Bank held liable for money transfer to a ‘non-existent’ foreign bank

In an unusual and interesting Supreme Court case, Justice Saleem Marsoof, President’s Counsel and renowned expert in Commercial law, has recently delivered, what many consider, a landmark judgment on a documentary credit transaction involving the Commercial Bank of Sri Lanka and its customer – Vanathuwilluwa Vineyards Ltd -- on an export of gherkins.

Justice Marsoof’s judgment (with which the other two members of the Supreme Court Bench, Justices Nihal Jayasinghe and Shiranee Tilakawardene agreed) will stand out for several reasons. It was an unusual case, the first of its kind decided in Sri Lanka and perhaps in the English speaking world – where a leading bank mistook “a money transfer system” (Giro) for “a Bank”. Secondly, while the facts were fairly simple and straight forward – (an export of gherkins to Holland) the litigation which commenced in 1992 took nearly 16 years to be concluded in 2008. Also, the country’s leading commercial lawyers appeared – K. Kanag – Iswaran and Dr. Harsha Cabral (President’s Counsel) - for the customer and Romesh de Silva, PC for the Bank. The judgment contains an excellent summary of textbook and case law on the subject and will if brought to the notice of English texts on Documentary Credits find a place in their future editions. What follows is a brief account of the decision for lay readers. An article for law journals is under preparation.

Vanathawilla Ltd. (VVW Ltd.) enjoyed 60% of the export market for Gherkins-in-Brine to Belgium and 50% market share to Holland. In August 1990 VVW Ltd. shipped two consignments of gherkins to a Dutch buyer on two separate ships to Antwerp. VVW Ltd. drew on the buyer two bills of exchange for Dutch guilders 46,800 and 40,800 for the two shipments and gave to its banker – The Commercial Bank, for negotiation together with the bills of lading.

As directed by VVW Ltd.’s written instructions, the Commercial Bank was asked to courier the original documents (bills of lading and the bills of exchange) to a Bank mentioned as in the written instructions as “GIRO VAN DE BANK, KAMER VAN KOOPHANDEL, ORRDRECHT NR 55988, HOLLAND” (This name proves to be a decisive factor in this case).

On receiving the above written instructions, the Commercial Bank, discounted the two bills of exchange and credited VVWs (its customer’s) bank account with the Sri Lankan rupee equivalent. A short while later, the Commercial Bank reversed the above credit and debited the customer’s (VVW Ltds) account on the basis that the two bills of exchange had been dishonoured.

The amount debited came to about Rs.2.3 million on the first shipment and Rs.1.4 million on the second with 28% interest from November 1991. On 23rd November 1992 the customer (VVW Ltd) filed action to recover the amounts so debited. Three years later, in November 1995, the trial first commenced in the District Court of Colombo. However, with both parties agreeing, the case was transferred to the Commercial High Court in terms of The High Court of the Provinces (Special Provisions) Act No. 10 of 1996. The customer’s case was presented by (i) its director (V.N. Viswakula), and (ii) by a banking expert (Jinasena Perera) and (iii) a Director of Aitken Spence who only gave evidence about the shipping of the gherkins.

The Commercial Bank led no evidence and restricted its defence to a cross – examination of the customer’s witnesses. The Commercial High Court held in the Bank’s favour and the customer appealed to the Supreme Court. A three Judge Bench of the Supreme Court reversed the decision of the Commercial High Court and gave judgment for the customer. Justice Marsoof (with whom the other two judges agreed) in a 16 page judgment held that the entire transaction should be looked upon as a transaction involving the finance of exports and a contract for the sale of goods on “Documents against Payment (D/P) terms” involving a “collection” agreement and be governed by the Uniform Rules for Collection (URC) 1978 version. The Supreme Court rejected the Bank’s argument that the transaction in dispute can be disposed of by simply applying legal principles relating to discounting of bills of exchange and not in a broader context of a transaction based on “documentary bills”.

