Factual Summary: Applicant seller obtained transferable LCs in favor of beneficiary who handled import formalities and carriage arrangements for pet toys which were supplied by a third party to whom a portion of the credit was transferred. Over time, the beneficiary consistently raised the price of the pet toys in its sales to the applicant. Applicant neither knew the unit price nor total price charged by the ultimate supplier because the bank substituted the beneficiary's invoices for those of the transferee beneficiary. Therefore, the applicant was unaware of the profit the beneficiary was making on the toys for each transaction.

After transactions over two years, the issuer mistakenly dispatched the transferee beneficiary's invoice to applicant rather than to the original beneficiary, thereby revealing to the applicant the substantial profit being made by the original beneficiary. Applicant thereafter terminated its business relationship with the beneficiary who brought this action against the issuer. The trial court found that the issuer was in breach of its contractual obligation of confidence and awarded damages to the beneficiary. The beneficiary appealed on the ground that damages were inadequate. Beneficiary's appeal was dismissed. Issuer cross-appealed on the grounds that the interest rate on the damages was too high. Issuer's cross-appeal was allowed.

Legal Analysis:

1. Agency in LCs; Partial Transfer; Transfer; Issuer's Duty to Original Beneficiary when Transferring: The issuer claimed that the relationship between the applicant and beneficiary was that of principal and agent rather than buyer and seller, and that the beneficiary's claim must fail on public policy grounds as the beneficiary's profit was a secret profit. Both trial and appellate courts rejected this argument. The appellate court stated that "[the applicant's] evidence was that it regarded the [beneficiary], not the [third party], as the [applicant's] supplier and, in giving the evidence, [applicant] acknowledged that he knew, or must have known, that the [beneficiary] was making a markup." Though the appellate court agreed with the issuer that "the fact that the parties used transferable letters of credit did not preclude the existence of a relationship of agency," it noted that, "it was the agreed evidence of the expert witnesses that the majority of transferable LCs are in practice used for the benefit of middle-men who wish to conceal the identity of their supplier or the amount of their markup." The appellate court upheld the trial court's ruling that the applicant and beneficiary were not related as principal and agent, and that the issuer must be liable to the beneficiary.

2. Damages: The beneficiary argued that the trial court calculated damages inadequately and alleged that there "was no indication to show how the trial court reached the figures because there was no consistent pattern in the discounts applied to reach the annual figures for loss of profit." Beneficiary further alleged that because the trial court was satisfied that the beneficiary and applicant established a real or substantial chance of obtaining the original beneficiary's future business, beneficiary should be entitled to at least fifty percent of what they had been profiting during the two-year relationship. Finally, beneficiary argued that calculation of damages should have been based on the projected profits discounted by a percentage to reflect various "legitimate imponderables". The court rejected the beneficiary's arguments, stating that they "would lead to a figure of damages which appear to be out of all proportion to the nature of the Bank's mistake." The court stated that "while it could reasonably be contemplated that the established relationship of [the applicant] and [the beneficiary] would have continued for a time, and thus that some award of damages for loss of future business fell to be made, that time should in all the circumstances be limited to a period of one year from the date of the breach, all loss thereafter being regarded as too remote." The appellate court reassessed and reduced the damages from $47,278.15 to $45,000 to "reflect the small degree of uncertainty inherent in even the closest of trading relationships."

3. Remoteness of Damages: The issuer contended that there was no causation between its breach of confidence and the beneficiary's losses, arguing that "it was not within the [issuer's] actual or reasonable contemplation that disclosure of the profit being made by [the beneficiary] would be likely to result in the termination of the trading relationship between [the beneficiary] and [the applicant]. The [issuer's] breach of duty was not the effective cause of any loss, [rather] that cause being the inherently unstable nature of the relationship between the beneficiary and the applicant." The Court of Appeal was not convinced, stating the LC is "designed to protect its customer against the risk of precisely that which is proved to have occurred in this case...the very nature of the obligation and the admitted duty of confidence in such cases arises from the acknowledged need to protect the [issuer's] [beneficiary] from disclosure of his level of profit and the danger of an any consequent decision by his [applicant] to go direct to the [beneficiary's] own supplier."

4. Damages: The issuer argued that the trial court's award of 6% interest to the beneficiary was excessive. The trial court's award was based on the loss that the beneficiary had suffered due to "[having] had to borrow and [being] out of pocket." While the appellate court acknowledged that "interest can't within the constraints placed upon the courts...ever be an exact mathematical calculation", it accepted the issuer's argument and stated that "the rate [of damages] remains based upon broad considerations appropriate to plaintiffs of the class concerned, rather than the particular borrowing arrangements of an individual plaintiff." The appellate court lowered the interest award to 3% because the trial court did not consider evidence related to other businesses in the beneficiary's class.



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.