Article

Factual Summary: Contractor, a Maryland corporation, agreed to provide an airport radar system for a Peruvian Government Agency. The contract required that Contractor provide a Completion Bond issued by Local Bank naming Governmental Agency as the Beneficiary in the amount of US$11,942,016.80. It provided that Beneficiary "could only exercise the [Completion Bond] if [Applicant] did not perform its obligations under the Contract."

To assure reimbursement of Local Bank in the event of a drawing of its Completion Bond, Contractor/Applicant obtained a standby LC payable to Local Bank for the same amount as the undertaking issued by an international bank. Contractor agreed with International Bank that "should [Local Bank] be required to pay out the Completion Bond to [Governmental Agency]" and cause International Bank "to pay out the LC to [Local Bank], [International Bank] would debit from [Applicant's] account the amount paid to [Local Bank]."

At the request of Contractor/Applicant, first International Bank sent the following message to Local Bank:

"On our behalf and full responsibility please issue your letter of guarantee in favor of [the (Governmental Agency)] for account of [(Contractor)] ... Your guarantee must be effective from December 30, 1996 and include the following wording in Spanish: '

[Exact wording of the completion bond which (Local Bank) issued].'

Our counter guarantee in your favor ... under which we irrevocably and unconditionally undertake to reimburse you against your first demand by tested telex or swift message for any amount up to [the value of the completion bond] indicating that you have been required by beneficiaries to pay under your letter of guarantee."

On the basis of this undertaking, Local Bank issued its Completion Bond subject to the law of Peru which provided that it was "'solidary, unconditional, irrevocable, on demand and without waiver of excussio benefits ... with respect to faithful compliance with the contract." The opinion explained the meaning of "excussio" in a footnote as follows:

"'Under civil law, excussion is defined as a diligent prosecution of a remedy against a debtor or the exhaustion of a remedy against a principal debtor prior to resorting to his sureties. The literal translation of excussio is discussion.' Federal Deposit Ins. Corp. v. Consolidated Mortg. & Finance Corp., 691 F. Supp. 557, 565 (D.P.R. 1988) (citing Black's Law Dictionary 509 (5th ed. 1979))." The documents before the court also indicated that under Peruvian law the Government Agency could only exercise the bond if the Contractor failed to perform its contractual obligations.

At some point, first International Bank's undertaking was replaced by a standby letter of credit issued by replacement International Bank. Its standby provided that:

"This standby letter of credit is issued as our counter guarantee to your letter of guarantee ... in favor of [the (Governmental Agency)] ... and replaces (Original Issuer) Letter of Credit ... presently issued in your favor as a counter guarantee to your letter of guarantee.

The (International Bank) hereby irrevocably and unconditionally undertake [sic] to reimburse you against your first demand by authenticated telex or swift message for any amount up to USD11,942,016.80 indicating that you have been required by beneficiaries to pay under your letter of guarantee."

Thus, as summarized by the court, "should [Local Bank] be required to pay out the Completion Bond to [Governmental Agency]" and cause International Bank "to pay out the LC to [Local Bank], [International Bank] would debit from [Applicant's] account the amount paid to [Local Bank]."

According to the contract, Governmental Agency was to accept the radar system in two phases: "First, there would be a preliminary technical acceptance when the system was installed and operations began, and second, there would be a 'final' acceptance beginning thirty days after technical acceptance which would indicate that the system was in full compliance with the Contract's terms."

When Contractor/Applicant sought to obtain final acceptance, Governmental Agency refused to issue it whereupon Contractor terminated the contract and attempted to initiate required dispute resolution procedures.

At this stage, Governmental Agency contacted Local Bank requesting that the Completion Bond be extended for three months. If it was not extended within 48 hours, the Government Agency stated that "it must be executed in favor of [Government Agency]."

In response to this extend or pay request, Local Bank telexed International Bank:

"Unless you extend maturity date of your stand by letter of credit ... we have to execute your referenced stand by L/C and stating that we have been required by beneficiaries to pay under our letter of guarantee.

Therefore, we are claiming payment ... to be credited to our account ...

Kindly advise extension or confirm payment."

