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Note: United Bank Limited (Bank) permitted commercial LCs from other banks to be negotiated by its branches if the issuing bank was a correspondent bank or if it was listed as the first five hundred banks in the world. If the issuing bank was not listed, the negotiation of LCs required approval from Bank executives. Bank's internal instructions stated:

DOCUMENTS DRAWN UNDER EXPORT LETTERS OF CREDIT.

Attention of branches is invited to our Circular Letter No.ID:DW:THQ:687:84 dated the 22 July 1984 and IS:SVP11118:86 dated the 9th February, 1986 whereby branches were advised (through their Circle Executives) to obtain prior permission/clearance before negotiating/discounting documents presented in terms of letters of credit issued by the banks not included in our agency arrangements. It has now been decided that our branches may negotiate/discount documents drawn under LCs issued by those non-correspondent banks who are listed in the first five hundred banks of the World. Such listing is done by "The Banker" a publication of the Financial Times and for convenience's sake a list is enclosed of those which are included in the above category but are not our correspondents. This list of non correspondent banks may be kept on record and branches may negotiate documentary Letters of Credit received from the banks without any reference to International Division Head Office, Karachi.

Several of Bank's employees (Employees) (listed at the end of this note) in three branches negotiated LCs issued by non-listed banks, in particular the East Mediterranean Trust and Banking Corporation (Issuer), without permission from the competent authority designated by Bank and contrary to Bank's express policies. One of the charges against Employees was that the documents presented under the LCs contained "'Received for Shipment' notation but as precautionary measure and bank's procedure, the subsequent confirmation was not sought from the shipping company as to when the goods [were] actually...'shipped on board'."

The issuers of a number of these LCs defaulted, resulting in a loss of RS 32,430,000 for Bank. When Bank terminated Employees for non-compliance with its policies, Employees sued Bank for wrongful termination. The trial court ruled in favor of Bank, stating that Employees were not wrongfully terminated. On appeal by two of Employees, Ishtiaq Ahmad Sheikh and Muhammad Naeem Shaikh (Appealing Employees), who had management authority, the Supreme Court of Pakistan, in an opinion by Nasir-ul-Mulk, J., partially allowed the appeals, ruling that Appealing Employees were guilty only of misconduct. The Supreme Court modified the trial court's decision, converting the penalty for Appealing Employees from termination to a compulsory retirement from Bank.

Appealing Employees argued that Bank's management was regularly apprised of the negotiations, that the branches were regularly audited, and that some of the LCs permitted bills of lading with, "received for shipment," notations were properly negotiated under UCP400 which governed the LCs.

One of the claims against Appealing Employees was that they dealt with documents of the Tawakkal Group despite a telefax message instruction to the contrary. The trial court found Appellant Employees were to blame "for dealing with the Tawakkal Group when, 'the market reputation of the Tawakkal Group which was known to almost everyone in Pakistan, who reads newspaper. The party had long earned illrepute due to many fraudulent dealings in privatization and other activities'." The Supreme Court of Pakistan, however, ruled that "impression gathered from newspaper reports can hardly be made basis for judicial findings, moreso, when no reference was made to any such report."

The Supreme Court also stated that no negotiations took place after the telefax, negotiation with non-correspondent banks took place at many different branches of Bank, and it could be safely concluded that it happened as a "matter of practice". Moreover, the court noted that senior officers of Bank also overlooked instances of Appealing Employees' non-compliance and encouraged negotiations of LCs between Bank and Issuer.

Employees who were dismissed and did not appeal: Zahid Umar Farooqui, Muhammad Feroz, Muhammad Yaqoob, Nisar Ahmed Ansari, M. Umar Suleman, M. Fayyazuddin and Zahid Hameed.

[JEB/sls/ak]

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