures to the bond proved to be forgeries. The person represented as Andrew King, a farmer, turned out to be the fireman of a steam-engine, who, perfectly innocent of Harvey’s fraud, was made unconsciously to personate the individual represented as desiring an insurance.
The Insurance Company brought their action to compel the British Linen Company to make good to them the 436 l. 7 s. 5 d. paid to them to answer the drafts of “Andrew King,” whose drafts they had not answered.
The Second Division of the Court of Session, on the 8th July 1859, pronounced judgment against the British Linen Company, decerning against them for 436 l. 7 s. 5 d., with interest and costs.
Against this judgment the present Appeal was tendered to the House.
The Attorney-General (a) and Mr. Anderson appeared for the Appellants. They contended that the fraud was by the Respondents’ own agent, whom they had enabled to commit it.
[ Lord Chelmsford: Was he their agent in getting the money?]
The Appellants were guilty of no negligence. In Orr v. The Union Bank of Scotland (b), Lord Cranworth countenanced the doctrine that where the customer’s neglect of due caution has caused his bankers to make a payment on a forged order, he shall not set up the invalidity of the document. Young v. Grote (c) was to the same effect. There the customer of a bank signed a check in blank to be filled up by his wife, with whom he left it; and she inserted the words
_________________ Footnote _________________
( a) Sir Richard Bethell.
( b) 1 Macq. 522.
( c) 4 Bing. 253.
Page: 111?
“fifty pounds” in such a manner that another person was able to write “ three hundred and.” before the word fifty. Thus the bankers were deceived, and the deception having been effected through the customer’s default, they were absolved from liability.
At the close of the Appellants’ argument, their Lordships, without hearing the Respondents’ Counsel, pronounced the following opinions.
Counsel: Mr. Pattison for the Respondents.
Lord Chancellor’s opinion.
The Lord Chancellor (a):
My Lords, I must say that this appears to me to be a very clear case lying within a very short compass. I do not understand this to be an action, as has been suggested by the Attorney-General, whereby the Pursuers seek to be indemnified for a wrong done by the Defenders. It is an action brought to recover a sum of money which the Pursuers deposited with the Defenders for a certain purpose. Now it is quite clear to me that if the fraud upon the Pursuers which Harvie concocted had been discovered at any time before the payment was made by the Defenders, the Pursuers would have been entitled to recover the money which they had deposited. Then the question is, whether this payment by the Defenders upon the forged signature of Andrew King discharges them? I think it certainly does not discharge them. This is the ordinary case of bankers paying money upon a forged cheque. It is a hard case, very much to be regretted, in respect of which there is an enactment (b)
_________________ Footnote _________________
( a) Lord Campbell.
( b) 16 & 17 Vict. c. 59. s. 19., passed on the 4th August 1853, after the date of the transaction out of which the present case arose. The words of the 19th section are as follows: —
“Provided always, that any draft or order drawn upon a banker for a sum of money, payable to order on demand, which shall, when presented for payment, purport to be endorsed by the
which has been referred to in this argument, discharging them from liability upon a draft payable to order on demand, but there has been no enactment to save their liability in such a case as this. Here the Bank has paid upon the forged signature of Andrew King, and that is no payment at all. Therefore things are in the same situation as if the money were still in the till of the bankers.
An attempt was ingeniously made by Mr. Anderson to show that Harvie, in presenting the letter of credit and receiving the money, was the agent of the borrower, and that the payment of the money to the agent of the person in whose favour the letter of credit was given must be regarded as payment to himself. But that is utterly untenable, because, according to the course of the transaction, there would have been no payment of the borrower until the letter of credit had actually been endorsed by him, or a draft drawn by him for the amount.
Then this seems to me to come under the case of money deposited for a particular purpose, which purpose has not been answered; and as the money must be considered as being still in the hands of those with whom it was deposited, they must pay it to the parties to whom it belongs. The very lucid reasoning of Lord Chancellor Cranworth, in the case of Orr and Barber v. The Union Bank of Scotland (a), lays down
_________________ Footnote _________________
person to whom the same shall be drawn payable, shall be a sufficient authority to such banker to pay the amount of such draft or order to the bearer thereof, and it shall not be incumbent on such banker to prove that such endorsement, or any subsequent endorsement, was made by or under the direction or authority of the person to whom the said draft or order was or is made payable, either by the drawer or any endorser thereof.”
