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Topics: Breach of Contract; Documentary Collections; Drafts; Fiduciary Duty; Fraud; Negligence; URC 522 Articles 1, 4, 9 & 26
Note: To support its purchase of nearly 300,000 articles of readymade garments (the Goods), SportLife Brands LLC (Buyer), a Delaware company, arranged with Generation Next Fashions Ltd. (Seller), a Bangladeshi company, for payment via documentary collection with Freight on Board (FOB) and 60-day deferred payment terms. The orders, based on two sales contracts,1 were placed on behalf of Buyer by Specsavers (Broker). Handling the collection instructions were JPMorgan Chase Bank, N.A. (Collecting Bank) and Southeast Bank Ltd. (Remitting Bank); the instructions were expressly subject to URC 522 and provided that “Please Advise Non Payment/Acceptance with reason by SWIFT”; (2) “All charges outside Bangladesh are on account of [Buyer]”; (3) “Please Deliver Documents against Acceptance”; and (4) instructions regarding where the proceeds should be remitted. (emphasis in original).2
The Goods were inspected by Broker before shipment from Bangladesh and were “accepted without reservation” before being turned over to a freight forwarder nominated by Buyer. Shipment destination was unmentioned. In all, five shipments occurred throughout August 2020 pursuant to the sales contracts. Later, on three separate occasions, Collecting Bank “obtained acceptance” from Buyer with the maturity dates; Collecting Bank thus released all shipping and commercial documents to Buyer. Problems began when Buyer failed to pay at maturity. Remitting Bank, on behalf of Seller, made several demands for payment beginning in late October 2020. Collecting Bank did not respond. Broker later sent emails acknowledging the default while assuring eventual payment. In later communications, however, Broker, on behalf of Buyer, allegedly “sought a sudden and unlawful discount” of eight percent. Collecting Bank later sent a January 2021 SWIFT message alleging a new maturity date based on an “enclosed signed agreement” between Buyer and “Broker, the agent of [Seller]”. Seller alleged the SWIFT message was “knowingly false” as Broker was Buyer ’s agent and Seller made no discount agreement.
Back and forth demands for payment by Remitting Bank and claims of new maturity dates (and alleged discounts for Buyer) by Collecting Bank continued through 2021. Ultimately, Seller was not paid and Collecting Bank ceased communications. Seller sued Collecting Bank in late November 2021. After a period of pretrial motions, Seller, in its Second Amended Complaint, asserted claims of breach of contract, breach of fiduciary duty, conversion, negligence, tortious interference with contract, bailment, fraud and civil conspiracy. Collecting Bank moved to dismiss the complaint. The US District Court for the Southern District of New York, Liman, J., granted the motion to dismiss with prejudice.
Before explaining many of the factual allegations and case posture, the Judge notably reviewed the basics of documentary collections, commenting that they are an “alternative to letters of credit.”
In a bank collection of documents transaction or a documentary collection transaction, banks serve as intermediaries for buyers and sellers of goods but without themselves making any engagement or promise to pay the seller against receipt of the commercial documents related to the transaction. Thereby, the bank takes no credit risk.3
As was done in this case, the exporter appoints a remitting bank while the importer appoints a collecting bank. In this way, the remitting bank forwards trade documents tendered by the seller/ exporter to the collecting bank with instructions. Critical to the international standard practice of documentary collections is the Uniform Rules for Collections (URC 522), which apply if expressly incorporated into instructions. Pursuant to Article 1, a collecting bank becomes bound by URC 522 if it agrees to handle received instructions. If it elects not to handle instructions for any reason, a bank must so advise the party from whom it received the instructions “without delay”. Citing URC 522 Article 4, the Judge noted that collection documents must be accompanied by “complete and precise instructions.” Accordingly, banks are only permitted to act upon such collection instructions.
Turning to the first claim, breach of contract, Seller claimed that the collection instructions created a contract between it and Collecting Bank pursuant to URC 522 and the N.Y. Uniform Commercial Code. The bank’s duties were to “collect payment” and “endeavor to ascertain the reason for non- payment, and without delay to advise about the non-payment.” Seller claimed that these obligations arose from URC 522 Article 26 (Advices).4 As Collecting Bank breached these duties, it was liable to Seller. While Collecting Bank argued that Seller failed to allege a valid contract, the Judge disagreed. As Remitting Bank forwarded documents with instructions applicable to URC 522 to Collecting Bank which Collecting Bank “accepted” (though it could have refused), there was a legal “meeting of the minds.” Once Collecting Bank accepted the instructions, “it was obligated to ‘act in good faith and exercise reasonable care’ to carry them out.”5 What Seller failed to allege was any cognizable breach by Collecting Bank.
