Article

Type of Lawsuit: Issuer sued applicant for reimbursement.

Parties: Plaintiff/Issuer/Appellant- St. George Bank Ltd. (Formerly Advance Bank Australia Ltd.) (Counsel: F. Donohoe of Laurence & Laurence) Defendant/Applicant/Buyer/Respondent- Heinz Salzberger (Counsel: R. Newlinds of Hagarty & Elmgreen) Beneficiary/Seller- Tessidi Speciali Italia (TSI) Nominated Bank- Rolo Banca (Milan)

Underlying Transaction: Sale of fabric.

LC: LC for US$ 42,590. Subject to UCP500.

Decision: The Supreme Court of New South Wales Court of Appeal, Stein, JA., Sheller, JA., and Heydon, JA. affirmed the trial court's decision in favor of the applicant.

Rationale: Issuer's negligent examination of documents containing discrepancies bars it from reimbursement which received nonconforming goods even though applicants took possession of them and used them.

Factual Summary: To facilitate the issuance of an LC for the purchase of fabric, applicant agreed to reimburse issuer. The agreement provided that LCs were to be subject to the UCP and that "the bank may debit the customers' account for all amounts paid or incurred by the bank in connection with the credit." The LC that was issued provided that partial shipments were prohibited. After examining the documents, the issuer informed the nominated bank that the documents were discrepant. However, the nominated bank rejected this discrepancy, and the nominated bank paid the beneficiary under the terms of the LC. The nominated bank then requested that issuer credit its account without delay, which was done. The transportation document was an airway bill and applicant took possession of the goods on 5 August 1997. It appears that the documents were received by the issuer from the nominated bank on 15 August 1997. Although the applicant had taken up the goods, "made up the fabric into clothing", and presumably received the documents, it "complained bitterly" about the quality of the goods (which the trial judge described as "shoddy") and on 4 September 1997 wrote to assert that the LC had expired. Since the nominated bank had indicated that the documents were presented within the validity period of the credit, the issuer insisted that the applicant reimburse it. Subsequently, on 16 September 1997, applicant's solicitor claimed that there had been a partial shipment contrary to the terms of the LC in a letter to the issuer. Although the court does not so state, presumably this discrepancy was apparent from the documents. When the issuer approached the nominated bank regarding refund of the payment, it refused because proper notification was not given under UCP500 Article 14(d), thereby precluding the issuer from claiming that the documents were discrepant. When the applicant refused reimbursement, the issuer brought this action against applicant to collect. The trial court ruled that issuer could not recover because of its own negligent examination of documents. After an appeal was lodged, leave to appeal was revoked.

Legal Analysis:

1. Role of the UCP: Describing the UCP as a "Code", the court indicated that "it is not intended to be a legally enforceable code" but to "operate as a guide and code of behaviour". It then noted that it is "often incorporated into credit contracts by reference, see Lord Mustill in Royal Bank of Scotland plc v Cassa di Risparmio delle Provincie Lombarde [1992] 1 Bank LR 251."

2. Independence of LC: The appellate court noted that "the banks involved have no responsibility for the quality of the goods. They are concerned only with the conformity of the documents in question to the credit."

3. Reasonable Care: The appellate court noted that "both the issuing bank and any intermediary bank are under an absolute duty to examine the documents with reasonable care to ascertain that they appear on their face to comply with the provisions of the credit."

4. Discrepancy: Having recited rules regarding independence of the LC transaction from the underlying transaction, the duty to exercise reasonable care, and that documents must "strictly comply with what is required", the appellate court concluded that "it follows that a partial shipment is unacceptable." The court observed that "this doctrine" (presumably strict compliance) "applies even if the discrepancy is an extremely technical one..."

5. Role of Nominated Bank: Agency: The court characterized the nominated bank (which it described as an "intermediary") "as the agent of the issuing bank."

6. Reimbursement: The court concluded that when the LC bank "fails to correctly perform its function" and fails to spot a discrepancy, the buyer is entitled to refuse to accept the documents." The court observed that "the dispute as to payment is one between issuer and nominated bank."

7. Unjust Enrichment: The issuer had sought recovery based on unjust enrichment in the alternative. Rejecting this argument, the court ruled, "It is difficult to see in the circumstances of this case how the principles of unjust enrichment have any application."

8. Waiver: The issuer argued that applicant had waived it breach of the reimbursement agreement relying on a 1909 case, Friedlander v. The Bank of Australasia. The court noted that "Friedlander was determined in 1909 and appears never to have been applied or even cited. Its facts are very different to the present case. The relevant law has developed since Friedlander, see for example, Pavey & Mathews Pty Ltd v Paul (1987) 162 CLR 221."

Comment:

1. It appears that this court has confused the beneficiary's obligation to the issuer with that of the issuer to the applicant. The two are not the same. The independence principle applies to the former. It cannot apply to the latter.

2. As to the beneficiary, the terms of the LC established the conditions on which its obligation turns. As to the applicant, the reality is far more complex. For example, it is impossible to tell from the opinion whether the discrepancy (partial shipment) was even prohibited in the application or whether that request was inserted into the LC by the issuer. The source of the requirement is irrelevant as to the beneficiary. It is highly relevant as to the applicant.

3. Even more surprising is the court's failure to understand the linkage with the goods. As to the issuer, the applicant cannot retain and use of the goods and still resist its obligation to reimburse the issuer. If the issuer is not reimbursed, it owns the goods at the very least.

4. There is also an issue of causality. The shoddiness of the goods cannot absolve the applicant from reimbursing the issuer for that portion it has accepted and used for them.

5. Moreover, the issuer raises a serious issue regarding waiver by the applicant. Not only does the applicant's conduct suggest that it regards the discrepancy as irrelevant, but the fact that it waited more than a month after receipt of the goods and failed to complain about the discrepancy in its first communication with the issuer suggests that it has waived the discrepancy.

6. The court's characterization of the relationship between an issuer and a nominated bank as an "agency relationship" is simply wrong. A nominated bank is independent from the issuer. It is not its agent. Its actions do not bind the issuer and its appointment is not recoverable under most circumstances after the credit has been issued. If it acts, it does so on its own behalf.

7. The court's description of the UCP as not a "legally enforceable code" but as "a guide and code of behaviour" that is "often incorporated into credits by reference" is interesting if not particularly helpful.

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