Under Article 3 of the 1978 Uniform Rules for Collection (URC) of the International Chamber of Commerce (ICC) which applied, two banks are essential to collect a documentary credit (in this case, the two bills of exchange). Firstly, the Remitting Bank and secondly, the bank nominated by the principal (VVW Ltd.) which is referred to as the Collecting Bank. Here the Collecting Bank nominated by the customer and to which the Commercial Bank had couriered the documents for collection was “GIRO VAN DE BANK”, in Holland. The astounding revelation in this case – a revelation that this writer cannot believe – was that no bank called Giro Van De Bank ever existed.

The customer had in its written instructions (referred to earlier) asked the Commercial Bank to courier the original documents to this Bank and the Commercial Bank did so. Little did the customer and Commercial Bank know or realise that there was no such “Bank”.
The Aitken Spence Shipping Agent, who gave evidence, informed Court that the words “Giro Van De Bank” literally meant in the Dutch language, “account of the bank” – nothing more, nothing less. “Giro” meant “account” and “Van De Bank” meant “of the Bank”.

The banking expert (Jinasena Perera) who gave evidence to support the customer, also testified that “Giro Van De Bank” was merely a money transfer system and was not a commercial bank listed in the Bankers Almanac which gives a list of all banks operating globally. Because of this fatal mistake made by both the customer and the Commercial Bank, the endorsement on the documents dispatched namely, “Giro Van De Bank” was taken as an order to deliver the goods (gherkins) to the holder of the bill of lading “for the account of the Bank, that is, the Commercial Bank of Ceylon Ltd.”.

As to how such a simple mistake was made will not be clear except within the Bank. As Justice Marsoof observed: “The Commercial Bank was in the best position to explain what happened but chose to close its case without leading any evidence”. How did a leading Sri Lankan Bank make such a silly mistake to think that Giro Van De Bank was a Commercial Bank in Holland? Surely, the staff in their Export or International Division would have had the ability to check this up without any difficulty.

The Commercial Bank argued that they could not be blamed about this fatal mistake and that it was the customer that must take the entire blame because the customer had given specific written instructions to the Commercial Bank to send the documents to Giro Van De Bank in Holland.

The Supreme Court, however, held that since the Bank refused to lead any evidence at the trial, there was no evidence before the Court to what extent the customer’s express directive to the Bank had misled the Bank and could therefore be considered as an Estoppel in the Bank’s favour.

In this writer’s view, it is amusing to note that the Manager, Exports of the Commercial Bank had also written to the Manager of the Giro Van De Bank about the fate of the first shipment. That letter also refers to a “tele – inquiry” about the matter. (How could they have telephoned a non – existing bank!).

This evidence clearly showed that the Commercial Bank even if it did make a human error about thinking that Giro Van De Bank was indeed a Commercial Bank, did not take any steps to correct their mistake and continued in the mistaken belief that Giro Van De Bank was a bank in the commercial sense.

The customer also led evidence to show that the Commercial Bank had later realized its own mistake and had sent out a letter of demand to the shipping agents claiming damages for the wrongful delivery of the gkerkins without proper endorsement of the bills of lading.

A banking expert (Jinasena Perera) had also testified that if the Commercial Bank, as the Remitting Banker, had any doubts as to the standing of an entity called Giro Van De Bank (which had been named by the customer as the Collecting bank) it could have verified the matter easily by contacting its Correspondent bank in Holland. All Sri Lankan banks have Correspondent banks in foreign countries with which they have communications in export trade.

It was well after the buyer in Holland had got delivery of the gkerkins without paying for them, that the Commercial Bank woke up to the fact that Giro Van De Bank was not a Bank as such. Furthermore, the customer had been so informed not by the Bank’s Manager of Exports but by the Marketing Manager of the Bank!

In an exhaustive and meticulous judgment, where all aspects of the law and practice are covered, Justice Marsoof held in the customer’s favour holding that the Commercial Bank had not only acted in total disregard of the provisions of the 1978 Uniform Rules of Collection for Documentary Credits but had acted recklessly and in violation of the obligations to act in good faith and to exercise reasonable care in discharging its obligations as a Remitting Bank.

As an anecdotal postcript to this case while noting that the Commercial Bank’s liability resulted in not appreciating the meaning of a Dutch term “Giro Van De Bank”, it is interesting to note that the word “gherkins” (which were the goods shipped) is also derived from a Dutch word “angurk” or “angurkje” – a young green cucumber used for pickling!