Note: When investors, United Fisheries Ltd., Blenheim Fisheries Ltd, and Kypros Kotzikas , agreed with PK Flinders Island Pty. Ltd. to invest CAD 1 million in a joint venture to operate a fish processing factory on Flinders Island, they retained Papasavas & Co. as the solicitor for the joint venture but not for them individually. When the venture failed and they were exposed to additional liability, the investors sued the solicitor for failure to exercise reasonable care, professional skills and good faith in that the solicitor failed to inform them of a liability of PK Flinders Island Pty Ltd for CAD $140,000 to the National Australia Bank as applicant for a red clause LC to fund a sale of abalone to a Hong Kong company, a liability assumed by the joint venture. The bank manager described the LC in the following manner: "A red clause letter of credit results from an arrangement between a buyer and seller that the buyer will assist the seller in obtaining pre-shipment finance to enable goods covered by the red clause letter of credit to be purchased and shipment made. The buyer arranges the issue of a red clause letter of credit by his bank. The red clause letter of credit is an irrevocable credit between two banks which contains a special clause authorizing the advising bank (in this case the National Australia Bank) to make an advance to a beneficiary (in this case PKFI) of an amount of credit. The advising bank effectively grants a loan to the beneficiary which is guaranteed by the issuing bank". The Supreme Court of Victoria Commercial and Equity Division, Byrne, J., entered judgment in favor of the solicitor, concluding that it had not undertaken to ascertain the correctness of the balance sheet of the businesses.


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.