Article

Factual Summary:

Partial transfers were effected on a transferable commercial LC, leaving the beneficiary a balance of US$ 2,039,699. When documents were presented, the confirmer paid the beneficiary $172,129.06 more than that amount. When the beneficiary refused to reimburse it, the confirmer filed this action. On cross motions for summary judgment, the trial court awarded summary judgment to the confirmer.

Legal Analysis:

1. Overpayment under LC Agreement: The beneficiary asserted that the confirmer did not comply with UCP500 Article 13(b), which grants to an issuing or confirming bank "a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly." The beneficiary argued that, because the confirmer did not raise any objections to documents during the seven-day period, and instead raised its objections more than seven months later, it is precluded from making any claim against the beneficiary.

The court determined that nothing in Article 13(b) indicates that a bank has no remedy or recourse, if subsequent to taking up and paying for submitted documents, it discovers that it has mistakenly over-paid the beneficiary of a letter of credit. Thus, under the theory of unjust enrichment, Chase is permitted to recover the money it mistakenly paid. As a result, it turned to "the 'longstanding' and 'well recognized' principle that a 'party who pays money, under a mistake of fact, to one who is not entitled to it should, in equity and good conscience, be permitted to recover it back.' This principle, which applies even if the mistake is due to the negligence of the payor, is based on the theory of unjust enrichment."

2. Transfer: The beneficiary argued that amounts unpaid to the transferees should be credited to the original beneficiary in calculating the amount of any overpayment. The court concluded, however, that the amount transferred to the transferees under the LC was not thereafter available to the original beneficiary and the balance subsequently available to the original beneficiary should be used rather than the unpaid balance available on the LC.

Comments:

1. Typically there is little scope for equitable doctrines in LC practice (or law). The situation in this case represents one of the few instances where an equitable doctrine may be relevant. The issue here is not, strictly speaking, payment by mistake but overpayment by mistake. Under the finality rules of the UCP, a mistaken payment for the amount due would be final and there would be no room for equitable relief on a theory of mistake. Such a rule would interfere with the operation of UCP500 Articles 13 and 14. These rules do not, however, as the court notes address a situation where the problem is excessive payment. In such a situation, the principle of restitution should obtain.

2. The court properly determined that the amount available to the original beneficiary after a transfer has been effected is only the untransferred balance even if the transferee beneficiaries do not draw the entire amount transferred. While the court does not discuss it, the basis of this conclusion is the nature of a transfer. Once a transfer has been effected, the original beneficiary has no interest in that amount and the obligation of the issuer runs not to it but to the transferee beneficiary.

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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.