Article

Factual Summary:Pursuant to a contract between an Australian Seller and an Indian buyer, Applicant arranged for issuance of three letters of credit for the purchase of chick peas and dun peas to be shipped from Australia to India.

The LCs required "signed commercial invoice in 1 original + three copies certifying that the goods shipped as per beneficiaries contract." LCs also required production of clean on-board ocean bills of lading made out to order blank endorse marked "freight prepaid" and "notify applicant".

At request of Buyer, Beneficiary/Seller agreed to switch the initial bills of lading in order to split B/ Ls into smaller denominations and Carrier raised no objection. Apparently unbeknownst to Beneficiary, Applicant "was proposing more than a mere splitting of the bills of lading by the proposed substitution. Under the draft proposed by (applicant), it was shown as the shipper in place of (beneficiary/seller) and (buyer) was the designated notify party."

In the course of communication exchanges between Applicant and Beneficiary regarding the terms of the switched B/Ls, the vessel, MV Nelson, was approaching the port of discharge. Due to the likely unavailability of the B/Ls at time of cargo discharge in Calcutta, Beneficiary sought assurances that discrepancies would be waived. In a facsimile to Beneficiary, Buyer stated:

"Re: SHIPMENT OF DUN PEAS AND CHICK PEAS PER M/V NELSON PLEASE NOTE ALL DOCUMENTS SHALL BE ACCEPTED BY US."

In a telefax sent next day, Applicant informed Buyer that due to its failure to pay other unrelated contractual bills, it was unwilling to waive discrepancies. Prompted by Buyer's payment of an unrelated invoice, Applicant accepted discrepant documents in late January under the third LC but continued to refuse the discrepant documents under the first and second LCs. Subsequently, Applicant informed Issuer that the discrepant documents related to the second LC were not accepted and issuer informed negotiating bank.

Compounding the matter of discharging cargo in Calcutta, a lighterage problem prevented the discharge of the dun peas. As a result of several factors, various parties sought letters of indemnity. Among them, Carrier relied upon two letters of indemnity from the Beneficiary which Negotiating Bank executed. When the vessel was arrested, Carrier claimed under the indemnities and initiated litigation against the Negotiating Bank for failing to indemnify it from liability.

Legal Analysis:

1. Letters of Indemnity: Carrier contended it "relied upon representations in permitting delivery of the cargo without surrender of the bills of lading." Bank argued that its employee had no authority to issue a letter of indemnity, that such a letter would exceed the available credit facility, and that the bank's role was merely to verify the signature of its customer, the Beneficiary. The court concluded that the Carrier's case in contrast failed, stating it was "satisfied that (negotiating bank's) department was not authorised to issue bank guarantees or indemnities and that (negotiating bank's manager) was well aware of this."

Moreover, the court stated the negotiating bank's LC manager and representatives of the applicant "failed to turn their minds, clearly, to what were the consequences of (negotiating bank's LC manager's) signing of the LOIs on behalf of (negotiating bank)."

"The evidence ... is strongly indicative of a state of confusion, if not, near panic created by (buyer's) dishonesty in failing to meet its obligations of payment under the (seller/buyer) contracts, combined with (applicant's) frustrating conduct in delaying acceptance of discrepant documents, due to unsatisfactory business relations with (buyer). I think the reasoning of both (beneficiary) and (negotiating bank's LC manager), shortly stated, was that, once payment under the subject letters of credit was assured by acceptance of discrepant documents, the provision of an LOI was an expedient, risk free exercise.

In reality, with (applicant) as the notify party under the initial bills, as shipper under the switched bills and as the party nominated in the (seller/buyer) contracts to open the requisite letters of credit, the risk was great in providing the LOIs where, in each instance, the bills of lading would be in the possession of (applicant) under the letters of credit arrangements and where the passage of the bills into the hands of (buyer) depended upon the terms of the financial arrangements between (applicant and buyer): the precise terms of which were unknown to (beneficiary)."

2. Switched B/Ls; B/Ls, Switched: The court found that:

"The true nature of the bills of lading which were substituted for the initial bills distinguished them from mere splits of the initial bills of lading into smaller parcels of cargo. ... The date and place of issue of the initial B/L-1 was stated to be 'Fremantle, 24th December 1998.' The switched B/Ls-1A to 1F designated place and date of issue as 'SINGAPORE AS AT FREMANTLE BDT. 24.12.98'. (Beneficiary/Seller) was no longer shown as the shipper, being replaced by (applicant) and the notify party became (buyer).

B/L-2 was replaced by a bill of lading which remained unchanged as to the cargo to which it related but otherwise contained changes to the identity of the shipper and notify party as was the case with switched B/Ls-1A to 1F. Its place and date of issue was described as 'SINGAPORE AS AT ESPERANCE AUSTRALIA BDT. 27.12.98'. ... The only justification for this change was to remove (Beneficiary/Seller) from the face of the bill and to pass rights as shipper to (Applicant).

