Further decision on UCP 600 in latest turn in the long-running saga of Fortis Bank v Indian Overseas Bank

Updated April 2011

On 2 February 2011 we reported on the judgment handed down by the Court of Appeal in Fortis Bank S.A./NV & Stemcor UK Limited v Indian Overseas Bank upholding the decision of Hamblen J. Although Indian Overseas Bank (IOB) had correctly identified discrepancies and was entitled to reject certain documents, it had lost that right under the preclusion provisions Article 16 of UCP 600 by having failed to return the discrepant documents reasonably promptly when it said it would do so.

While the preclusion issue was being resolved, the containers that were the subject of the underlying shipment were unclaimed and were accruing port and demurrage charges. The carriers sought reimbursement of these charges from the shipper, Stemcor. Stemcor made various payments to the carriers including US$869,048 to Mediterranean Shipping, which they then sought to recover from IOB.

The Commercial Court has now given a judgment in this latest episode in the saga which defines 'reasonably promptly' as three banking days. The judgment will also give comfort to banks issuing letters of credit in relation to potential liability for losses ancillary to the letter of credit.

The court rejected Stemcor's claim on the following grounds:

• Three of the letters of credit had been confirmed by Fortis Bank who had made payment to Stemcor at the time of presentation. To recover from IOB its additional losses in respect of the container charges, Stemcor needed to show that IOB had breached a contractual obligation owed to it. The judge however did not accept that IOB owed any contractual obligation to Stemcor in respect of these three credits. In his view, relying on Article 7(a)(ii) of UCP 600, the issuing bank's obligation to pay the beneficiary only arose if the nominated bank had failed to pay the beneficiary and did not survive once the beneficiary had been paid. IOB may have had an obligation to reimburse Fortis Bank, but had not breached any obligation to Stemcor. The claim under these credits failed.
• As to the two letters of credit that had not been confirmed, there was no doubt that IOB had breached its obligations to Stemcor. While initially IOB had been entitled to reject the documents, it lost that right once it failed to return the documents reasonably promptly having said it would do so. At that point IOB became obliged to pay Stemcor and its failure to do so was a breach of contract. In the judge's view, reasonably promptly meant within three banking days. In deciding on the period of three days he took into account the five day limit under UCP for the paying bank to decide whether to accept or reject the documents. He also commented that many banks would aim to despatch the documents more swiftly.
• However, Stemcor still had to show that IOB's breaches under these two credits were the cause of Stemcor’s losses in respect of the additional container charges. The judge said that for Stemcor to establish causation, it would have to show on the balance of probabilities that if IOB had made payment when it should have done (that is, once it had lost the right to rely on the discrepancies) then the importer would have taken up the documents and collected the goods, with the result that the additional port and detention charges would not have been incurred. The judge did not agree. He thought it quite possible that the importer might not have taken up the documents taking into account the fall in the market price for the goods and also that, as far as the importer was concerned, it was through IOB's own fault that it had become obliged to pay.
• Stemcor also tried to argue that it was entitled to repayment from IOB on the principles of recoupment and contribution. To succeed on these heads of claim Stemcor needed to prove that in paying Mediterranean Shipping for the port and detention charges, they had discharged a legal obligation that IOB itself would have been under. To do this, Stemcor needed to show that IOB had been a party to the contract of carriage. Stemcor argued that it had entered into the contract of carriage as agent for IOB. However, even though IOB was named as consignee on the bill of lading, the judge saw no reason to depart from the usual rule that a party who procures shipment for the ultimate benefit of a consignee does not thereby contract with a carrier as agent of the consignee. The judge held that Stemcor had not acted as agent for IOB, which was not therefore a party to the contract of carriage and thus had no legal obligation to pay the carrier. Stemcor's claim based on recoupment and contribution therefore also failed.
• As the judge said, if Stemcor’s argument on recoupment had been correct, it would follow that whenever a bank required that it be named as a consignee in the Bill of Lading in a letter of credit, it must be inferred that it was authorising the shipper to contract on its behalf. Such a conclusion would run contrary to the regime established by the Carriage of Goods by Sea Act and open banks up to potentially enormous liabilities. The judge referred to the explanation in Aikens, Lord and Bools on Bills of Lading that the bank’s interest in the Bill of Lading is only by way of security and it should not be saddled with the liabilities of the original shipper simply by virtue of being a lawful holder of the bill.

While this may seem an unsatisfactory result for Stemcor, it does set welcome limits to the extent an issuing bank may be liable for a beneficiary's losses ancillary to its claim under the letter of credit.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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