Trade Finance - duty of care of inspection agency/restitution of funds paid by mistake

Niru Battery Manufacturing Co & Another –v- Milestone Trading Ltd & Others [2003] EWCA Civ 1446

On 23rd October 2003 the Court of Appeal gave judgment dismissing the appeals of Credit Agricole Indosuez (CAI) and SGS against the first instance decision of Moore-Bick J. The judgment sheds light on the extent of the duty of care owed by an inspection agency to the buyer and also considers the liability of a party who has received monies paid by mistake to make restitution.

Facts

M had contracted to sell 10,400 metric tonnes of lead to N for a total price of $5,837,480. M made arrangements with CAI to finance his purchase of the lead he needed to meet his obligations under the contract. As security for this finance CAI held the warrants for the lead which they would retain until M had provided funds. Without the warrants M was not able to ship the goods. N was to make payment for the lead through a letter of credit opened by Bank Sepah Iran.

One of the documents required under the letter of credit was a certificate from SGS stating that

"the quality and packing of the goods loaded are strictly complying with specifications of the goods indicated in the relative proforma invoice and the terms of the L/C"

SGS physically inspected the goods and provided a certificate as required by the terms of the letter of credit. To trigger payment under the letter of credit M, however, procured a false bill of lading which indicated the goods have been loaded, when in fact they had not been. M passed the bill of lading and other documents to CAI who presented them, including the false bill of lading to Bank Sepah. For internal reasons Bank Sepah delayed payment and due to the falling price of lead, CAI sold the warrants (effectively the lead itself) to protect its security. Shortly after, however, the $5,837,480 was received by CAI from Bank Sepah. Instead of returning the funds to Bank Sepah CAI paid the monies away on M's instructions.

Key Points in Judgment

SGS

1. The court confirmed that the judge was correct to have held that SGS owed a duty of care to the buyer, even though they had been instructed by the seller. On the particular facts of this case SGS had assumed a responsibility to the buyer to take reasonable care to ensure that the certificate it issued was accurate on the matters it reported, which included reporting that the goods it inspected had been loaded. In this context loading meant either physically loaded onto trucks or (which was the judge's view) control of the goods had been transferred to the freight forwarder.
2. The court held that SGS was in breach of this duty in that it was insufficient in these circumstances for SGS simply to have relied on the bill of lading as proof that the goods had been loaded.

CAI

1. In relation to CAI's conduct, the court of appeal upheld the finding that the relevant employee of CAI had not knowingly or recklessly presented a false bill of lading to Bank Sepah nor had the bank acted dishonestly when it paid away the money received from Bank Sepah; the employee not having consciously transgressed the standard of an ordinarily honest banker.
2. The court did, however, also uphold the judge's decision that CAI's knowledge of Bank Sepah's mistake was such that it could not rely on the defence of change of position in answer to the bank's claim for restitution. When a recipient knows that the payer has paid money to him as a result of a mistake of law or fact it will generally be unconscionable or inequitable for the court to refuse restitution to the payer.

For further information on this judgment please contact either Charles Spragge at charles.spragge@cms-cmck.com or Tim Richards at tim.richards@cms-cmck.com

If you are interested in receiving a broad update on some of the latest developments in trade finance law CMS Cameron McKenna are putting on a series of breakfast briefings on 25 November, 10 December 2003 and January 2004. Details of these briefings and registration details can be found either on the seminar section of Law-Now or by telephoning Debra Benvenuto on 0207 367 2567 or contacting her by email at debra.benvenuto@cms-cmck.com