Article

Factual Summary: Buyer contracted with a broker to obtain pre-packaged dog chews bearing Buyer's trade name. Payment was by transferable LCs. The LC was transferred from Beneficiary to a Thai Manufacturer which presented its documents under the transferred credit. Issuer substituted documents and forwarded them to applicant of the original LC. The name and address of the Manufacturer was revealed on documents not substituted but not the amount of the mark-up charged by Beneficiary. After thirty three such transactions, Issuer mistakenly forwarded Transferee Beneficiary's documents, including Transferee's invoice with its price details, intended for Beneficiary to Buyer/Applicant, which revealed the extent of Beneficiary's markup on that transaction which was 19%, an amount equal to Buyer's profit. Angry at the amount of the mark-up, Applicant terminated its relationship with Beneficiary and dealt directly with Manufacturer, engaging in trade amounting to approximately ninety shipments over the next four years, were worth approximately US$1,800,000. The resulting loss of business from its principal customer caused Beneficiary to go out of business.

Beneficiary sued Issuer for breach of contract by revealing Beneficiary's confidential information to Applicant, claiming damages for the loss of opportunity for future profits. The trial court found for Beneficiary and awarded it damages for future profits that would have been received over the next four years through repeat business with Applicant on a gradually reduced basis. On appeal, the appellate court reduced the amount of damages to one year, noting "that time should in all the circumstances be limited to a period of one year from the date of breach, all loss thereafter being regarded as too remote". On further appeal, the House of Lords granted the seller's appeal and reinstated the damages calculated in the trial court.

Legal Analysis:

1. Transferable Credit, duty of issuer not to disclose confidential information. While noting that the LC was issued at the application of Applicant, Lord Hope noted that "it created a relationship between the Bank and [Beneficiary] too which was based on contract." Although recognizing that "[t]he letter of credit did not contain an undertaking in terms that the Bank would treat the documents provided to it by the beneficiary as confidential", Lord Hope observed that "the judge's finding that the Bank owed a duty of confidence to [Beneficiary] was not challenged in the Court of Appeal." Nonetheless, Lord Hope repeated with approval the conclusion of the appellate court that "the duty of confidence arises from the acknowledged need for the issuing bank to protect its customer from disclosure of his level of profit and from the danger that if that level of profit is disclosed his purchaser will go instead direct to the customer's own supplier." Referring to Paget's Law of Banking, Lord Hope noted that the right of substitution "is an important part of the transfer regime. It enables the first beneficiary to keep confidential from the applicant the amount of his profit from the transaction. For sound commercial reasons he is entitled to keep the amount of that profit secret. The information is confidential to the first beneficiary. It is the duty of the issuing bank to protect that confidentiality."

2. Transferable Credit, duty of issuer not to disclose confidential information. On appeal, Issuer argued that, since the Applicant/Buyer knew of the identity and contact information of the manufacturer, it could have cut out Broker at any time. While recognizing that this point was valid, Lord Hope observed that this event did not occur until the disclosure and that the evidence was that it was the disclosure of the amount that caused the termination of the relationship. Moreover, Lord Hope noted that the fact that the documents not substituted revealed the identity of the manufacturer "did not release the Bank from their duty to preserve the confidentiality which attached to [Transferee Beneficiary's] invoice to [Beneficiary]."

3. Transferable Credit, Damages for Breach of Duty of Issuer Not to Disclose Confidential Information. Issuer argued that at the time of the application for the credit it would have been impossible to determine how long the broker relationship would continue or the price would be confidential. Lord Hope rejected this argument, noting that there was no inevitable connection between the knowledge of the identity of the manufacturer and knowledge of the amount of the mark-up. "The fact that [Applicant] had the means of obtaining the information if it chose to do is beside the point. The effect of the contract that the Bank entered into was that it was obliged not to pass this information on, and [Beneficiary] had an obvious and legitimate commercial interest in maintaining its confidentiality. There is no reason at all to suppose that, if it had been asked at the time of the contract, [Beneficiary] would have agreed to the release of this information by the Bank to [Applicant]." Accordingly, Lord Hope concluded that the damages were not too remote.

4. Transferable Credit, Damages for Breach of Duty of Issuer Not to Disclose Confidential Information: As to the quantum of the damages, Lord Hope noted that the trial court had calculated damages on the basis of the annual profits that Beneficiary would have received over the next four years if the trading relationship had continued and then subtracting increasing depreciation from each year's profit to compensate for both the uncertainty of future transactions and the fact that Applicant had the means to increase its profit margins by going directly to the Manufacturer. On appeal, the appellate court had concluded that the trial court had erred on the quantum of damages, and limited the damages to one year.

On further appeal, Beneficiary argued that Issuer's damage was open-ended because it was not limited in the LC application. Lords Hope and Walker noted that the increasing depreciation from each year's profit that the trial court used to determine damages was not the best way to calculate damages. However, they concluded that "the cost and delay that would be involved in sending the matter back to the judge are so out of proportion to the amounts involved as to make that course unacceptable."

Comment:

1. The opinions assume that the "contract" out of which damages arise came into being at the time that the bank issued the transferable LC. While there is a contract in connection with the issuance of an LC, it is between the issuer and the applicant. The LC cannot properly be understood as a bilateral contract and the relationship between the issuer and beneficiary is not one of mutuality. The request for transfer, however, does give rise to a relationship between the transferring bank and the beneficiary. At that time, the transferring bank undertakes to effect a transfer. That bank need not be the issuer but could be any bank so nominated under UCP500 Article 48. If there is a duty of confidentiality, it arises at that time and it is between the transferring bank and the original beneficiary. It is at that stage that the request for transfer should address questions of the obligations of the transferring bank and any limitations of damages.

[JEB/az]

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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.