Factual Summary: To enable seller to obtain sul-phur for shipment, applicant/buyer provided for a let-ter of credit that included a red clause to be used to pay partial shipping costs in advance.

The applicant was late in opening the letter of credit. When issued, the letter of credit provided for an advance payment of £ 96,200 to be paid on receipt of a signed commercial invoice, a draft drawn on the bank payable in 45 days, and a "[c]ertificate from the shipping company certifying the amount has been received by them as advance payment of freight for shipment against this LC. Their certificate to indicate our LC number."

Although the beneficiary did not contract for the purchase of the sulphur until after the extended date for shipment had passed, it made a presentation and received payment under the red clause of the letter of credit. The required certificate from the shipping company was issued by a company, which was a corporate incarnation of the principal of the beneficiary.

After drawing on the letter of credit, the ben-eficiary attempted to negotiate an extension of the shipping date, the letter of credit's expiry date, and an increase in the contract price, in addition to its attempt to amend the certificate of shipping that the defendant had issued the previous day. The appli-cant rejected these amendments and afterwards, demanded that the bills be recalled and the advance refunded. When the beneficiary refused to do so, the applicant sought and obtained a Mareva order against the shipbroker and the beneficiary and had writs served on them. On appeal, the applications to set aside the Mareva injunctions were dismissed. The applicant then moved for summary judgement against the shipbroker. Held: granted.

Legal Analysis:

1. Issuer of Shipping Certificates:The court concluded that the shipping company from whom the shipping certificate was required under the terms of the credit did not have to be a ship owner, and could have been a ship management company, or a ship-ping agent. The red clause required the shipping cer-tificate to be issued by a company which had agreed to carry the goods or a company properly authorized to act on its behalf. The court quoted from Royal Brunei Airlines Sdn Bhd v Tan[1995] 2 AC 378, [1995] 3 A11 ER 97, at page 389:

"Honesty has a connotation of subjectivity, as distant from the objectivity of negligence. Hon-esty, indeed, does have a strong subjective element in that it is a description of a type of conduct as-sessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly connected with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious im-propriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular cir-cumstances. The standard of what constitutes hon-est conduct is not subjective. Honesty is not an op-tional scale, with higher or lower values according to the moral standards of each individual."

The court then concluded that the beneficiary's "conduct in issuing the certificate...and drawing down on the letter of credit may have been honest by the standards which he set himself but that is not the proper test. By any normal moral standards, in my judgement, it was dishonest."

2. Reimbursement: Common Law Restitution: Fraud: The court recognized that the extraction of money by compulsion is a situation for which the courts will allow a personal restitutionary claim at common law. The shipbroker argued that the funds did not belong to the applicant but rather to the bank, thereby making restitution unavailable. The court ruled that as a matter of law, the bill of exchange accepted by the issuer never belonged to the applicant. It rejected the argument that the restitutionary claim should fail, however. The court emphasized that tendering to the bank of false documents in which the broker played an important role was a forcible extraction of money from the applicant because the applicant would have no opportunity of challenging payment but would be bound to recompense the bank.

3. Reimbursement: Third Party Liability: Counsel for the applicant, "submitted that it would be a strange state of affairs if a person who creates a false document for presentation to a bank so as to obtain payment under a letter of credit is not liable to the person who caused the credit to be opened and who will obviously suffer the loss. I agree, and I think that, for the reasons stated, [the applicant] is entitled to a personal restitution remedy. In principle that remedy is subject to the usual restitutionary defenses, but since [the shipping agent] has not chosen to explain what it did with the money, it is not able to establish that it has any defense to a claim in restitution."

4. Reimbursement: Constructive Trust: The applicant argued that the shipping agent was a remedial constructive trustee of the applicant. The court decided that such a conclusion was not so apparent as to permit entry of summary judgement although it did not reject the remedy outright.



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.