Article

Note: The plaintiff - a banking corporation under Egyptian law with a Jordanian branch (Issuer)- had a long-standing business relationship with a Jordanian company. This Jordanian company ordered sanitary equipment from an Austrian company.

The payment for the sanitary equipment was agreed in the form of a letter of credit. Issuer's Jordanian branch opened a letter of credit upon instruction of the Jordanian company. As the Austrian defendant (Advising Bank) did not want to commit to the payment of the letter of credit, an irrevocable letter of credit not confirmed by Advising Bank was issued. Advising Bank was to reimburse itself from funds of Issuer at the reimbursing British bank. By the terms of the issued letter of credit, an allowance for three drawings was agreed upon.

The LC was first drawn in October 1995 and this transaction went smoothly. However, the second transaction in 1996 became the issue of this litigation. At this time Issuer requested Advising Bank not pay the Austrian Beneficiary, since it suspected fraudulent activities in the transaction. In addition, Issuer claimed that not all the prerequisites for payment had been fulfilled (i.e. the Bill of Lading was not endorsed).

Advising Bank did not stop payment as it claimed that all prerequisites for payment had been fulfilled. Advising Bank did not follow the instruction of Issuer not to honour the LC and paid Beneficiary the amount due under the LC. It reimbursed itself through the reimbursing British bank and sent the documents to the Issuer. Subsequently Issuer sued Advising Bank, since Advising Bank did not return the reimbursed sum.

Advising Bank, after paying Beneficiary under the letter of credit, acquired the rights arising out of the letter of credit. Therefore, it had a right to be paid under the letter of credit provided the documents complied with its terms and did not have to return the reimbursed sum. The court discussed various legal grounds supporting the claim of Issuing Bank, namely compensation for damages and unjust enrichment, as well as any set-off rights of the Advising Bank and applicable law issues. However, as it was unclear whether the documents conformed to the terms of the letter of credit, no concluding judgment could be made.

Compensation for Damages: The Supreme Court ruled that Advising Bank, as appointee of Issuer, had to comply with Issuer's instructions although they were in breach of Beneficiary's rights under the letter of credit. Even if Advising Bank did not abide by the instruction of Issuer, compensation could be sought by Issuer only for actual damages, which the court determined did not occur since Issuing Bank was itself under an obligation to pay Beneficiary under the LC. In such a case, non-compliance with the instruction by Advising Bank would not give rise to damage claims. The court determined that Issuer could not escape its contractual responsibilities towards Beneficiary. Therefore, Advising Bank's reimbursement at the reimbursing bank, although unauthorized, did not result in damages as, nevertheless, the LC would have to be honoured.

Claim for Unjust Enrichment: Issuer claimed that the Advising Bank misappropriated its funds without title by mingling the Issuer's money with its own (through the transfer of funds to Advising Bank's account), thus unjustly enriching itself. Therefore, Issuer purported to have a claim for unjust enrichment pursuant to Section 1041 of the [Austrian] Civil Code, despite the existence of a contractual relationship between the parties.

The Supreme Court based its decision on previous holdings regarding situations involving contractual claims and claims based on unjust enrichment. Despite the competition between these, the Supreme Court stated that it would not decide in favour of a claim of unjust enrichment if the reason for the transfer of assets between the parties was based on legislation or a contract.

The Supreme Court held that in a three-party relationship, a claim of unjust enrichment cannot be made if a contract between the parties exists on which the claim can be based. It held that if the documents had complied with the letter of credit, then Advising Bank would have acquired a valid claim against Issuer by way of subrogation. In such case, Issuer could not be considered to have lost assets unjustifiably by Advising Bank going against its instruction. Advising Bank, on the other hand, would not have been unjustly enriched by the reimbursement. It could base its claim on the subrogation of rights from the letter of credit, so that no claim for unjust enrichment would exist.

The Supreme Court held that even if the conditions of payment under the letter of credit had not been fulfilled, Issuing Bank would not be entitled to make an enrichment claim since it would have a claim for breach of contract, which takes precedence over claims for enrichment.

