Article

Factual Summary: Gunvor agreed to sell 17,000mt of gasoil +/- 10% to UIDC, c.i.f. Takoradi, Ghana. UIDC had contracted to onsell the gasoil to Cirrus. Both contracts provided for payment by letter of credit. On 6 April 2010 the UBA opened a letter of credit (described by the court as "prime" LC) on the application of Cirrus in favour of UIDC under UCP600, expiry date 12 June 2010. On 12 April 2010 SCB confirmed the prime LC. On 30 April 2010 the prime LC was transferred by SCB to Gunvor, with Société Générale appointed to act as Guvnor's agent for the purpose of drawing under the transfer letter of credit.

The gasoil was shipped in two parcels: 9,466 mt of gasoil on the vessel Maria E on 12 May 2010, and 9,208 mt on Erin Schulte on 13 May 2010. The bills of lading provided for carriage of the gasoil to Takoradi, consignee to Société Générale or order. On arrival the cargo on the Maria E was tested and found to be substandard, and was rejected by Cirrus and UIDC. Subsequently Cirrus agreed to purchase the Maria E cargo at a reduced price, but would not take the cargo on the Erin Schulte.

On 20 May 2010 UBA advised SCB of "Amendment No 3" to the prime LC, which reduced the quantity of goods and the amount payable to correspond with the new agreement. UIDC agreed to Amendment No 3. SCB asked Gunvor for its agreement to Amendment No 3, but this was not forthcoming.

SCB advised UBA that UIDC had agreed to the amendment, however SCB had failed to first obtain Gunvor's agreement to a corresponding amendment of the transfer letter of credit. His Lordship stated:

The effect of that oversight was that, although SCB remained liable to Gunvor to honour the transfer letter of credit in accordance with its original terms, it could seek recourse against UBA under the prime letter of credit only to the more limited extent resulting from Amendment No 3.

New buyers for the Erin Schulte cargo were found and new letters of credit were opened in favour of UIDC, one by SCB itself.

On 4 June 2010 Gunvor presented documents for the Erin Schulte cargo under the original transfer letter of credit. The documents presented included bills of lading covering the Erin Schulte cargo indorsed in favour of SCB. On 7 June 2010 Société Générale formally confirmed to SCB that Gunvor had rejected Amendment No 3. On 9 June SCB informed Société Générale that the documents did not comply with the letter of credit and that it was holding them to Société Générale's order. After legal proceedings were commenced SCB, on 7 July 2010, paid in full the amount of the face value of the letter of credit, interest and costs.

Legal Analysis:

This case raises interesting legal issues about the effective transfer of a bill of lading where the bill of lading is presented to a bank for the purpose of examination by the bank under a letter of credit. The case also examines whether recovery against an issuing or confirming bank is made on the basis of a debt owed or for damages.

The question raised by the court was whether payment by SCB was made in response to "an implied request" to perform the obligations under the letter of credit or whether it amounted to a claim for damages its breach. The former would result in a transfer of the bill of lading, whereas the latter may result in the bank still holding the bill of lading on behalf of the beneficiary in accordance with its statement of rejection. There had been no discussion between the parties in the case about the nature and purpose of the actual payment make by SCB. In the words of the court: "The question in this case is whether, having taken possession of the bill of lading for examination, the bank, by rejecting it and holding it to the order of the person presenting it, refuses to accept delivery and thereby prevents the completion of the indorsement in its favour."

The Court of Appeal held that the judge at first instance erred in holding that the subsequent payment, on 7 July 2010, after the rejection of the documents, amounted to a transfer of the bill of lading as at the date of presentation, 4 June 2010.

The Court of Appeal held that the delivery of a bill of lading was an essential element in a series of voluntary acts intended to transfer rights. The rejection of the documents by SCB on the presentation of the documents under the letter of credit, meant that the transfer was incomplete. Once rejected, SCB could not unilaterally change its mind. The Court held that consent of the presenter is required.

Where the beneficiary makes a claim for wrongful dishonour, the beneficiary's claim is to recover the face value of the credit properly sounded in debt rather than damages for breach. After a thorough analysis of the historical view, the Court of Appeal considered that the modern view supports "the proposition that if the opening or confirming bank fails to pay against presentation of conforming documents under a letter of credit payable at sight, the beneficiary may sue in debt to recover the value of the credit, provided he is willing and able to transfer the documents to the bank against payment."

The beneficiary could have retained control of the documents and instead specifically sued for damages for breach of contract for wrongful rejection, but in this case did not do so.

Comment

This is another case where the parties made assumptions about the documents under circumstances where an apparent rejection had taken place. In settling payment at a later date, it was ambiguous whether the payment was for the debt obligation or damages (that is a form of compensation) for the breach. This has consequential impacts on what is to happen to the goods, and the ownership and control of the goods. Beneficiaries must consider carefully the claim to be made where an apparent rejection of documents arise.

* Solicitor and barrister of the Supreme Court of New South Wales and of the High Court of Australia and a Senior Lecturer at the University of Queensland, TC Beirne School of Law. Dr. Davidson is also a Fellow at the Institute of International Banking Law and Practice.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.