This case involved the issuing of letters of credit. Plaintiff company in February 1992 authorised the opening of a letter of credit by BOV in favour of Netco Vakindogv Dis Ticaret Ltd, for the sum of US$ 41,225.00. This letter of credit was issued listing a number of conditions including that the documents accompanying the goods being purchased by plaintiff company (apples) had to contain a declaration that the merchandise was “first grade”.

The consignment of apples arrived in Malta in March 1992. When plaintiff company went to BOV to pick up the relevant documents so as to claim title and possession over the merchandise, it found that defendant was still not in possession of the same documents. Since the nature of the goods could have led to quick deterioration, plaintiff procured a bank guarantee to allow his possession of the goods without the necessary documentation.

Upon opening the container, it was clear to plaintiff that the goods were of an inferior quality to that agreed upon. Plaintiff instructed the bank to stop payment to the vendors. However, the bank instructed plaintiff that it was constrained to pay even without the declaration of quality demanded by plaintiff company. When the documents relating to the goods (bill of lading, invoice, etc.) arrived, they lacked the declaration.

The bank allegedly made the payment irrespective of the plaintiff’s request, breaching the same obligations it undertook upon the issuing of the letter of credit. Plaintiff hence requested the Court to condemn BOV for paying the vendor to its prejudice and to reimburse the amount paid.

BOV claimed among other things that the plaintiff’s claims were inadmissible because the company accepted the goods and actually sold the goods to third parties. BOV also pleaded prescription. Furthermore, BOV stated that the company had renounced to any rights when it procured a shipping guarantee where the bank was authorised to pay on condition that “it shall not be incumbent upon the Bank to enquire whether any such amount is in fact due”.

The First Hall Civil Court accepted the plea of prescription under Article 2156(f) of the Civil Code and rejected all plaintiff’s claims.

The Court noted that the opening of the letter of credit led to the creation of three relationships between:

1. Netco Vakindogv Dis Ticaret Ltd (Vendor) and plaintiff (Buyer);

2. Plaintiff and BOV (Issuing Bank);

3. BOV and Netco Vakindogv Dis Ticaret Ltd.

These relationships lead to the creation of certain rights and obligations:

1. BOV’s obligation to follow plaintiff’s instructions and pay only upon presentation of the documents by the vendor in accordance with the plaintiff’s orders.

2. Plaintiff’s obligation to pay the same bank if the bank followed all its instructions.

The bank claimed that the relationship created upon the creation of the bank guarantee overpowered the relationship created before the opening of the letter of credit. The agreement between the bank and plaintiff regarding the guarantee stated that the bank was obliged to pay the vendor “in consideration of their delivering to the customer [plaintiff] without the production of the relative Bill of Lading and/or other shipping documents relating to the goods …” and “any request made upon the Bank by or on behalf of Norasia Agencies Malta Ltd [vendor] for payment of any sum shall be sufficient authority to the Bank for making such payment, and that it shall not be incumbent upon the bank to enquire whether any such amount is in fact due”.

The bank hence claimed that due to the creation of the bank guarantee after the issuing of the letter of credit it was released from the obligation to examine “whether any such amount is in fact due”, and it therefore did not need to observe whether the documents were in conformity with that stipulated upon the opening of the letter of credit. However, evidence revealed that payment was made under the letter of credit and not under the guarantee.

In fact the guarantee remained pending despite payment, until the same guarantee was revoked with the vendor’s consent. Had the payment been effected under this guarantee, it would not have remained pending for four years. A bank official also confirmed that the guarantee was never availed of. Payment was thus deemed effected under the letter of credit. The bank based its argument on the fact that it paid on the basis of the guarantee and not the letter of credit. Hence the bank was indirectly agreeing that had it paid under the letter of credit, it had done so in breach of its obligations since the documents were not in accordance with the plaintiff’s instructions.

The Court of First Instance thus concluded that the bank should not have effected payment in favour of the vendor company and hence, plaintiff was not obliged to pay the bank the amount. The fact that the plaintiff managed to sell the goods was considered irrelevant since the bank had still failed in its obligations and the plaintiff could not be punished by losing the right to make an action against the bank, simply due to its attempt to make good losses incurred as a result of the bank’s shortcomings. The Court went to the extent of calling the bank’s reasoning absurd since it seemed to be claiming that for plaintiff company to keep its rights intact, it had to maximise rather than minimise its losses. If the plaintiff company were to ultimately benefit from the whole situation, the court contended that there was always the remedy against unjustified enrichment. (actio de in rem verso).

The court then moved on to examine the question of prescription. Since this was a contractual issue, the relevant legal provision was deemed to be Article 2156(f) of the Civil Code which states:

The following actions are barred by the lapse of five years:

(f) actions for the payment of any other debt arising from commercial transactions or other causes, unless such debt is, under this or any other law, barred by the lapse of a shorter period or unless it results from a public deed.

The Plaintiff requested the Court to order the reimbursement of the money that the bank debited on 13 March, 1992. Plaintiff initiated proceedings against the bank on the 13 May, 1997. Hence, in accordance with the above article, this rendered the action time-barred. According to Article 2107(2) – “Prescription is also a mode of releasing oneself from an action, when the creditor has failed to exercise his right for a time specified by law. The Court hence upheld the plea of prescription in favour of defendant bank under Article 2156(f), however condemning the Bank to pay all expenses.

The Appeal Judgement delivered on 28 September, 2007, will be

reported next Wednesday.