Article

Factual Summary: Applicant entered into a contract with Beneficiary to purchase 10,400 metric tons of lead to be conveyed from Sweden to Iran, payment to be made by LC. Documents called for by the LC as issued included a FIATA multimodal transport bill of lading and an inspection certificate issued by Inspection Company certifying that "the quality and packing of the goods loaded are strictly complying with specifications of the goods indicated in the relative proforma invoice and the terms of the L/C." This language was prescribed by Iranian import regulations.

To fulfill the contract, Beneficiary's Director arranged to have his bank purchase the warrants under the system organized by the London Metal Exchange (LME), where "[t]he lead is deposited by producers in LME approved warehouses in lots of 25 metric tons, each of which is individually identified and made the subject of a single warrant. The lead is traded by buying and selling the warrants, which are effectively documents of title. Physical delivery can only be obtained from the warehouse against presentation of the relevant warrant." Beneficiary's Bank, however, was unwilling to accept assignment of the LC, and insisted on holding the warrants as security for payment. Without access to the warrants, Beneficiary was unable to satisfy the terms of the LC, which required that they be presented.

To solve this problem, Beneficiary's Director arranged for a false FIATA bill of lading to be produced that specified shipment of the lead under warrant to Beneficiary's Bank, stating that the lead had been "taken in charge in apparent good order and condition, unless otherwise noted herein, at the place of receipt and delivery as mentioned above," and was en route to Iran. The following day, Inspection Company issued a certificate declaring that the lead had been presented to their inspectors, and certified the quality, quantity, packing, and loading of the goods as strictly compliant with the bill of lading , as was required by the LC. In fact, the only inspection performed was a purity inspection of the lead in the warehouse. There was no observation made of packing or loading the lead, which could not have been verified to be "taken in charge," because the lead never left the warehouse.

The bill of lading, inspection certificate, and other required documents were presented to Issuer by Beneficiary's Bank, rejected, cured (the opinion refers to them as "manuscript alterations"), and were taken up by the Issuer. Since Issuer lacked sufficient funds to pay, it did not pay Beneficiary for over a month. During that intervening time, the price of lead began to fall, and Beneficiary's Bank sold the warrants to another buyer and credited the profit to an account of Beneficiary's Director unrelated to Beneficiary company. Neither Applicant nor Issuer were informed of this transaction.

When Issuer obtained access to sufficient funds, it was worried that there would be liens on the lead due to its delay in making payment. Issuer therefore requested and received verification from the carrier that issued the B/L that the goods were free of liens and awaiting shipment. Issuer also contacted Beneficiary to verify that the lead was available, and solicited a guarantee from Beneficiary that the monies would be repaid in 45 days if the goods were not shipped pursuant to the B/L. Issuer then contacted Beneficiary's Bank, remitting US$5,795,560.65 in settlement of the LC.

Beneficiary's Bank suggested to Beneficiary's Director that the funds be returned to Issuer, since the lead was no longer available. Beneficiary's Director insisted the funds not be returned, as he was in continued negotiations with Applicant and the return of the funds might jeopardize the negotiations. Beneficiary's Director instructed its bank to remit the funds to a metal broker not a party to this suit. All of the funds from the transaction were subsequently paid out according to the instructions of Beneficiary's Director.

Beneficiary sent a subsequent fax to Applicant claiming that Beneficiary suffered a loss of over US$1.8 million as a result of Issuer's failure to make timely payment. This loss was alleged to be made up of warehouse charges, a market loss, interest, and the cost of transporting the goods from the warehouse to port and back. Beneficiary then offered to ship 7,000 metric tons of lead and retain the balance of the payment as security for its losses pending settlement.

No agreement was reached regarding a subsequent shipment. Applicant received no goods from Beneficiary, and Issuer debited Applicant's account for the full amount of payment under the terms of the LC. When they found out the documents were fraudulent, Applicant and Issuer brought suit against Beneficiary, Beneficiary's Director, Beneficiary's Bank, and Shipping Company for deceit; against Inspection Company for negligence in issuing inspection certificate; and against Beneficiary's Bank for restitution of funds remitted under mistake of fact.

Suits against Beneficiary and Shipping Company were stayed because both had been struck from the registers in their countries of incorporation. After trial, Beneficiary's Director, Beneficiary's Bank, and Inspection Company were held jointly and severally liable to Applicant and Issuer for US$5,712,762 plus interest of US$1,174,999 and costs. Beneficiary's Bank and Inspection Company were given leave to appeal, Beneficiary's Director was denied leave to appeal. The Court of Appeal affirmed all judgments from below, denying all appeals.

Legal Analysis:

1. Role of Inspection Certificate: Inspection Company agreed with the trial court judge that the "purpose of providing for an independent surveyor to inspect the goods under a contract of this kind is to provide the buyer with an assurance that the seller has shipped goods that conform to the contract ...," but claimed that the "function of the certificate is to guard against the shipment of inferior goods, not to confirm the goods have been shipped or to guard against the issue of a dishonest bill of lading." The appellate court emphasized the importance of an inspection certificate as a verification of shipment, stating that:

although a certificate will contain important statements about the quality and quantity of the goods, its primary importance lies in the very fact that it has been issued. As the judge put it in paragraph 60, possession of a certificate covering the required matters enables the seller to demand payment under the letter of credit and triggers the corresponding obligation of the buyer to indemnify the issuing bank. I agree with the [trial court] judge that that is just as true if the surveyor is required to certify that the goods have been loaded as it is if he is required to certify that they are of contractual origin or quality.

