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Note: AIC Ltd. (Broker/Beneficiary) purchased four parcels of gasoline from Mobil Sales and Supply Corporation. The purchase contract specified that the gasoline was to be inspected by an independent inspector, ITS Testing Services (Inspector), and that the results of the inspection were to be "final and binding for both parties save for fraud or manifest error." Inspector certified one of the four parcels of gasoline to be unacceptable, but issued a further certificate of quality for a "shore composite blend," stating that the four parcels, in aggregate, met specifications. It was later determined that Inspector had used an improper method of testing for certification, and had not informed any of the parties of this error.

Assuming that the certificate was correct, Broker/Beneficiary subsequently sold the gasoline to Galaxy Energy (Buyer/Applicant) pursuant to a sales contract providing that quality be determined "[a]s ascertained at load port and confirmed by [Inspector's agent]." Credite Agricole (Issuer), at the request of Buyer/Applicant, issued an LC for payment to Broker/ Beneficiary. Buyer/Applicant began offloading of the gasoline in New York, but suspended operations, complaining to Broker/Beneficiary that the gasoline did not meet specifications. Buyer/Applicant then finished offloading to a third-party storage facility. Broker/Beneficiary offered Buyer/Applicant a discount of US$100,000, which Buyer/Applicant refused, requesting instead a US$230,000 discount, which Broker/Beneficiary refused.

Broker/Beneficiary then presented documents under the LC, including the shore composite certificate, commercial invoice, and LOI for payment under the LC. Claiming breach of contract, Buyer/ Applicant was awarded a temporary injunction from the Tribunal of First Instance of Geneva, Switzerland, restraining Issuer from paying Broker/Beneficiary. The dispute led to litigation in Switzerland, England, and the United States of America, resulting in Broker/ Beneficiary being ordered to pay Buyer/Applicant US$1,165,037.62 plus interest.

Subsequently, Broker/Beneficiary brought the instant action in England against Inspector for breach of contract, deceit, breach of duty, and statutory liability under a local law regarding the certificate issued by Inspector and used to claim on an LC. Inspector denied liability, principally contending that Broker/Beneficiary's claims were barred by the statute of limitations, but asserting in the alternative that Broker/Beneficiary improperly drew on the LC. The Queen's Bench Division (Commercial), Cresswell, J., ruled in favor of Broker/Beneficiary, awarding it damages against Inspector in the amount of US$2,283,582 plus CHF524,901.90 (the total amount of damages, interest, and attorney's fees in all previous actions).

The court found that Inspector "owed a duty to take reasonable care to ensure that any certificate it issued was accurate as to those matters on which it was instructed to report. It had been negligent in its initial analysis of the regular cargo and in issuing certificates of quality." The court explained that "[t]he damage flowed directly from the deceit and was caused directly by the deceit or constituted consequential losses caused by the deceit. [Broker/ Beneficiary] had the benefit of the letter of credit issued on the instructions of [Buyer/Applicant]. [Broker/Beneficiary] (in the light of the matters then known to [it]) reasonably held [Buyer/Applicant] to the contract and claimed on the letter of credit." Since Broker incurred damages from its draw on the LC due to Inspector's certificate, the court concluded that Inspector is answerable in damages.

Comments by James E. BYRNE:

1. This case is notable in that it enforced the seller's rights against the inspector that had issued and erroneous certificate. Unanswered is the question of whether the bank or applicant could have recovered against the Inspector.

2. Although that question is theoretical in this case, it should not have been. Based on the facts stated in this case, the injunction was improperly issued. The courts and their progeny would have refused the relief on the ground that the beneficiary was innocent. That ground is not consistent with the standard international letter of credit practice, however, since no bank undertaking to honor a document that is fraudulent. The true reason why an injunction is improper is that difference in the quality of the gasoline is simply not LC fraud.

[JEB/ees]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.