Article

Factual Summary: Applicant and Buyer entered into an associateship agreement (“Agreement”) in which Applicant acted as an intermediary for the purchase of copper wire rods and import into India from Seller. Under the Agreement, Applicant was responsible for importing the copper wire rods on behalf of Buyer and for opening four commercial LCs in favor of Beneficiary/Seller to pay for the goods. Buyer’s obligation under the Agreement was to provide Applicant with “margin money as advance of 25% of the value of the Letter of Credit to be opened by [Applicant] . . . along with 25% cash advance and a post dated cheque 102.5% of the value of consignment in favour of [Applicant] along with an undertaking.” Beneficiary was to deliver proforma invoices to Applicant specifically naming Buyer. Beneficiary was then to issue a final invoice for Buyer which upon acceptance would be returned to Beneficiary and constitute the contract between the parties. When this step was completed, four LCs subject to UCP600 were obtained by Applicant through Issuer in favor of Beneficiary and confirmed by Confirming Bank.

After Applicant obtained the LCs, Seller/Beneficiary presented documents to Confirming Bank which disbursed the proceeds to Beneficiary under all four LCs. In consultation with Applicant and Buyer, Issuer reimbursed Confirming Bank on two of the LCs, but rejected one presentation nineteen days after Confirming Bank presented the documents without explanation for the dishonor. The opinion is silent as to the fourth LC.

Applicant and Buyer sued Issuer, Beneficiary, and Confirming Bank, alleging fraud due to Beneficiary’s close relationship with Issuer, and applied for permanent injunctions to stop payment on the LC. Applicant and Buyer alleged that Beneficiary colluded with Issuer to forge shipping documents fraudulently to negotiate payment from Confirming Bank and that Confirming Bank knew about the fraud. The trial judge dismissed the request for injunction as Applicant and Buyer had not established that Confirming Bank knew of any fraud, noting also that the proceeds had been released to Beneficiary. On appeal, affirmed.

Legal Analysis:

  1. Fraud

Applicant and Buyer claimed that the trial court had committed grave error in dismissing the fraud claims. In their complaint, Applicant and Buyer alleged that the Beneficiary had engaged in fraud twice, first stating that “[Confirming Bank] is in active collusion with [Beneficiary]” and that Beneficiary “forged the shipping documents to fraudulently demonstrate export in order to surreptitiously negotiate with [Confirming Bank] for release of payments without actually ever dispatching the goods.” The complaint also alleged that “[Confirming Bank] has also wrongly negotiated with [Beneficiary] without correctly verifying the documents, giving rise to suspicion, that it is hands in glove with [Beneficiary].” In upholding the trial court’s decision, the appellate court agreed that Applicant and Buyer failed adequately to allege that Confirming Bank knew about or engaged in the fraud.

The appellate opinion noted that to successfully allege fraud, a party must provide clear evidence of the fraud itself and the bank’s knowledge of that fraud. The appellate court stated that “a comprehensive narration of facts that constitute cause of action has to be given in the plaint.” The opinion concluded that merely alleging fraud without any offering of proof is not enough to provide clear evidence and it was noted that neither Applicant nor Buyer made specific allegations against Confirming Bank in regard to its knowledge of fraud in their complaints. The appellate Judge also noted that Confirming Bank had already paid Beneficiary, making the injunction “infructuous”. The appellate Judge cautioned that “injunctions against the negotiating banks for making payments to the beneficiary must be given cautiously as constant judicial interference in the normal practices of market can have disastrous consequences as it affects the trustworthiness of the Indian banks and markets.”

For the purposes of injunction, the appellate Judge explained that it “must be slow in granting an order of injunction restraining the realisation of a bank guarantee or Letter of Credit.” The opinion stated that there are only two instances when a court may grant an injunction; when fraud clearly occurred and is of a grievous nature, and the bank receives notice of the fraud and when injustice harms a party to such an extent as to result in irrevocable harm. Neither of these instances occurred because Issuer concluded that the two LCs complied and failed to provide Confirming Bank with notice in a timely manner under the UCP600.

The appellate court reiterated the trial court’s observation that Applicant and Buyer were still able to pursue remedies against Beneficiary for fraud notwithstanding the failed application for injunction.

  1. UCP600; Preclusion; UCP600 Article 16; Complying Documents

The appellate Judge, in affirming the denial of the injunction, referred to UCP600, stating that it provides that “the Banks are bound to release the payment in terms of the Letter of Credit if the complying presentation is made by the Beneficiary.” The appellate Judge noted that Beneficiary presented complying documents, and that Issuer had approved Confirming Bank’s presentation of documents for two of the four LCs in consultation with Applicant, only refusing documents for one LC.

Furthermore, the appellate court noted that under UCP600 Article 16 (Discrepant Documents, Waiver and Notice), an issuing bank must give notice within 5 days to a confirming bank if it is refusing to honor the presentation of documents. Since Issuer had waited 19 days before rejecting documents related to the LC, it was precluded from refusing under UCP600 Article 16. Thus, Issuer had both the right and the duty to release payment of the LCs to Confirming Bank.

Comment:

  1. There are two reasons that the issuer has wrongfully dishonored. One reason is the preclusion rule. However, preclusion would not operate had the confirmer colluded with the beneficiary in committing letter of credit fraud. Thus, the only critical issue in this case is whether the confirmer is a protected person, having acted in good faith or whether it is tainted by the fraud. While the opinion is not entirely clear, it appears that the courts did not accept this argument of applicant and buyer.

[SRJ/ZTS]

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