( a) See suprà, vol. 1, p. 513. Of this case ( Orr v. Union Bank of Scotland), the editors of Chitty on Bills of Exchange (Messrs. Russell and Maclachlan, p. 350), say that it “is perhaps the only case in the books on letters of credit; it is a Scotch case,principles which seem to me to apply entirely to the present case.
_________________ Footnote _________________
but it seems that on that subject the law of Scotland is identical with the law of England. It is not an unlikely result of the more liberal legislation with regard to cheques, and of the greater protection afforded to bankers in paying them, that this instrument will soon fall into disuse.” So say the learned editors of Chitty; but it appears that though cases are scanty in England on letters of credit, they are not scanty in America. In the “Draft of a Civil Code for New York, 1862,” there is a chapter entitled “Letter of Credit,” p. 338, which chapter (short and pregnant) we insert. “A letter of credit is a written request addressed by one person to another, requesting the latter to give credit to the person in whose favour it is drawn. It may be addressed to several persons in succession and must express a consideration. Upon the debtor’s default, the writer of the letter of credit is liable to those who gave credit in compliance with its terms. Letters of credit are either general or special. When the request is addressed to specified persons by name or description, the letter is special. All other letters of credit are general. That the mere fact of the letter being addressed to a particular person does not make it a special letter, see Benedict v. Sherrill, Hill & D. Sapp. 219.; Union Bank v. Coster, 3 N. Y, 203; affirming S. C., 1 Sandf. 563. A general letter of credit gives any person to whom it may be shown, authority to comply with its request, and by his so doing it becomes, as to him, of the same effect as if addressed to him by name. Several persons may successively give credit upon a general letter; Union Bank v. Coster, 3 N. Y. 203; affirming S. C., 1 Sandf. 563. If the letter of credit in its terms contemplates a course of future dealing between the parties, it is not exhausted by giving a credit, even to the amount limited by the letter, which is subsequently reduced or satisfied by payments made by the debtor; but is to be deemed a continuing guaranty; Gates v. McKee, 13 N. Y. 232; and compare Fellows v. Prentiss, 3 Denis, 512. Unless the terms of the letter express or imply the necessity of giving notice of acceptance to the writer, he is liable for credit given upon it without notice to him; Whitney v. Groot, 24 Wend. 82.; Union Bank v. Coster, 3 N. Y. 203; affirming S. C. 1 Sandf. 563; Douglass v. Howland, 24 Wend. 35; Smith v. Dann, 6 Hill, 543. If a letter of credit prescribes the persons by whom, or the mode in which, the credit is to be given, or the term of credit, or limits the amount thereof, the writer is not bound except for transactions which conform strictly to the mode and terms prescribed, and are within the limit fixed; Brickhead v. Brown, 5 Hill, 634; affirmed, 2-Denis, 375. No other person than the one to whom a special letter of credit is addressed, can, by acting
I must therefore advise your Lordships to affirm the Interlocutor of the Court below, and to dismiss the Appeal with costs.
Lord Cranworth’s opinion.
Lord Cranworth:
My Lords, I will only add a word to what has been said by my noble and learned friend. I should be very sorry that what fell from me in the case of Orr and Barber v. The Union Bank of Scotland, which has been referred to by Mr. Anderson, should be misunderstood. When I said that there might be circumstances of fraud or negligence that would vary the case, what I meant was, that there might be negligence in the circumstances that were the immediate cause of the payment by the bank, as in the case decided in the Court of Common Pleas (a), where a cheque had been drawn payable to bearer “fifty pounds,” and it had been so badly written, or there had been so large a blank left on the left hand side of the “fifty,” that the person who got hold of it was enabled to put in “three hundred and,” and the Court of Common Pleas held that as negligence on the part of the drawer had afforded the opportunity for that fraud, which the Bank could not have discovered by ordinary diligence, they might be absolved from the ordinary liability attaching to the payment of a forged cheque. But in this case I must say, that to suppose that this fraud,
_________________ Footnote _________________
upon it, create any obligation against the writer. Brickhead v. Brown, 5 Ilill, 634; affirmed, 2 Denis, 375: Robbins v. Bingham, 4 Jchns. 476; Walsh v. Baillie, 10 id., 180. If a special letter is addressed to several jointly, the credit must be given by all, or the writer is not liable. Penoyer v. Watson, 16 Johns. 100. The person to whom a special letter is addressed cannot render the writer liable upon it by procuring strangers to give credit to the holder of it; Robbins v. Bingham, 4 Johns. 476; Walsh v. Baillie, 10 id. 180. Guaranty for six months’ credit does not cover a four months’ credit; Leeds v. Dunn, 10 N. Y. 475.”