Collecting Bank was required the follow the instructions it received; as noted, the instructions were expressly to “deliver documents against acceptance.” When Buyer accepted the goods and incurred its deferred payment undertaking, Collecting Bank was required to deliver documents, which it did. Collecting Bank was not obligated to collect payment.6 Seller continued to rely on URC 522 Article 26 to claim that Collecting Bank breached its collection obligations. The Judge disagreed, however, expressing that Article 26 did not impose the obligations that Seller claimed. That provision
imposes on the collecting bank an obligation to – at the time the purchaser determines whether to consummate the transaction in the form of either payment or notice of acceptance as provided for in the Collection Instructions – advise the remitting bank if the purchaser accepts or rejects the goods (for example, if the purchaser believes the goods to be non-conforming).
The Judge then reviewed the three subsections of URC 522 Article 26(c). Essentially, they provide for three possible scenarios after a remitting bank sends instructions: (1) collection for delivery against payment and buyer pays; (2) delivery against acceptance and buyer accepts; and (3) buyer refuses to pay or accept despite delivery.7 Thus, in certain situations a collecting bank should enquire as to why a buyer has not given acceptance or paid, so long as it has followed its instructions, the “collecting bank’s job is done.”
In particular, where the collecting instructions call for delivery against acceptance and the purchaser has accepted, the collecting bank’s duty is to deliver the documents. It has no continuing and further duty to monitor whether the purchaser has paid and, if it has not, to understand the reasons for non-payment.
Collecting Bank properly advised Remitting Bank of the acceptance when it was so given at the Bangladeshi port. By validly transferring trade documents thereafter, Collecting Bank satisfied its contractual obligations. Nevertheless, Seller forwarded a new argument concerning a SWIFT message regarding an amendment to the collection instructions which allegedly then required Collecting Bank to obtain an undertaking from Buyer to pay. Apparently, the original instructions included drafts drawn on Collecting Bank (as opposed to the correct party, Buyer). The matter was resolved by Collecting Bank requiring Buyer to sign each draft. The Judge rejected Seller ’s new argument for two reasons. Principally, the argument was new and not within Seller ’s pleadings. Thus, it should not have been considered. Moreover, even if the claim were properly before the court, it was unmeritorious because “[Seller] has not explained what it would mean for the collecting bank to obtain from the drawee an undertaking to pay other than to do what [Seller] alleges [Collecting Bank] did” – confirmed acceptance of the trade documents before releasing title thereto. Having failed to allege a valid breach of contract claim, the Judge granted Collecting Bank’s motion to dismiss that branch.
Turning to breach of fiduciary duty, Seller claimed that Collecting Bank, as its collection agent, undertook a fiduciary duty. Essentially, Seller applied the same arguments from its breach of contract claim against this alleged duty, i.e. that Collecting Bank was required to collect payment and, absent payment, was required to obtain reasons for non-payment without delay. Collecting Bank merely argued that Seller failed to allege facts sufficient to show any such duty. The Judge noted the parties were dealing at arms-length and all obligations between them arose from the binding collection instructions: “Because the relationship between the parties was governed by a contract which did not impose a fiduciary duty, absent further allegations of facts supporting the existence of an independent fiduciary duty, no fiduciary duty arose and therefore no breach of such duty could arise.” That branch of the complaint was dismissed.
Seller next alleged conversion by Collecting Bank. To support a conversion claim, a plaintiff must show (1) specific, identifiable property; (2) with ownership or possession of the same; and (3) an unauthorized control, interference or alteration by a defendant to the detriment of plaintiff ’s rights. Even if Collecting Bank had allegedly mishandled documents under valid collection instructions, the Judge was “skeptical” if such conduct would give rise to a separate tort claim apart from a clear breach of contract action. Accordingly, the claim failed because, as pleaded, it sounded entirely in breach of contract. Furthermore, Seller failed to allege any specific conversion: “[Collecting Bank]’s exercise of dominion over the title to the goods was authorized by the Collection Instructions, and could not give rise to a claim for conversion.”
Turning to the claim of negligence, Seller argued that Collecting Bank owed it a duty of ordinary care and reasonable care under the N.Y. UCC and URC 522, respectively. By failing to collect payment and failing to obtain reasons for non-payment, the bank breached these duties. The Judge disagreed. Again noting that Collecting Bank followed the instructions it received, Seller also failed to allege facts giving rise to any independent duties apart from contractual obligations: “The Collection Instructions did not require [Collecting Bank] to obtain payment or a guarantee of payment before releasing the title documents and they did not require [Collecting Bank] to advise regarding non-payment.”
