International Trade: Maltic Ltd and Fidelity Bank - Essay Example

[Manager] 26 May INTERNATIONAL TRADE Maltic Ltd. has no cause of action against the advising bank, Fidelity Bank. Under Article 17 of the Uniforms Customs and Practice for Documentary Credits, Fidelity Bank shall be exempt from liability due to force majeure. Article 17 of the UCP provides: “Bank assume no liability or responsibility for the consequences arising out of the interruption of their business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control, or by any strikes or lock-outs, unless specifically authorized, banks will not, upon resumption of theory business pay, incur a deferred payment undertaking, accept drafts or negotiate under credits which expired during such interruption of their business”. Hence, if the bank, at which presentation is to be made is closed as a result of any act of God such as in this case, a tsunami, the bank has no obligation to accept or negotiate a credit, which expired at such time it was closed. However, there are exceptions to the rule. If the bank is closed for other reasons, not stated under this article, the period of presentation is extended until the next day when the bank opens. In the case at bar, Maltic Ltd. cannot file a case against Fidelity Bank because the reason for the closure of the bank is due to a force majuere, a tsunami occurred which restrained to banks employees to report for work for three (3) days until the tsunami passes. Therefore, the bank cannot be held liable for the refusal to pay of The Agribusiness Credit Bank. The doctrine of autonomy can also be applied in this instance. Well-entrenched is the rule under Article 3 of the Uniform Customs and Practice (UCP), which states that: “Letters of credit, by their nature are separate and distinct from a contract of sale or any other contract on which they may be based and that banks are in no way concerned with or bound by such contract, even if the letter of credit contains a reference to the underlying contract”. It is for this reason that it is deemed that the undertaking by the bank to pay or accept bills of exchange or drafts, nor to fulfil any other obligation under the letter of credit, is not subject to claims of defences by the applicant resulting from its relationship with the issuing bank or with the beneficiary. “As for the contractual relationship existing between the applicant and the issuing bank, the beneficiary cannot avail itself of any benefit from it because he is not a privy to such contract” (van Niekerk & Schulze 307). Therefore, Maltic Ltd., the beneficiary, cannot hold the Fidelity Bank for the refusal of The Agribusiness Credit Bank to pay of the credit for the simple reason that it is merely a correspondent bank, which is in the same locality of the exporter, Stevenson Ltd. The role of the correspondent is only to act as the advising bank, the confirming bank and the paying bank. “The correspondent bank is the advising bank as it informs the beneficiary that the letter of credit has been opened in his favour” (Sarkar 20). In the case of The Agribusiness Credit Bank, it shall be liable to pay Maltic Ltd. on the basis of issuing an irrevocable letter of credit and damages incurred by Maltic Ltd as beneficiary. This is pursuant to Article 9 of the UCP which provides: “An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the Nominated Bank or the Issuing Bank, and the terms and conditions of the credit are complied with.” In this case at bar, Maltic Ltd. was issued an irrevocable letter of credit by The Agribusiness Credit Bank, based on the following terms: 1. Payment against invoice, insurance policy, bill of lading and; 2. Certificate of quality signed by two experts from the National Oatmeal Inspectorate. There was no showing that Maltic Ltd. was not able to comply with the documents set forth under terms and conditions provided in the letter of credit. In fact, the advising bank, Fidelity Bank assured Maltic Ltd. that a quality certificate issued by one expert is sufficient. Maltic Ltd. faithfully complied with the complete requirements under the letter of credit in good faith. There was absence of any circumstance showing that there was indeed a failure on the part of Maltic Inc. to be remiss of its obligation to submit the documentary requirements. However, several days after receiving the documents, the issuing bank, The Agribusiness Credit Bank refused to pay on the date stipulated. Thereafter, news report broke the issuing bank is in serious financial distress and on its way to bankruptcy. Therefore, bad faith was present in the acts committed by The Agribusiness Credit Bank. Maltic Inc. can sue The Agribusiness Credit Bank for damages after receiving the complete documents submitted by Maltic Inc. based on the conditions of the letter of credit, and later on refuses to pay due to its looming insolvency. Here, the option of Maltic Ltd. is to demand payment from the applicant, Stevenson Ltd., for failure of the issuing bank to pay based on the letter of credit. The obligation of Stevenson Ltd. as the buyer to the seller still stands even though there was failure on the part of the issuing bank to honor the letter of credit. “When looking at the principle of autonomy, all the undertakings in respect of the documentary letter of credit between the parties are considered to be independent from each other. As such, even though all these undertakings are related, failure to fulfil one undertaking does not render the next undertaking unenforceable” (Sarkar 32). There