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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1999 LC CASE SUMMARIES 1999 Conn. Super. LEXIS 2901 (Conn. Super. Ct. 1999)
Topics:
Injunction; Garnishment; Arbitration; Comity
Type of Lawsuit:
Applicant sued beneficiary and issuer for injunction.
Parties:
Plaintiff/Applicant/Buyer- Gerald Metals, Inc.
Defendant/Beneficiary/Seller- Jinzhou Hauxin Copper Industry Co., Ltd.
Defendant/Issuer- Union Bank of Switzerland, A.G.
Underlying Transaction:
Sale of copper blister ore.
LC:
Commercial LC for US$ 1,743,505.95. Silent as to governing rules.
Decision:
The Superior Court of Connecticut, Karazin, J., granted the applicant's Motion for Prejudgment Garnishment against the obligation of the issuer on the LC.
Rationale:
Switching goods for those of inferior quality warrants prejudgment garnishment.
Article
Factual Summary:
To pay for copper blister ore, the buyer obtained a commercial LC from its bank payable in two installments. The copper was assayed in China prior to shipment to Korea and 80% of the LC was paid. When the goods arrived in Korea, a second assay was undertaken pursuant to the agreement and it was discovered that the goods were of significantly inferior quality with a value of $366,000 less. To prevent payment of the balance due under the LC, the applicant sued the beneficiary and the issuer, seeking injunctive relief and prejudgment garnishment of the amount owed under the LC. The trial court granted the applicant's motion for garnishment.
Legal Analysis:
1. Garnishment: The court indicated that it believed the affidavit testimony submitted by the applicant regarding the quality of the goods, including that of the inspector. The court indicated that "[s]ometime after the goods were assayed [the beneficiary] switched the goods or someone else switched the goods ... ."
2. Agreement to Arbitrate the Underlying Transaction: In response to the beneficiary's argument that the underlying transaction was subject to arbitration in China, the court indicated that it accepted the affidavit opinion of an expert who opined that "efforts by the American Corporation to enforce an English arbitrator award in the People's Republic of China may well encounter significant obstacles in the Chinese judicial system that would greatly delay the recognition and enforcement of such an award and further significantly increase the cost associated with its recognition and enforcement in ways not contemplated by convention." The court accepted his conclusion that "the likelihood of getting the money back once it is paid is greatly decreased."
Comment:
1. The court does not elaborate the grounds on which the garnishment is to be measured. Under LC law, these grounds must be the same as those by which an action for injunctive relief is granted, namely egregious fraud. Whether this case involves a mere dispute about quality or letter of credit fraud is more difficult to say but based on the tone of the court's opinion, it may be safely conjectured that it would have found that this test had been met. The issue may simply be a matter for the trier of fact.
2. As to the refusal to give effect to the agreement to arbitrate, it is not necessary to assess the impartiality of the Chinese arbitration or judicial system. Unless the LC itself is subject to an arbitration agreement, no such agreement in the underlying transaction can prevent an applicant from seeking injunctive relief for a fraudulent drawing.
© 2000 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.