2. Lack of Privity: Inspection Company argued that the scope of their duty was limited to the quality and quantity of the goods to be inspected. The appellate court disagreed, stating that although

[Buyer] was not in direct contractual relations with [Inspection Company] because [Inspection Company's] contract was with the buyer [sic], but the relationship between them arose out of a commercial contract and I agree with the judge that it was closely akin to a contractual relationship in which a duty of care would fill the gap left by the contractual doctrines of consideration and privity.

In further discussion of an inspection company's duty, the appellate court, quoting the trial court judge, stated that:

"Inspection companies ... are instructed in connection with documentary sales precisely because they are understood to have the necessary facilities and expertise to enable them to determine whether the seller has performed his contract in the relevant respect and are trusted to exercise independent judgment. Although an inspection company may receive its instructions from the seller, it will be aware that its certificate is likely to be required for presentation to the buyer or a bank as part of the documentation against which payment is made. It is aware, therefore, that the buyer, or a bank, which ultimately has recourse to a buyer, will rely on the existence and accuracy of its certificate in paying the price for the goods. The buyer is the person whom the inspection company should have in contemplation as the person most likely to be affected by any error in the certificate ...."

3. Duty of Inspection Company Regarding Loading: Inspection Company asserted that no duty existed between the inspection company and the buyer with respect to loading, which was "incidental and not central to the function of [Inspection Company]." Buyer countered that "it was entirely within [Inspection Company's] own hands to decide what aspects of the shipment it chose to certify. If there was some aspect of the operation which [Inspection Company] did not wish to certify, it could refuse to do so at the outset. It did not, no doubt because it could not have done so and provided the service required by the Iranian authorities." The appellate court concurred with the buyer's reasoning, and went on to state that "the documents emanating from Iran show that supervision of loading was mandatory." However, the appellate court then limited the scope of the inspection company's duty, stating it would be required to "do no more than take reasonable care to satisfy itself that the goods it had inspected were the goods in fact loaded on to trucks before issuing a certificate to that effect."

4. Definition of 'Loaded': The trial court judge "held that, in order for the goods to be 'loaded' in the context of multimodal transport of LME lead, they did not have to be physically delivered on to trucks and that it was sufficient for the warrants which represented them to be delivered to the freight forwarder." On appeal the buyer submitted that the trial court judge's definition of 'loaded' was in error, and contrasted 'loaded' with 'taking in charge', stating that "'loading' refers to the physical stage in the transport whereas 'taking in charge' refers to control of the cargo. Thus [the buyer] submitted that in a case of this kind the lead would only be 'loaded' when physically loaded on to the trucks for transport to the ocean vessel." The appellate court determined that the buyer's submissions would be correct both in an ordinary case of multimodal transport and in the instant case where the lead was represented by LME warrants.

5. Causation: Inspection Company argued that it should not have been required to enquire at the warehouse, with the shipping company, or with the seller to establish who had control over the lead because those enquires would not have yielded the truth as to who held the warrants. The appellate court disagreed, and quoting the trial court, stated that: "it was likely (in the sense of more probable than not) that, if [Inspection Company] had made proper enquiries about the location and control of the goods, it would not have been satisfied that they were under [Shipping Company's] control. In that event it is self-evident that [Inspection Company] could not and would not have issued a certificate which complied with the terms of the letter of credit .... [A]lthough there were other causes of the loss, the inspection certificate was one of the keys to the funds represented by the letter of credit and the loss flowed from the original cause, namely the presentation of worthless documents."

6. Deceit: The trial court judge acquitted Beneficiary's Bank of the tort of deceit, and on appeal Issuer and Applicant claimed the acquittal was in error. Issuer and Applicant alleged that the an agent of the bank knew the documents required by the LC included a transport document, and because the bank held the lead warrants, must have therefore have known the LC documents were false. The appellate court disagreed with this allegation, and quoted the trial judge's statement regarding the agent's actions:

"I accept [CAI employee's] evidence that he did not appreciate the significance of the reference to the bill of lading. That may have been due to carelessness on his part, but having seen and heard him give evidence I am not persuaded that he allowed the documents to be sent to the back office for checking and presentation to [Issuer] knowing full well that the bills of lading were not genuine. Nor, I should make it clear, am I persuaded that he was reckless in that regard, in the sense that he realised something might be wrong but did not bother to investigate. I accept that the significance of the letter simply failed to register with him."

7. Mistake of Fact: Since the issuer paid under a mistake of fact, the court required the beneficiary's bank to repay the money unless it could present a defense of change of position.

8. Change of Position: Beneficiary's Bank argued that a change of position defense was available when the recipient under a mistake of fact pays away the money in good faith, that any payment is in good faith unless it is made dishonestly, and since the trial court held the bank did not act dishonestly, the bank should not have to repay the issuer due to change of position. The appellate court disagreed, and quoting the trial court judge, stated, "[w]here he knows that the payment he has received was made by mistake, the position is quite straightforward: He must return it. This applies to a banker who receives a payment for the account of his customer as to any other person ...." In conclusion on change of position, the appellate court stated that "[t]he essential question is whether on the facts of a particular case it would in all the circumstances be inequitable or unconscionable , and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer."

Comment by Soh Chee Seng*: The decision is not fair to the beneficiary's bank. As indicated, the beneficiary's bank paid the beneficiary in good faith. The trial court also held that the beneficiary's bank did not act dishonestly. Would the decision be different if the LC was confirmed by the beneficiary's bank? Why should the beneficiary's bank be liable to the issuing bank for restitution of monies paid by mistake of fact? The decision may increase problems for an already problematic documentary credit world.

[JEB/fkd]

* Soh Chee Seng is Technical Consultant on Trade Finance Issues for the Association of Banks in Singapore and a regular participant in the Annual Survey of LC Law & Practice conference series.

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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.