Article

A commercial letter of credit was opened for the first transaction by Applicant/Buyer at Summit Bank of Karachi (Issuing Bank) in favor of Beneficiary/Seller, with Habib Bank Ltd, Dubai (Confirming Bank) confirming, and National Bank of Fujairah (Advising Bank) advising. When fuel oil arrived, a sample failed the local quality requirements. Beneficiary/Seller claimed that the sample was flawed and the oil simply needed to be blended, which could be done on the ship. Local authorities did not permit a second testing. After negotiations between the parties, Beneficiary/Seller ordered its ship to return to its home port, re-blend the oil, and return to the port of delivery.

Following delivery, Beneficiary/Seller presented documents under the letter of credit to Confirming Bank, which accepted them. Advising Bank then informed Issuer that the documents presented complied with the letter of credit. Issuing Bank’s letter of credit department agreed. However, at the urging of Applicant/Buyer, the directors of Issuing Bank halted the reimbursement process and Applicant/Buyer obtained a temporary injunction against payment. There did not appear to be any legitimate reason for this action. Under pressure from Confirming Bank and Advising Bank, Applicant/Buyer canceled the injunction and Issuing Bank reimbursed Confirming Bank.

Beneficiary/Seller then attempted to arrange delivery of the second fuel oil shipment and gas oil shipment. Payment was to be made by a commercial letter of credit for both of these shipments. However, Applicant/Buyer refused to open new letters of credit for these shipments, claiming it would not have the necessary credit until the first shipment was sold. Beneficiary/Seller sued Applicant/Buyer for damages under the contracts for the second fuel oil shipment and the gas oil shipment. Applicant/Buyer counterclaimed for damages resulting from the late arrival and short delivery of the first fuel oil shipment. The High Court of Justice, Queen’s Bench Division, Commercial Court, Males, J., granted judgment to Beneficiary/Seller and dismissed Applicant/Buyer’s counterclaims.

Beneficiary/Seller claimed it was entitled to damages for breach of the second and third contracts. Applicant/Buyer argued that Beneficiary/Seller had repudiated the second contract by canceling its charter to transport the fuel oil, showing it would not have been able to perform under the contract. The Judge rejected this argument, concluding that Beneficiary/Seller’s canceling the charter was not a defense to its liability since Applicant/Buyer had already failed its contractual duty to open a letter of credit.

Beneficiary/Seller argued it was entitled to damages for anticipatory breach of the gas oil contract on the basis that Applicant/Buyer had informed Beneficiary/Seller it would not open a letter of credit for that shipment. Applicant/Buyer claimed that Beneficiary/Seller could not recover as it claimed the breach happened prior to the expiration of the period in which the letter of credit could have been issued under the contract. The Judge rejected Applicant/Buyer’s argument and found in favor of Beneficiary/Seller on the basis that there was an anticipatory breach of the contract when Applicant/Buyer told Beneficiary/Seller they would not be opening a letter of credit.

[JK/ARB]

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 the ICC or Coastline Solutions.