Article

Factual Summary: To pay for the purchase of zippers, Buyer caused bank to issue an LC in favor of Seller/Beneficiary located in California, U.S.A. Beneficiary presented documents reflecting the delivery of the goods to Buyer in Kiev (Ukraine) by January 30, 1992 as required by the LC. Three months later, Issuer informed Beneficiary the Presidium of the Soviet Supreme had made a decision between issuance of the LC and performance on the underlying contract by delivery of the goods which required suspension of the funds required to honor the LC until further action was taken by the Russian Central Bank. The Beneficiary took no legal action at that time.

Beneficiary and Issuer corresponded by mail over the next nine years. During that time, Issuer first acknowledged its debt on the LC and subsequently alleged that the goods were never received. Issuer did, however, admit that the documents submitted by Beneficiary in January 1992 complied with the LC terms. Despite this admission, Issuer later informed Beneficiary that the documents did not comply with the LC terms and would not be honored, prompting the Beneficiary to bring this action for wrongful dishonor.

Issuer moved to dismiss because the Statute of Limitations had already run. That motion was converted to a motion for summary judgment, which the court granted. The court also granted summary judgment for Issuer on Beneficiary's claims for fraud, intentional infliction of emotional distress, and negligent infliction of emotional distress.

Legal Analysis:

1. Choice of Law: The court applied federal (U.S.) choice of law rules rather than those of California because the issuer was an agent or instrumentality of Russia, a sovereign state. Considering the Restatement (Second) of Conflicts of Law §188, the court looked to the "local law of the state which ... has the most significant relationship to the transaction" The court considered "the place of contracting, the place of negotiation of the contract, the place of performance, the location of the subject matter of the contract, the domicile, residence, nationality, place of incorporation and place of business of the parties" in determining the state with the most significant relationship to the transaction. Concluding that Russian law should be applied, the court noted that "Russian law imposes a three year statute of limitations and does not allow parties to contractually change the statute of limitations."

2. Amendment: The beneficiary argued that the credit was amended by virtue of the issuer's subsequent acknowledgment in correspondence that the debt existed. The court rejected this contention, noting that the putative amendment was not "complete and precise" as required by UCP400 Article 5.

3. Expiration Date: The court noted that the LC contained an expiration date of January 30, 1992. While the issuer argued that the breach of its LC obligation occurred on this expiration date, the beneficiary argued that the alleged amendment would have modified the LC to have an open expiration date. Concluding that the admission of the outstanding obligation by the issuer was not an amendment, the court also noted that UCP400 Article 46(a) required an LC to contain an expiration date. Citing with approval 3 Com Corp. v. Banco de Brasil, the court stated "[t]he complete absence of an expiration date is fatal to [the beneficiary's] argument that the ... letter constituted a valid modified [LC]."

4. Statute of Limitations, Accrual: The beneficiary argued that breach did not occur until 2001, when the issuer finally refused payment. The court stated that for purposes of determining when the three-year Russian Statute of Limitations began to run, the accrual was "January 30, 1992, when the [LC] expired without [the beneficiary] receiving payment" and ruled that the beneficiary's claim was barred because more than three years had passed since the accrual.

5. Fraud: The beneficiary alleged that the issuer knew prior to shipment that the Soviet decision would prevent payment on the LC and yet intentionally encouraged the beneficiary to ship the goods in reliance on the LC. The court granted summary judgment for the issuer because the claim was barred by California's three-year Statute of Limitations, applying California law to the fraud claim and the other tort claims as agreed to by the parties. The Statute started to run as soon as the beneficiary had inquiry notice of the potential fraud, which was given by the issuer's divulgence that the Soviet decision to withhold funds was made before the beneficiary had shipped the goods. The court determined that this information provided the beneficiary with sufficient "notice or information of circumstances [constituting fraud] to put a reasonable person on inquiry."

6. Fraudulent Misrepresentation and Emotional Distress: The beneficiary also argued that the issuer continuously deceived and mislead the beneficiary by promising that the LC would be honored, which resulted in beneficiary's failure to bring suit within the statutory period. The court granted summary judgment for the issuer on this claim, noting that because the beneficiary failed to state any reliance on the issuer's claim that the LC would be honored, the beneficiary had not met one of the requisite elements needed to prove fraudulent misrepresentation. The court further held that a claim of misrepresentation would not cause the Statute of Limitations to be tolled (suspended) during the time the misrepresentation allegedly occured because "fraud in concealing a cause of action ... tolls the applicable statute of limitations, but only for that period during which the claim is undiscovered by plaintiff or until such time as plaintiff, by the exercise of reasonable diligence, should have discovered it." Having failed to exercise reasonable diligence, the court concluded that the beneficiary was not entitled to claim that the running of the statute was tolled. The court also noted that claims for emotional distress are "generally not available where the alleged wrongdoing results only in economic injury to the plaintiff."

Comments:

1. Revocation: As an additional reason that the issuer's letter acknowledging the LC obligation did not constitute an amendment to the LC, the court cited UCP400 Article 7(b), which states that LCs "'should clearly indicate whether the credit is revocable or irrevocable." The court noted that the issuer's letter "does not expressly state whether the credit is revocable or irrevocable. [Issuer's] indication that payment would be made when available funds [were] provided by the Central Bank of Russia, but with no assurance such funds would ever be given, is decidedly ambiguous as to whether there is any irrevocable obligation, in violation of Article 7(b)."

This analysis is flawed. If the letter of acknowledgment were deemed to be an amendment to the letter of credit, the absence of an indication that it was irrevocable would result in the credit being revocable under UCP400's default rule contained in Article 7(c). However, we are discussing an amendment to an irrevocable credit. If the letter were an amendment that neither explicitly altered the irrevocable character of the credit as issued nor expressly stated that all other terms and conditions remain the same unless changed, it would be deemed to continue to be irrevocable. As it turns out, this letter should not have been regarded as an amendment, as the court concluded for other reasons.

2. Accrual of the Statute of Limitations: The court's solution to the accrual of the statute of limitations issue is interesting. The court concluded that the statute began to run when the credit expired. By having failed to honor the credit, the issuer would be deemed to be liable on it after a reasonable time for examination of the documents. At that point, the issuer's obligation arose and it is at that point that the statute of limitations would have begun to run and not at the later time at which the credit expired, because it was at the earlier point that it was obligated on the credit to pay.

[JEB/llh]

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