A decision by the High Court of Australia underlines, for documentary credit officers and the banks that employ them, the potential perils of signing or allowing to be signed documents other than those strictly associated with a documentary credit transaction.

The high court overruled an earlier decision of a lower court that a bank that also signed a shipper's letters of indemnity for the release of goods without the bills of lading was not liable to the carrier.

Authority to sign

The decision of the lower court was in part based on its agreement with the argument that a bank could put its signature on a letter of indemnity and later claim that the documentary credit officer who signed that document did it did not have the authority to do so.

The five high court judges sitting in Canberra unanimously held that the officer's signature was, de facto, the bank's signature, even if the officer was not authorised by the bank to sign the letter of indemnity.

Dispute origins

The dispute arose out of the sale of a cargo of chickpeas and dun peas by Australia's New England Agricultural Traders Pty Ltd (Neat) to India's Royal Trading Company.

The respondent, BNP Paribas, was Neat's Sydney banker. The appellant, Pacific Carriers Limited, was the time charterer of MV Nelson, the vessel on which the cargo was carried.

Letters of indemnity

Several things went wrong during the shipment, leading Neat to provide letters of indemnity to the carrier to release the cargo without the original bills of lading.

The appeal to the high court concerned two letters of indemnity signed byNeat and BNP that indemnified Pacific for any loss arising out of its delivery of the goods without the original bills of lading.

Insolvency

Neat became insolvent, so Pacific claimed against BNP under the letters of indemnity to recover losses it eventually sustained in the transaction. BNP disputed Pacific's claim, arguing it signed the letters only to authenticate Neat's execution of the letters. Alternatively, it argued that the letters were signed without its authority and were therefore not binding.

The lower court held that the bank officer who signed the letters had neither actual nor ostensible authority to bind the bank, thus agreeing with BNP's argument that the officer who signed the letters lacked authority, since she was the manager of the Documentary Credit Department. It was the bank's Guarantee Loan Department that issued indemnities BNP had argued.

Precedent set

The high court, however, noted that the same officer had on an earlier occasion signed and stamped a letter of indemnity by Neat authorising delivery of cargo without bills of lading.

On this and several other grounds, the high court decided that Pacific's reasonable assumption that BNP was indemnifying it to deliver goods without bills of lading was "induced and assisted" by BNP's conduct and the court ruled that it would be unjust to now permit BNP to depart from that assumption.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.