Article

Factual Summary: To pay for the purchase of air conditioners from Seller, Buyer (Applicant) obtained an acceptance letter of credit from Issuer in favor of Seller (Beneficiary). As partial security, Applicant proffered two LCs in its favor which amounted to 85% of the value of the LC.

The LC required presentation of various documents including a packing list and a delivery order "stating the delivery date as not being later than 15 July". The LC also required that the documents were to be presented within 14 days after the delivery date and within the validity of the credit.

The delivery order was counter-signed by Applicant as required by the credit and contained a statement that the goods were delivered in one lot. It was accompanied by a packing list that was generated solely for presentation under the LC since none accompanied the delivery of the goods.

When complying documents were presented, Issuer accepted the draft and paid on maturity. However, only US$424,292.40 worth of goods were delivered on the date of the delivery order. The balance had been delivered prior to the issuance of the LC in the three months before the date of the delivery order. As stated by the Judge, the delivery order was "designed to conform to the terms of the LC", having been prepared in two stages, the first of which was before Beneficiary was aware of the LC terms.

When Applicant was placed under receivership due to insolvency, as a result of a report of the Receiver, Issuer discovered that the goods were not delivered in one lot on the date of the delivery order. Issuer then sued Beneficiary for damages, alternatively alleging deceit or negligent misrepresentation. The trial court found in favor of Issuer on the count based on deceit and dismissed the count based on negligent misrepresentation.

Legal Analysis:

1. Deceit: Beneficiary argued that its employees honestly believed that the LC permitted it to deliver the goods in several lots and to present a consolidated delivery order covering the prior shipments. The Judge rejected these contentions. The Judge concluded that the documents presented by Beneficiary represented that the goods were delivered on the date of the delivery order in one lot, that this representation was false, and that it was made fraudulently and with the intent that Issuer rely on it which it did with resulting loss.

The Judge rejected Beneficiary's interpretation that the LC covered all prior orders. She noted that had Beneficiary believed this interpretation to be correct, it would have presented the actual delivery orders which would not have complied with the LC term requiring documents to be presented within 14 days of delivery and not ones artificially created for the LC presentation.

The Judge noted that in order to prove deceit, it was necessary to prove that there was an absence of an honest belief by the person making the representation that the statement was true. The Judge noted that this standard required an inquiry into the state of mind of the person making the representation. She stated that while the unreasonableness of the belief or its grounds will not per se suffice to prove the absence of an honest belief, it is evidence "from which fraud may be inferred." In weighing the evidence, the Judge concluded that "All the above lead to the irresistible conclusion that [Beneficiary] did not honestly believe the truth of the representations in [the delivery order]. [Beneficiary] clearly intended to make the Representation in [the delivery order] to secure payment from Issuer under the LC."

With respect to the question of whether Issuer relied on the misrepresentation, the Judge noted testimony from Issuer's trade operations witness who indicated that documents indicating prior delivery dates would not have been honored absent approval by the relationship manager or a supervising credit officer. The Judge noted on the witness' testimony that was not contradicted that the LC was issued to pay for "fresh goods" and that the bank would not have financed goods that had already been delivered. In response to questions on cross examination, the witness indicated that financing for goods already delivered might have been available but would require new documentation. "[The witness] was specifically asked why [Issuer] would require its customer to go through fresh documentation for a new product when the LC was already in place to finance the previous deliveries. The reason that [the witness] gave was '[a]ccountability for the product that is being used to finance the relevant purchases ... compliance with whatever internal policy; basically proper credit covenants.'" [The witness] went on to explain the rationale for his stance in the following terms:

It's basically good banking practice. You do not mix one product, one loan product, for use of another product. For example, you do not give an OD to buy a property with a long-term intention in mind. There is no right or wrong, but it's just something that is not done correctly in terms of credit decisions.

The Judge stated:

If [Beneficiary] honestly thought that [Issuer] would have paid [Beneficiary] "[in] all events," there would have been no need to go through the charade of misleading packing lists and delivery orders. [Beneficiary] would have simply tendered the discrepant documents and looked to [Issuer] for payment. The reason [Beneficiary] did not is obvious: they knew that [Issuer] would regard as material the representations contained in [the delivery order] with regard to the delivery of the Goods. That is why [Beneficiary] stated in [the delivery order] that the Goods were all delivered in "1 lot" despite the LC not stipulating such a requirement.

Beneficiary argued that subsequent intervening events, namely its inability to obtain reimbursement from Applicant or from the LCs that it held as security, disrupted the chain of causation of damages. The Judge rejected this argument, stating that steps taken or not taken in mitigation are irrelevant to the question of causation.

2. Negligent Misrepresentation. Issuer argued that Beneficiary was also liable for negligent misrepresentation. The Judge rejected these contentions, finding that the "current state of the authorities does not support the existence of a cause of action in negligent misrepresentation by an issuing or confirming bank against the beneficiary of a letter of credit." The Judge cited Gutteridge & Megrah's Law of Bankers' Commercial Credits (Europa Publications, 8th Ed., 2001) for the proposition that "the causes of action available to the bank to recover any payment made to the beneficiary are that of money had and received and the tort of deceit against the beneficiary."

Issuer argued that in Niru Battery Manufacturing Co v. Milestone Trading Ltd, [2004] 1 Lloyd's Rep. 344, where "the English Court of Appeal found that a third party inspection company assumed responsibility to the buyer to take reasonable care to ensure that the inspection certificate it issued was accurate," supported "the principle that an issuer of a document which is to be used in a letter of credit transaction owes a duty to ensure that the statements in that document are true and accurate." The Judge rejected this argument, noting that in Niru, "the inspection company had assumed responsibility towards the buyer" and that in this case there was no such assumption of responsibility. The Judge also noted that in Montrod Ltd v. Grundk�r Fleischvertriebs GmbH [2002] 1 WLR 1975, the judge ruled that "the beneficiary under the letter of credit did not owe a duty of care to the applicant in presenting documents under the letter of credit" and which provided as dicta that "[t]he beneficiary does not owe a duty of care to the issuing bank."

The Judge also noted United City Merchants (Investments) Ltd v. Royal Bank of Canada, [1983] 1 A.C. 168, in which the House of Lords narrowly ruled that only fraud by beneficiary relieves an issuing or confirming bank of its duty to honor a complying presentation. The Judge cautioned that if "a bank may rely on negligent misrepresentation by a beneficiary to recover any money it had paid out to the beneficiary, the law would also have to accept that banks are entitled to invoke negligent misrepresentation by the beneficiary as a ground for not paying the beneficiary in the first place," which would "introduce into our common law, by way of a back door, a contention emphatically rejected by" United City Merchants and "unravel the narrow fraud exception [United City Merchants] took pains to limit; banks could refuse to pay the beneficiary once there was any inaccurate statement of material fact by simply alleging that the beneficiary had been negligent." The Judge concluded that the purpose of "documentary credits is to give sellers, as far as possible, an 'assured right' to payment notwithstanding disputes in the underlying sale contract" and that "developing the law to allow for a negligent misrepresentation exception would be an unjustified erosion of this very premise. Documentary credits must be allowed to be honoured, as far as possible, free from interference from the courts."

Comment:

Reading this decision regarding post honor remedies for issuers that have honored makes it apparent that there was no need in US law to develop a special LC warranty for fraudulent presentation. The trouble with the Singapore decision and the cases cited was that they referred to LC fraud and not the general common law of fraud. No injunction being sought and the LC having been paid, the only post honor issue is whether there was common law fraud. If there is an LC issue, it is finality and not independence.

[JEB/as]

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