B/L-3 was substituted for by five bills of lading, numbered 3A to 3E. Each of bills 3A to D issued in respect of 1,000 MT of dun peas, while 3E issued in respect of 169.23 MT. ... They were altered in the same way as switched B/L-2.

In the case of initial BL-4 there was no justification for its substitution, based on the concept of splitting. Each of the substituting bills of lading was issued in respect of the identical quantity of grain represented by the bill of lading which it replaced. ... The only justification for the substitution was to effect the changes to the shipper and the notify party as occurred with the other switched bills. In the case of switched B/ Ls-4A to 4D the date and place of issue was identified as 'SINGAPORE AS AT BRISBANE, AUSTRALIA BDT 4.1.99'."

It appears that the BLs-5A to 5F were not altered in that fashion, prior to the cargo being sold to a third party several months later.

"It is apparent from that evidence that at no point were there two sets of bills of lading relating to the same cargo, the initial bills having been surrendered prior to the endorsement of the switched bills. (Negotiating Bank) relied on a defence of illegality in relation to the switching of the bills. This defence was abandoned during the course of final submissions."

3. Negligence; Duty of Care; Ultra Vires: The Court noted:

"I think little utility lies in examining (Carrier's) case in negligence concerning the system in place within (Negotiating Bank) for the execution of documents. In this case (negotiating bank's LC manager) had express authority to execute the documents on behalf of (Negotiating Bank) for the purpose of verifying the signatories to the (Beneficiary/Seller) LOIs. It was her negligent performance of those responsibilities for which (Negotiating Bank) may be held liable.

One does not have to have recourse to any deficiencies in the system of banking as conducted by (Negotiating Bank) to reach that conclusion.

The central question, then, is whether (Negotiating Bank) owed a duty of care to (Carrier) to avoid any economic loss to it that may be caused by (Negotiating Bank's) negligence. In my view, in the particular circumstances of this case, there is only one acceptable conclusion. (Negotiating Bank) did owe such a duty of care to (Carrier)."

Note: The text of the Letter of Indemnity follows. For reasons not entirely clear in this opinion of more than 200 pages, the court declined to enforce it. The reasons given want of authority, are hardly persuasive where it was executed by a bank employee in the LC department. That the court found there to be a duty of care and justifiable reliance because the signature was a bank employee adds to the confusion.

"SS/MV ALAM TANGKAS

Goods: 12,600 METRIC TONNES AUSTRALIAN FIELD PEAS

B/L No: Nos 1 - 13

Description: IN BULK

Marks: N/A

Loading Port (S): WALLAROO, SOUTH AUSTRALIA, AUSTRALIA

Discharged Port (S): CALCUTTA, INDIA

The above goods were shipped on the above vessel by Messrs NEW ENGLAND AGRICULTURAL TRADERS PTY LTD (and consigned to order) but the relevant Bills of Lading have not yet arrived.

We hereby request you to deliver such goods to: RECEIVERS AS DIRECTED BY AGENCIES AT RECEIVING PORT: PURBA BHARATI SHIPPING AGENCY PVT LTD without production of the Bills of Lading.

In consideration of your complying with our above request we hereby agree as follows:

1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability loss or damage of whatsoever nature which you may sustain by reason of delivering the goods to RECEIVERS AS DIRECTED BY AGENCIES AT RECEIVING PORT: PURBA BHARATI SHIPPING AGENCY PVT LTD in accordance with our request.

2. In the event of the proceedings being commenced against you or any of your servants or agents in connection with the delivery of the goods as aforesaid to provide you or them from time to time with sufficient funds to defend the same.

3. If vessel or any other vessel or property belonging to you should be arrested or detained or if the arrest or detention thereof should be threatened, to provide such bail or other security as may be required to prevent such arrest or detention or to secure the release of such vessel or property and to indemnify you in respect of any loss, damages or expenses caused by such arrest or detention whether or not the same may be justified.

4. As soon as all original bills of lading for the above goods shall have arrived and/or come into our possession, to produce and deliver the same to you whereupon our liability hereunder shall cease.

5. The liability of each and every person under this indemnity shall be joint and several and shall not be conditional upon your proceeding first against any person, whether or not such person is party to or liable under this indemnity.

6. This indemnity shall be construed in accordance with English law and each and every person liable under this indemnity shall at your request submit to the jurisdiction of the High Court of Justice of England.

Your (sic) Faithfully,

For and on Behalf of NEW ENGLAND AGRICULTURAL TRADERS PTY LTD

[signed] [signed] Name: PETER P SNIEKERS PETER M HOWARD Designation: DIRECTOR DIRECTOR NEW ENGLAND AGRICULTURAL TRADERS PTY LTD PO BOX 770 ARMIDALE NSW 2350 97

PH: (067) 725588 ACN 003 271 841

For and on Behalf of BANQUE NATIONALE DE PARIS, SYDNEY

Bankers : [BNP bank stamp] [signature] [signature indecipherable] ERA DHIRI"

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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 ICC or the other partners in DC-PRO.