Letter of Credit

The distinguishing feature between the standby letter of credit, such as that used to guarantee payment in The Delfini [1990] 1 Lloyd's Rep. 252 or The Filiatra Legacy [1991] 2 Lloyd's Rep. 337, and a traditional documentary credit, is that in the latter a document of title is normally taken by the bank as security, whereas in the former it is assumed that no such document may be available.

The advantages to the bank of taking a document of title were considered in this journal in my two-part article on "Moving away from traditional documentation", in the summer and autumn 1997 issues of DCI. Transfer of property and constructive possession are insufficient on their own, however, when the goods have been lost or damaged at sea. In this case, a cause of action against the carrier is required. In the UK, prior to September 1992, the Bills of Lading Act 1855 was in force, as are similarly drafted provisions still in many parts of the English-speaking world (for example, India, in respect of multimodal transport, and Canada).

In the UK, section 1 of the Act operated in some circumstances to transfer the necessary contractual rights from the original shipper to a consignee, or endorsee of a bill of lading, but it was clear as long ago as the decision of the House of Lords in Sewell v. Burdick (1884) 10 App. Cas. 74 that the special property enjoyed by a bank as pledgee was insufficient to trigger section 1, even if the bank had taken the security of a shipped bill of lading, the only document capable of triggering the section.

In some circumstances, a bank could rely on an implied contract against the carrier, as for example in Brandt v. Liverpool, Brazil and River Plate S.N. Co. [1924] 1 K.B. 575, when a contract between a bank as endorsee and shipowner was implied on the terms of the bill of lading, where the shipowner delivered the cargo against payment of freight by the bank. It became clear in The Dona Mari [1974] 1 W.L.R. 341 that contracts could also be implied from the tender of other documentation, such as a ship's delivery order