In Fortis Bank SA/NV v Indian Overseas Bank, the court considered the liability of a bank for failing to honour five letters of credit issued by it.
The second claimant, Stemcor sought to recover damages for port storage costs and container demurrage charges said to have resulted from Indian Overseas Bank's (“IOB”) failure to honour five letters of credit. Stemcor had entered into contracts for the sale of shredded steel scrap to an Indian company. Payment was to be by letter of credit opened by a first class bank and advised by Fortis Bank (“Fortis”) in London. IOB opened five letters of credit and notified Fortis. The first three were confirmed by Fortis.
Each of the letters of credit required presentation of bills of lading consigned to the order of IOB. Following shipment of the steel, Stemcor presented the documents for payment. Fortis duly paid out under the first three letters of credit and claimed reimbursement from IOB. In respect of the other two, Fortis forwarded the documents to IOB. The market price for the steel fell dramatically below the contractual price and the recipient refused to take delivery. IOB rejected the documents presented by Fortis and refused to pay out under the fourth and fifth letters of credit and refused to reimburse Fortis for the funds paid out under the other three. The court held that discrepancies existed in the documents but IOB was unable to rely on those due to its failure to return the documents promptly. Stemcor argued that IOB had breached its obligations under the letters of credit and had it not done so, the port and detention costs would not have been incurred and IOB was therefore liable for those costs.
The court disagreed and was of the view that Stemcor had failed to prove that the storage costs resulted from IOB’s breach and that the recipients would not have accepted the goods even if IOB had complied with its obligations.
The court commented on the timescales within which banks should be acting on letters of credit and the court took the view that whilst a bank was not required to consider whether to pay out immediately, a bank which failed to consider and despatch rejected documents within three banking days (in the absence of any extenuating circumstances) would have failed to act with reasonable promptness.