Article

Factual Summary: On the day that the LC was issued, transfer of the entire credit was requested by the first beneficiary and effected by the adviser [transferring bank] through the second beneficiary's bank, a local Egyptian correspondent bank. A week later, the transferring bank received the original LC from the second beneficiary's bank together with a telex which read:

Kindly find enclosed your original letter dated 14 Oct. and its attachments returned to your goodbank as per beneficiaries request without any action effected at our end.

In response to this message, the transferring bank informed the issuer that the second beneficiary had cancelled the LC. Six weeks later, the second beneficiary's bank requested that the LC be retransferred to the first beneficiary. Although the transferring bank forwarded this request to the issuer, the issuer refused to do so.

The second beneficiary brought an action against the transferring bank for breach of contract and negligence, and the first beneficiary brought an action against the transferring bank for breach of contract, negligence, and negligent misrepresentation, seeking damages for costs and expenses in setting up and maintaining the LC. In an earlier order, the court granted the transferring bank's motion to dismiss the first beneficiary's negligent misrepresentation claims and the second beneficiary's contract claim but denied a motion to dismiss the other claims. Subsequently, the transferring bank moved for summary judgment against the first beneficiary which was granted. The court also denied leave to amend the complaint.


Legal Analysis:

1. Ripeness: The transferring bank contended that the action was not ripe for adjudication because the credit had not been drawn nor had it expired and, being irrevocable, cannot be cancelled without the beneficiary's consent. Noting that the allegations in the complaint related to breach of an independent contract with the transferring bank and its breach of a duty of accurate transmission, the court ruled that: "irrespective of when the underlying letter of credit matures or whether it is still enforceable, [the beneficiaries'] alleged breach of contract and negligence claims have already accrued."

2. Advice; Contractual Relationship with the Beneficiary: While recognizing that "in the ususal letter of credit transaction there is no contract between the advising bank and the beneficiary", the court noted that the first beneficiary had alleged that a separate contract was created, thus giving rise to a cause of action under contract law and surviving a motion to dismiss for failure to state a cause of action.

3. Advice; Duty to Transfer Messages Accurately to the Issuer; Prior UCC Section 5- 107(1); UCP500 Article 7: The advising bank argued that as a matter of law "an advising bank does not have a duty to the beneficiary or intended beneficiary to transmit information accurately to the issuing bank", warranting dismissal of the beneficiary's negligence claim. The court noted that while Prior UCC Section 5-107 indicates that the adviser is responsible for the "accuracy of its own statement", the UCP does not impose a general duty of accuracy in its own statement. Under NY non-conforming Section 5-102(4), the court noted that because the credit was issued subject to the UCP, UCC Article 5 does not apply. The court noted, however, that:

Despite the absence of a duty of accurate transmission in the UCP, some New York courts have suggested in dicta that such a duty exists under New York law even when the UCP is controlling. See Merchants Bank of New York, 585 F. Supp. at 308 ("The advising bank ... assumes no liability to the party addressed, except liability for accurate transmission."); General Cable Ceat. S.A. v. Futura Trading Inc., No. 82 Civ. 1087, 1983 WL 1156, at *2 (S.D.N.Y. Jan. 17, 1983) (same); First Commercial Bank, 64 N.Y.2d at 296 (citing the U.C.C. for the proposition that an advising bank's only obligation is to convey accurate information of the issuance, amendment and terms and conditions of the credits to its beneficiaries). New York courts have also drawn analogies to the U.C.C. when the UCP is silent or ambiguous, so long as the provision is not in conflict with the purposes of the UCP. See Mennen v. J.P. Morgan & Co. Inc., 91 N.Y.2d 13, 22, 689 N.E.2d 869, 875, 666 N.Y.S.2d 975 (1997); 3Com Corp. v. Banco de Brasil S.A., No. 97 Civ. 3819, 1998 WL 161877, at *4 (S.D.N.Y. Apr. 3, 1998).

The court, however, found it unnecessary to reach this question because of the allegation of a special contractual relationship between the first beneficiary and the advising bank.

4. Negligent Misrepresentation by Adviser:The beneficiary alleged that the adviser had negligently misrepresented the communication to the transferee beneficiary to the issuer. The court noted that a claim for negligent misrepresentation requires an allegation that the plaintiff has relied on the statements alleged to constitute the misrepresentation. Since the claimed misrepresentation was made to the issuer and not to either of the beneficiaries, the court concluded that neither could have relied on it, requiring dismissal of the claim.

