Article

Factual Summary: To assure monthly payments for the sale of fibre optic preform during a five year purchase agreement, Applicant caused Issuer to issue a revolving commercial LC in favor of Japanese Beneficiary. The LC required presentation in India of documents including an airway bill. As issued, the LC indicated the name of the freight forwarder who was to issue the airway bill. This provision was amended twice, once to change the name to "Excel Japan, Ltd."

A subsequent amendment changed the term to "Excel Japan Limited or its successor, if any." The appellate court stated that "The word 'successor' was added because the prior freight forwarder...merged with Excel. As a result [Applicant] advised [Issuer] to amend the letter of credit to account for any other future mergers or asset sales."

After several months of deliveries, the freight forwarder informed Beneficiary that it had been instructed by Applicant not to accept further cargoes. Beneficiary informed Issuer that there was a dispute with Applicant and informed Issuer that it intended to appoint another freight forwarder "as the successor freight forwarder in accordance with the terms of the referenced letter of credit and the underlying Long Term Sale and Purchase Agreement between [Beneficiary] and [Applicant]." Issuer responded that this issue was between Beneficiary and Applicant and that it "would not accept a nomination that departed from the terms of the letter of credit" The appellate court noted that "the record shows, Unitrans was a different freight forwarder with no relationship to Exel." Issuer contacted Applicant "to ascertain whether it consented to payment if a discrepant shipper were named," and Applicant refused.

Subsequently, Beneficiary presented documents to Issuer including an airway bill "signed by an unidentified individual whose signature was preceded by the typewritten words, 'Unitrans Ltd. as Agent of Air India Ltd., carrier and as successor of Exel Japan Limited.'" Issuer refused this presentation on the ground that "the airway bill was to be 'issued by M/ S Exel Japan Ltd. However the same has been issued by Unitrans Ltd.'"

When efforts to resolve the dispute failed, Beneficiary filed this action against Issuer in New York state court for wrongful dishonor. Issuer answered, asserting various defenses but not fraud, and moved to dismiss on the grounds of forum non conveniens. Beneficiary opposed this motion and cross moved for summary judgment. Subsequently, Issuer moved to amend its answer, asserting fraud as a defense. The trial court denied Issuer's motion to dismiss and granted Beneficiary's motion for summary judgment. On appeal, reversed.

Legal Analysis:

1. Compliance; Airway Bill, "Successor": Describing the case as "relatively uncomplicated", the appellate court stated that the issue in the case was whether or not "the airway bill issued by 'Unitrans Ltd....as successor of Exel Japan Limited' complied with the letter of credit requiring an airway bill issued by 'Exel Japan Limited, or its successor, if any.'" It then stated that "it is unlikely that the issue can be resolved without the necessity of calling witnesses and solely on the basis of documentary evidence. Although the letter of credit is governed by the 378 Uniform Customs and Practice for Documentary Credits (UCP), the UCP does not cover every contingency and the meaning of the letter's terms will have to be determined by reference to the law governing the transaction. Since the letter of creditwas issued there, India is considered the place of performance and its law will determine the meaning of 'or its successor, if any.'"

2. Independence Principle; UCP500 Article 3; Strict Compliance: The appellate court, without reaching the merits of the case, noted that the trial court, in reaching the meaning of the term 'successor," relied on provisions of the underlying agreement which permitted Beneficiary "to nominate a freight forwarder under certain circumstances." The appellate court observed that the credit did not contain such a provision and invoked UCP500 Article 3 for the proposition that the credit is a separate transaction from the underlying sales contract. It indicated that compliance with the terms of the credit must be strict.

3. Forum Non Conveniens: The appellate court ruled that the trial court, while taking into account the adequacy of India as an alternative forum, "[i]gnored all of the other requisite factors, including that there be some factual connection between New York and the dispute." Considering the other factors, including the need for experts and other witnesses, the need to interpret Indian banking law, and the interest of India in resolving its own affairs, the appellate court concluded that the trial court erred in dismissing Issuer's motion to dismiss on grounds of forum non conveniens. The appellate court questioned whether the adequacy of the alternative forum was even a factor and noted that there was testimony that India had reformed its commercial law system to permit expedition of commercial cases.

Comments:

1. The appellate court's decision on forum non conveniens turns on its understanding of the resolution of the issue in the case at bar. That issue is one of documentary compliance. Although the court claims to invoke the independence principle in rejecting the trial court's reference to the underlying contract, one may wonder what principle it had in mind in stating that the resolution of the case required testimony of experts and fact witness that were peculiar to India. Unless the issue is one of fraud, the question is whether or not a document that on its face indicated that it was issued by a company as "successor of Exel Japan Limited" complied with a credit term requiring an airway bill issued by "Exel Japan Limited, or its successor, if any". Under the independence principle, that issue must be resolved by examining the document on its face. On its face, the answer is simple. It complies. There should be no need for expert testimony and, if expert testimony is required, it would be of standard international letter of credit practice, having nothing particular to do with Indian practice. Whatever the bank meant and whatever Indian law says, the issue is whether or not the document on its face complied. That the court would contemplate consideration of facts and Indian law indicates that the appellate court itself does not understand the nature and implications of the independence principle.

2. If the question is one of fraud, then matters change. With respect to that issue, however, the underlying contract is highly relevant. That the beneficiary has the right to nominate a successor makes it apparent that the claim to act under the credit as the successor to the named freight forwarder is not letter of credit fraud since there is a colorable basis for the claim that is consistent with the underlying contract. As such, one wonders whether the court properly reversed the trial court since it was mistaken in its evaluation of the factors involved.

[JEB/ees]

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