Article

Factual Summary: To pay for oil sold by a Polish producer to a Czechoslovakian importer, Bank issued two irrevocable and transferable credits, one in the amount of CZK7,500,000, the other for CZK1,625,000. Payment was to be effected against the presentation of "officially authenticated duplicates" of rail waybills. The credits were subsequently transferred to a transferee.

Transferee presented demand for payment ofCZK4,577,219. Issuer refused, stating that the documents were discrepant. The bank also claimed that the description of the goods differed from that of the credit because the first original was presented. Transferee sued the bank for wrongful dishonor. The trial court ruled in favor of the Issuer. On appeal, affirmed.

Legal Analysis:

1. Transport Documents, Original; Original versus Copy: Transferee presented the first original of rail waybills instead of authenticated duplicates (Original no. 2). It argued that the original is not just a mere substitute for duplicates, but that it fulfills the function of transport documents better than the duplicate. The Supreme Court rejected this argument, noting that Transferee was not allowed to interpret requirements of the credit extensively. It ruled that originals do not comply with the credit requirements. The court referred to the analysis of the lower courts, which found that only an authenticated duplicate of the rail waybill, according to §61 of the Rules governing rail carriage, entitled the sender to control the goods and embodied the right to order the carrier to re-route the goods or change the consignee, whereas the first original of rail waybill is a mere evidence of the transport contract, which is given to the consignee upon payment of due freight and does not give the sender any right of control.

2. Strict Compliance: Some of the presented railway bills described the goods as "nafta surowa", whereas the description of the goods in the credit was "petrolej". Nafta surowa is a Polish equivalent for the Czechoslovakian expression petrolej. The Supreme Court stated that since the rail waybills were issued by a Polish rail carrier, the transferee should have asked the carrier for an additional document stating that nafta surowa is a Polish synonym for petrolej. The court pointed out that the bank rightly refused to pay on this basis, as it is not the business of banks to know whether the expression nafta surowa is the equivalent of petrolej.

3. Conversion: Transferee argued that Issuer had knowledge that the applicant had received the goods, and thus was required to pay regardless of the discrepancies. The Supreme Court, however, ruled that the obligation of the bank is to make sure that presented documents comply with the credit and not to determine where the goods where loaded and delivered. Even if the bank knew that the goods had been delivered to the applicant, its undertaking was not modified by this fact.

Comments by Marek DUBOVEC:

1. This decision dates from the early 1920s applying national rules governing rail transport; long before the International Convention Concerning Rail Carriage of 1961 (CIM) was adopted. According to these national rules, a duplicate rail transport document carried better rights than an original, which was the reason why the duplicate was required under the credit. In this case, the court looked at the function and rights that were carried by the duplicate and disregarded labels. The court correctly stated that only the duplicate could be presented, because the right of control (stoppage in transit) was embodied in the duplicate as provided by the "Rail Code", whereas the original would not give the bank any rights. The original was a mere evidence of contract without the right of disposal.

2. On the second issue, the court pointed out that it is not the business of the banks to be familiar with various trade terms or different expressions used in a specific industry. This reasoning is consistent with the standard banking practice.

3. The third point is, however, very troubling. The issuing bank's reliance on the "duplicate v. original discrepancy" allowed the applicant to get away with a conversion of beneficiary's goods. The knowledge by the bank that the goods have been delivered is critical in a cause of action for conversion. In this case, the bank knew that the goods had been delivered and, thus, its right of control had been extinguished. At this point, the bank could not exercise any disposal rights embodied in either the duplicate or the original. Once the goods were delivered the distinction between the duplicate and the original that the bank relied on lost its merits. The court's analysis stopped short of this point. Even though the court raised a legitimate point about the right of control, it did not establish its boundaries (e.g. from the issuance of the document to the delivery of the goods).

Comments by DCW:

1. This case is being abstracting and reported (citation of decision) not only for historical reasons as one of the earliest reported European LC cases, but because the topic it addresses, originality, remains current.

2. This discussion is the only reported case where the presentation of an original was discrepant when the LC required another original copy. The reason for that discussion is not that the sole original was directed elsewhere, as assumed by ISP98 Rule 4.15(d) (Original, Copy, and Multiple Documents), but because original No.2 was the document required for the possession of the goods.

3. On the language issue, the Issuer bears the risk of a document in a foreign language where the credit does not require that documents be in a given language. On that basis, contemporary LC practice would take a different approach.

[JEB/MD]

* National Law Center for Inter-American Free Trade, S.J.D. candidate at the James E. Rogers College of Law at the University of Arizona, Fall 2006.

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