Factual Summary: To pay for 150 metric tones of waste paper, Buyer/Applicant obtained a letter of credit in favour of Seller/Beneficiary from Issuing Bank. Prior to the goods being received, Seller/ Beneficiary agreed with Nominated Bank for it to silently confirm the letter of credit. Among other terms, the agreement provided "[t]he Bank retains the right to effect recourse to the beneficiary where any delay/default/loss occurs resulting from a dispute in relation to the commercial contract." Subsequently, Seller/Beneficiary drew two sets of bills of exchange on Issuing Bank, negotiated them to Nominated Bank, and was then credited with their face amount.

Upon receiving the waste paper, Buyer/Applicant determined that it was not of the quality ordered and refused to accept the goods and obtained a temporary restraining order in India preventing Issuing Bank from releasing funds to Seller/Beneficiary. Subsequently the Indian court found in favor of Buyer/Applicant and directed that the letter of credit be treated as though it was cancelled.

As a result of the temporary restraining order, Nominated Bank informed Seller/Beneficiary that Issuing Bank would be unable to release the funds. As a result, Nominated Bank exercised its contractual right of recourse and debited Seller/Beneficiary's account.

Seller/Beneficiary sued Nominated Bank for wrongful dishonor of the silently confirmed credit. The trial court found in favor of the Seller/ Beneficiary, concluding that Nominated Bank had breached an "implied term" that required Nominated Bank "take all steps necessary to achieve payment in the event of a default by [Issuing Bank]." On appeal, the Supreme Court of South Australia reversed.

Legal Analysis:

1. "Implied Term": Nominated Bank argued that the trial court erred in their analysis of the "implied term".

Seller/Beneficiary abandoned the "implied term" argument relied upon by the trial court and contended that the contractual right to recourse only applied to loss derived from the silent confirmation and that the failure of Issuing Bank to make payment did not warrant exercise of the right of recourse. First, Seller/Beneficiary argued that acceptance of the bills of exchange by Issuing Bank superseded the letters of credit and thereafter, Nominated Bank could only seek recourse against Issuing Bank as Nominated Bank assumed assignment of Seller/Beneficiary's rights. Second, Seller/Beneficiary argued that the right to recourse existed while Nominated Bank's confirmation remained a silent confirmation and that once payment was not made under a silent confirmation, Nominated Bank became a "confirming bank" under UCP600 and was thereafter compelled to make payment to Seller/Beneficiary.

The Appellate Judges agreed with the Nominated Bank's arguments that there was no "implied term". They also found the right of recourse was covered by the agreement so that, in the event of a dispute, the risk of non-payment of the letter of credit by Issuing Bank would "ultimately fall upon [Seller/ Beneficiary] and not [Nominated Bank]." The Judges also concluded that the agreement did not require Nominated Bank to take assignment of the letter of credit. The Judges further rejected both arguments posited by the Seller/Beneficiary.

2. Contractual Right of Recourse: Nominated Bank argued that its agreement with Seller/Beneficiary expressly contemplated a situation where payment would not be made as a result of a dispute between Seller/Beneficiary and Buyer/Applicant, and that in the event of such dispute, Nominated Bank would have the right of recourse against Seller/Beneficiary. The Judges found no support for Seller/Beneficiary's argument that the right of recourse had expired upon acceptance of the bills of exchange by Issuing Bank nor that Nominated Bank had taken an assignment of Seller/Beneficiary's rights. The Judges also rejected Seller/Beneficiary's argument that Nominated Bank had become a "confirming bank" under UCP600 upon acceptance of the bills of exchange finding that no extrinsic evidence supported this position and that such a position was contrary to the terms of the contract.

Text of the Silent Confirmation Agreement:

The agreement was in writing and in the following terms:

Silent Conformation Documentary Credit

Documentary Credit No: 747FLCDA080006

Issuing Bank: BANK OF INDIA

Amount (Including tolerance, if any): USD38,100.00


Credit Expiry Date: 31/05/2008

Our Reference: 0053737844/T40360

At your request and subject to acceptance of this offer, the Commonwealth Bank of Australia will silently confirm the above Documentary Credit.

The Bank undertakes to honour drawings on presentation of the documents required under Documentary Credit to the Commonwealth Bank of Australia in accordance with the terms and conditions of the Credit and subject to the provisions of the Uniform Customs and Practice for Documentary Credits, International Commerce Publication No. 600 (2007 Revision).

This offer has been made based on the format of the Documentary Credit as it was initially advised by the Issuing Bank. Any Amendment/s will require the separate approval of the Bank in writing.

By accepting this offer, the company agrees to:

- Assist the Bank and take all steps necessary to achieve payment as the bank may require in the event of default, including initial proceedings to enforce recovery.

- Assign and subrogate all rights and proceeds to which you are entitled or will become entitled under the relevant Documentary Credit to Commonwealth Bank of Australia, including (but not limited to) your rights against the Issuing Bank, all title and interest in the documents under the Credit and goods to which the documents relate and all proceeds of sale of the goods.

This offer is personal to you and is not transferable.

The Bank retains the right to withdraw this offer prior to your acceptance, should we perceive any change in circumstances warrant so.

Fee: AUD120.00

Payable: On acceptance of this offer

Validity of Offer: This offer will lapse if unaccepted by 25/04/2008

Our silent confirmation is conditional upon receipt by the Bank of the Original Credit and all amendments any payment of our fee.

Any alteration to this document renders our offer null and void.

The Bank retains the right to effect recourse to the beneficiary where any delay/default/loss occurs resulting from a dispute in relation to the commercial contract.

Please sign below indicating your acceptance/ rejection and return all pages by fax.



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.