DISPUTE BETWEEN TWO BANKS, WHERE ONE BANK HAD ISSUED TWO LETTERS OF CREDIT IN IMITATION OF WHICH TWO SWINDLERS HAD FORGED SPURIOUS LETTERS, AND WHERE THE OTHER BANK HAD MADE A PAYMENT AGAINST THE PRESENTATION OF LETTERS OF CREDIT EMANATING OR APPEARING TO EMANATE FROM THE FIRST BANK. WAS THE PAYING BANK ENTITLED TO REIMBURSEMENT FROM THE BANK ISSUING THE LETTERS OF CREDIT?
Award made on February 19th, 1927, by Mr. Maurice Hermans, Avocat à la Cour de Cassation of Belgium: (Translated from the original French text.)
"1. On June 25th 1926 the X... branch of the defendant bank delivered to an individual calling himself A. P. a letter
of credit, No. 6232 for £3,250, payable at a number of European banking houses among which the defendant bank figured.
"On June 28th 1926 the same branch delivered to an individual calling himself M. S. a letter of credit No. 6241 for £1,000 payable at various European banking houses among which the defendant bank figured.
"2. According to custom the said branch immediately sent to the various banking houses indicated in the letters of credit, notices informing them of the issue of the said letters of credit and specifying their serial number, their amount, the period of their validity and the names of the payees; attached to these letters were specimen signatures of the payees.
"3. On August 5th 1926 two individuals presented themselves at Bank No. 1 which payed to one of them the sum of £3,200 and to the other the sum of £975 on presentation, the said bank states, of letters of credit Baring the Nos. 6232 and 6241 respectively. Bank No. 1 also asserts that the letters bore no mention of previous payment having been made and that it entered on them the payments made by it. It is to be noted that letter of credit No.6241 delivered to the so-called M. S. did not mention Bank No. 1 among the paying banks, and that Bank No. 1 could not in consequence have been advised of having a payment to make to the so-called M. S.
"4. On August 6th 1926 the plaintiff (Bank No. 2) paid to the so-called A. P. the sum of £3,2oo and to the so-called M. S. the sum of £950 on resentation, it states, of letters of credit similar to those which, according to the letters of advice, had been issued by the branch of the defendant. It states also that on the letters thus presented there appeared no mention of a previous payment having been made and that it entered on them, in ink and by means of a perforating machine, the sums withdrawn from it.
"5. On August 7th 1926 two individuals presented themselves at Bank No. 3 whose name appeared among the paying banks on the genuine letters of credit; they were the bearers, this bank states, of letters bearing the same numbers and having the same import as those which had been issued by the X... branch of the defendant and caused themselves to be paid £3.150 on presentation of letter No. 6232 and 4950 on presentation of letter No. 6241. The said bank states also that the letters bore no mention of any previous payment having been made and that it entered on them the amount of the payments made by it.
"6. On August 9th 1926 two individuals presented themselves at Bank No. 4 whose name appeared among the paying banks in the genuine letters; they were bearers of letters of credit bearing the numbers specified; one of them obtained payment of £950 on letter No.6241, but when the other presented letter No. 6232, the cashier took it saying that he was going to consult the manager; when he returned the individual had disappeared.
"7. Letter No. 6232 thus surrendered to Bank No. 4 is a forgery which at first sight resembles the original letter No. 6232 if a comparison is made with the specimen produced by the defendant; nevertheless a close comparison of the forged letter with the specimen reveals certain differences.
"8. The original letters of credit were not returned and have not therefore been presented to the arbitrator.
"9. It was certainly to the payees of the original letters of credit Nos. 6232 and 6241, that is to say to the individuals who presented themselves at X... as A. P. and M. S. and to whom the genuine letters had been delivered, that the plaintiff paid £3,2oo and £950 respectively, and it was they who signed the receipts in duplicate in accordance with custom.
"10. According to the letters of advice, the plaintiff had the right to reimburse itself from Bank No. 5 for the advances made on letters of credit Nos. 6232 and 6241; consequently it caused two cheques to be presented at the said bank, but the latter refused payment of them on the grounds of insufficient funds, having already reimbursed to Bank No. 1 the sums that it had advanced on the letters of credit which had been presented to it.
"11. It was only on August 11th that the defendant warned the plaintiff and other interested banks by telegram and letter, that no further payment could be made on theletters of credit.
"12. The plaintiff advised the defendant on August 16th 1926 that it was debiting the account of the latter's branch at X... with Pesetas 131,762.50, value August 10th, to offset the payments which it had made on the two letters of credit. The defendant's branch and the defendant itself refused to accept this debit.
