Article

Factual Summary: Bank issued an LC in the amount of US$250,000,000. The credit was sent by telefax directly to Beneficiary and also advised through U.S. Advising Bank. [The Opinion uses the term "confirming" with respect to this notice, but its context suggests that there was no confirmation.]

The Opinion then discusses arrangements between Beneficiary and third parties, whose relationship to the underlying transaction and credit are unclear. The discussion relates to "funding" the LC. The Opinion states that Beneficiary "delivered to [Issuer] the documents that were stipulated in the agreement with [Co-Plaintiff, who was not a party to the LC] as the documents that were required under the letter of credit." Assuming that the transaction is not fraudulent, what it may mean is that Beneficiary required funding in order to perform under the credit.

The Opinion recites that Beneficiary "instructed" the "Chief of the International Department of [Issuer], to 'set off ' the agreed-upon increments of $ 25,000,000 and to remit them to [Beneficiary] as directed." It also told Issuer that it was required "to submit a 'pre-advice' letter to plaintiff's counsel for review. [Beneficiary] provided [Issuer] with an exemplar of the required 'pre-advice' letter, as well as the exact text of each incremental letter of credit (valued at $ 25,000,000) that was to be 'drawn under' the original letter of credit issued by [Issuer]."

In an Affidavit, the Beneficiary's President stated that it "was ready, willing, and able to perform its obligations under the letter of credit."

Demands for US$ 25,000,000 were regularly made and not honored. It is unclear from the Opinion whether they were dishonored or ignored, but the latter seems more likely. Prior to its expiration, Issuer "informed [Beneficiary] that the letter of credit had been cancelled. The cancellation of the letter of credit was effected without plaintiff's consent and prior to the expiration date ...."

Claiming anticipatory breach due to the cancellation, Beneficiary brought this action against Issuer, which failed to appear or answer. A default judgment was entered against Issuer and the case was referred to a Magistrate to determine damages. Damages of US$ 100,000,000 plus prejudgment interest were recommended. Beneficiary's request for costs was denied.

Legal Analysis:

1. UCP500; Prior New York Section 5-103(4): Interpreting New York law prior to Revised UCC Article 5 coming into force, the Magistrate stated that, "[a]lthough the UCP is not law, its provisions have binding force when the UCP is expressly incorporated into a letter of credit." While he noted that LCs subject to the UCP do not fall under New York's version of Prior Article 5 pursuant to New York Section 5-103(4), "[n]evertheless, New York courts often rely on provisions of Article 5 of the UCC, provided they are not in conflict with the UCP, concerning matters for which the UCP contains no explicit provisions."

2. Cancellation: The Magistrate concluded that "cancellation of the letter of credit prior to the date of its expiration, and without the consent of the plaintiff, constituted anticipatory breach of contract."

3. Damages: The Magistrate stated that Beneficiary was entitled to the full face value of the credit on anticipatory breach. Noting that the Beneficiary only sought damages of US$ 100,000,000, that amount was recommended.

4. Interest: On request by the Beneficiary, the Magistrate recommended an award of interest at the New York statutory prejudgment rate of 9% from the date on which the cancellation occurred.

5. Incidental Damages: Beneficiary requested incidental damages, but they were denied since no documentation was submitted to substantiate the claim.

Comments:

1. This Opinion leaves many questions unanswered and raises others. Without the text of the credit, things are even more murky. The major question is what the beneficiary was doing. It is unclear how it could demand that the issuer send a pre-advice of a credit that it had already issued. Nor is the role of the other co-plaintiff clear. This party apparently offered to "fund" the credit by causing a nominated bank to "accept and fund" the credit. Perhaps what is meant is that a bank would be sought that would loan funds based on the credit.

2. Even more unclear is whether the documents presented complied with the credit that was issued. The Opinion states that they complied with the agreement with this third party who was to assist in funding the credit. Whatever agreement was in existence, it could have had no effect on the credit as issued.

3. Since the issuer was not represented and did not answer, the answers to these questions cannot be determined. Given the enormous amount of the credit and the non-appearance of the issuer, the suspicion arises that there is a fraud afoot. The only major reason to doubt this conclusion is the reported advise from Chase Manhattan and the fact that the issuer informed the beneficiary that it was cancelled.

4. If the credit was issued and if some demand was made, it is unclear why there was no notice of refusal pursuant to UCP500 Article 14. Perhaps there was one that was not mentioned.

5. On the issues of damages and prejudgment interest, the Opinion is correct, but as to incremental damages, it is not. While it is unclear what damages are intended, LC law is quite clear that the liability of the issuer is limited to the face amount of the credit. That the beneficiary only chose to claim US$ 100,000,000 out of a credit for US$ 250,000,000 is another mystery, but, for purposes of whether incremental damages can be permitted, is beside the point.

[JEB/fkd]

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