( a) Young v. Grote, 4 Bing. 253.
which had been in some measure concocted and in some measure perfected against the Insurance Company, had anything to do with, this payment of the forged cheque, would, I think, be preposterous. I entirely agree with the observation of Lord Benholme, that it had nothing to do with it. The Caledonian Insurance Company took such precautions that, unless there was forgery, they were safe. The truth is, that although King’s name was forged, the Bank paid the cheque upon the authority of Mr. Harvie. The agent says he knew Mr. Harvie very well, and therefore he of course trusted to him that it was a genuine signature.
Lord Wensleydale’s opinion.
Lord Wensleydale:
My Lords, I am entirely of the same opinion. I think the case is a very plain and clear one. I never had the least doubt about it. It is the case of money paid into the hands of the Defenders for the purpose of being paid out upon Andrew Kings draft. But the true draft of Andrew King’s was never given; consequently the money remained in the hands of the Defenders for the use of the Pursuers the moment they chose to demand it. It is the simple case of money had and received. The machinery of the letter of credit is merely for the purpose of having the money paid at Irvine instead of being paid at Edinburgh. Still it admits the liability to pay the sum of money to the order of Andrew King. It is only machinery for the purpose of ordering the agent of the Bank at Irvine to pay a sum of money to their customer which has been paid into the Bank at Edinburgh, and also of communicating to Andrew King that he has authority to receive it. It does not vary the position of the parties in the least. The money was paid by the Pursuers to the Bank for a special purpose, and that purpose was not answered; therefore they have a right to demand it back again.
Lord Chelmsford’s opinion.
Lord Chelmsford:
My Lords, I agree with my noble and learned friends, and I can add nothing to the reasons which they have given for their opinion.
Lord Cranworth: May I make one remark? It is quite lamentable to see the amount which has been expended in litigation in such a case as this. It is true that the sum in dispute here is rather considerable—430 l.; but I see that the taxed costs on one side below were 277 l., and probably on the other side they were quite as much, and therefore the costs of the two parties taken together go far beyond the sum in dispute, and then the Appeal to this House will nearly double it; so that we cannot shut our eyes to this, that the costs that have been incurred in the litigation in this case (which I do think is as plain as any case could be) are probably more than four times the amount of the sum in dispute.
The Lord Chancellor: I may add that we have been told that in bankruptcies in Scotland the costs upon the average are’ not above 10 per cent, of the assets, whereas in England they are 35 per cent.; but in this case it appears that the costs in the Court of Session are three times as much as they would be in the Court of Queen’s Bench or in the Court of Chancery in England.
Interlocutor appealed against affirmed, and Appeal dismissed, with Costs.
Solicitors: Gordon & Wilkins — Connell & Hope.
Banco Santander S A v Banque Paribas
[2000] EWCA Civ 57
Waller LJ
“38 Rights of the holder
The rights and powers of the holder of a bill are as follows:
(1) He may sue on the bill in his own name:
(2) Where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill:
(3) Where his title is defective (a) if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill, and (b) if he obtains payment of the bill the person who pays him in due course gets a valid discharge for the bill.”
Thus holders in due course can sue on the drafts even if fraud is discovered prior to the maturity date of the draft. Furthermore, if a Confirming Bank who has accepted a bill becomes the holder and holds the bill at maturity, the bill is discharged by virtue of section 61 of the Bills of Exchange Act. Although the matter was not explored in argument, I understood it to be common ground between Mr Howard and Mr Hapgood that since that discharge is by law automatic, the fraud would not provide an answer, and that thus the Confirming Bank is in as good a position as a holder in due course, even if it purchases drafts accepted by it.
So the argument runs, with the deferred payment letters of credit there has grown up a practice of discounting the promise in the forfait market. It will curtail the beneficial use of the deferred payment letter of credit if something equivalent to section 38 is not put in place to protect innocent assignees. Reference in this regard was made to an article in Insight (1999 Volume 5, No.4 pages 14-15 -Tab 19 in the authorities bundle). This article followed Langley J’s decision in this case, and suggested that it was now “difficult to see the future for the deferred payment L/C at least in this jurisdiction.”
