“We should be winning cases every day”, remarked my colleague. “Why?”, I retorted. “Because I have not seen you so happy in a while”. He was right. Lawyering can be both incredibly stimulating and unimaginably frustrating at the same time. The grind can be so daunting – sometimes impossible – you could forget that you’ve not had a hearty smile in months. Which is why my elation knew no bounds when the Federal High Court pronounced its judgment in our client’s favour, holding one of the large commercial banks in breach of the terms of a documentary credit transaction and, consequently, reversed huge debit entries assessed/imposed by the bank (against our client) due allegedly to devaluation of the naira and awarded substantial damages against the bank, among other awards. I shall return to this case shortly.
All too often in banker-customer relationships in Nigeria, the customer finds himself at the short end of the stick. The heartbreaks can arise from poor customer service, failure to follow instructions, unauthorized debits, mindless reversals of fund transfers, delays (last week, I made an electronic transfer which a bank credited after 3 days, 2 visits – to both the originating and destination banks), unexplained interest charges, wrongful dishonour of cheques/mandates, to downright fraudulent activities against customer accounts. The list is endless.
For businesses, the effect could be even worse – loss of business, reputational damage, loss of goodwill, financial hardship and many times, outright ruination of the business itself. Businesses engaged in international trade and finance, who must necessarily use these banking instruments/facilities, often find themselves naked and exposed to the whims of the bank, who readily passes on the negligence of bank officers to the unsuspecting business. This is the recurring problem in documentary credit otherwise known as letter of credit (“LC”). It is the use of the LC that would form the focus of this piece.
When these banking malpractices occur and the complaints are lodged, they are often times ignored or treated with levity. The customer then faces the dilemma of whether to take on these institutions in the court of law and hold them accountable or just “swallow” it. Experience has shown that the customer is usually unsure (and afraid) to sue a bank. The bank has big fearsome lawyers, they reason. And the financial, social, political and other clout to muzzle or to wipe out the customer and her claims.
My answer to the customers’ nagging question is, YES. YES, you can hold the bank accountable. So, when my client, a customer of a commercial bank first walked in, there was this palpable trepidation. The client had been told – by a director in a big financial institution – not to waste her time but to find ways to ‘settle’ with the bank because it would be fruitless to fight. Settlement here means no more than capitulation – understanding that if the bank officers should throw them some bones here and there, they must accept to avert banks’ wrath. We thought differently.
In the above case, the bank established two LCs on behalf of our client for the importation of manufacturing equipment. Although our client provided adequate funding, the bank negligently failed to bid for foreign exchange (forex) timely. Upon discovery, the bank then offered a distinct loan facility to the client to ‘help’ pay off the huge dollar debt arising from devaluation. However, this dodgy facility was to cover the bank’s mess. Accepting the loan meant that my client would bear the ultimate burden of the crushing devaluation including bank interests and charges. The LCs were established at NGN198/$1 but the exchange rate was about NGN300/$1 at the time of the loan. In essence the bank was still profiting from its own wrongdoing.
The client accepted the loan. We advised our client to repudiate the loan and challenge the bank’s misdeeds. Because what the bank offered was the worst possible outcome for the client. Should they fight and lose, the outcome would be exactly where the bank had dumped them. But should we win, then they are in a good place. So, fight, we recommended. We litigated and won. The court declared the loan and any further obligation arising from the LCs a nullity. And the case decided speedily because of the procedure we adopted.
Another case:
In another recent case our client needed to import raw materials from China for its production in Lagos. It therefore approached another bank to open a confirmed letter of credit in favour of the foreign exporter. As requested by the bank, our client provided 110% cash cover for the naira value of the transaction. The bank established the LC at NGN420/$1, the official exchange rate at the time (2022).
The exporter shipped the raw materials to Nigeria. In November 2022, the bank received the shipping documents as provided in the LC and released the documents to our client. Our client proceeded to clear the raw materials and moved on with its business.
Surprisingly, in 2023, the bank claimed that the correspondent bank confirmed receipt of payment for the LC in January 2023. Consequently, the bank demanded that our client should issue instructions to enable the bank to bid for forex under the prevailing exchange rate as well as additional funding to cover the difference caused by current exchange rate. Our client disputed the bank’s claim the bank threatened to unleash recovery actions against our client.
By August 2023, when the bank allegedly procured forex, the Federal Government had deregulated the foreign exchange market with the consequent free fall of the naira. It was impossible for our client to bear the burden.
We sued the bank on our client’s behalf.
Sometime ago, the Federal High Court, sitting at Ikoyi, Lagos, Nigeria, delivered its judgment in our favour, and held that the bank breached the terms of the LC by failing to obtain forex within the tenor of the LC; that the exchange rate of the contracts was NGN420/$1 – the prevailing rate as stated in the offer letter and the Import Finance Facility and not later as claimed by the bank; that the seven months lag between the receipt of documents and bid for forex was unreasonable and wrongful; that oral or other evidence was not required to ascertain the rights of the parties to documentary credit.
Conclusion
Customers should be acutely aware of their rights under LC contracts, particularly confirmed LC. Once the customer has funds in its account and supplies relevant documents, the law imposes on the banks, a corresponding duty to act promptly in every transaction involving foreign trade/currency. The bank must bid for forex immediately to avoid the risk of exchange rate fluctuation. Customers should be vigilant to resist attempt by bank officers to pressure them to bear responsibility for the bank’s misdeed or negligence.
The banks should constantly train and retrain their officers in this very vital area of international trade finance. The relevant departments should provide high level supervision in this area because time is of the essence. The bank should have a system (software) that will track timelines for processing every application for LC because of the exposure to huge risk of leaving compliance completely to human monitoring or interface alone. Their risk processes should be able to pick lapses.
Finally, lawyers who offer advice or representation on international trade finance must endeavor to do the hard work of understanding the unique requirements of the law in this area and be brave enough to encourage their clients to approach the courts if they must.
ROWLAND O UZOECHI practices law in Lagos, Nigeria.
He is a partner in the commercial law firm, Peach & Bonds LP and regularly represents and advises clients on banking, finance, capital markets, intellectual property and corporate and commercial law.
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