UK: Letters Of Credit: Issuing Bank's Limited Liability As Consignee Under The Bills Of Lading

(1) Fortis Bank S.A./N.V. and (2) Stemcor UK Ltd v Indian Overseas Bank [2011] EWHC 538 (Comm)

Please see our website at www.incelaw.com for the following related articles: "Letters of credit and documentary discrepancies: the doctrine of strict compliance" and "Implied obligation under Article 16(f) of UCP 600 to return rejected documents reasonably promptly". These articles have also appeared in our International Trade and Legal Updates for February and October 2010, also available on our website.

The background to this dispute

This Commercial Court decision is the latest in a line of judgments from the English courts dealing with various disputes arising out of five letters of credit ("L/Cs")that were opened by the Indian Overseas Bank ("IOB") at the request of an Indian government-owned company, MSTC, whose role includes assisting Indian companies to purchase steel scrap from abroad. The L/Cs related to five sale contracts for steel scrap, with Stemcor as the seller and SESA as the buyer. The advising bank was Fortis Bank in London. The letters of credit were all subject to the Uniform Customs and Practice for Documentary Credits, 2007 revision ("UCP 600").

The goods were shipped in containers from European ports to Haldia port in India over a period of almost seven weeks towards the end of 2008. The bills of lading named Stemcor as the shipper and the consignee was "to the order of" IOB. However, by the time of shipment, the market price for scrap steel had fallen considerably and was below the contract price. SESA wished to extract itself from the now unprofitable contracts and therefore raised with MSTC a number of alleged discrepancies in the documentation presented by Stemcor for payment under the L/Cs. However, by this time, Fortis had already negotiated and honoured the first three L/Cs, numbers 1-3, and had paid the relevant sums to Stemcor. In respect of the two remaining L/Cs, numbers 4-5, Fortis had not added its confirmation but had forwarded the documents presented by Stemcor to IOB.

Given SESA/ MSTC's allegations of discrepant documents, IOB declined to reimburse Fortis for the payments under L/C numbers 1-3 and declined to pay Stemcor under L/C numbers 4-5.

Previous court proceedings

In September 2009, the Commercial Court dismissed all the alleged discrepancies in the documents presented under the L/Cs, apart from the objection that the beneficiary's consolidated certificate failed to satisfy the requirements of the L/Cs. The judge held that this was a valid point of discrepancy, but left open the issue whether IOB was precluded from relying on this point because it had delayed in returning the documents to Fortis. Judgment was entered against IOB in respect of the shipments to which the preclusion point did not apply.

In January 2010, the Commercial Court held that, having given a refusal notice, IOB was under an implied obligation to return the rejected documents to Fortis / Stemcor reasonably promptly, that it had failed to do so and that it was consequently precluded under Article 16(f) of UCP 600 from relying on the discrepancy in the beneficiary's consolidated certificate.

IOB appealed to the Court of Appeal in respect of both judgments. In January 2011, the Court of Appeal dismissed the appeal. In respect of the preclusion point, the Court of Appeal commented that the practice of bankers and international traders was that, on rejection, the issuing bank would either hold the documents pending the presenter's instructions or return them promptly and without delay. Accordingly, where a bank elected to return documents, it was required to do so with reasonable promptness. On the facts of this case, the appeal judges concluded that IOB had not returned the documents with reasonable promptness (there was a period of some months between the Article 16 notice and actual return of the documents) and it was therefore precluded from relying on the discrepancy.

The present Commercial Court proceedings

The steel scrap had been left unclaimed at Haldia port and Stemcor incurred substantial storage charges and container demurrage costs. It subsequently sought to recover these costs from IOB either as damages resulting from IOB's wrongful delay in making payment under the L/Cs, alternatively by way of restitution. The judge dismissed Stemcor's claim in its entirety.

Claim in damages

L/C numbers 1-3: Stemcor had argued that IOB had breached its obligations under the letters of credit and was therefore liable for any damages caused. However, the judge agreed with IOB that, in respect of the L/C numbers 1-3, where Stemcor had been paid by Fortis as the confirming bank, IOB had breached its obligation to reimburse Fortis but that was not an obligation owed to Stemcor. Stemcor could not therefore claim damages for that breach.

L/C numbers 4-5: The judge held that IOB was in breach of contractual obligations owed to Stemcor. As to when the breach occurred in the cases where the discrepancy in the beneficiary's consolidated certificate applied, the judge held that IOB's obligation to return the documents with reasonable promptness meant within three banking days of the "return" notice, absent extenuating circumstances. Nonetheless, the judge held that the claim for damages under these L/Cs also failed because, on the balance of probabilities, IOB's non-payment under the L/Cs had not caused Stemcor's loss. Rather, the judge found that, on the evidence, SESA would likely have refused to pay MSTC for the goods, collect the steel scrap and paying outstanding charges. Nor did MSTC appear to have any means of forcing SESA to make payment.

Restitution

The judge also dismissed the argument that IOB owed an obligation as named consignee under the bills of lading to pay the storage charges and the container demurrage to the carriers and that they should reimburse Stemcor for discharging that liability on their behalf. Under the Carriage of Goods by Sea Act 1992 ("COGSA"), IOB would only have been liable as consignee if it had taken or demanded delivery of the goods from the carrier or if it had made a claim under the bills of lading against the carrier in respect of those goods. However, the judge said that IOB was not the buyer of the goods, nor did it have an interest in the contracts of carriage. It had only a notional security interest.

He also rejected an argument that Stemcor had entered into the contracts of carriage on behalf of IOB. The judge doubted that every time a bank required in a letter of credit that it be named as consignee in the bill of lading, it was authorising the shipper to contract on its behalf: "such a conclusion would run contrary to the regime established by COGSA and open banks up to potentially enormous liabilities".

Comment

The judgment in this case acknowledges the limited involvement of banks issuing documentary credits in the context of the contracts of carriage relating to the sale contracts. An issuing bank will usually have no knowledge of the terms and conditions of any bills of lading issued, even though the bills may be made out to its order. Consequently, it would be unjust for a bank with only a security interest in the goods to be saddled with the liabilities of the original shipper simply because it was the lawful holder of the bills, except in circumstances where that bank sought to exercise or enforce its rights under those bills.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.