Article

Factual Summary: To assure payment of the purchase price of a floating dry dock, Buyer arranged for issuance of a commercial letter of credit for US$27,581,000 payable to Seller. This credit was advised through Seller's bank which was nominated to negotiate.

To assure performance of the contract, Seller's bank issued a standby letter of credit payable to Buyer in the same amount. This standby was confirmed by the bank's New York branch.

The standby was structured to serve as a performance standby for 95% of the amount and to be reduced by 95% on presentation of a certificate of substantial completion issued by Seller and purportedly containing the counter-signature of an officer of Buyer. The standby then provided that 5% would be available without amendment from the date of substantial completion as indicated on the certificate or from the expiration date but only if payments of at least US$25,851,950 had been made.

The relevant text of the standby provided:

This standby letter of credit, shall be reduced by 95 percent ... (USD26,201,950), upon presentation to issuing bank by account party of a certificate of substantial completion countersigned by a purported authorized officer of the beneficiary. Reduction shall be in the form of an amendment with the original sent to the beneficiary through advising bank.

This letter of credit, in the amount of 5 percent ... (USD1,379,050) shall be extended [the "extension"] without amendment for one year from the expiration date [being August 30, 2000] or the date of substantial completion upon presentation by account party of the certificate of substantial completion countersigned by a purported authorized officer of the beneficiary, or any future expiration date that is consistent with the performance and warranty requirements in the contract between the beneficiary and account party without notice from us, provided that the extension shall only become effective after payments, aggregating to not less than ... (USD25,851,950) have been made to the account party under the letter of credit ... issued in favor of the account party for the account of the beneficiary in connection with the supply of the ... dry dock to the beneficiary. In no event shall this standby letter of credit be extended for a period longer than eighteen (18) months past the date appearing on the signed certificate of substantial completion.

Issuer's employee indicated in an email that "the cumulative result of these extensions would be that the letter of credit would be 'extended for a ... 18- month period (ie ... counting from September 1, 2000')." A subsequent email by this same employee, however, stated that "Only US$19,306,000 have been paid via the [commercial letter of credit to Seller]. Consequently the 5% (US$ 1,379,050) liability under our [standby letter of credit] is not yet effective 258 according to the [standby letter of credit's] terms. As towing of the drydock to the USA just started yesterday and it will take about 3 months' time[,] we do not expect further payment (except for the 8th payment which is being handled under negotiation) from the USA before November 2000 and our 5% liability will not be effective before then." Apparently, subsequent payments were insufficient to meet the approximately US$25.8 million called for under the commercial LC. On the expiration date, the standby was cancelled.

One year later, Buyer demanded payment on the standby and payment was refused due to the expiration of the credit. Buyer then brought this action for wrongful dishonor, breach of contract, breach of fiduciary duty, and negligence. Confirmer moved for summary judgment. The trial court granted summary judgment for Confirmer on the grounds of breach of fiduciary duty and negligence, but denied it on the claims of breach of contract and wrongful dishonor. On motion by Confirmer for reconsideration, denied.

Legal Analysis:

1. Summary Judgment: The court noted that "[u]nlike typical contract disputes, the interpretation of letters of credit are generally well suited for summary judgment determinations."

2. Pleading; Procedure, Breach of Contract Claim; Contract Claim: In its opinion, the court noted that "[a] claim of wrongful dishonor is nearly identical to a breach of contract claim," and treated them together. On Confirmer's Motion for Reconsideration, the court restated its position, concluding that only the action for wrongful dishonor survived. It noted that "there are a number of significant substantive differences" between an action for breach of contract and for wrongful dishonor, but stated that "for purposes of determining whether an ambiguity exists, however, such differences are insignificant."

3. Construction and Interpretation; Precision. The court noted that a corollary of the rule of strict construction of LC terms was the requirement that "the terms of the letter to be precise and unequivocal, so as to notify the beneficiary of what is necessary to obtain payment."

4. Ambiguity; Construction: The court stated that "[w]hen an ambiguity exists in a letter of credit, it is to be construed against the drafter."

5. Ambiguity; Construction: However the court noted that "the beneficiary has a duty to 'inspect the letter of credit and is responsible for any negligent failure to discover that the credit does not achieve the desired commercial ends'", quoting from Mutual Export Corp. v. Westpac Banking Corp., 983 F.2d 420, 423 (2d Cir. 1993).