5. Expert Witnesses: The first beneficiary contended that the interpretation given by the transferring bank to the message from the second beneficiary's bank was unreasonable and that the transferring bank had an affirmative duty to seek verification before taking any action on the request. Both the transferring bank and the first beneficiary submitted affidavits from expert witnesses. Contending that no jury could find that it acted negligently in interpreting the message as calling for cancellation of the credit, transferring bank's experts indicated that the interpretation was reasonable and in accord with industry practice and custom.

In particular, [the transferring bank] contends that the return of a letter of credit along with a message that no action has been taken by the bank which is returning the letter of credit and where no reference is made to retransfering the letter of credit indicates that the sender intends to cancel the letter of credit

Recognizing that it was "highly unusual" to dismiss a negligence claim when reasonableness is at issue, the court indicated that dismissal may be appropriate "when the non-moving party fails to set forth any facts that could lead a rational jury to conclude that the moving party acted unreasonably." The court also noted that "while a court may not weigh the credibility of expert witnesses on a motion for summary judgment, a court also need not credit expert testimony where such testimony rests on pure speculation. ... Tellingly, however, plaintiff's expert does not assert that industry custom and practice would lead a bank to believe that ABL's return of the letter of credit along with the attached message was a refusal to advise."

6. Advice; Election not to Advise; UCP500 Article 7(a): The court noted that the transferring bank had submitted expert testimony that pursuant to UCP500 Article 7(a) a bank requested to advise a credit must inform the bank requesting it to do so without delay of its failure to do so. Noting that the transferring bank's expert suggested that such notice would be expected within one day and that no contradictory evidence was offered, it took the second beneficiary's correspondent three months to do so.

7. Reasonableness of Interpretation; International LC Practice; Cancellation: The first beneficiary contended that the transferring bank should have interpreted the Egyptian correspondent's message as a request to retransfer the credit. Labeling the contention as "purely speculative", the court noted that "presented no evidence that industry custom and practice would lead a bank to determine that the return of a letter of credit without a request to retransfer was, in fact, a request to retransfer the letter of credit." Recognizing the first beneficiary's argument that cancellation can only take place with the consent of the beneficiary, the court noted that the message indicated that the credit was being returned "per beneficiaries request".

Although [the first beneficiaries] contend that summary judgment is inappropriate because there is a material issue of fact as to whether [the transferring bank's] interpretation of the [Egyptian correspondent's] message was reasonable, [the first beneficiaries] offer no evidence as to how a bank acting in accordance with industry custom and practice would interpret the return of an original letter of credit 'as per beneficiaries request' without any action effected by the sender. [Their] expert merely concludes that, in his opinion, 'a bank in the position of [the transferring bank], would not have interpreted the message from [the Egyptian correspondent] as a request to cancel the letter of credit.' ... [The transferring bank], however, did interpret the message in precisely that fashion: [The first beneficiaries] cannot avoid summary judgment by setting forth other courses of conduct that [the transferring bank] could have taken without providing evidence that by taking the course that it did, [the transferring bank] acted unreasonably.

8. Duty to Consult: The court rejected the first beneficiary's argument that the transferring bank should have consulted with the second beneficiary and its correspondent bank:

As this Court noted in its December 22, 1998 Order, an advising bank's duties are limited. Although plaintiffs' expert opines in conclusory fashion that [the transferring bank] should have consulted with [the first beneficiary] or the [second beneficiary] before acting on [the second beneficiary's correspondent's] message, nowhere do [the first beneficiaries] provide legal support for the proposition that an advising bank has a legal obligation to inquire of a beneficiary to a letter of credit about the beneficiary's intent before acting on instructions. This is especially true here where the instructions themselves provided that they were 'per beneficiaries [sic] request.

9. Transfer; Effect on First Beneficiary: Concluding that the transferring bank had no duty to the first beneficiary after having effected a transfer of the whole credit, the court noted that the first beneficiary "was not even a party to the letter of credit at the time [the transferring bank] received the message." As result, even had it been aware of the intention of the second beneficiary, it had "no duty to 'watch out'" for the first beneficiary's interest.

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