This was an appeal to a judgement delivered in 2005 regarding the issuing of a letter of credit in favour of a foreign company. The First Hall Civil Court ruled in favour of the defendant bank that pleaded prescription. However, the Court agreed that the bank should not have effected payment in favour of the foreign company, since the documents presented to the bank did not include a declaration regarding the quality of the goods (apples) that the plaintiff required.

As a result, the goods received were of inferior quality. Plaintiff would have won the case on the basis that the bank had an obligation to ensure that the declaration regarding the quality was present in the documents. The bank’s constant argument was that since the plaintiff company had procured a bank guarantee, this guarantee superseded, and all the bank’s obligations under the letter of credit were subsidiary to the obligations as per the agreement in relation to the Bank guarantee that stated that “…it shall not be incumbent upon the bank to enquire whether any such amount is in fact due”.

The First Hall Civil Court disagreed with the defendant’s claims, stating that the payment was effected under the letter of credit, hence the obligations still held. However, the Court ruled in favour of the defendant bank purely because more than five years had elapsed since the bank had debited the plaintiff company, and hence, the action was time barred in accordance with Article 2017, that states that “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 parties both appealed to the judgement. Plaintiff pleaded that the court’s judgement in relation to the prescription issue was incorrect. Defendant appealed on the grounds that it felt that the plaintiff had renounced its rights under the letter of credit when it had sold goods of an inferior quality, although it initiated proceedings against the bank to reimburse the price of these goods. Although the Court of First Instance ruled in favour of defendant bank, the bank was still condemned to pay expenses. Hence, the reason for the bank’s appeal was to avoid the payment of expenses which derived from the fact that had there not been the prescription issue, the Court would probably have ruled in favour of plaintiff.

Plaintiff’s Appeal: Plaintiff felt that Article 2156(f) of the Civil Code, in relation to prescription was not applicable to the case in question. Reference was made by Plaintiff to the cases Spiteri v. Petrococchino (1919) and Buttigieg et v. Caruana (1955). The Court examined Article 2156(f) which essentially 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 results from a public deed.

The above-quoted case law delves into a discussion on “other causes”. There was no doubt that the issuing of a letter of credit is a commercial transaction. Hence if a bank mistakenly pays, the same bank would be exposing itself to damages. Contractual liability alleged by the plaintiff company arose as a result of a lack of execution or a mistaken execution of obligations resulting from a contract. So long as such a contract is not public, an action in relation to the same contract is subject to a five-year prescription period. The bank’s obligation not to pay the amount due under the letter of credit, unless the merchandise was declared “first grade” in the documents, was deemed by the Court as an intrinsic part of the contract in question. This was confirmed in Corinthia Palace Hotel Ltd v. Grima (2003), amongst others, where it was stated that this article applies to credit of money or the value of money. The Court hence stated that whatever Plaintiff’s arguments, this case was ultimately regarding money that was paid in breach of conditions stipulated in a letter of credit. Hence, the Court stated that Article 2156(f) was indeed applicable and hence the action was prescribed by Law.

Defendant’s Appeal: The fact that the plaintiff managed to sell the goods was considered irrelevant by the First Hall Civil Court, which stated that since the bank had still failed in its obligations, 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 of Appeal did not agree with this statement and it has long been established by our Courts that a purchaser may not refuse to pay for goods due to alleged defects, while at the same time retaining the same goods.

The Court of Appeal referred to Attard v. Direttur ta’ l-Edukazzjoni (1992), where the Court stated that a purchaser who still retains an object after discovering a defect/s must still pay the price due. This principle was further discussed in cases such as Micallef v. Sullivan (2002). These judgements essentially stipulated that acceptance to keep the item of an inferior quality amounts to a renunciation of the rights exercisable against the vendor for a breach of contract, since acceptance and an action for damages are inconsistent with one another. The purchaser may perhaps ask for a reduction in price.

The Court made reference to the book “Payment Obligations in Commercial and Financial Transactions” by Goode (1983; p. 48) – “A bank issuing or confirming a letter of credit commits itself to payment on due presentation of the specified shipping documents and is not concerned with the underlying contract of sale or its performance... The courts have repeatedly held that in the absence of fraud or illegality the bank must pay against a conforming tender even if the seller has broken his contract by shipping goods that are defective, not in accordance with the contract description or deficient in quantity.”

The documents however must be conforming. If there are clear discrepancies, the bank may refuse to effect payment. In this case, when the bank received the documents, the declaration that the goods were “first grade” was not found. However, it so happened that the plaintiff company retained the possession of the goods and hence, the bank had a right to debit the same plaintiff company. For this reason, the Court of Appeal, while rejecting the plaintiff company’s appeal, upheld the appeal of defendant bank and released the same of expenses incurred in the Court of First Instance.