Note: Amardeep Garments Pvt. Ltd., and others (Sellers), textile manufacturers based outside the United States, contracted with 4004, Inc. (Buyer) to ship ready-made goods to Buyer in the United States. Sellers shipped several containers worth USD 2,577,677.90. To obtain payment, Sellers used bank collections, bills of exchange, and other documents. Sellers had originally issued bills of exchange drawn on Cathay Bank (Collecting Bank), but at its request, Sellers amended the bills so that Buyer was named the drawee. Buyer subsequently declared bankruptcy, and Sellers were not paid for the goods.

Sellers sued Collecting Bank for, inter alia, negligence, negligent misrepresentation, and statutory negligence. On Collecting Bank's motion to dismiss, the Court limited the issue to whether collecting bank "had a duty to explain more clearly" that a bill of exchange did not guarantee payment. Sellers moved for pretrial summary judgment on this issue. The U.S. District Court for the Central District of California, Anderson, J., denied Sellers' motion for summary judgment.

The Judge found that under California law, the standard of disclosure was ordinary care. The Judge further noted that under California law, "[o]rdinary care in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged". Relying on the testimony of Sellers' own expert, the Judge ruled that standard banking practice is that a payment on a Bill of Exchange is not guaranteed unless the bill of exchange has an aval from the collecting bank, which was not present on the bill issued by Sellers. The Judge found that the lack of aval on the bills of exchange was sufficient notice to Sellers that payment was not guaranteed. The Judge thus found that Collecting Bank had no further duty to inform Sellers of this information, and ordered Sellers to show cause why judgment should not be entered for the Collecting Bank.

Text From Opinion:

"The standard method through which a collecting/ presenting bank guarantees payment of a time bill of exchange or draft is through affixation of an aval by the bank. It is industry custom and practice that if a collecting/presenting bank is to act as a guarantor, then that information is expressly stated in the instructions accompanying the documentary draft. The lack of an aval on any of the BOEs was a disclosure that Defendant was not guaranteeing payment."



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.