Article

Factual Summary: Buyer contracted with Beneficiary for purchase of 756 metric tons of seamless steel pipe on behalf of Surety/Applicant and to have the pipe shipped to Mobile, Alabama, U.S.A. Buyer also arranged for Freight Forwarder to transport the pipe from Mobile to Doha, Qatar. Buyer was required to pay by means of a commercial LC.

Unable to obtain an LC, Buyer turned to Surety/ Applicant, who applied for and obtained an LC in the amount of US$656,756 in favor of Beneficiary. Beneficiary, however, refused to ship the goods because "some of the terms of that [LC] were not acceptable to [Beneficiary]." When amendments were obtained, Beneficiary shipped the goods to Mobile. Among other things, the LC required presentation of a dock receipt issued by the "Mobile Port Authority, Alabama." Beneficiary made two presentations under the LC, and was paid.

At the instruction of Buyer, Freight Forwarder arranged for the pipe to be shipped to Doha.

Surety/Applicant became dissatisfied with Buyer during the course of events, and ordered that the pipe not be shipped outside the U.S.A. When the pipe was shipped to Doha, Surety/Applicant sued Beneficiary for breach of its LC presentment warranties, breach of contract, breach of implied bailment contract and common law fraud. Surety/ Applicant also sued Freight Forwarder for negligence in breach of its statutory duties as a freight forwarder. Surety/Applicant moved for summary judgment. The trial court denied Surety/Applicant's motion and ruled as a matter of law.

Legal Analysis:

1. Breach of LC Warranty; Revised UCC Section 5-110; Prior UCC Section 5-111; Revised UCC Section 5-109; LC Fraud; Fraud:

Surety/Applicant claimed that Beneficiary breached its LC warranty by presenting a dock receipt signed by Cargo Handler when the LC required that any dock receipts be issued by the Mobile Port Authority. The court stated:

The facts evidence that since at least 1987, the "Mobile Port Authority" has not issued dock receipts because it no longer participates in cargo handling operations and the operations directors at the Port Authority testified that it is the common practice in the industry and with the Port Authority's... regulation for independent licensed cargo handlers to sign these dock receipts.

Surety/Applicant also claimed that the dock receipt was "fraudulent,"

[B]ecause it erroneously indicated that all 184 pieces of pipe had been unloaded at the designated pier on or before Saturday, February 28, 2004, when in fact, 32 pieces of pipe contained in two railroad cars which were physically at the Port, but which were not actually physically unloaded by the stevedore until March 3, 2004.

Beneficiary responded that:

[T]he dock receipt dated February 28, 2004 was not signed by [Cargo Handler], until all of the pipe had been unloaded and placed at rest on the dock and that it is the custom and practice of the Port to date the dock receipt at the point when the cargo is on the ground at point of rest in good condition and according to the expected date that the cars would be unloaded, but that the date shown on the dock receipt is not always accurate because "sometimes things change."

Interpreting Prior UCC Section 5-111 to the effect that "the beneficiary, by transferring or presenting a documentary draft or demand for payment warrants to all interested that the necessary conditions of credit... have been complied with[,]" the court quoted PNC Bank, Nat'l Ass'n v. Liberty Mut. Ins. Co., 912 F.Supp. 169 (W.D. Pa. 1996) [abstracted at 1997 Annual Survey 501], affirmed 101 F.3d 691 (3d Cir. 1996): "[b]eneficiary compliance with the 'conditions of the credit' denotes the beneficiary's compliance with the conditions of the letter for which credit is specified in that document, not compliance with the conditions of the underlying contract."

Citing that case with approval, the court stated that "in the absence of language expressly making veracity a condition of the credit, as long as the beneficiary presents to the issuer documents which conform with the conditions of the [LC], the warranty of the presentment under Section 5111 is not breached." The court noted that "[t]he dock receipt is the presentation document submitted pursuant to [an LC] presentment, and accordingly, even if the minor delay in unloading... could be construed to render the receipt false, the warranty of presentment was not breached because veracity was not a condition of the [LC]."

The court also noted:

What [Surety/Applicant] does not... demonstrate, even under the broadest reading of the... facts, is how these events could "so vitiate the underlying transaction" as to constitute a material fraud..."material fraud" would not include petty or inconsequential discrepancies... the courts must examine the underlying transaction when there is an allegation of material fraud, and that material fraud by the beneficiary occurs only when the beneficiary has no colorable right to expect honor and where there is no basis in fact to support such a right to honor. 2B Uniform Commercial Code (U.L.A.) Section 5-109 (Master Edition). Even accepting [Surety/Applicant's] position that the facts of a discrepancy is not disputed, the Court does not see how this discrepancy amounts to a fraud at all, much less a "material fraud."

2. Breach of Contract; FAS Port: Surety/ Applicant also claimed that Beneficiary breached the contract because the LC required delivery FOB and that "the [LC] provided that it would expire (without payment) if 'shipment' of the steel pipes was not completed, as evidenced by... dock receipts...."

The court observed that there was no evidence of any contractual relationship between Beneficiary and Surety/Applicant, and that the terms of the contract were "FAS Port of Mobile[,]" a term with which Beneficiary complied.

The court also rejected Surety/Applicant's other claims against both Beneficiary and Freight Forwarder. Given Surety/Applicant's position in its motion for summary judgment, that there were no disputed material facts, the court ruled that Beneficiary and Freight Forwarder were not liable as a matter of law. It stated, "[s]hould [the] defendants choose to file motions for summary judgment, the Court will enter an appropriate order requiring them to do so...."

[JEB/dgd]

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