Article

Factual Summary: Pursuant to a contract between an Australian Seller and an Indian buyer, a third party financier applied for issuance of three letters of credit for the purchase of chick peas and dun peas to be shipped from Australia to India payable to Beneficiary/Seller.

The LCs required "signed commercial invoice in 1 original + three copies certifying that the goods shipped as per beneficiaries contract." The LCs also required production of clean on-board ocean bills of lading consigned to order and endorsed to the notify party.

While the vessel was at sea and at the request of Applicant, Beneficiary/Seller agreed to "split" the bills of lading in order to split the B/Ls into smaller denominations and Carrier raised no objection to this procedure. Apparently unbeknownst to Beneficiary, Applicant "was proposing more than a mere splitting of the bills of lading by the proposed substitution. Under the draft proposed by (Applicant), it was shown as the shipper in place of (Beneficiary/Seller) and (Buyer) was the designated notify party."

As communications were exchanged between Applicant and Beneficiary regarding the terms of the switched B/Ls, the vessel, MV Nelson, was approaching the port of discharge. Due to the likely unavailability of the B/Ls at time of cargo discharge in Calcutta, Beneficiary sought assurances that discrepancies would be waived. In a facsimile to Beneficiary, Applicant stated:

"Re: SHIPMENT OF DUN PEAS AND CHICK PEAS PER M/V NELSON PLEASE NOTE ALL DOCUMENTS SHALL BE ACCEPTED BY US."

In a telefax sent next day, Applicant informed Buyer that due to its failure to pay other unrelated contractual bills, it was unwilling to waive discrepancies. Prompted by Buyer's payment of an unrelated invoice, Applicant accepted discrepant documents in late January under the third LC but continued to refuse the discrepant documents under the first and second LCs. Subsequently, Applicant informed Issuer that the discrepant documents related to the second LC were not accepted and issuer informed negotiating bank.

Compounding the matter of discharging cargo in Calcutta, a lighterage problem prevented the discharge of the dun peas. In the meantime, there was a "sharp drop" in prices. As a result of several factors, various parties sought letters of indemnity. They were executed by Beneficiary. When Carrier insisted on a bank endorsement, it was forwarded to Negotiating Bank officer who signed them. The Carrier relied on two letters of indemnity from the Beneficiary which Negotiating Bank executed in offloading the goods. When the vessel was arrested, Carrier claimed under the indemnities. Taking the position that it was not obligated and that the officer was unauthorized to act, the Negotiating Bank refused to pay. It also took the position that the employee made it clear to the Carrier that the signature only reinforced the signature of the shipper. Carrier initiated litigation against the Beneficiary and Negotiating Bank for failing to indemnify it from liability.

Judgment was entered for the Carrier on a theory of negligence. On appeal, reversed.

Legal Analysis:

1. Letters of Indemnity: Carrier contended it "relied upon representations in permitting delivery of the cargo without surrender of the bills of lading." Bank argued that its employee had no authority to issue a letter of indemnity, that such a letter would exceed the available credit facility, and that the bank's role was merely to verify the signature of its customer, the Beneficiary. The trial court concluded that the Carrier's case in contract failed, stating it was "satisfied that (Negotiating Bank's) department was not authorised to issue bank guarantees or indemnities and that (Negotiating Bank's employee) was well aware of this."

Moreover, the trial court stated the Negotiating Bank's LC manager and representatives of the Applicant "failed to turn their minds, clearly, to what were the consequences of (Negotiating Bank's employee) signing of the LOIs on behalf of (Negotiating Bank)."

"The evidence ... is strongly indicative of a state of confusion, if not, near panic created by (Buyer's) dishonesty in failing to meet its obligations of payment under the (Seller/Buyer) contracts, combined with (Applicant's) frustrating conduct in delaying acceptance of discrepant documents, due to unsatisfactory business relations with (Buyer). I think the reasoning of both (Beneficiary) and (Negotiating Bank's employee), shortly stated, was that, once payment under the subject letters of credit was assured by acceptance of discrepant documents, the provision of an LOI was an expedient, risk free exercise.

In reality, with (Applicant) as the notify party under the initial bills, as shipper under the switched bills and as the party nominated in the (Seller/Buyer) contracts to open the requisite letters of credit, the risk was great in providing the LOIs where, in each instance, the bills of lading would be in the possession of (Applicant) under the letters of credit arrangements and where the passage of the bills into the hands of (Buyer) depended upon the terms of the financial arrangements between (Applicant and Buyer): the precise terms of which were unknown to (Beneficiary)."

The Appellate Court noted:

"The real difficulty with (Carrier's) claim in contract flows from (Trial Court's) finding that (Negotiating Bank's employee) was manager of the department in (Negotiating Bank) known as documentary credits with duties which involved the supervision and the handling of import/export letters of credit and, as she was well aware, that that department was not authorised to issue bank guarantees or indemnities. When she was vigorously cross-examined by counsel for (Carrier), (Negotiating Bank's employee) insisted that in signing the (Beneficiary's) LOIs she intended to do no more than verify the signatures of those who had signed on behalf of (Beneficiary)."

2. Negligence; Duty of Care; Ultra Vires: The Trial Court noted:

"I think little utility lies in examining (Carrier's) case in negligence concerning the system in place within (Negotiating Bank) for the execution of documents. In this case (negotiating bank's LC manager) had express authority to execute the documents on behalf of (Negotiating Bank) for the purpose of verifying the signatories to the (Beneficiary/Seller) LOIs. It was her negligent performance of those responsibilities for which (Negotiating Bank) may be held liable.

One does not have to have recourse to any deficiencies in the system of banking as conducted by (Negotiating Bank) to reach that conclusion.

The central question, then, is whether (Negotiating Bank) owed a duty of care to (Carrier) to avoid any economic loss to it that may be caused by (Negotiating Bank's) negligence. In my view, in the particular circumstances of this case, there is only one acceptable conclusion. (Negotiating Bank) did owe such a duty of care to (Carrier)."

The Appellate Court noted:

"There was no evidence that (Negotiating Bank) had at any time agreed to indemnify (Carrier) for the consequences of (Carrier's) delivering the cargo without production of the bills of lading. Nor was there any evidence that (Negotiating Bank) ever intended to give such an indemnity or represented to (Carrier) that it would do so. (Carrier's) case was starkly pleaded as based on a duty of care (Negotiating Bank) owed (Carrier) 'in executing or signing the agreements dated on or about 28 January 1999 and 19 February 1999'. This claim must be looked at in the context that (Negotiating Bank) did not represent to (Carrier) that the person signing in the space reserved for Banker's signature had authority to bind the bank to the indemnity. The submission must be that (Negotiating Bank) was under a duty of care to (Carrier) which required it to go further and indicate on the document the limited purpose for which (Negotiating Bank's employee) signed it. In my opinion, the duty of care does not extend so far."

Comment:

This decision can only be squared with the reasonable expectations of the commercial community if one posits that the significance of the signature was apparently ambiguous or that the carrier was aware that it was only given to verify the authentication of the shipper's signature. If not, exceeding his or her authority by an employee who deals with international trade would not be an excuse unless the carrier was aware that there was no authority to indemnify it.

[JEB/csb]

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