"Whereas the plaintiff claims that the payments made by it to the payees of the letters of credit No. 6232 and No. 6241 are valid and that it has in consequence the right to maintain this debit; "Whereas the defendant disputes this claim;
"Whereas, as the defendant rightly points out, the burden of the proof falls on the plaintiff in order to substantiate its claim;
"But whereas the question is to determine of what the proof should consist;
"Whereas, in order to settle this question, it is necessary to show , the legal aspect and the operation of the letter of credit;
"Whereas a letter of credit is a document by which a person - generally a bank - gives to one or several other persons generally one or several other banks-power of attorney to pay to a third party whom the letter names and within the periods that it stipulates, sums of money of which the maximum amount is generally fixed; whereas this letter is handed to the payee who is free to make use of it or not as he wishes; whereas when he makes use of it he presents it at a bank, or at one or more of the banks which the letter names; whereas the bank which makes a payment causes the payee to furnish it with a receipt, generally in duplicate, and enters the amount of the payment on the letter of credit itself in such a way that the sums which may be advanced later on the same letter are reduced by that amount; whereas the bank making the payment of necessity returns the letter to the payee when the latter has not drawn the total of the sums which he has a right to draw;
"Whereas the bank which issues the letter of credit advises immediately and directly the bank or banks whose name or names it enters on the letter, and informs them of the essential points of that letter (name of payee, amount of the total sum which may be paid, duration of validity, serial number) at the same time as it sends to these banks a specimen of the signature of the payee;
"Whereas at first sight it appears that the bank which has made the payment must, in order to be reimbursed by the
bank which issued the letter of credit, prove not only that made the payment to the payee of the letter of credit himself but that it made the payment on presentation of the letter, that the letter was the genuine letter of credit and not a forged one, that the letter bore no mention of any previous, withdrawal greater than the difference between the total amount of the letter of credit and the payment which it made and that the payment was made during the period of validity of the letter;
"Whereas the defendant claims that such is the proof which he plaintiff must furnish;
"Whereas this claim is founded neither in law nor in equity;
"Whereas, in fact, as is recognised by all authorities when peaking of letters of credit, the relations established between the bank issuing the letter of credit and the banks appointed make the payments, are the relations of principal and attorney-in-fact;
"Whereas, the bank appointed by the letter of credit to take payments to the payee as required, and which, within the period of validity of the letter, made a payment to the payee of that letter within the limits of the total originally indicated in it, has no need to produce the letter in order to prove that it had the right to make a payment on it; whereas that power is sufficiently established by the letter of advice which it received from the bank issuing the letter of credit; at the time of issue; whereas the bank has consequently in its possession written proof of the power of attorney that was given to it;
"Whereas if the production of the letter by the payee, at the bank from which he demands a payment, constitutes nevertheless an essential formality for the operation of the letter of credit, this is not for the purpose of proving the existence of a power of attorney of which the bank entrusted with the payment is already aware and which it is in a position to prove by another written document which is and remains in its possession, but it is to enable the bank making the payment to ascertain whether any previous payment has been made, and to enter on the letter the amount of the payment it has made; the paying bank must in fact enter on the letter the payment it makes, in order that the other interested banks maybe advised that from then onwards they can only make payments on the letter of credit up to the difference between the maximum amount of the letter and the amount of payments already made;
"Whereas if these operations are examined from the legal standpoint it appears that the payment made by a bank on a letter of credit constitutes, in respect of the amount of that payment, a revocation of the power of attorney given to the banks designated by that letter; whereas the entry of the payment on the letter and the presentation of the letter bearing that entry constitute the notification to the banks concerned of that revocation; whereas it is actually the only means of notification possible in the normal operation of the letter of credit;
"Whereas every bank appointed by the letter of credit has in principle the right to pay to the payee the total amount for which the letter is issued; whereas it retains that right, as long as the power of attorney given to it by the issuing bank and of which the latter has directly notified it has not been revoked and that it has not been notified of that revocation; whereas it appears from the foregoing that it is indeed the payee himself who is made responsible by the agreement which exists between himself and the issuing bank for giving this notification in the case of partial revocations arising from the fact that partial payments have been made on the letter of credit; whereas if the payee instead of giving this notification to the bank at which he is going to demand a payment by presenting to it the genuine letter in which the payments already made are entered, presents either a forged letter or the genuine letter from which he has been able skillfully to erase the mention of the previous payment or payments, it must be admitted that in acting thus he is not presenting a document which apparently establishes a right but a document which being forged or falsified does not establish any right; he fails to make known the partial revocation of a right whose existence has been brought by other and more certain means to the knowledge of the bank making the payment; whereas in consequence the payment made by the bank appears to be the act of an attorney-in-fact within the limits of the power of attorney which has been notified to him, made, it is true, after revocation of the power of attorney but of which revocation the attorney was ignorant;
"Whereas the attorney-in-fact, in order to justify his acts, need only prove the existence of his power of attorney and that his act comes within the terms of this power of attorney; whereas if the principal claims that the power of attorney has been revoked wholly or partially, it is for him not only to prove it but also to prove that this revocation was duly notified to the attorney-in-fact;
"Whereas in the present case the attorney-in-fact can only make a payment against presentation of the letter of credit; whereas while it may seem that by this very fact he must be presumed to have received notification of the revocation, such presumption cannot be admitted;
"Whereas in fact it is possible that the letter presented to the attorney-in-fact may be a forged letter or the genuine letter which has been falsified and that thus the revocation is not notified to him;
"Whereas the normal operation of a letter of credit demands that the bank making a partial payment hands back the letter to the payee; whereas therefore the normal operation of the letter of credit necessarily assumes that the bank making the partial payment does not retain in its possession the one document whereby it could be shown that it received notification of the revocation of its power of attorney in respect of a determined amount; whereas in consequence it is not possible to oblige it to furnish written or verbal evidence that it received the notification, since it has to give up the only piece of written matter that is the instrument of such evidence and since the only available witness is normally the official of the bank making the payment, i.e. the bank itself in a certain measure; and further also because, even on the supposition that such evidence would be declared admissible without reservation, it is unreasonable to expect a man before whose eyes numerous documents pass daily, to have his attention attracted by details of which he cannot take notice, to implant them in his memory in regard to each and every one of these documents, in view of a possible dispute which may arise at the end of amore or less lengthy period; because this man may disappear; because the issue of what is frequently an important lawsuit cannot be allowed to depend upon such frail and perishable evidence;