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Factual Summary: Buyers who were shell companies with virtually no assets, conspired to entice seller to sell 330,000 metric tons of marine diesel, at 25,000 MT/month. The proposed agreement provided that seller would be paid by a revolving LC at a rate of US$ 6,137,000 per delivery. The parties had agreed that the required LC documents "must evidence the delivery" of the goods on board the buyer's vessel.

After buyer failed to produce a letter confirming an LC during the first month of the agreement, seller telexed to inform buyer that he considered the contract canceled. Buyer responded with assurances that a "partnership" with another buyer would induce purported issuer to issue a complying LC.

Seller agreed to renew the agreement. In collaboration with a bank employee acting beyond his authority, the following tested telex was sent by bank:

RE SURICO INC. C/O QATAR NATIONAL NAVIGATION AND TRANSPORTATION CO. LTD. ACCOUNT NO. 728/B

ON BEHALF OF OUR CLIENT MARTEC PETROLEUM AND ENERGY CORP., WE INFORM THAT OUR CLIENT IS READY FOR THE PURCHASE OF THE 25,000 METRIC TONS F MARINE DISEL PER MONTH FOR ONE YEAR WITH RENEWALS, AS SPECIFIED IN CONTRACT BETWEEN MARTEC PATROLEUM ENERGY CORP. AND SURICO INC. ON JANUARY 17, 1986.

OUR CLIENT WILL PROCEDE TO ISSUE THE NECESSARY LETTER OF CREDIT REVOLVING FOR EACH SHIPMENT, TO THE BANK ACCOUNT OF YOUR DESIGNATION UPON RECEIPT BY THIS BANK OF VERIFIABLE DOCUMENTATION GUARANTEEING AVAILABILITY AND OWNERSHIP OF THE ABOVE PRODUCT AND THE PERFORMANCE BOND UARANTEE OF 2% (TWO) PER CENT OF THE VALUE OF ONE SHIPMENT, REVOLVING FOR EACH SHIPMENT.

WE WOULD APPRECIATE TOUR CONFIRMATION OF THE ABOVE WITHIN THE NEXT 24 (TWENTY FOUR) HOURS.

As a result of the promised LC, seller began to mix fuels to comply with the contract. However, the LC never arrived and seller refused to continue without it. Buyer and seller continued to negotiate. In the meantime, the market price dropped. Finally, seller agreed to a US$ 0.30/MT price reduction, and buyer and bank's employee orally assured seller that the LC would be sent. Buyer chartered an oil tanker, which proceeded to seller's port. However, bank sent another telex, which referred to the prior telex and stated: "THE MESSAGE OF 1/21/86 IS SIMPLY INFORMATIONAL AND CONVEYS ABSOLUTELY NO ENGAGEMENT OR RESPONSIBILITY ON THE PART OF [BANK] N.A." The buyer's ship returned empty, to its homeport.

A year later, the bank discharged the employee in connection with similar transaction, telexing a correspondent bank that a previously issued LC would not be honored "on the grounds of apparent fraud in the transaction." Seller sued the bank for breach, fraudulent misrepresentation and negligent representation. The trial court entered judgement in favor of the purported issuer.

Legal Analysis:

1. Apparent Authority of Bank Employee: Although there was no evidence that bank employee who was a middle level manager of a suburban retail office had actual authority to commit bank to issue LC, the court found that the issuance of a tested telex by issuer gave rise to apparent authority on which recipient could justifiably rely. It stated: "There is absolutely no question in this case that the tested telex watchdogs at [the bank] at this particular time at least, were sound asleep. [The employee] should never have been able to send this tested telex, but he was, and he was allowed to send it by the only entity which could have prevented him from sending it, and that, of course, is [the bank]."

2. Promise to Issue LC: Tested Telex: Because the promise to issue an LC was sent by tested telex and with apparent authority, it gave rise to an enforceable promise on the part of the bank, notwithstanding the absence of authority.

3. Breach of Promise: Since it concluded that the beneficiary could never have produced the necessary documents, the court ruled that the bank would never have been required to pay on an LC had it issued one because no documents evidencing delivery could be issued because no vessel could have been loaded since buyer had no intention of performing.

4. Negligence Representation: The court concluded that there was no basis for an action for negligent representation because no duty existed between the bank and the seller. The court stated: "In order to impose tort liability here, there must be some identification source of a special duty of care. The existence of such a special relationship may give rise to a special duty regarding commercial speech and justifiable reliance on such speech." Since the rela-tionship was merely an ordinary banking relationship with no prior or continuing relationship, the court ruled that no such special relationship existed.

5. Fraudulent Misrepresentation: The court stated that there was without doubt a fraudulent scheme but that the seller's reliance on it was not reasonable. In the court's opinion, the telex and the employee's oral representations did not guarantee the buyer's performance. The court stated that: "In the face of a myriad of storm signals and a plunging ba-rometer, [seller] by conducting no inquiry into the resources of [buyer] steered its commercial vessel into a hurricane of fraud, where not surprisingly, the vessel sank."

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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.