Seller ’s next claims were two versions of tortious interference with contract. This claim requires “the existence of a valid contract between the plaintiff and a third party, defendant’s knowledge of said contract, defendant’s intentional procurement of the third-party’s breach of the contract without justification, actual breach … and damages resulting from the breach.” Seller argued that by transferring trade documents to Buyer without receiving payment, Collecting Bank “sought to prevent the performance of the contract” thereby depriving Seller of its expected benefit. The Judge rejected this claim for similar reasons: a contract governed the relationship between the parties and Collecting Bank’s actions regarding the documents could not give rise to an independent tort. The next branch of this claim was couched in terms of negligence or recklessness. Collecting Bank allegedly interfered with the contract “by falsely claiming [Buyer]’s entitlement to certain credits and/or offsets pursuant to the Fraudulent Agreement.” Seller referenced the January 2021 SWIFT message which mentioned an alleged discount. The Judge dispensed with this claim quickly as Seller stated in its own pleadings that it entered into an agreement with Buyer in December 2020 on modified terms. There were no stated facts which suggested that Buyer would have paid for the goods “but for” Collecting Bank’s SWIFT message. The tortious interference with contract allegations were dismissed.
Running short on legal theories, Seller included a bailment claim. Under N.Y. law, a bailment claim may arise from the delivery of some personal property, whether based on an express or implied contract for a specific purpose, and after conclusion of that purpose, is redelivered back. Much like the conversion claim, however, as pleaded the bailment claim was duplicative of the breach of contract allegation. Accordingly, it was dismissed.
The next to last claim was fraud. An allegation of fraud requires, among other elements, a knowingly made misrepresentation by a defendant upon which a plaintiff reasonably relies to their detriment. A heightened pleading standard also applies which requires that fraud be alleged with particularity. Much like its prior arguments, Seller insisted Collecting Bank’s January 2021 SWIFT message was “knowingly false” as it suggested Broker was the agent of Seller and that Seller had not agreed to a discount or new maturity date. Collecting Bank argued the claim should fail for lack of specificity and for failure to identify any damages. In citing various case law, the Judge noted that N.Y. courts will not allow fraud claims regarding collecting banks alongside breach of contract actions. In a similar case where a remitting bank failed to ascertain reasons for non-payment and gave no advice of non-payment, the court opined that the bank’s “subsequent failure to respond to inquiries from the Bank of China, may constitute violations of the Uniform Rules for Collection, but the actions do not give rise to an independent claim for fraudulent concealment.”8 By the time Collecting Bank sent the January 2021 SWIFT message, Buyer was months late in payment and Seller had already agreed to the discount. Further, there was “no allegation that the SWIFT message caused [Seller] to desist from demanding payment on the terms it had previously agreed to following receipt of the message.” Failing to allege any injury or further facts, the Judge dismissed the fraud claim.
As its final claim, Seller alleged civil conspiracy between Collecting Bank and Buyer. Critically, however, N.Y. law does not provide for an independent tort of civil conspiracy, the claim must relate to an actionable underlying tort of separate defendants. As all prior tort claims had been dismissed for failing to be adequately pleaded, the Judge dismissed the civil conspiracy claim and ordered Collecting Bank’s motion to dismiss be granted with prejudice.
Comment: This lawsuit could serve as a case study for international commercial transactions students.
1Contracts were dated mid-July 2020 for a combined value USD 667,665.42.
2All factual claims derived from Seller ’s Second Amended Complaint.
3Citing Prof. James E. Byrne, LC Rules & Laws Critical Texts for Independent Undertakings 55 (6th ed. 2016).
4 Article 26(c)(3) provides in part “The presenting bank should endeavour to ascertain the reasons for non-payment and/or non-acceptance and advise accordingly, without delay, the bank from which it received the collection instruction. The presenting bank must send without delay advice of non-payment and/or advice of non-acceptance to the bank from which it received the collection instruction.”
5Citing recent case Select Harvest USA LLC v. Indian Overseas Bank, 2023 WL 2664079, at *2 (S.D.N.Y. Mar. 28, 2023) [USA] (quoting URC 522 Article 9).
6Seller mentioned N.Y. UCC Article 4-503 which provides in part “[u]nless otherwise instructed and except as provided in [N.Y. UCC Rev.] Article 5 a bank presenting a documentary draft (a) must deliver the documents to the drawee on acceptance of the draft if it is payable more than three days after presentment; otherwise, only on payment.” Based on the claims, Collecting Bank satisfied this provision.
7Under the URC 522 Article 26, these scenarios are (1) “Advice of Payment”; (2) “Advice of Acceptance”; and (3) “Advice of Non-Payment and/or Non-Acceptance”, respectively.
8Citing Tianjin Longxing (Grp.) Co. v. GMAC Commercial Fin. LLC, 2007 WL 9817703, at *4 (S.D.N.Y. Apr. 24, 2007) [USA] (quoting URC Art. 26(c)(3)) (internal citations omitted).