Article

Factual Summary: To finance the purchase of 10,000 MTS of scrap steel, a commercial credit for US $2,171,750 was issued. When the shipment arrived at its destination, the necessary LC documents had yet to be assembled. Because presentation was not yet possible, the beneficiary gave the ship owner a letter of indemnity authorizing the release of the cargo and the beneficiary obtained the cargo.

The presentation under the LC was made to the advising bank and contained five discrepancies, two of which were incurable: shipment prior to date permitted in LC, and late presentation. Six days later, the advising bank informed the beneficiary of the discrepancies and the beneficiary directed the bank:

to forward all documents to the opening banks with clear instructions that they are not to release the documents until all discrepancies have been waived and documents have been accepted. The opening banks are to send a telex to your goodselves confirming this on the date the documents are accepted.

The advising bank forwarded the documents to the issuer with a message that listed the discrepancies and told the issuer:

CONSEQUENTLY, WE SENT YOU HEREWITH DOCUMENTS ON A COLLECTION BASIS. DOCUMENTS SHOULD NOT BE RELEASED TO OPENERS UNTIL ACCEPTED BY THEM. ON ACCEPTANCE, PLEASE AUTHORIZE US BY TESTED TELEX TO CLAIM REIMBURSEMENT AT MATURITY AS PER L/C TERMS.

The issuer responded with the following:

REF YOUR DOCUMENTS VB 904615 FOR USD 21,69,896/- [sic] UNDER OUR L/C BVC/F/12/89-90 RECEIVED WITH DISCREPANCIES MENTIONED IN YOUR COLLECTION SCHEDULE. IN VIEW OF THE DISCREPANCIES DOCUMENTS ARE HELD BY US STRICTLY ON COLLECTION BASIS WITHOUT ANY RESPONSIBILITIES ON OUR PART AND YOU ARE NOT REPEAT NOT AUTHORIZED TO CLAIM THE REIMBURSEMENT ON MATURITY.

The advising bank did not respond either to this telex or to a follow-up telex in mid-September seeking confirmation that the first telex had, in fact, been received. Nor did the advising bank, according to the beneficiary, inform the beneficiary of the issuer's telexes. In addition, the applicant/importer claims not to have been told by the issuer of the discrepancies in the documents or that the issuer had purportedly disavowed the LC. As a result, the applicant/ importer, from September 1989 onwards, continued to take delivery of the goods believing the issuer would honor the LC on 4 December 1989, the LC maturity date, 180 days after the shipment of the goods.

Over the following months the issuer, due to concerns over the applicant's financial condition, took a number of steps to regulate the applicant's banking business, including requiring the applicant to deposit into cash credit account(s) at the bank all proceeds realized from the sale of the goods manufactured from the scrap steel imported under the LC. The issuer, furthermore, reportedly led the importer to believe that a portion of those deposits would be earmarked for payment of the L/C on the maturity date, with the balance rebated for working capital.

The issuer maintains that it released the documents to the applicant in mid-November 1989 after the applicant had accepted the 180-day time drafts that accompanied the documents. The importer contends that it accepted the drafts in late October believing the LC still to be in place and received the documents from the issuer in mid-December, after the LC maturity date, in accordance with standard practice developed with the issuer on earlier LCs.

On 4 December, the maturity date of the LC, the issuer failed to pay the beneficiary, maintaining that the LC was no longer in effect and that the date only represented the due date of the collection drafts. On 6 December, the issuer informed the advising bank that the collection drafts remained unpaid. On 22 December, the advising bank demanded that the issuer honor the LC.

At this time, the applicant did not have enough funds in its account to cover either the LC or the collection drafts, whichever was operative. However, the issuer had taken steps to manage the applicant's accounts. The issuer required the applicant to deposit funds into a cash credit account that would be earmarked to pay the LC obligation in dispute. The deposited funds included those from the resale of the goods purchased from the beneficiary. Instead of applying the funds in the account to payment of the LC or the drafts, however, the issuer used the funds to cover other outstanding debts owed by the applicant to the issuer.

The beneficiary brought suit against the advising bank for negligence in its instructions to the issuer and for failing to inform the beneficiary of the issuer's disclaimer of its obligations under the LC. The beneficiary also sued the issuer for failing to make the payments due under the LC, failure to remit the funds specifically collected from the applicant for that purpose, and unjust enrichment.

The U.S. District Court for the Southern District of New York originally dismissed the suit because it determined that collection law and not LC law applied to the case, thereby making the applicant an indispensable party to the litigation. On appeal, the Second Circuit determined that the beneficiary should have had an opportunity to present its LC claim; and, even if the applicant was indispensable, the claims against the advising bank could be fully litigated in this forum. By this time, the applicant had also agreed to submit to the court's jurisdiction, but was never impleaded into the action. Following further discovery, both the issuer and the beneficiary moved for summary judgment. The issuer also moved to dismiss on the grounds of comity because liquidation proceedings had recently been initiated against the applicant in India and that should be the proper forum for the beneficiary to seek its recovery.

Legal Analysis:

1. Governing Body of Law (LC v. Collections):The beneficiary based its claims against the issuer on alternative theories: one based on LC law and one on collections. Under the LC theory, the beneficiary argued that the issuer had failed to comply with UCP Article 16(e) by failing to hold the discrepant documents or return them to the advising bank. The issuer sought summary judgment by arguing that LC law did not apply and that it had complied with applicable collections procedures.

All parties agreed that whether LC law applied or not turned on the interpretation of the advising bank's telex to the issuer. The issuer argued that the terms "on a collection basis" clearly took this out of the realm of LC law. The beneficiary argued, however, that the language concerning reimbursement "as per L/C terms" clearly indicated that this was a presentation under the LC and not a collections item. The court found validity in both arguments by noting that the phrase "on a collections basis" is inherently ambiguous and its meaning must be derived from the context in which it is used. The court then found that the extrinsic evidence offered by the parties to aid in the interpretation of the phrase did not resolve the issue. As there were two reasonable interpretations of the phrase, summary judgment on the application of LC law was inappropriate.

The issuer next argued that even if it could not be determined which body of law applied, that it should prevail as a matter of law under either theory. The court disagreed by finding first that an issue of material fact existed as to whether, if collection law applied, the issuer had violated URC Article 10 by releasing the documents to the applicant without obtaining payment. This issue again would turn upon the interpretation of the advising bank's telex, of which there were two reasonable interpretations. Accordingly, summary judgment was not appropriate. Thus finding that summary judgment would not be appropriate under the collection theory, the court did not continue on to consider the arguments under the LC theory.

2. Unjust Enrichment: The beneficiary argued that the issuer was unjustly enriched because it collected sufficient funds and earmarked them for the payment of the LC, but then applied those funds to other outstanding debts owed by the applicant to the issuer. The court found that the determination of this issue depended, in large part, on the determination of the rights of the parties under either LC or collection law. Accordingly, it ruled that summary judgment was not appropriate.

3. Comity:The issuer argued that the beneficiary was seeking, essentially, to recover the applicant's assets held at the issuer bank. Since liquidation proceedings had recently been initiated against the applicant in India, the issuer argued that comity would require dismissal of this action as the beneficiary should join in the foreign action out of respect and deference to foreign law. The court ruled that if LC law applied, then the obligations being sued upon would run directly from the issuer to the beneficiary and not involve the applicant at all. Further, the court found that the claim based on collection law was directly against the issuer for not following proper procedures and not against the applicant. As such, the foreign liquidation proceeding would not be the proper forum and comity did not require dismissal of this action.

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