are three parties involved in a documentary letter of credit. As a general rule, the three parties consist of: the account party or applicant being the buyer or importer, the opening bank or issuing bank being the applicant bank and the beneficiary is the seller or exporter (Sarkar 18). Accordingly, there are at least “three separate and distinct contractual relationships formed in this transaction. First, there is the contract between the beneficiary and the applicant; Second, the contract between the applicant and the issuing bank; Third, the letter of credit contract between the issuing bank and the beneficiary. Lastly, there is the contractual relationship between the advising bank and the issuing bank” (van Niekerk & Schulze 292). All these contracts are completely independent of each other. Therefore, non-compliance of one contract does not render all others unenforceable. The legal effect of a letter of credit signifies that the bank will pay the beneficiary on behalf of the applicant and constitutes an absolute payment by extinguishing the original debt. In any case, the beneficiary shall have the option to disregard the letter of credit and merely claim from the applicant in cases where the issuing bank becomes insolvent or is unwilling to pay (van Niekerk & Schulze 293). It can be gleaned from the given facts of the case, that there is no a clear intention of novation by the parties, which replaces the previous obligation to a new obligation, as evident from express wording of the contract of sale between Maltic Ltd. and Stevenson Ltd. and also letter of credit nor any surrounding circumstances, then both the applicant and the issuing bank are liable towards the beneficiary (van Nierkerk and Shulze 294; 295). Under the UCP, once a letter of credit is accepted by a beneficiary, it merely operates as conditional payment and not absolute payment. Furthermore, when the issuing bank becomes insolvent, the foundation of the letter of credit or bank guarantee shall be extinguished (Mugasha 119). Here, the most important issue is borne by the beneficiary Maltic Ltd., who depends on the credit or guarantee, as a form of security or a source of payment. While on the part of the applicant, Stevenson Ltd., the issues are as follows: 1.) Whether the liquidator of the insolvent bank, Agribusiness Credit Bank can seek reimbursement from the applicant; and 2.) Whether the applicant can recover the money previously paid to the bank. These two issues are only material and relevant when the issuing bank’s insolvency occurs prior to the payment to the beneficiary. Here, the liquidator easily prevails over the applicant if the payment has been made because the issuer is presumed to have performed its obligation. Hence, the liquidator cannot demand payment from the applicant if the issuing bank fails to pay the beneficiary in the letter of credit. In the US law, this scenario considers the insolvent issuing bank to have breached its contract for failure to provide consideration through payment of the letter of credit. US Courts have interpreted the reimbursement agreement as bilateral contract which requires the applicant to reimburse the issuing bank, while the bank’s obligation is to honor the beneficiary’s demand for payment by accepting and paying the draft (Mugasha 119). While on the other hand, English Courts view insolvency as a repudiation of the application-reimbursement contract since the issuing bank no longer has the capacity to fulfil its obligation. This was illustrated in the case of  Sale Continuation Ltd v Austin Taylor & Co [1967] 2 All ER 1092. If the insolvency of the issuer takes place after the applicant has paid the issuing bank, the weight of opinion rules in favour of the applicant allowing it to recover the amount paid to the insolvent issuing bank. The law gives the applicant a priority to claim ahead of the other unsecured debtors and shall enjoy the preference of credit among them (Mugasha 119). This ruling was presented in the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, when the House of Lords stated that: “ The money received by and insolvent person for a specific purpose does not form part of the estate of the insolvent person and the transferor may take back the asset”. This was known as the Quistclose Trust. In the context of the letter of credit or bank guarantee, this rule shall apply if the issuing bank becomes insolvent while in possession of the letter of credit money, the money should either be used to pay the beneficiary or returned to the applicant. In which case, Maltic Ltd. has the right to demand payment of the obligation from Stevenson Ltd. for non-compliance of the Issuing bank to honor the irrevocable letter of credit. Hence, both applicant and issuing bank are liable to pay Maltic Ltd. based on the letter of credit to afford protection to the party acting in good faith. Works Cited: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Mugasha, Agasha. The Law of Letters of Credit and Bank Guarantees. Annandale, NSW: Federation Press, 2003. Print. Sale Continuation Ltd v Austin Taylor & Co [1967] 2 All ER 1092. Sarkar, Rumu, Transnational Business Law: A development Law Perspective.The Hague, The Netherlands: Kluwer Law International, 2003. Print. Uniform Customs and Practice for Documentary Credits. International Chamber of Commerce Publication Number 500, Effective January 1, 1994. Van Niekerk, J.P. and W.G. Schulze. The South African Law of International Trade, 2nd ed. Pretoria: SAGA Legal Publications, 2006. Print. Read More