6. Construction; Contract Law: After delineating the principles of interpretation and construction of letters of credit, including strict compliance, requirement of precision, independence, construction against the drafter, and a duty on the part of the beneficiary to clarify terms, the court noted that "where these princip[le]s are insufficient to resolve a dispute, they may be supplemented with 'traditional principles of contract interpretation' so long as they do not conflict with letter of credit law", quoting from Ocean Rig ASA v. Safra National Bank of New York, 72 F. Supp.2d 193, 198 (S.D.N.Y. 1999).

7. Ambiguity: The court ruled that the standby was ambiguous even though it was uncontested that 95% of the credit expired. As to the balance, the court noted that it was "unclear" whether the payment of $25,581,950 was required prior to the expiration date for the extension to operate. The court indicated that it would not decide this issue "until the parties establish a more complete record with regard to the parties' intent, relevant trade practices and prior relations of the parties, if any."

8. Fiduciary Duty: Beneficiary argued that "it reposed trust in [Confirmer] to conduct an unbiased review of the documents. Moreover, [Beneficiary] claim[s] that [Confirmer]'s position as both issuing and confirming bank placed [Beneficiary] at the mercy of [Confirmer], who [Beneficiary] w[as] forced to trust." The court rejected this argument. Noting that there was a degree of trust required, it also noted that "there is no difference between the trust reposed in [Confirmer] in this transaction and the requisite trust of any two sophisticated entities negotiating at arm's length in any other commercial transaction."

9. Negligence: Beneficiary argued that bank abandoned its role as confirming bank and improperly relied upon its Shanghai branch to determine the validity of the LC. The court rejected this claim, noting that a legal duty must be shown to exist independently from the duties imposed by the LC in order to show negligence.

10. Good Faith; Rev. Section 5-102(7): Confirmer argued on its motion for reconsideration that, although Rev. UCC Section 5-102(7) does define "good faith" and there may be a duty of good faith in the dealings of the parties to a letter of credit, the statute "does not create a cause of action" based on breach of a good faith duty.

Comments:

1. The court's statement of principles of LC construction are partially encouraging and partially discouraging. The recognition of the importance of precision is helpful. The rule of construction against the drafter is only partially helpful because it does not expressly recognize that the drafter in the case of LCs is the issuer or confirmer whose undertaking it is. An inquiry into who originally proposed the term at issue is not only contrary to the independent character of the LC, but invites exploration of issues linked to the underlying contract such as the intent of the parties. The construction of the LC should be based on how it would be objectively understood in the LC community. Likewise, the suggestion that the beneficiary has a duty to "inspect" the LC which in some manner grants the issuer license to issue and take advantage of ambiguities in its undertakings is not sound law. The beneficiary is stuck with any terms in the LC that are clear but cannot be performed. It should not be stuck with lack of professionalism on the part of the issuer or confirmer in issuing a LC with ambiguous terms. Where an LC contains such terms, the beneficiary should be able to draw in any manner that represents a commercially viable interpretation. The final statement to the effect that, as a matter of final recourse, recourse should be had to general principles of contract interpretation is only partially saved by the qualifier that they must not conflict with letter of credit law.

2. As to the substantive issues in the case, it is understandable that the court is reluctant to enter summary judgment. One wonders, however, what insight can possibly be gained from a determination of the parties' intent. As to relevant trade practices and the prior relations of the parties, one wonders if the court is talking about the buyer and seller or the bank and the beneficiary. The only practices and relations that are possibly relevant to the meaning of the standby are those of LC practice and the bank/ beneficiary relationship. One gets the impression, however, that the court is thinking in terms of the factors that one would consider in interpreting a sales contract.

3. As to the terms of the standby, one is forced to consider the expiration date. It appears to have been extended twice by amendment. When the final date arrived, the issue was whether or not there was a further extension. It would appear that such a further extension could have been effected in one of two ways: 1) a further amendment or 2) by operation of the terms of the credit. There was no further amendment. Therefore, one must look to the terms of the credit as amended. There is no indication that the 95% reduction had occurred by the time that the credit expired. The clause quoted by the court is problematic. Ignoring the provisions on the substantial completion certificate and those consistent with the performance and warranty requirements (which appear to be non documentary conditions), the clause provides for extension on expiry but only if the minimum payment has been made under the commercial credit. This provision is not a non documentary condition since it is under the control of Bath Iron Works Corp. v. West LB AG con't 260 the bank, but it is one that is out of the control of the beneficiary since it cannot control a drawing on the commercial credit.

4. One wonders whether this credit had been extended and was still available. If it is still available, there is some merit to considering the ambiguity and construing it against the confirmer and issuer. It would also be interesting to know whether the payment was eventually made in the required amount during the next year. If so, one must investigate the allegedly discrepant presentation before the first anniversary of the expiration date and consider whether the credit was automatically extended for another period.

[JEB/sdw]

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