United City Merchants (Investments) v. Royal Bank of Canada

An English firm, Glass Fibres and Equipment, Ltd. (Glass Fibres) (plaintiff), agreed to sell equipment to Vitrorefuerzos S.A., a Peruvian fiberglass firm, for twice the usual price. Vitrorefuerzos paid Peruvian currency to a Peruvian bank to obtain a letter of credit to be used to pay for the equipment. Glass Fibres agreed to send the surplus portion of the equipment price to a firm associated with Vitrorefuerzos (associated firm) in the United States. In effect, the associated firm acquired United States dollars in exchange for the Peruvian currency that Vitrorefuerzos had paid to the Peruvian bank. The transaction was illegal in Peru. Peruvian law barred residents from holding foreign currencies abroad or in Peru and barred overvaluation of imports to evade currency controls. Glass Fibres collected 20 percent of the purchase price and sent half of the United States dollars to the associated firm. The letter of credit required shipment of the equipment by December 15, 1976, but the shipment was not sent until December 16. The shipping agent, acting on his own, falsified the date on the bill of lading to say December 15. Discovering the fraud, the Royal Bank of Canada (Royal Bank) (defendant), the confirming bank for the Peruvian bank’s letter of credit, declined to pay more. Glass Fibres and United City Merchants (plaintiff), Glass Fibres’ bank, sued to collect the unpaid money. At trial, the judge ruled that the late shipment did not justify nonpayment but held that Glass Fibres could not collect because the letter of credit was unenforceable as a violation of British law implementing the Bretton Woods Agreement (Bretton Woods). After an appellate ruling in favor of Royal Bank, the case reached the House of Lords.