Note: To pay for the purchase of Fresh Monsanto Polystyrene Injection Moulding Powder, Sha Misrimal Bherajee (Buyer/Applicant) arranged for issuance of two commercial letters of credit by Eastern Bank Limited (Issuer) in favor of British Mercantile Company Limited (Seller/Beneficiary) in the amounts of US$4,535 and US$3,330. The credits were issued on 28 December 1950 and 31 January 1951.

The LCs required clean on board bills of lading, but the goods were packed in reused drums. Accordingly, Ellerman & Bucknall Steamship Company Limited (Carrier) issued a claused bill of lading. At the request of Seller/Beneficiary and on its provision of an acceptable indemnity, Carrier reissued the bills of lading in a clean format.

When the goods were delivered, the drums were found to contain coal dust and factory shavings. Buyer/Applicant recovered part of its loss in an action in the U.S. against Seller/Beneficiary. It also sued Issuer and Carrier in India for breach of contract. The City Civil Court, Madras, dismissed the action against Carrier. On appeal, the Madras High Court reversed. In a judgment by Subba Rao, J., the appeal was dismissed, in effect sustaining the judgment against Carrier.

Carrier argued that the High Court gave relief to Buyer/Applicant on deceit, but that the theory on which Buyer/Applicant had based its claim was breach of contract. Carrier also argued that it had no responsibility to indicate in the bills of lading that the drums were old and could not have misled Issuer to pay the amount to Seller/Beneficiary under the LCs against the shipping documents. Finally, Carrier asserted that the age of the drums had no real impact on the goods inside and that the drums were suitable containers for the delivery of the goods.

Buyer/Applicant argued that a fraudulent misrepresentation was made by Carrier in collusion with Seller/Beneficiary and claimed that Carrier and Seller/Beneficiary had represented that the bills of lading were clean, when in fact they were not. Buyer/ Applicant claimed that Issuer, acting on this representation, paid the amount listed on the LCs to the Seller. Buyer/Applicant asserted that Issuer would not have paid Seller/Beneficiary, but for the misrepresentation.

The appellate court ruled that Carrier was obviously in collusion with Seller/Beneficiary so that it could draw on the credit. Furthermore, the appellate court ruled that Carrier also took an indemnity bond from Seller/Beneficiary to guard itself against repercussions of their representation.



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.