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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2003 LC CASE SUMMARIES 62 Fed. Appx. 401; 2003 U.S. App. LEXIS 8615 [U.S.A.]
Full Text at 2004 Annual Survey 378.
Topic:Strict Compliance; Agency; Waiver; Estoppel; Non-Bank Issuance; Non- Documentary Conditions; Fraud; RICO; Conspiracy; Collusion; Misrepresentation
Type of Lawsuit: Beneficiary sued Non-Bank Issuer for fraudulent misrepresentation and a related conspiracy, conversion, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO").
Parties:
Plaintiffs/Appellants/Sellers/Beneficiaries- Win Spark Trading Company; Pearl Textiles Far East, Ltd.; Truebright Company Ltd. (Counsel: John Weber, Brooklyn, New York)
Defendant/Appellee/Buyer/Applicant- Periscope Sportwear, Inc. (Counsel: John P. Amato of Han & Hessen, LLP, New York, New York)
Defendant/Appellee/Non-Bank Issuer- Century Business Credit Corp.
Underlying Transaction: The sale of clothing.
LC: Silent as to amount and governing rules.
Decision: The U.S. Court of Appeals for the Second Circuit, Van Graafeiland, J., Miner, J., and Pooler, J., in a per curiam opinion, affirmed the judgment of the U.S. District Court for the Southern District of New York, Rakoff, J., dismissing the Beneficiaries' case with prejudice.
Rationale: Absent allegations of facts showing a conspiracy to commit fraud by the Issuer or collusion between Applicant and Issuer, the doctrine of strict compliance governs the obligation of an Issuer, regardless of promises made by Applicant to Beneficiary.
Prior History: Win Spark Trading Co. v. Century Business Credit Corp., 2002 U.S. Dist. LEXIS 10949 (S.D.N.Y. June 12, 2002) abstracted at 2003 Annual Survey 297.
Article
Factual Summary: In three actions that were consolidated, three Beneficiaries sued Non-Bank Issuer of a LC and Applicant related to the sale of clothing exported from Hong Kong to the U.S. for its failure to honor a letter of credit on theories of fraudulent misrepresentation, conspiracy, and violation of the RICO statute against organized crime.
The LC provided that it "would not be honored unless the Beneficiary first made the shipment available for inspection by one of [Issuer's] officers." Although the Beneficiaries shipped the goods, they had failed to comply with the inspection clause in the LC. Although the Applicant promised that the clause would be waived, it was not, and, when nonconforming documents were presented, Issuer dishonored. Applicant sold the goods but became insolvent. Beneficiaries then brought an action against the Non-Bank Issuer for fraudulent misrepresentation, conspiracy, conversion, and RICO violations. As a matter of law, the trial court granted the Issuer's motion for summary judgment. On appeal, affirmed.
Legal Analysis:
1. Strict Compliance: The appellate court noted that Beneficiaries admitted that they had failed to comply fully with the express terms and conditions of the LC. In affirming the District Court's dismissal of the Plaintiffs/Beneficiaries' fraud-based claims, the appellate court ruled that the duty of the Issuer to pay on the LC only arises if the terms of the LC are complied with strictly.
2. Misrepresentation/Collusion: Beneficiaries alleged that Applicant acted in collusion with Issuer to intentionally misrepresent that the "payment authorization clause" would be waived. The appellate court further found that there were no facts alleged showing collusion between the Issuer and Applicant designed to falsely induce Beneficiary to believe that the LC would be altered as to documentary requirements or that Applicant was acting as Issuer's agent.
Comments:
1. Non-Bank Issuance. The credit in the case at bar was issued by a non-bank. While such credits are proper in the US if not issued by the beneficiary, not all non-bank LC issuers are equal (just as it is true that not all bank issuers are equal). Of particular concern is the professionalism of a non-bank issuer with respect to issuance of the credit and examination of the documents. In this case, it appears that both concerns would be justified.
2. Conditions that Cannot Be Fulfilled by the Beneficiary. The credit in the case at bar contained a most unusual condition. While not representing good practice, it sometimes occurs that a credit will contain a provision requiring an approval by the applicant as a document under the credit. Such a provision, in effect, defeats the ability of the beneficiary to obtain complying documents if the applicant elects not to cooperate unless the beneficiary is able to obtain a timely mandatory injunction. In this case, however, the condition was that the issuer inspect the goods. It is not alleged that the beneficiary tendered the goods and the issuer refused to inspect them, and we are left to wonder what happened.
3. Non-Documentary Condition. There is no indication as to whether this credit was issued subject to UCP500. Even if not, it was probably subject to Revised UCC Article 5. In either event, a nondocumentary condition would be disregarded. While it is not clear from the opinion how the condition regarding making the goods available for inspection was worded, the text seems to suggest that it was non-documentary. In that event, it should have been disregarded.
4. One is also left to wonder how the applicant obtained the goods. If a bill of lading was forwarded to the applicant by the issuer, it should be precluded from asserting that the documents did not comply. If not, the beneficiary had no security and mistakenly placed its trust in an LC with conditions that it should have realized could not be fulfilled.
[JEB/ees]
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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.