We were told that in another jurisdiction, France, in a case to which Santander were a party, a blow similar to that apparently dealt by Langley J had been dealt to “deferred payment” letters of credit (see the decision of Paris Court of Appeal dated 28th May 1985 at tab 21 in the authorities bundle) so the reference to “this jurisdiction” alone may be a little harsh, and indeed Mr Howard submitted that since their use apparently continued following the Court of Appeal in Paris’ decision, the prediction may be somewhat exaggerated.
But whether exaggerated or not, I have to say that I have felt some anxiety about this point. I can see how it can be said with force that a promise by a bank under a letter of credit made once documents have been accepted should be capable of being acted on by other bankers without inquiries as to the bona fides of the beneficiary. The difficulty is that Santander tried to establish a market custom to the effect that this was how such promises were treated in the market, but failed.
In bringing this new type of instrument into operation, it seems it has not been thought necessary to make express provision in the UCP to cover the situation, or to make express provision in the letters of credit themselves. So far as the UCP is concerned that seems to be true even following the decision of Langley J in this case as we were informed by Mr Howard, who produced a Banking Commission Statement on the Future of UCP 500 revision produced by the International Chamber of Commerce. How far all this material was admissible must be in considerable doubt, but it was all produced without protest, and is helpful in seeking an overall view.
I have ultimately concluded that if parties agree for whatever reason that they will not provide a negotiable instrument, and do not provide by terms of the trade or even by the express terms of the instrument itself the protection for assignees that a negotiable instrument would provide, they must live with the consequences.
I thus do not think it is open to the court simply to make an exception to what would otherwise be the clear rule that a defence which would have been available as against the assignor should be available against the assignee.
If I am right so far, that (as Mr Howard submitted) is in fact the end of this appeal. Santander’s claim is as assignee, and they are defeated by the defence that would have been available as against Bayfern.
However, in case I be wrong in my conclusion so far, and because the matter was fully argued, I turn to the terms of the UCP.
Terms of the UCP
These terms would apply if Santander had paid Bayfern on 17th June 1998 the $19,667,238.84 in discharge of the obligations of Paribas and Santander under the letter of credit. The letter of credit was subject to the UCP and the relevant Articles seem to me to be as follows.
“Article 2
Meaning of Credit
For the purposes of these Articles, the expressions “Documentary Credit(s)” and “Standby Letter(s) of Credit” (hereinafter referred to as “Credit(s)”, mean any arrangement, however named or described, whereby a bank (the “Issuing Bank”) acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf,
i. . . .
or
ii, authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)),
or
iii. . . .
against stipulated document(s), provided that the terms and conditions of the Credit are complied with.
Article 9
Liability of issuing and Confirming Banks
(a) An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with.
i. . . .
ii. if the Credit provides for deferred payment – to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit.
iii. If the Credit provides for acceptance:
a. By the Issuing Bank – to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,
or
b. By another drawee bank – to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity.
iv. if the Credit provides for negotiation – to pay without recourse to drawers and/or bona fide holders. Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A credit should not be issued available by Draft(s) on the Applicant. If the .Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).
b. A confirmation of an irrevocable Credit by another bank (the “Confirming Bank”) upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with.
[The sub-articles mirror a i, ii, iii and iv].
Article 10
Types of Credit
a All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
b. i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the “Nominated Bank”) which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank.
Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.
. . .
d By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.
Article 13
Standard for Examination of Documents
a Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.
. . . .
Article 14
Discrepant Documents and Notice
a When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. To reimburse the Nominated Bank which was paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated,
ii to take up the documents.”
It is Mr Hapgood’s case
(1) that a claim for reimbursement could not be made prior to 27th November 1998; and (2) that the claim would be for the full $20,315,796.30. That, as it seems to me, already has this rather odd feature. It is not in fact reimbursement for the sum paid out which is being claimed, and nor as one would tend to think it should be if reimbursement flows from payment, is reimbursement available at the moment when the payment has been made.
