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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES N.Y.L.J., 28 August 1997, at 21 (N.Y. Sup. Ct. 1997)
Topics:
Fraud, Prior UCC - 5-114; Independence Principle.
Type of Lawsuit:
Beneficiary sued issuer for wrongful dishonor.
Parties:
Plaintiff/Beneficiary- CE Casecnan Water and Energy Company
Defendant/Issuer- Korea First Bank
Applicants- Hanbo Engineering and Construction Company and Hanbo Corporation
Underlying Transaction:
Construction of power and irrigation infrastructure in the Philippines.
LC:
Standby for US$ 117,850,000. Silent as to the UCP.
Decision:
The Supreme Court, New York County, awarded summary judgment to the beneficiary and compelled payment under the standby.
Rationale:
The issuer must honor the presentation as neither the issuer nor the applicant had made a showing of fraud sufficient to meet the standards of prior UCC - 5-114, and as the presentation complied with the terms of the credit.
Article
Factual Summary:
A standby letter of credit for US$ 117,850,000 was issued to secure obligations under a construction contract. By its terms, the beneficiary was entitled to make a drawing if the applicant defaulted on the construction contract in the amount of the damages up to the amount of the standby. The applicant's insolvency was a default under of the contract.
When the applicant became insolvent, the beneficiary terrninated the contract and made a presentation for $79,329,000. The applicant disputed the amount of the draw, contending that the beneficiary owed it significant amounts and that the beneficiary had not suffered $79 million in damages. Accordingly, the applicant notified the issuer that the statement in the drawing certificate was fraudulent. The issuer then informed the beneficiary that it had to conduct an investigation into the matter before honoring the demand.
Fearing the financial collapse of the issuer, the beneficiary obtained a temporary restraining order which required the issuer to post a bond or to set aside funds to satisfy the demand. The beneficiary then sued to compel payment and the applicant intervened. The court granted summary judgment to the beneficiary.
Legal Analysis:
1. Independence Principle: The court first noted that the letter of credit was independent of the underlying transaction and any dispute that arose out of it.
2. Prior of 5-114(2) LC Fraud: The court then stated that under prior UCC - S-114, the issuer had to prove that the beneficiary's claim had absolutely no basis in fact. Accordingly, the court turned to the issuer's evidence and found that, at the time of the drawing, no amounts were owed by the beneficiary to the applicant. Moreover, the beneficiary had presented evidence of damages arising from the applicant's breach. The court noted that the calculation of those damages would have to be left to arbitration on the underlying contract. Additionally, the court noted that had the applicant wanted the beneficiary to quantify its damages as a condition to drawing, it should have made that a documentary condition of the credit. As the applicant and issuer had not made a proper showing of fraud under prior UCC - 5-114, and as the presentation complied and the beneficiary had a colorable claim, the court awarded summary judgment to the beneficiary.
©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.