Article

Factual Summary:

Applicant, a Hong Kong import business dealing with external suppliers and Hong Kong based businesses, purchased tin sheets from Fraudster/Beneficiary that were to be shipped from any port in Russia to a specific port in China, with payment by means of a commercial LC. When the LC was issued and confirmed, Fraudster/Beneficiary submitted documents to Advising/Confirming Bank, which honored and forwarded the documents and claimed from Reimbursing Bank. Reimbursing Bank reimbursed Confirming Bank then sought compensation from Issuing Bank, which paid after a period of time.

When the goods were not delivered, Applicant investigated, and discovered that the shipment had not been made, and that the Fraudster/Beneficiary was not, in fact, a real company. Applicant sued Issuing Bank for wrongful honor, claiming that Issuer had breached implied contractual duties to advise Applicant and failed to exercise a duty of care in reviewing the submitted documents. The Trial Court granted judgement in favor of Issuer.

Legal Analysis:

I. Contractual Duties of Issuing Bank to Advise Pre-Issuance

Applicant alleged that Issuing Bank had an implied duty to advise Applicant as to what documents should be included in an LC on the basis of a) conversations between Issuing Bank’s officers and Applicant, and b) Applicant’s lack of knowledge in this area. The Judge rejected this claim generally, as the responsibility for deciding the terms of an LC lay with the Applicant and Beneficiary, not the Issuing Bank. The Judge then addressed Applicant’s other justifications.

Applicant claimed that it relied on alleged conversations with Issuing Bank employee in which Applicant asked for advice and requested to know what documents should be included in the LC. Applicant argued that Issuing Bank had assumed an implied duty to advise on which documents to include. The Judge, however, rejected this argument on the grounds that Applicant was not able to produce specific evidence of these requests or delineate what specific requests were even made.

Applicant also claimed that as Applicant had not previously dealt in LCs, Issuing Bank should have advised Applicant on the documents to include. The Judge rejected this for three reasons: 1) the testimony of Applicant’s Shipping Clerk, 2) Prior LCs and 3) the lack of a recognized duty to advise generally.

Applicant’s claim of lack of knowledge was undermined by the presence of Applicant’s shipping clerk, who testified they personally were familiar with LCs. The Judge ruled that even though Applicant had never dealt with LCs before, and Applicant’s Shipping Clerk had never dealt with Issuing Bank before, a finding was warranted that Applicant had sufficient knowledge of LCs to competently assemble one without the assistance of Issuing Bank.

The Judge also rejected Applicant’s claim on the basis of other LCs drafted by Applicant around the same time. In the first LC that Applicant opened with Issuing Bank, a certificate of inspection was included in the required documents. The Judge took this as evidence that Applicant understood the importance of verification of shipment by an independent party.

The Judge also recognized that the delineation of specific duties within the contractual agreement between Issuing Bank and Applicant suggests that under the doctrine of expression unius est esxclusio alterious, similar implied duties cannot be assumed to be present.

II. Issuing Bank’s Duty of Care (Post-Issuance Issue)

Applicant contended Issuing Bank should have rejected the forged BL on account of discrepancies within the document, and in the alternative, the document should have been rejected under the fraud exception.

Applicant’s expert witness LEE To On, contended that the BL contained a number of discrepancies which should have led to the rejection of the documents. Formatting concerns such as the positioning of certain fields, the lack of a full letterhead, and unusual document numbering were all brought up as potential discrepancies which would have led to the rejection of this document. The Judge rejected these points, approving the view taken by Issuing Bank’s expert witness, SOH Chee Seng. Mr. SOH opined that while the discrepancies raised by Mr. LEE would have required specialized knowledge of the “trade practice” of shipping which a document checker at a bank would not ordinarily possess. Further, the Judge recognized that some of the discrepancies would have run afoul requirements of UCP600, this LC was governed by UCP500.

Alternatively, Applicant argued that taken collectively, the quantum of irregularities should have suggested to the bank checkers that there was a potential for fraud. The Judge also rejected this contention, noting the narrow nature of the fraud exception and reiterating that to discover the irregularities would require knowledge of “trade practice” which bank checkers were not expected to have.

[ARB]

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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.