Even if a seller is responsible for an LC issuing bank’s failure or refusal to pay because it did not present documents on time or presented non-compliant documents, is it entitled to payment from the buyer which has accepted and secured title to the underlying goods?
An English court answered affirmatively in Moeve Trading SAU v. Mael Trading FZ LLC.[[1]]
Moeve Trading (Seller) and Mael Trading (Buyer) entered into a contract for the sale of gasoline and gasoil products supported by LCs whereby the purchase price was to be paid upon presentation of shipping documents, including bills of lading. Two LCs were issued in favour of the Seller by Bank of Africa United Kingdom (Issuing Bank) and confirmed by JP Morgan Chase Bank (Confirming Bank).
When Seller presented documents for payment under the LCs, Issuing Bank refused. The court was provided no evidence, nor asked, to determine whether or not the Issuing Bank was entitled to refuse payment. After Buyer acquired title to the cargo, Seller sued Buyer for the purchase price and sought summary judgment.
In challenging Seller’s claim, Buyer contended it had “discharged its obligation to pay the purchase price absolutely or conditionally by the mere issuance of the Letters of Credit, and if conditionally, it was not open to the Seller to by-pass the Letters of Credit and seek payment from the Buyer.” The Buyer further maintained it had “no obligation to pay the purchase price unless and until the Seller first hands over the requisite documents, including the Bills of Lading, before the Buyer's obligation to pay crystallises.”
From its extensive review of case law, the court outlined six principles in circumstances where a sales contract calls for payment by LC. Among them, where an LC operates as an absolute payment, the buyer’s obligation to pay the purchase price is discharged once the LC is issued because the LC becomes the exclusive source of payment. In most instances, however, an LC will function as a conditional payment and there are various scenarios where the seller may or may not turn to the buyer for payment.
The court determined the scenario seen in this case was where “the letter of credit operates as a conditional payment and the seller is responsible for the issuing bank’s failure or refusal to pay, for example by not presenting the documents in time or by failing to present compliant documents, but if the buyer nonetheless has accepted the goods and the title to the goods has passed to the buyer, the seller is entitled to be paid the price of the goods by the buyer.”
Before granting Seller’s application for summary judgment on its claim for the cargo’s purchase price against the Buyer, the court stated:
“[T]he Seller is entitled to the price in accordance with [Sale of Goods Act provision] because title to the Cargo was transferred to the Buyer and the Buyer’s failure to pay the price is wrongful … . This is so whether or not the Seller was at fault in not obtaining payment of the price under the Letters of Credit. Accordingly, the reasons for the non-payment, on this analysis, are irrelevant to the Seller’s entitlement to be paid the price by the Buyer.
As a result, the Buyer has no real prospect of arguing that it has discharged its payment obligations by arranging for the issue of the Letters of Credit, the Seller is entitled to summary judgment in respect of its claim for the price … .”