Set Off of Claims: The Supreme Court rejected Advising Bank's argument that it offset its obligation with its claim under the LC acquired by subrogation. If Advising Bank made the payment because the documents complied with the conditions of the letter of credit, then Issuer had no claim against the defendant against which to offset the obligation. On the other hand, if the documents were not in order, the defendant could not acquire a claim under the LC, so the set-off of claims would not be possible in both cases due to lack of reciprocity.

Applicable Laws, Jurisdiction: The decision also gives some guidance on the law applicable to the claims at issue. For breach of contract claims, the law governing the contract applies. Claims for unjust enrichment are subject to the law governing the location where the enrichment occurs and the set-off is subject to the law governing the obligation against which the set-off is made. In the present case the relationship between Issuer and Advising Bank was subject to Austrian law because under Austrian collision rules the relevant criterion is the residency of the relevant branch of Advising Bank. The court held that the enrichment occurred in Austria because in the case of bank transfers, the place of the bank administering the account into which the transfer is made is decisive. Therefore, in any case the set-off was subject to Austrian law as both claims against which the set-off was directed were governed by Austrian law.

The court did not follow Issuing Bank's objection that it had neither a seat, nor a place of business in Austria and that therefore, the Austrian courts did not have jurisdiction for set-offs and counter claims of Advising Bank. Issuer argued that all claims against it should be filed with the Jordanian courts. The Supreme Court, however, affirmed the competence of the Austrian courts - this is always the case if the defendant can present a counterclaim.

Comments by Binder Grösswang Rechtsanwälte OEG:

Important lessons can be learnt from the Supreme Court's decision, including the following:

1. If the issuing bank fears that the advising bank(together with the beneficiary) might also act in its own interest when processing the letter of credit, it should agree with the advising bank that it will and may not, by subrogation or any other act, acquire any rights under the letter of credit;

2. If the issuing bank gives instruction not to pay under an unconfirmed letter of credit, it must not forget also to revoke the authority of the advising bank to reimburse itself and inform the reimbursing bank accordingly; and

3. To prevent any discussion of whether set-off is possible, the issuing bank and the advising bank should contractually agree that no party can offset any claims in connection with the letter of credit.

Comments by Documentary Credit World:

1. This abstract and, presumably the court, referred to the defendant Austrian bank as the "Advising Bank". While it may have been nominated to advise the credit and have done so, its actions that are the subject of the suit were not those of an advisor. In making payment on the credit, it was nominated and acting in another capacity, either as a nominated paying or negotiating bank, or as a non-nominated collecting bank. Since the abstract indicates that the bank was authorized to reimburse itself, it may be surmised that the bank was nominated. Whether or not it was nominated, of course, makes a difference with respect to its rights to reimbursement.

2. The abstract does not indicate whether or not the reimbursement instructions were subject to the URR and whether or not they were irrevocable. Perhaps this point does not matter since the Austrian bank was able to reimburse itself.

3. While the abstract does indicate, somewhat oddly that "it was unclear whether the documents conformed", the preliminary question is whether there was adequate and timely notice. If not, it is irrelevant whether or not the documents complied. The abstract does not mention anything about a notice of refusal.

4. If the objection was that there was fraud, there is no need for timely notice. But there is a need for the issuer to prove that there is letter of credit fraud.

5. If it did so (and the abstract is not clear on this point), the relevance of its nomination becomes relevant. As does the notice. Since the Austrian bank did not confirm, the question is whether or not its nomination could be revoked or whether it can act in good faith after the request by the issuer. The banking community has not formally addressed this issue. It is likely, however, that it would regard the nomination, like the LC, as irrevocable. Even if it were revocable, it is likely that a court would treat it as if it were irrevocable if the nominated bank had acted in reliance on the nomination.

6. To resolve these questions under a theory of agency suggesting that the Austrian bank is the "appointee" of the issuer, distorts letter of credit practice and law and the issues involved.

* For further information on this case, contact Tibor FABIAN at Binder Grösswang Rechtsanwälte by telephone (+43 1 534 800)or by fax (+43 1 534 808) or by email (fabian@bgnet.at). The Binder Grösswang Rechtsanwälte website can be accessed atwww.bgnet.at.

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