International collection rules do not give rise to a contract between the collecting bank and the principal
For a number of years banks have used the ICC's Uniform Rules for Collection (URC) to govern the international collection of documentary instruments. Their impact on the contractual relationship between the parties to a collection instruction has never been clear, however. The recent case of Grosvenor Casinos Limited v National Bank of Abu Dhabi has helpfully provided guidance in this area. In that case, a commercial court judge held that the current version of the URC (URC 522) does not create a contractual relationship between a collecting bank and a principal. This decision confirmed the pre-existing common law position.
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Background
Mr Al-Reyaysa lost around £18 million at the roulette tables of a casino owned and operated by Grosvenor Casinos Limited (Grosvenor). He sought to pay for his losses through a series of cheques drawn on his account at the National Bank of Abu Dhabi (NBAD). Grosvenor presented these cheques to its bankers, NatWest, which remitted them to NBAD in Ajman for payment. The collection instructions issued by NatWest were expressed to be subject to URC 522. The parties' roles in this collection instruction were therefore that Grosvenor was the principal, NatWest was the remitting bank and NBAD was the collecting bank.
Although a number of Mr Al-Reyaysa's cheques were honoured, two cheques totalling £6,680,000 were not. Grosvenor successfully sued Mr Al-Reyaysa, but could not enforce its judgment in the UAE (where Mr Al-Reyaysa's assets were located). As a result, Grosvenor brought proceedings against NBAD, claiming that NBAD was in breach of contract. Grosvenor argued that a contract existed between it and NBAD as a result of URC 522, which was incorporated into the collection instruction. Grosvenor also brought a separate claim in deceit, which failed on factual grounds.
Decision
The judge held that URC 522 did not create a contractual relationship between a principal and a collecting bank. In reaching this "very firm conclusion", the judge relied, in particular, on Article 4 of URC 522, which he thought "fatal" to Grosvenor's case. Article 4 requires the collecting bank to disregard instructions received other than from the remitting bank, with the result that the collecting bank is prohibited from acting on instructions received directly from the principal. The judge considered this provision to be inconsistent with a direct contractual relationship existing between the principal and the collecting bank. He therefore dismissed Grosvenor's claim for breach of contract.
Application
Following this decision, it is clear that a collecting bank does not, under English law at least, have a direct contractual relationship with a principal by reason of URC 522. Banks therefore have a valuable line of defence against a breach of contract claim brought by a principal for alleged breaches of URC 522. It is, in fact, possible that a collecting bank will escape liability in any event because the remitting bank, with whom it does have a direct contractual relationship, is likely not to have suffered any loss.
It is important to note, however, that, in an international context, English law will not always apply. Collection instructions are typically sent from a remitting bank located in one country to a collecting bank located in another. Furthermore, collection instructions rarely contain governing law clauses. Although not an issue in this case, if the law of the UAE had been applied to the dispute (rather than English law), a different result may have been reached. Banks should therefore consider the governing law when sending collection instructions to or receiving them from a foreign bank.
Grosvenor Casinos Limited v National Bank of Abu Dhabi [2008] EWHC 511 (Comm)
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Contacts
If you would like further information on this subject please get in touch with your usual contact or:
Richard Caird,
Partner, T: +44 (0)20 7246 7262
Stephen Burke,
Lawyer, T: +44 (0)20 7246 7398
Author/EditorCopyright © Denton Wilde Sapte LLP, unless otherwise indicated. All information correct as at date of publication. Consistent with our policy when giving advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of a specific problem, it is recommended that professional advice be sought. |