Article

Factual Summary: To secure performance of a contract to supply videophones, Seller caused its U.S. bank to issue a standby LC in the amount of $300,000 payable to the Buyer/Beneficiary, a Chinese company.

Claiming breach, Beneficiary drew on the LC. Issuer refused to honor the credit, noting discrepancies. Subsequently, the U.S.-based Applicant obtained a temporary restraining order ex parte in a Massachusetts court against Issuer and Beneficiary prohibiting drawing or payment. Prior to service of this order on Beneficiary or actual notice and before the expiration of the credit, Beneficiary made a representation, attempting to cure the discrepancies. On the date that a preliminary injunction was entered, Issuer notified Beneficiary that it would not honor the re-presentation due to the court order prohibiting payment.

Approximately 4 months later, Applicant's action against Beneficiary was dismissed, and the injunction dissolved. Beneficiary pursued arbitration against Applicant and prevailed. When it learned that the injunction had been dissolved three years after the re-presentation, Beneficiary demanded payment from Issuer, which was refused. Beneficiary then brought this action against Issuer for wrongful dishonor, misrepresentation, and deceptive trade practices under the law of the state of Massachusetts. The trial court entered summary judgment in favor of Beneficiary on the LC claim and in favor of Issuer on the misrepresentation and deceptive trade practices claims. On appeal, affirmed.

Legal Analysis:

1. Injunction, Effect on Unserved Beneficiary: Issuer argued that because the temporary restraining order was in effect on the date that the representation was made, it should be regarded as void, imposing no obligations on Issuer. The appellate court, however, agreed with the trial court that Beneficiary could not be bound by an order of which it had no notice. "We reject the [Issuer's] argument that the temporary restraining order was akin to the automatic stay in bankruptcy proceedings, a statutory creation that relaxes notice requirements in the service of certain policy objectives while replacing those requirements with other forms of protection. We conclude that [Beneficiary's] second presentation was not void, or otherwise affected, as a result of the restraint."

2. Injunction, Estoppel: The appellate court also concluded that by failing to inform Beneficiary that the presentation was void at the time that it refused the documents, Issuer "would be estopped from asserting subsequently that the presentation was void because its failure to state that as a ground for dishonor would have lulled [Beneficiary] into assuming that the bank acknowledged that presentation was valid," citing Prior UCC Article 5.

3. Injunction, Obligation of Issuer: The appellate court noted that "[p]ermissible grounds for rejecting otherwise complying documents calling for payment under a letter of credit are few." "Circumstances justifying nonpayment (and thus an injunction) generally require 'fraud so serious as to make it obviously pointless and unjust to permit the beneficiary to obtain the money.'" "There must be a showing that the beneficiary's conduct has been such that the legitimate purposes of enforcing the issuer's independent obligation will not be served."

4. Injunction, Obligation of Issuer; Expiration, Effect of Injunction: The appellate court stated that "[c]ommercial certainty calls for confidence on the part of the beneficiary of a letter of credit that, absent extraordinary circumstances, he will be paid upon presentation. The sole ground for nonpayment asserted by [Issuer] at the time of the second presentation was the restraining order (followed by the preliminary injunction). When the injunction was dissolved by virtue of the dismissal of [Applicant's] complaint, no impediment to payment remained. This was true notwithstanding that the letter of credit had expired." "While the injunction may have postponed the [Issuer's] obligation to make payment, it did not extinguish the obligation, and failure to make payment upon dissolution of the injunction was a wrongful dishonor."

5. Injunction, Obligation of Issuer: The appellate court observed that neither Issuer nor Beneficiary were aware that the injunction had been dissolved. While noting that Beneficiary "could have been more aggressive in keeping track of events affecting its interests, the balance of the burden must be allocated to the bank. The [Issuer] was not a mere stakeholder. The [Issuer] committed itself, presumably for consideration, to its customer [Applicant], and the [Issuer] promised the intended beneficiary ... that payment would be available on proper demand. In these circumstances, it was incumbent on [Issuer] to inform itself of the status of the injunction so that, upon the injunction's dissolution, it could make the payment it had promised."

6. Statute of Limitations; Laches: The court noted that the action was brought within the six year statute of limitations then applicable. It rejected Issuer's argument that the equitable doctrine of laches should prevent the claim without even considering whether laches is available because Issuer's "allegations that circumstances were such that it did not conduct its usual review of the presented documents, and that its collateral was jeopardized, are, if true, products of the [Issuer's] own choices and provide no basis for a laches defense."

7. Misrepresentation; Deceptive Trade Practices; Legal Advice: Beneficiary claimed that by informing it that the injunction that had been entered was in force when there was a hiatus of three days between the temporary restraining order and the entry of the preliminary injunction, and by informing it that the injunction was permanent, Issuer had made misrepresentations that were actionable in themselves or as an unfair trade practice under local law. The appellate court rejected these arguments. It noted that there was no evidence that Issuer knew that its statements were false or that Beneficiary had relied on them in view of having made a representation. The court also noted that the characterization of the preliminary injunction as "permanent" was based on a representation by Applicant's counsel, was more accurate than would be the case with a temporary restraining order in that it would remain in effect until lifted by the court, and that the bank had not undertaken to provide Beneficiary with legal advice.

Comments:

1. This decision reaches a proper result, although some of the reasoning is unsettling. Timely presentation of documents under a UCP500 LC requires that notice of refusal be given setting forth the reasons for refusal. If the only reason given is the existence of a court order, then the issuer is obligated to honor the credit when the injunction is lifted without regard to whether or not the credit has expired. Expiration only affects whether or not presentation is timely.

2. The appellate court indicated that the Issuer was "estopped" from asserting that the presentation was "void", while noting that its failure to do so would not affect the question of whether or not it was void. This aspect of the opinion is most confusing. The argument that the credit was void can only be addressed as a matter of law, the issue being whether or not the effect of an injunction that had been dissolved was to void a credit that fell within the scope of the injunction. As to the notice, it is hard to understand what effect claiming that the LC was void could have on the Issuer's obligations. If there were an injunction, or if the credit were void, it would make no difference if the issuer mentioned it or not. The doctrine of preclusion under UCP500 to which the LC was applicable would only operate on the ability of the issuer to assert that the documents did not comply with the terms and conditions of the credit, an issue which only became relevant when the injunction was dissolved.

3. This decision should serve as a lesson to bank counsel for situations in which an injunction has been entered. The lesson is that a timely presentation cannot be ignored and, notwithstanding the entry of an injunction or attachment order, any discrepancies should be noticed and timely refusal made. Absent such a step, the bank may find itself exposed when the injunction is lifted. While the decision does not raise the issue, banks should also be entitled to request judicial protection for extension of their obligations beyond the time in which they may have been expected to be exposed. In a situation such as the case at bar, the ability to pay the funds into the registry of the court and claim reimbursement from the applicant would be one possible course. While such a course is not justified in order to avoid the bank's examination of the documents and decision as to whether or not they comply, it may be appropriate where the court decides to enter a preliminary injunction.

4. The case is also a lesson for beneficiaries. Here, the 6-year statute had not run. Under Revised UCC Section 5-115, however, the statute of limitations is one year from the time that the claim accrues (at the time of dishonor in this case). In such a situation, a beneficiary may wish to require that a bond be posted protecting it from the running of the statute.

[JEB/rdhf]

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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.