A court in Sri Lanka has recently delivered what an insurance ombudsman has described as a landmark judgment on a letter of credit (L/C) transaction involving a local bank and an export shipment of gherkins.

Dr Wickrema Weerasooria says the "unusual and interesting" case involving the Commercial Bank of Sri Lanka and its customer Vanathuwilluwa Vineyards Ltd (VV) stands out for several reasons.

Discounted bills

The case centred on the customer's written instructions asking the Commercial Bank to courier the original documents to "Giro Van De Bank."

On receiving the above written instructions, the Commercial Bank discounted two bills of exchange and credited VV's bank account.

Some time later, the Commercial Bank reversed the credit and debited its customer's account on the basis that the two bills of exchange had been dishonoured.

By this time the Sri Lankan bank had discovered that there was no such bank as "Giro Van De Bank", which apparently means "account of the bank" in Dutch.

Bank at fault

The court ruled in the customer's favour, holding that the Commercial Bank had acted in total disregard of the provisions of the 1978 Uniform Rules of Collection for Documentary Credits.

The court also decided that the bank had acted recklessly and in violation of its obligations to act in good faith and to exercise reasonable care in discharging its obligations as a remitting bank.

Unusual aspects

One reason the ombudsman considers this case unusual is that although the facts were fairly simple and straightforward, the litigation began in 1992 but took nearly 16 years to be concluded in 2008.

Moreover, it was well after the buyer in Holland took delivery of the gherkins without paying for them that the Commercial Bank woke up to the fact that "Giro Van De Bank" was not a bank.

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