This case is about a dispute between a company called Vanathawilluwa Vineyard Ltd (VWV) and a Bank regarding two shipments of gherkins exported to Holland.
VWV Ltd, a Company in the import and export business shipped two consignments of gherkins to a buyer named Hans Van Kilsdonk in Holland.
Bills of lading (shipping documents) were issued to the order of a local Bank. VWV. Ltd drew two bills of exchange for the shipments, payable to the Bank “at sight” (immediate payment).
The Bank (referred to hitherto as The Bank for purposes of this article) endorsed the bills of lading with “Deliver to the order of Giro Van De Bank”. The dispute arose when the bills of exchange were dishonoured (not paid by the buyer), and The Bank debited VWV’s account for the value of the bills.
VWV claims that The Bank acted negligently by releasing the bills of lading to Giro Van De Bank, which they allege was not a real bank. They also blamed the Bank for not collecting payment before releasing the documents. (Documents against Payment (DIP) terms).
Central issue
The Bank claims they followed VWV’s instructions in the letters “P6” and “P7” which instructed them to send the documents to Giro Van De Bank.
The central issue of the case is whether the transaction should be considered a collection arrangement (DIP terms) as argued by VWV, or simply a discounting of bills of exchange as argued by The Bank.
The Commercial High Court ruled in favour of the Bank.VWV is appealing the decision in the Supreme Court (Vanathawilluwa Vineyard Ltd v. Commercial Bank Of Ceylon – SLR – 68, Vol 1 of 2008 [2008] LKSC 6; (2008) 1 Sri LR 68 (27 February 2008),arguing that the transaction involved DIP terms and the bank did not follow proper collection procedures.
The judgment mentions relevant banking practices and regulations such as Rules for Collections (URC), potentially applicable to the collection process. Also mentioned are duties of banks and agents, including following instructions and exercising due care.
VWV Ltd. instructed the Bank to forward documents to “Giro Van De Bank” (allegedly not a real bank) for collection.VWV Ltd. claims the transaction involved “Documents Against Payment (D/P)” terms, requiring payment collection before releasing documents.
The Bank argues they followed VWV Ltd’s instructions and discounted the bills of exchange (immediate payment).VWV Ltd. blames the Bank for debiting their account without collecting payment and proper verification of “Giro Van De Bank.”
The Bank claims they acted as instructed and are not liable for the actions of “Giro Van De Bank.” VWV Ltd. provided witness testimony and copies of letters and bills of lading. The Bank did not present any evidence.
Independent verification
What was the obligation of the Bank as a remitting bank between following customer instructions vs. independent verification? The applicability of Uniform Rules for Collections (URC 1978) to the transaction was considered by the Supreme Court.
Also considered was the potential privity (a relation between two parties that is recognised by law) of contract between parties involved (VWV Ltd, The Bank, “Giro Van De Bank”).
The core issue is whether the Bank followed proper procedures while handling the collection of payment from the buyer. The judgment states Uniform Rules for Collections (URC 1978) govern documentary collections and outline best practices for banks. Article 3 of URC 1978 requires the remitting bank to utilise a reputable “bank” as the collecting bank. “Giro Van De Bank” doesn’t appear to be a legitimate bank.
The judgment observes The Bank failed to comply with Article 6 of URC 1978, which prohibits sending goods directly to a bank without prior agreement. The Bank also disregarded Article 10 of URC 1978 by not specifying whether documents should be released against acceptance i.e (D/A) or payment (D/P).
Dishonoured documents
The Bank’s actions also violated Article 20 of URC 1978, which mandates “advising fate” of bills sent for collection and returning dishonoured documents. Since the Bank didn’t follow proper procedures outlined in the URC 1978, they cannot rely on instructions from VWV Ltd. to absolve themselves of liability.
Counsel for the Bank argued they are holders in due course of the discounted bills of exchange and can claim reimbursement from VWV Ltd. if the buyer defaults.
The Court disagreed as the Bank was the original payee of the bills, disqualifying them from being holders in due course. Even if the bank wasn’t the payee, they still wouldn’t have recourse against VWV Ltd. because there’s no evidence the bills were presented to the buyer for payment.
In a collection arrangement, the bill of lading is security for payment and should only be released upon receiving payment. The Bank failed to return the bills of lading to VWV Ltd, further breaching their obligations.
The Court also delved into the defence of estoppel raised by the Bank. Estoppel by representation prevents someone (the representor) from denying a statement they made (the representation) that caused another person (the representee) to take a detrimental action based on that belief.
Collection process
The Bank argued that VWV Ltd’s instructions (documents P6 and P7) to send documents to “Giro Van De Bank” constituted a representation that this was a legitimate bank. They claim this misled them into believing it was safe to handle the collection process as instructed.
The court identified critical flaws in the Bank’s argument. The Bank offered no evidence to prove they actually believed “Giro Van De Bank” was a real bank. This is crucial as estoppel hinges on the representee’s (Bank’s) state of mind and reliance on the representation.
Banks are also expected to exercise due diligence when handling collections. Sending documents to an unverified entity named “Giro Van De Bank” raises red flags and suggests the Bank failed to meet this standard.
As discussed earlier, the Uniform Rules for Collections (URC 1978) outline best practices for documentary collections. The Bank’s actions violated several articles of URC 1978, suggesting they prioritised VWV Ltd’s instructions over proper procedures.
Citing the case of Hirdaramani Ltd. v De Silva [55 NLR 294] the Court emphasised that estoppel requires evidence of the representee’s (Bank’s) belief and detrimental action based on that belief. Since the Bank offered no such evidence, their argument failed. Additionally, the Bank’s failure to follow URC 1978 guidelines weakened their position.
The Court discarded the Bank’s estoppel argument. The lack of evidence and the Bank’s own negligence in verifying “Giro Van De Bank” undermined their defence. This strengthened VWV Ltd’s case and paved the way for a favourable judgment.
Estoppel by representation requires proof of the representee’s reliance on the representation and resulting detriment. Banks have a duty of care in handling collections, and established protocols such as URC 1978 guide their actions. Failure to follow established protocols can weaken a bank’s defence against claims of mishandling collections.
The Appeal was allowed and the plaintiff-appellant was ordered Rs. 10000 nominal costs.
