The Court Ruled on a Customs Broker’s Liability for Opening a Letter of Credit on behalf of an Importer

In September 2009, the Tel Aviv Magistrate’s Court delivered a judgment dealing with the relationship and duty of care existing between the various parties to a documentary credit transaction, including the importer (the applicant for credit), the issuing bank, the correspondent bank and the customs broker who handles the opening of the letter of credit on behalf of the importer.

The case concerned a claim brought by an importer against the issuing bank and the correspondent bank on the grounds that these entities had been negligent and had breached their duty of care towards him by confirming the compliance of the documents and consequently payment under the letter of credit, despite significant non-compliance of the documents.

The importer had entered into a contract with the beneficiary under which he had ordered bolts of cloth for the manufacture of trousers. For this purpose, acting through a customs broker, he applied to Union Bank to open a letter of credit to finance the deal. Union Bank opened a letter of credit and appointed Chase Manhattan Bank as the correspondent bank under the letter of credit. The importer claimed that instead of receiving quality fabrics he received fabric waste, which gave rise to the exception of fraud. The importer further claimed that there was significant non-compliance in the documents stipulated in the letter of credit, as the letters “USA” appeared in the certificate of origin and not the letter “P”, as required by the letter of credit.

Before ruling on the claim, the court reviewed the principles of documentary credit transactions. In this context, the court noted that the purpose of such a transaction is to draw a balance between the conflicting interests of the two sides to the underlying contract. Documentary credit guarantees the payment of the agreed consideration in the underlying contract subject to compliance with certain conditions and in particular the presentation of various documents, as determined in advance in the letter of credit. In general, the main parties to the documentary credit transaction are the applicant for the credit, who is the customer in the underlying contract (applicant), the opening bank (issuing bank), the correspondent bank, and the beneficiary who is entitled to receive payment under the underlying contract. The issuing bank enters into a contract with the correspondent bank, which may act as an advising bank or as a confirming bank. In a documentary credit transaction “without confirmation”, the correspondent bank is in the position of an advising bank. The function of an advising bank is largely technical and consists of linking the issuing bank and the beneficiary When the correspondent bank acts as a “confirming” bank (a confirmed documentary credit transaction) it assumes direct responsibility towards the beneficiary In such a case, the beneficiary is entitled to address his demand for payment either to the issuing bank or directly to the confirming bank, as he chooses, and each of the banks owes a direct, independent and separate obligation to the beneficiary to make payment. A confirmed letter of credit therefore provides greater security to a beneficiary in a credit transaction.

In the case at hand, it was agreed that the correspondent bank would act as a confirming bank, i.e., the correspondent bank would have independent, separate and direct responsibility towards the beneficiary for payment of the letter of credit subject to examination of the documents. The correspondent bank confirmed the compliance of the documents and paid the beneficiary.

Notwithstanding that the court found that there had been a significant discrepancy in the documents and that it had been improper to approve the payment as a result of this discrepancy, the court ruled that it had not been proven that there was an agreement between the importer and the correspondent bank and it had not been proven that the correspondent bank owed a duty of care in tort towards the importer. Therefore, the court held that the correspondent bank was not liable towards the importer despite having been negligent in examining the compliance of the documents, as aforesaid.

In our opinion, when a correspondent bank acts as a confirming bank and has authority to approve payment and pay the beneficiary, but at the same time is subject to the independent obligation to examine the compliance of the documents and approve the payment subject only to compliance of the documents, it is appropriate to impose a duty of care on the correspondent bank towards the importer who may be harmed by the acts or omissions of the correspondent bank.

On the other hand, the court held that the issuing bank (Union Bank) was liable towards the importer, stating that even in a “confirmed” documentary credit transaction (in which it was the correspondent bank which checked the documents and paid the beneficiary – at the demand of the beneficiary), the issuing bank was subject to a separate and independent obligation towards the credit applicant, to check the documents, and in the case of a discrepancy, to take all the measures available to it in order to prevent the applicant from being debited. The court ruled that “the Union Bank was under a duty to check the credit documents immediately upon their presentation… and to the extent that they contained discrepancies, it had to identify them and avoid allowing Chase to debit his account in the amount of the credit, in the absence of explicit authorization by a third party or by the plaintiffs to make the payment despite the specific discrepancies found and brought to their knowledge.”

With regard to the non-compliance in the documents, the court held that “both under the non-compliance principle – the stringent test – and under the above substantive compliance test, recording the letters “USA” instead of the letter “P” in the certificate of origin was a discrepancy in respect of which the bank should have refused to accept the documents in the absence of explicit and specific authorization by the plaintiffs or third party.”

It was held that the incorrect statement in the certificate of origin would lead the customs authorities to decide that the merchandise was not exempt from tax.
The customs broker had handled the opening of the letter of credit and Union Bank had debited the account of the customs broker for the credit amount. The court ruled that as Union Bank had been negligent in identifying the discrepancies in the documents and had not acted as required in order to prevent the customs broker from being charged in the amount of the credit, and as the customs broker had acted as the agent of the importer vis-à-vis Union Bank, it followed that the importer had actually been caused damage, equal at least to the amount of the credit.

Union Bank filed a third party notice against the customs broker and argued that the customs broker had signed a document waiving any discrepancy in the documents and exempting the bank from any liability for any such discrepancies. The court did not accept this argument and held, inter alia, that the exemption provision in that document was void as it amounted to an unduly disadvantageous provision in a standard contract.

Ultimately, the court upheld the importer’s claim against Union Bank (the issuing bank) and held the latter liable for the credit amount. The court dismissed the importer’s claim against the correspondent bank and dismissed the third party notice sent by Union Bank against the customs broker.
Civil File 13937/01 (Magistrate Court in Tel Aviv) Yamtex Ltd. et al v. Union Bank, Chase Manhattan Bank and Tutex v. Albany Marine Logistics Services.

Adv. Roy Gilad