Article

Note: Devon Robotics (Applicant) obtained a US$5,000,000 letter of credit from Itochu (Issuer) for the benefit of Health Robotics (Beneficiary). Applicant, a US corporation, sought to distribute robotic medical preparation products developed and licensed by Beneficiary. To this end, Applicant and Beneficiary signed two independent contracts concerning exclusive distributions of Beneficiary's products, one of which-the Cytocare Agreement- required regular license fee payments. The standby letter of credit was issued to guarantee these required payments.

During these contract negotiations, Deviedma (Defendant) was General Counsel for the Beneficiary. After these contracts were completed, Defendant became Applicant's COO. Applicant alleges that one month after becoming COO for the Applicant, Defendant advised Issuer that Applicant was in default of its obligations to Beneficiary under the Cytocare Agreement. One week later, Defendant drew down the entire US$5,000,000 without consent of the Applicant. Issuer then demanded the entire principal from the Applicant. (Applicant also alleged that Defendant interfered with other contractual negotiations and defamed the company in communications with customers.)

Applicant sued Defendant and Beneficiary, alleging (1) breach of fiduciary duty, (2) tortious interference with current and prospective contractual relations, (3) defamation and (4) conspiracy. Applicant also sought preliminary and permanent injunctive relief. Defendant, highlighting a broad arbitration clause in the underlying agreements between Applicant and Beneficiary, moved to dismiss the suit for want of subject matter jurisdiction (Fed. R. Civ. Pro. 12(b)1) and want of a well-plead complaint (Fed. R. Civ. Pro. 12(b)6).

The United States District Court for the Eastern District of Pennsylvania, Joyner, J., granted Defendant's motion in part and denied Defendant's motion in part. As to subject matter jurisdiction, the Judge ruled that, as Defendant was not a signatory to the agreements between Beneficiary and Applicant, the arbitration clause therein only applied where Defendant could show (1) a close relationship between the entities involved and (2) that the alleged wrongs are intimately founded in the underlying contractual obligations, to which Defendant was not a party to it. Using this rule, the Judge ruled that the court lacked subject matter jurisdiction only with regard to the conspiracy claim, as the question was intimately tied to the Cytocare agreement.

Comment by William Lowery:

Notably, throughout the court's ruling and discussion, no mention of the letter of credit is made. The Judge does not entertain the potential implications of an Applicant drawing on a letter of credit in favor of the Beneficiary, an omission that was probably appropriate as this suit was based on underlying contractual matters rather than the letter of credit itself.

[JEB/wtl]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.