Article

Note: US retailer, J.C. Penney and Company (JC Penney), placed a rush order for boy's cargo pants with a company in Bangladesh, Merchantex, (Seller) who was to manufacture the pants through Uniwear, an Uzbecki company (Manufacturer) of which it was a 75% owner. The fabric was to be supplied by Sinomast Ltd. (Fabric Supplier), a Hong Kong company. JC Penney was to pay Seller who would pay Manufacturer and Fabric Supplier. There was, however, testimony that "the banking system in Bangladesh where [Seller] is situated and in Uzbekistan where [Manufacturer] is located is not sufficiently advanced or flexible to deal with international letter of credit payments which were to be involved in this case." Therefore Etacol (Applicant), a Hong Kong trim supplier with a good banking relationship with HSBC, applied for and obtained an LC in favor of Fabric Supplier for US$433,000. JC Penney, in turn, obtained an LC in a larger amount in favor of Applicant covering the cost of fabric, the amount due to Seller, and Applicant's 3% commission. The LCs named Applicant as "Buyer" because JC Penney's system could not accommodate any other arrangement. When Applicant received the proceeds from the JC Penney LC, it would reimburse HSBC for the Fabric Supplier's LC and pay Manufacturer.

To accommodate JC Penney in view of the rush, Fabric Supplier shipped the goods before the LC had even been approved. However, the fabric was stopped at the Chinese/Uzbekistan border due to lack of a health certificate, causing the order to be air freighted at an additional cost of US$100,000 due to its urgency. Blaming this switch to more expensive transport on Fabric Supplier's freight forwarders, Seller ordered Applicant to withhold US$100,000 from the payment. Although the court does not so state, it would appear that the delay resulted in discrepancies in the documents under the Fabric Supplier's LC.

When Fabric Supplier aggressively sought to collect the US$100,000 balance, Applicant brought an action in Hong Kong for a declaration that it did not owe monies to Fabric Supplier since there was no contractual relationship between the two companies. Fabric Supplier counterclaimed for US$100,000. The Hong Kong Court of First Instance, Carlson, Deputy High Court Judge, entered the declaration that no funds were owed to Fabric Supplier by Applicant.

Fabric Supplier argued that the terms of the LC and the documents produced under it identified Applicant as the buyer. While recognizing that Fabric Supplier was not privy to the correspondence and arrangements by which this transaction was set up, the court noted that Fabric Supplier's principal concern was the ultimate sale to JC Penney. Taking an objective view of the relationship, the court concluded that the LCs and related documentation were not determinative and that the documentation attaching to the LC named Applicant as buyer due to the demands of the LC system and not because it was in a contractual relationship with Fabric Supplier. The court concluded that the documents did not change the fact that Fabric Supplier was selling the fabric to the Manufacturer and the Seller.

Fabric Supplier also argued that Applicant acted as an agent for Manufacturer and that in this capacity, Applicant incurred personal liability because while acting as agent it had not avoided liability by disclosing that it was acting as an agent. Recognizing that Applicant was an agent, the court noted that it had "a very limited role ... in arranging payment to suit [Fabric Supplier's] wish to be paid in either Hong Kong or the US through a reliable bank by letter of credit." The court concluded that it could not be said that performing this limited role gave rise to concurrent liability for the sale of the fabric.

[JEB/jmf]

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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.