On the other hand Mr Howard accepts that if there had been no fraud, the fact is that Paribas would have paid on 27th November 1998 the $20,315,796.30. The basis for that concession is set out in the judge’s judgment in the following terms:-
“In my judgment Mr Howard is right in his submissions that:
(i) where the Confirming Bank discounts its own obligation, at maturity either it is to be deemed to make payment at that date or it is entitled to claim as assignee of the claims of the Beneficiary.
(ii) where a forfaiter discounts the Credit it is entitled to claim as assignee.”
Both sides, as it seems to me, thus approach the question of reimbursement on the basis that the mandate of Santander is to pay $20,315,796.30 on 27th November 1998, and in the one case as per Mr Hapgood, Santander must be treated as having done that by an early payment on 17th June 1998 whether or not there would have been a liability to pay on 27th November 1998, and as per Mr Howard, for Paribas, Santander is either deemed to be an assignee (with the result as per the first section of this judgment), or possibly can be treated as having paid on 27th November 1998 provided there would have been a liability to pay as at that date.
There was some debate before the judge and before us as to whether the obligation to reimburse the Confirming Bank arose under Article 10 d, or whether because of the words at the conclusion of that Article “undertakes to reimburse such bank in accordance with the provisions of these Articles”, that took one to Article 14, and in particular Article 14 a i. I am not sure that it makes any great difference to the strength or weakness of the arguments which Article applies. As it seems to me Article 14 a i does not set out fully the conditions which must be fulfilled in order for the obligation to reimburse to arise. Whether one is considering a “deferred payment undertaking”, “accepted drafts” or “negotiation”, reimbursement would only arise on payment although the word payment does not appear in Article 14 a i. Reimburse means repay a person who has expended money, and it is simply meaningless to suggest that there can be an obligation to reimburse a “deferred payment undertaking”.
Ultimately the question to be asked is what precisely the Issuing Bank has requested the Confirming Bank to do, and what the Issuing Bank has promised to do if the Confirming Bank does what is requested of it. The answer, as it seems to me, is that the Issuing Bank has requested the Confirming Bank to give its own undertaking to pay on 27 th November 1998, in addition to that of the Issuing Bank, and has promised to reimburse the Confirming Bank when it pays on that deferred payment undertaking i.e. pays $20,315,796.30 on 27th November 1998. There is no request from Paribas that Santander should discount or give any value for the documents prior to 27th November 1998, and albeit it may not be a breach of mandate for Santander to do so, it is up to Santander whether it does so or not.
Mr Hapgood submits, (as the judge also found), that since it was not a breach of mandate for Santander to discount it follows that Santander are entitled to be reimbursed as agents under the UPC and consistently with the principles in Bowstead 16th Edition, Article 64, which is in the following terms:-
“Subject to the provisions of Article 65, every agent has a right against his principal to be reimbursed all expenses and to be indemnified against all losses and liabilities incurred by him in the execution of his authority: and where the agent is sued for money due to his principal, he has a right to set off the amount of any such expenses, losses or liabilities unless the money due to the principal is held on trust.”
In my view Mr Hapgood cannot argue simply from the fact that to do something is not a breach of mandate to the position that what was done was authorised by the principal so as to produce a right of reimbursement. An agent may be entitled to go off and do something on his own account without being in breach of his mandate from the principal, but it does not follow that when he does do something on his own account, because he is not in breach of the mandate, the principal must indemnify him in relation to that which he has done. In my view the position is that Santander had no authority to negotiate from Paribas to discount, and did not seek it. It was something they were entitled to do on their own account. If they had not chosen to discount and had waited until 27 th November, they would have had a defence, and it is in those circumstances not open to them to claim reimbursement from Paribas.
If a Confirming Bank in the position of Santander wishes to be free to give value for documents when it accepts the documents, it can do so either by insisting on the use of an acceptance credit or by insisting on obtaining authority to negotiate and confirmation of reimbursement if it does. European Asian Bank v Punjab & Sind Bank (No 2) [1983] 1 WLR 642 seems to me to demonstrate how, if Santander had informed Paribas that it had discounted, and had received confirmation from Paribas that Paribas would still reimburse on 27th November 1998, Paribas would not be able to raise the fraud exception because they would be estopped from disputing Santander’s authority to discount.
Conclusion
For reasons which differ very little from those of the judge, I would dismiss this appeal.
LORD JUSTICE MUMMERY: I agree.
LORD JUSTICE MORRITT: I also agree.
Order: Appeal dismissed.
(Order does not form part of the approved Judgment