There followed a series of communications between the various parties, including allegations by the Local Bank that it had been required by beneficiaries to pay and claiming reimbursement ("'we have been required by [Governmental Agency] to pay under our [Completion Bond]' and therefore 'are claiming payment of your stand by'"), allegations that no payment had been made, and allegations that the Government Agency had suspended its drawing pending conciliation.

Contractor/Applicant entered into the dispute resolution procedure "'upon information and belief' that ... [Governmental Agency] had not attempted to draw upon the completion bond and [Local Bank] had not paid the proceeds of the completion bond to [Governmental Agency]."

Contractor/Applicant brought an action against Local Bank in the New York state courts claiming LC fraud, common law fraud, and conversion in that Local Bank made a material misrepresentation in calling for payment on the standby backing its local undertaking. Contractor/Applicant also sought and obtained an ex parte Temporary Restraining against Local Bank that enjoined Local Bank "and all those acting in concert with it" from honoring its local undertaking. This order was continued and converted into a preliminary injunction until Local Bank was served almost six months later at which time Local Bank had the action removed to US Federal Courts. Local Bank then moved to have the Complaint dismissed for failure to allege personal jurisdiction. The trial court granted Local Bank's motion and dismissed the action.

Legal Analysis:

1. Jurisdiction; Personal Jurisdiction: Contractor/Applicant claimed that New York had jurisdiction over Local Bank under several statutes. First, it claimed general jurisdiction because Local Bank was engaged in a "continuous and systematic" course of doing business in New York. In considering this factor, the court indicated that New York courts look to "a traditional set of indicia: for example, whether the company has an office in the state, whether it has any bank accounts or other property in the state, whether it has a phone listing in the state, whether it does public relations work there, and whether it has individuals permanently located in the state to promote its interests."

The only contacts alleged by Contractor/Applicant were an indication in an Annual Report, the availability of an interactive website, sale of its securities, and correspondent banking relationships with New York banks with which accounts are maintained. Noting that Local Bank is not authorized to do business in New York and a sworn statement by an officer of the bank that it has no office or employee in New York, the court suggested that the vague reference to an office in New York was not sufficient to confer jurisdiction. It also noted that website accessibility is not sufficient, nor are general statements regarding investments by US citizens without a showing of the number or percentage of New York investors. In addition, the court indicated that the existence of a correspondent banking relationship does not subject a foreign bank to New York jurisdiction. The court also rejected Contractor's allegation that Local Bank was a "mere department" of its parent bank which did business in New York. The court concluded that the relationships between the two organizations did not indicated that the allegations made by Contractor fell short of sufficient allegations of the requisite degree of control.

Contractor/Applicant also alleged that jurisdiction was available under New York's long arm statute which confers jurisdiction on persons who are non-domiciliaries but who commit certain tortuous acts within the state or, in some cases outside the state. The court noted that Contractor failed to allege that the telexes from Local Bank to International Bank were sent from New York. Proceeding on the assumption that the telexes were sent from Peru where Local Bank does business, the court noted that there were no allegations that Contractor would experience harm in New York. "Thus, the underlying events have little, if any, connection to New York ... ." "Rather than demonstrating any direct injury, insofar as [Contractor] suffered any 'injury' in New York, it was through either the [Government Agency's] demand for payment under the completion bond, an integral part of the Contract entered into by [Contractor] and the [Government Agency] or through [Local Bank's] failure to exercise its role properly as contemplated under that Contract. These facts strongly cut against [Contractor's] argument that the injury somehow occurred in New York because they demonstrate a 'purely fortuitous' connection to New York." In addition, the court noted that conferring jurisdiction based on where payment is to be made creates a result which is arbitrary and not acceptable.

Moreover, the court also determined that even if Contractor's allegations were sufficient under New York law, they would fail the US Constitutional requirement of due process. While the court noted that there were sufficient minimum contacts to meet this test, the assertion of jurisdiction did not comport with traditional notions of fair play because defending the suit in New York would place a considerable burden on Local Bank, New York has little interest in adjudicating the dispute since Contractor is not a New York corporation, Peruvian law is applicable to the determination of the underlying contract and the propriety of any drawing on the standby and the completion bond. Contractor assumed the risks of doing business in Peru, and most of the essential witnesses and documents are in Peru. In addition, the court concluded that the interests of Peru outweighed those of New York.

[JEB/jcs]

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