Article

Factual Summary: Applicant caused bank to issue a revolving LC to pay for the purchase of fiber optic cable for use in telecommunications from Beneficiary. By the terms of the sales contract, Applicant was required to notify Beneficiary of the name of the air carrier who was to deliver each month's shipment by the fifteenth of the previous month. As amended, the LC provided for the presentation of an "[a]irway bill/air consignment note issued by [primary carrier] or its successor, if any," in order to allow Beneficiary to name the carrier for the coming month if Applicant failed to do so within the allocated time.

Applicant had nominated the primary carrier for nine consecutive months, but, prior to the notification deadline for the tenth month, the primary carrier notified Beneficiary that Applicant had instructed it not to accept cargo until further notice. Beneficiary then named a second carrier for the coming shipment in a timely manner, notified Issuer by fax of the change, and shipped the goods and presented documents reflecting the newly nominated carrier. Issuer dishonored Beneficiary's presentation for noncompliance of the documents, arguing that the term "successor" in the language of the LC meant only a successor in interest and not a carrier that takes over delivery of the goods.

When Beneficiary sued Issuer for wrongful dishonor, Issuer moved for dismissal on the grounds of forum non conveniens, seeking to move the trial from New York to India, and introduced as an affirmative defense a claim of Beneficiary's fraud. In response, Beneficiary moved for summary judgment on the fraud charge. The court denied Issuer's motion for dismissal, and granted summary judgment for Beneficiary on the fraud claim.

Legal Analysis:

1. Forum Non Conveniens: Issuer argued that because it was an Indian bank that had issued the LC in India to pay for the shipment of goods from Japan to India, the case should be dismissed on the ground of forum non conveniens. Refusing to dismiss, the court noted that Issuer's stock traded on the NY Stock Exchange and that it had a NY representative who could be served, which constituted a "sufficient nexus between [Issuer] and New York to allow for the case to be heard in [New York]." Stating that the applicability of the doctrine of forum non conveniens turned on the consideration of "justice, fairness and convenience," the court considered factors such as the availability of another forum. In this respect, the court found the fifteen to twenty year lag in the Indian court system testified to by the beneficiary's expert to be so long that it would prevent justice.

Citing the Circuit Court's opinion in the similar case of Bhatnagar v. Surredra Overseas Ltd, 52 F.3d 1220 [3d Cir. 1995], the court noted that "at some point the prospective judicial remedy becomes so temporally remote that it is no remedy at all and may [be] ... so clearly unsatisfactor[y] as to be inadequate." The court stated that "[w]hile it is true that this action did not arise in New York State, our courts are competent to handle cases involving letter of credit issues, provided that they have jurisdiction over the defendant," and noted that "this case involves an interpretation of the language of a letter of credit and the court need only consider the relationship existing between the issuing bank and the beneficiary, independent of the commercial transaction giving rise to the credit."

2. Procedure; Summary Judgment: While noting that summary judgment is "drastic," the court observed that because "[p]arties to a letter of credit transaction deal in documents rather than with the facts the documents purport to reflect ... actions on letters of credit are well suited to determination on motion for summary judgment 'because they present solely legal issues related to the exchange of documents,'" quoting from Banque Worms v. Banque Commerciale Privee, 679 F.Supp. 1173 [SDNY 1988].

3. Independence from Underlying Contract: Issuer argued that there were outstanding issues of fact related to the underlying sales contract. The court rejected this argument, noting that "the issuer must honor a demand for payment under a letter of credit when the documents presented comply with its terms regardless of whether the goods conform to the underlying sales contract." (The court found that "[h]ere, [issuer's] obligation to pay under the letter of credit depended upon [beneficiary's] presentment of confirming documents."

4. Interpretation of LC Terms: Issuer argued that the substituted air carrier was not a "true successor" in interest to the primary carrier. The court rejected this interpretation of the LC, noting that "the plain language of the agreement provided that [beneficiary] could appoint a shipper for the following month if [applicant] failed to do so by the fifteenth day of the present month." The court also noted that such a narrow interpretation would allow the issuer "to refuse shipment at any point throughout the duration of its contract with [beneficiary]."

5. Ambiguity of LC Terms: In rejecting the issuer's narrow interpretation of the term "successor," the court noted that if a LC is "susceptible [to] two constructions, [and] if one interpretation mandates a fair result while the other leads to an inequitable result, the former interpretation is to be made."

Comment by Soh Chee Seng*: It is understandable why beneficiary elected to take action against the issuer in New York Supreme Court. The case involves an Indian Bank that had issued the LC in India for shipment of goods from Japan to India. As a foreigner, if you consider taking legal action against a bank in a third world country, you must first be very familiar with its court system. Though the case did not arise in New York, New York does have jurisdiction over the issue because of the issuer's presence on New York Stock Exchange. It is also important to know whether the Court is competent enough to handle cases involving letter of credit.

As the case illustrated, it involves an interpretation of a term in the LC. The LC provided for the presentation of air waybill or air consignment note issued by [primary carrier] or its successor, if any. The term "successor" is quite ambiguous.

Paragraph 2 of ISBP states "the applicant bears the risk of any ambiguity in its instructions to issue or amend a credit." As indicated by the Court in its rationale, where ambiguous, LC terms are to be construed in favor of the beneficiary.

[JEB/llh]

* Soh Chee Seng is Technical Consultant on Trade Finance Issues for the Association of Banks in Singapore and a regular participant in the Annual Survey of LC Law & Practice conference series.

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