Factual Summary: Unable to secure an LC from a bank for the purchase of pork products on its own credit, a Russian buyer obtained credit from a finance and investment company which requested its bank to obtain an LC from the issuer in favor of the seller. The LC named the finance company and not the buyer as applicant, and the issuer obtained from the applicant's bank a reimbursement undertaking. Concerned that the LC should not be "operable" until it was given funds by the buyer to cover the LC, the applicant required what it called a "locking clause." The clause required a "Certificate of inspection issued and signed by the credit applicant at his discretion on the goods quality and quantity in good order before shipment" issued in Germany. Based on the buyer's assurances, the beneficiary signed the certificate while the goods were en route to Russia in the applicant's name without being aware of the applicant's concern and presented the documents to the negotiating bank which honored. 2001 LC CASE SUMMARIES them. An inspection occurred on arrival in Moscow. When the documents were forwarded to the issuer, it reimbursed the negotiating bank and forwarded them to the applicant's bank seeking reimbursement. When the applicant's bank forwarded the documents, the applicant realized that the inspection certificates were forged. Accordingly, the applicant sought an injunction restraining the applicant's bank and the issuer from paying. In the meantime, the beneficiary had delivered the goods to the buyer who had not paid the applicant and had disappeared. All parties agreed that the documents appeared on their face to comply with the terms of the LC. The applicant sued its bank and the issuer to enjoin payment. The issuer in turn sued the applicant's bank for reimbursement, which in turn sued the applicant. The applicant then asked that the action be reconstituted and claimed the proceeds from the beneficiary due to fraud. All the parties moved for summary judgment. The court granted motions of summary judgment in favor of the beneficiary against the applicant, in favor of the issuer against the applicant's bank, and in favor of the applicant's bank against the applicant. The court denied the applicant's motion to have the action reconstituted but allowed the applicant to amend its claim against the beneficiary to include a claim for negligence.

Legal Analysis:

1. Fraud: The applicant's bank and the applicant argued that the issuer was not entitled to reimbursement because the beneficiary "presented inspection certificates purporting to be signed on behalf of the applicant when it knew that the certificates were signed without [the applicant's] authority." The court noted that "where an allegation of fraud arises, [an issuer] can pay and is entitled to be reimbursed by the party from whom it has received its instructions unless the fraud had been then clear to the bank." The court indicated that it was satisfied that the beneficiary did not know that the buyer had no authority from the applicant to authorize the signature of the inspection certificates on the applicant's behalf at the time of presentation of the documents. Therefore, the court concluded that the beneficiary had "not acted dishonestly" and that no fraud had been committed. The court continued in an analysis of suspected fraud whereby an issuer refuses to pay on a suspicion of fraud, but lacks clear evidence that the documents are fraudulent. Citing precedent, the court concluded that "a bank [is] bound to pay unless there [is] before it clear evidence of the fraud." Safa Limited v. Banque du Claire [2000] 2 Lloyd's Rep 600.

2. Fraud: The applicant's bank also argued that the inspection certificates should have been refused when the issuer realized they were "nullities" and that it was not liable to reimburse the issuer under these circumstances. Noting that the contention only operated when there was no clear fraud, the court indicated that it found no support for the submission that "there exists in parallel with the fraud exception a second exception covering documents which are nullities to the knowledge of the bank at the time of payment through the beneficiary is innocent of any deception." 3. UCP500 Arts 9 and 13; Facial Compliance; Compliance: The applicant's bank cited UCP500 Articles 9 and 13 for the proposition that "there may be found in the different wording of these Articles support for a distinction between the rights of the beneficiaries to payment, and the rights of the banks to reimbursement, namely that beneficiaries must present the correct documents to have a right to payment, not merely documents which appear correct, while banks need only be concerned with the appearance to have a right of reimbursement", contending that this distinction supported its argument that there was an exception to the requirement to pay where there is a nullity. The court rejected this argument, noting "if that is correct, the bank is entitled to go behind the appearance and to take. account of other information to say that the document is not what it appears to be and to refuse to pay, but if it chooses to go by the appearance alone and to pay, it is entitled to be reimbursed." It concluded that there was no exception other than that available for fraud.

4. Reimbursement: The applicant had undertaken to reimburse its bank in the following terms: "We agree that you and your correspondents are obliged only to verify that the drafts and documents purport to comply with the terms and conditions of the Credit and you will not be liable for, and we undertake to indemnify and to keep you indemnified against, any loss, damage or delay, however, caused, which is not directly due to the negligence of your own officers and servants." The court noted that these terms appeared to be "sufficient" to support a claim for reimbursement but addressed claims by the applicant that its bank "was obliged to receipt of documents to check that any certificate purporting to be that of the applicant had been duly issued." The court dismissed the claim with the comment that nothing suggested that the bank had agreed to this "unusual obligation".

6. Duty of Beneficiary to Applicant: The applicant had argued that the beneficiary owed a duty to the applicant with respect to the documents presented. The court disagreed, noting that "It cannot be argued that the beneficiary to a credit owes a duty to the applicant with regard to the documents which he presents. If the documents accord with the credit, the beneficiary is entitled to be paid. If they do not, they will be rejected unless the applicant agrees to waive the discrepancy. If the documents accord with the credit but there is nonetheless a breach of the underlying contract, which breach arises in connection with the documents, the buyer has a right of action against the seller/beneficiary arising from their contract. If the buyer is not the applicant, when the documents came through he will have had to reimburse the applicant just as he would have had to reimburse the issuing bank if he had been the applicant. The beneficiary does not owe a duty of care to the issuing bank."

7. Negligence: The applicant argued that the beneficiary had acted negligently in assuming the authority to sign the inspection certificates on the applicant's behalf without having made an inquiry. The court agreed, reasoning, that " assuming authority to act for the applicant in the certification the beneficiary came under a duty of care to ensure that it was indeed so instructed." The applicant claimed that the duty was breached when accepted the buyer's inference that the beneficiary had the authority to sign the documents. The court concluded that if the applicant could establish that the beneficiary owed it a duty, the applicant "would have to go on to establish that the circumstances were such that its duty required [beneficiary] to make further enquiries or checks, which would have revealed the true position." It also noted that proof was necessary that the damages were foreseeable. Accordingly, the court permitted the applicant to amend its claim against the beneficiary in order to provide it with the opportunity to prove these allegations.

Comment: 1. The court treated the negotiating bank as an extension of the beneficiary because there was no proof that it had indeed negotiated drafts and because there was a suggestion that it had taken an assignment of the rights of the beneficiary. Relying on Banco Santander SA v. Bayern Ltd [2000] 1 All ER (Comm) 776, the court concluded that "[the negotiating bank] would stand in no better a position as a party entitled to claim under the credit than the beneficiary." This further extension of the Banco Santander doctrine indicates further the undesirability of England as a forum or English law as a choice of law. What prudent bank would not seek an assignment from the beneficiary when it negotiates documents? To do so, does not lessen the reality of the negotiation. Nor is it necessary for there to have been drafts for there to have been negotiation. UCP500 Article 10(b)(ii) speaks not only of negotiation of drafts but also of negotiation of documents without drafts. There is no need for a draft for there to have been a negotiation under the. 2001 LC CASE SUMMARIES


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.