Factual Summary: Buyer/Applicant purchased metal bars from Seller/Beneficiary intended to resell them to Ultimate Buyer. Under its contract with Buyer/Applicant, Ultimate Buyer required that the bars be shipped between November and December 20008. On 10 December 2008, Buyer/ Applicant obtained a commercial LC subject to UCP600 in the amount of USD 80,665 from Issuing Bank in favor of Seller/Beneficiary. Field 44C of the letter of credit provided that 30 December 2008 was the latest date of shipment.

Freight Forwarder signed and stamped a bill of lading dated 30 December 2008 "AS AGENT ON BEHALF OF THE CARRIER", alleging that it was Carrier's agent. The bill of lading was presented and negotiated with other relevant documents through Negotiating Bank. A second bill of lading allegedly from Carrier's Agent, was issued on 2 January 2009. Issuing Bank received the negotiated bill of lading along with a request for payment from Negotiating Bank on 12 January 2009. After email exchanges and alleged telephone calls between Issuing Bank and Buyer/Applicant, Issuing Bank debited Buyer/ Applicant's account on 16 January 2009. Ultimate Buyer complained that, based on the second bill of lading, Buyer/Applicant had breached the terms of their agreement by failing to ship the goods between November and December 2008. Buyer/ Applicant asserted that as part of a settlement with Ultimate Buyer it had to deduct USD 64,431.53 from its original sales price, and thereafter brought action against Issuing Bank on the grounds that it had improperly honored a "freight forwarder bill of lading" and had failed to exercise due care in examining the relevant documentation before making payment.

The trial court dismissed Buyer/Applicant's claim, finding that the bill of lading presented for negotiation was a conforming document and that under UCP600, the Issuing Bank had no obligation to act "on the information supplied to it by [Buyer/ Applicant] or any constructive knowledge which [Issuing Bank] may possibly have acquired in the course of previous transactions involving the same parties." The court then awarded costs to Issuing Bank on a standard basis, noting that Issuing Bank had failed to include a claim for indemnity costs in its pleadings. Buyer/Applicant appealed the court's dismissal of its breach of contract claim and the Issuing Bank appealed the court's decision to award costs on a standard basis. On appeal, the trial court's dismissal was upheld.

Legal Analysis:

Independence Principle. Buyer/Applicant alleged that the bill of lading presented for negotiation was a freight forwarder's bill of lading (as opposed to the "true" bill of lading dated 2 January 2009), and thus should have been rejected for non-compliance. Buyer/Applicant argued that Issuing Bank should have been aware that Freight Forwarder was a freight forwarding company by virtue of Freight Forwarder's international repute in the industry, because Issuing Bank had been involved in previous transactions with Buyer/Applicant with Carrier undertaking the contracts of carriage, and because Buyer/Applicant informed Issuing Bank via emails that Freight Forwarder was not an agent for Carrier at the relevant time.

In determining whether Issuing Bank had to act on knowledge supplied by Buyer/Applicant or constructive knowledge from previous transactions, the court noted that under the independence principle governing the letter of credit as provided by UCP600 Article 14(a), banks are confined to dealing with the documents presented to them and do not take into account extraneous matters or circumstances. The court also added that each LC transaction is a separate and autonomous transaction, and prior transactions involving different carriers and agents are immaterial to the determination of the veracity of Freight Forwarder's representation on the bill of lading.

Citing the Institute's UCP600: An Analytical Commentary, the court further noted: "to investigate the underlying facts of the transaction would effectively alter the commercial character of the letter of credit, from one of payment on demand, to one of payment only after being convinced or compelled to pay." The court also added that banks often do not "possess the requisite expertise or tools to investigate, inspect or inquire into the truth of representations on the face of the documents".

Freight Forwarder Bill of Lading. The court then turned to the issue of whether the documents presented to and honored by Issuing Bank were, in fact, non-conforming because they were signed by Freight Forwarder as "agent of the carrier", as opposed to "agent of the named carrier" under UCP600 Article 20(a). Buyer/Applicant also relied on Jack: Documentary Credits in alleging that Issuing Bank should have rejected the forwarder bill of lading: " must be recognised that the bank's duty is not to engage in a merely mechanical proof-reading exercise but to use its judgment, banking experience and general knowledge to test compliance".

Affirming the District Court's finding that the bill of lading was compliant to the terms of the credit, the court clarified that while a freight forwarder typically acts as an agent of the cargo owner or the shipper and is rarely the actual carrier, there is no legal impediment as to why it cannot also enter into a contract of carriage with, and sign a bill of lading as agent of, a carrier. In cases where the freight forwarder signs as agent of a carrier, the bill of lading will be considered a "normal" bill serving as evidence of a contract of carriage, receipt for the goods, and documentary title, as opposed to a "freight forwarder's bill of lading", which merely serve as evidence of receipt and are not documents of title. The issue of whether a freight forwarder signs in its capacity as freight forwarder or as a carrier's agent depends on the arrangement of the parties to the transaction, which a bank, examining the transport documents presented for payment, would be illequipped to determine.

Furthermore, the court noted that there is no requirement under UCP600 that the carrier be named specifically at the location where the carrier's agent signs off the bill of lading. Buyer/Applicant noted that UCP600 Article 20(a) emphasizes substance over form with the opening words: "A bill of lading, however named, must appear to..." The court rejected Buyer/Applicant's interpretation of Jack: Documentary Credits, noting that the "judgment" referred in the context of the passage to an issuing bank's discretion to reject a shipment destined for a port in a different continent than that specified in the LC, and that "[o]ther cases may be less clear-cut and there must remain some doubt as to where exactly the dividing line falls between a fact which a bank can be expected to know...and one which it is not required to investigate".

Because the bill of lading signed off by Freight Forwarder was a conforming document, the court held that under the independence principle, Issuing Bank had no obligation to act on the knowledge regarding the identity of Carrier's Agent allegedly provided by Buyer/Applicant. Further, the court added that even if the bill of lading were discrepant, Buyer/Applicant had failed to prove that it had suffered any loss as a result of Issuing Bank's payment under the LC, as there was no evidence that Buyer/Applicant attempted to obtain delivery of the goods from Carrier on the strength of the bill of lading.

Costs on an Indemnity Basis. The court upheld Issuing Bank's appeal of the District Court's award of costs on a standard basis. Issuing Bank's claim for costs was premised solely on a contractual basis, in particular, clause 11.4 of Issuing Bank's standard terms and conditions governing the LC, which required Buyer/Applicant to indemnify the bank against legal costs on a full indemnity basis.

The court noted that Issuing Bank did not include a claim for costs on an indemnity basis in its pleadings and "it would be prudent for a party to specifically plead the term of the contract it intends to rely on, in order to avoid any arguments that the other party was taken by surprise or was prejudiced as a result of the lack of notice." However, the court found that no such surprise or prejudice occurred because Issuing Bank included the claim in its opening statement, and Buyer/Applicant referred to Issuing Bank's standard terms and conditions in its affidavits and list of documents. Moreover, the court concluded that in the interests of commercial certainty, absent manifest injustice, banks are entitled to rely on contractual indemnity clauses in documents governing the relationship with their customers.



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.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.