Article

Factual Summary: To obtain a license as a bonded state warehouse, the operator caused a standby LC to be issued in favor of the Georgia State Department of Agriculture. The plaintiff guaranteed notes from the principal officer of the warehouse to the issuer as collateral. The LC stated that funds under the LC were available against sight drafts by the beneficiary, provided such drafts "shall be accompanied by an affidavit from the Director of the Warehouse Division of the beneficiary stating that the (applicant) has failed to perform the duties and obligations of a licensed state warehouseman."

The applicant's principal officer received cotton from three farmer-consignees, but failed to issue warehouse receipts to the consignees. The applicant's principal officer subsequently transferred electronic warehouse receipts (EWRs) to his trading company and, through his trading company, sold the EWRs to mills, and never paid the consignees.

Subsequently, the beneficiary forwarded a sight draft to the issuer demanding payment of US$ 262,500 accompanied by an affidavit and supporting documents.

On 31 July 1998, the guarantor filed action to enjoin payment of the draft presentation by the issuer on the grounds that: 1) the principal officer of the applicant- and not the applicant-sold the cotton without permission, and 2) the affidavits of the consignees had not been presented with the sight draft.

The trial court dismissed the guarantor's action. On appeal, affirmed.

Legal Analysis:

1. Presentation of Required Documents: The guarantor contended that the beneficiary failed to attach affidavits from the three consignees to the sight draft demand and therefore, the issuer should not have honored. Such affidavits were not required by the LC. Upon presentation of a sight draft and an affidavit from the beneficiary's Director of the Warehouse Division, the beneficiary complied with terms of the LC regarding presentation of required documents. The court stated that "the sole issue before the trial court and thus the sole issue on appeal, is whether the documents presented by (the beneficiary) to (the issuer) satisfied the prerequisites for payment on the letter of credit."

2. Independence Principle: Although the beneficiary may have breached the underlying contract with the applicant, the court noted that the issuer's obligation to the beneficiary is independent of the beneficiary's performance on the underlying contract. Since the guarantor's defenses were based on the law of bailment, the court stated:

[L]egal defenses under bailment law or the UCC are not defenses to the terms of the letter of credit. The UCC and bailment law are only relevant in determining what additional duties [the applicant] had other than under South Carolina Systems Law Section 39-22-10 et seq. Under the letter of credit. But all of these issues were [the guarantor's] legal defenses to any future suit on the guaranty. The reason that a letter of credit with its terms was required was to avoid such defenses in the first place.

Comment:

While the denial of injunctive relief is appropriate, the formulation of the issue and rationale is not. Whether the documents comply with the terms of the LC is irrelevant to whether an injunction in available. The proper question is whether there is extraordinary fraud that would warrant intervention in the issuer's obligations. Since there is no indication of such fraud, an injunction would not be justified even if the documents did not comply.

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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.