Article

Note: Rhino Walls, Inc., the Buyer/Applicant, contracted with OmniPol Pty, Ltd., the Seller/ Beneficiary, to purchase two plastic recycling machines for US$1.96 million. The contract provided for several installment payments, one of which was a down payment, and the others were linked to the manufacture, shipment, delivery, and installation of the machines.

The US$600,000 down payment to Seller was secured by a transferable commercial standby. Buyer's business acquaintance, Gerald Michaud guaranteed the LC, which was issued by his bank, in favor of the Seller.

As issued, the standby required presentation of 1) a statement by Seller that Buyer had defaulted on its obligation to pay Seller the down payment; 2) a draft stating the amount due to Seller; and 3) the original LC. Subsequently, this standby was amended to change the beneficiary to Seller's bank, Bank One, NA, as Amended Beneficiary, and to require presentation of 1) a draft stating the amount due to Seller and 2) a statement by the Amended Beneficiary indicating that the purpose of the LC was for financial accommodation to Seller and that the draft "represents an amount now due and owing because [Buyer] has defaulted on its financial obligations to [Amended Beneficiary]."

In the meantime, Seller arranged with Carrier, Emery Airfreight Corporation, through a subsidiary, Emery Ocean Freight, to deliver the machines. Based on false representations made by Seller that the machines were ready to be transported, Carrier issued a received for shipment ocean bill of lading without first confirming that the machines were in fact ready to be transported, which they were not.

Subsequently, Amended Beneficiary drew on the LC. As Buyer was unable to secure financing for the remaining amount due, Guarantor contracted with Seller to purchase the machines, which he paid for and received. However, the machines never worked properly, and Guarantor sold them to a third party.

Guarantor then brought actions against Seller and Carrier, the latter action sounding in misrepresentation, fraud, or conspiracy to defraud in regard to the wrongful issuance of a received for shipment ocean bill of lading. Carrier filed a motion to dismiss, and Guarantor filed a motion for summary judgment. The U.S. District Court for the District of Kansas, Marten, J., granted the Guarantor's motion for summary judgment against Seller, but denied the Guarantor's motion for summary judgment against Carrier, granting instead Carrier's motion to dismiss the claims against it.

The court noted that the uncontroverted evidence established that Guarantor did not rely on the bill of lading when guaranteeing the LC. Indeed, the court noted that neither the original nor the amended LC even mentioned the bill of lading. Only the amendment to the underlying contract, which arose after the issuance of the LC, required the presentation of a bill of lading.

Furthermore, the court noted that the LC and guarantee obligations only concerned the down payment and not the shipment and delivery stages of the transaction. The LC "provided that payment would be due upon [Seller's] statement that [Buyer] was in default and that the draft amount was then owing. The LC thus sets a specific, and not particularly high, threshold for [Seller] to obtain payment. Certainly there is no provision that payment in any way depends on submission of a bill of lading."

The court also noted the effect of the transfer and amendment of the LC. "The earlier, limited conditions for calling the letter of credit were even further reduced. The bank was empowered to call the letter of credit on the grounds that [Seller] had defaulted to the bank. Thus, the letter could be called (and indeed actually was called) wholly independent of any bill of lading."

Guarantor argued that his liability could have been reduced after execution of the guarantee and issuance of the LC based on the subsequent actions of third parties. The court rejected this argument, stating that "the suggestion that [Guarantor] could have altered or diminished his liability is unsupportable in light of the strong policy against importing conditions into irrevocable letters of credit."

Comment: The issuer properly amended this credit to change the name of the beneficiary. Because the terms of the amended LC were different than would have been permitted under UCP500 Article 48, only the issuer could have effectively accomplished this change, either by its own transfer varying the terms of UCP500 Article 48 or by amendment.

[JEB/llh]

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