HSBC has been held responsible for damages after refusing to honour payment on a €200,000 letter of credit in favour of a supplier.
The court of appeal said the bank adopted a test of ‘strict compliance’ that was “too rigid, disproportionate and mechanical”.
The legal dispute centred upon a letter of credit issued by HSBC Bank Malta plc in favour of Piccinino Franchising International Limited in January 2014 in connection with merchandise shipped by the supplier to a third party in Libya.
That letter was termed as one of ‘Irrevocable Standby’, which meant it served to guarantee payment in case of “non-payment for various shipments for lingerie, swimwear, women’s clothing shipped by the beneficiary [Piccinino]” to Omar Almhdi Hamrouni in Libya.
Failing payment by that buyer, Piccinino turned upon the bank, presenting all necessary documents to settle the price for the shipped goods which amounted to some €178,286. But that request for payment was turned down.
The reason given by the bank was that there were discrepancies between the items listed in that letter of credit and those mentioned in the relative bill of lading and seaway bill.
Certain items described as “shop fittings, shoes, promotional material and a hazardous sealer” had not featured in the letter of credit, said the bank.
Piccinino filed a civil action against HSBC Bank Malta arguing the company had satisfied all documentary requirements and those documents did not conflict with the letter of credit. Moreover, that credit document did not prohibit the supplier from adding items on the bill of lading which were not mentioned in the letter of credit.
However, its claim was turned down by the court.
Although the court was inclined to agree with the seller’s argument that “items need not be identical but not in conflict”, the court needed “concrete evidence” that such conflict did not exist.
Piccinino appealed that decision arguing primarily that the dispute was not about the merchandise itself but the documents linked to the letter of credit.
When delivering judgment, the court of appeal upheld the appellant’s argument, observing that the crux of the issue was not about the merchandise but whether documents handed to the bank confirmed to the terms of the letter of credit.
Contrary to what the first court said, Piccinino had no obligation to prove what the merchandise actually consisted of, nor to produce pictures thereof.
Although it was commendable for the bank to closely scrutinise maritime documents, it could not go to extremes, nitpicking to escape its obligation to pay.
Once all documents were in place, it was not reasonable nor proportionate for HSBC to refuse to honour that credit simply because of items which had not been mentioned in the letter.
All considered, the bank was too “rigid, disproportionate and mechanical” when vetting the documents presented by the beneficiary, said the court, concluding that the bank was responsible for any damages suffered by the seller.
Lawyers Mario de Marco and Margo Zammit Fiorentino assisted the appellant.