Article

Factual Summary: To assure construction of a power plant in Mexico, Bank issued an LC at the request of Applicants, naming government agency as Beneficiary. The LC was confirmed by a Mexican bank. Applicants and Beneficiary had a contract dispute which was to be resolved in arbitration.

On Wednesday, 1 December 2004, Beneficiary presented documents to Confirmer in Mexico and Confirmer notified Issuer by SWIFT of Beneficiary's demand and subsequently forwarded the written demand and supporting documents, along with a request for reimbursement to Issuer. Issuer informed Confirmer that the SWIFT message had been forwarded to Applicants, who questioned payment of the LC due to lack of a "final arbitration award."

At Applicant's request, two Mexican courts issued orders "staying all action in the execution or payment of the LOC." ("Mexican Orders") At the same time, Issuer received Confirming Bank's Demand, Request, and supporting documents. On 7September 2004, Confirming Bank acknowledged receipt of the Mexican Orders, but "seemingly [did] not acknowledge actual 'service.'"

On 8 September 2004, at 9:20am Confirming Bank paid Beneficiary under the LC, and notified Issuer of payment by SWIFT message. Confirmer conceded that the Mexican Orders were "served" at 10:59am on 8 September 2004.

Issuer refused to reimburse Confirmer on the ground that the Mexican Orders prevented it from paying or reimbursing any funds under the LC. Confirming Bank sued Issuer in New York on the ground that proper presentation and payment were made under the LC. Confirming Bank's motion for summary judgment was denied.

Legal Analysis:

1. Notice of Refusal; Revised UCC Section 5-108(c). Issuer claimed that its communication via SWIFT on 3 September 2004 constituted an adequate and timely notice of refusal. The trial court ruled that this communication "is far from the requisite required under the LOC. [Issuer] was required to notify [Confirmer] in writing the discrepancy in the payment demand and the documentary terms of the LOC. Moreover, under the terms of the LOC' immediate notice' was required as well as the reason why [Issuer] believed that the Request could not be serviced. Upon receipt of the Request and the supporting documents on or about September 6, 2004,[Issuer] then had the obligation to give timely notice of nonconformity. There was no such notice on September 3, 2004, as [Issuer's] correspondence predates receipt of the Request and supporting documents, the September 3 correspondence could not possibly serve as the basis for notice given the plain fact that the documents regarding payment were not in [Issuer's] possession at that time. Thus, [Issuer] did not give timely notice of nonconformity and is prevented from claiming a discrepancy." In support of these propositions the court cited "UCP 55 [sic],Art., 14 [e]; UCC § 5-108 [c]; J. P. Doumak, Inc. v.Westgate Financial Corp., 4 AD3d 62; City of New York v. Delafield, 246 Corp., 236 AD2d 11, 22,resettled in part 244 AD2d 272, lv. denied 91 Y2d811)."

2. Compliance; Independence Principle. Issuer argued that the presentation did not comply with the terms of the LC since it did not properly take into account the absence of a definitive arbitral award. The court noted that there was no reference in the terms of the LC to an arbitral award which was related only to the underlying contract. The court noted that [Issuer's] argument that there should be a reference in the documents to an arbitral award "is not persuasive." The Court indicated that the independence principle was applicable, stating "The Court must adhere to the principle that letters of credit must be strictly construed and performed incompliance with their stated terms". and "The rule is rooted in the very purpose of a letter of credit: '[b]y conditioning payment solely upon the terms set forth in the letter of credit, the justifications for an issuing bank's refusal to honor the credit are severely restricted, thereby assuring the reliability of letters of credit as a payment mechanism' citing Voest Alpine Intl. Corp. v Chase Manhattan Bank, 707F2d 680, 682."

3. Independence Principle. The court stated that Issuer "must honor a demand for payment which complies with the LOC regardless of whether there is a contract dispute. Its obligation to pay is fixed upon presentation of the drafts and the documents specified in the LOC and any dispute on the underlying transaction is of no moment. Therefore, under the general rule, [Issuer's] obligation to pay is fixed."

4. Comity; Injunction, Foreign Court Orders; Law of the Place of the Performance. The court noted that there was a dispute whether the provisional stay orders were "served" on Confirmer at the time that it paid and as to whether Issuer is barred form reimbursing Confirmer. The court noted that the Mexican Orders would have no effect on a performance that was due in New York. It stated that if performance of the LC were to take place in New York, then foreign orders enjoining one of the parties would have no effect. The court also stated that "designation of place of payment under a letter of credit does not alter the rule that place of performance is to be place of issuance of the letter of credit, unless the paying bank is the confirming bank," citing Chuidian v. Philippine Nat. Bank, 976F2d 561, 563; 1992 U.S. App. LEXIS 24345. The court noted specifically that "Case law reveals that our State courts will not give effect to a foreign court order enjoining payment by an issuing bank to a confirming bank under a LOC where reimbursement is to take place in New York (see, J. Zeevi & Sons,Ltd. v. Grindlays Bank (Uganda) Ltd., 37 NY2d220, 226, cert. denied, 423 US 866; Canadian Imperial Bank of Commerce v Pamukbank Tas,166 Misc2d 647, 651- 652), and enforcement of the injunction would run contrary to New York's strong public policy in favor of enforcing letter of credit agreements according to their terms (First Commercial Bank v. Gotham Originals, Inc., 64NY2d 287, 298; Cantrade Privatbank AG Zurichv. Bangkok Bank Public Co. Ltd., 256 AD2d 11)."

However, the court further found that "It is clear from the record that [Beneficiary] performed under the LOC in Mexico City and [Confirmer] confirmed the performance in Mexico City with [Issuer] in Paris, France. There is no New York connection other than the unilateral acts by [Beneficiary] and [Confirmer] requesting the transmission of payment to New York accounts. In addition, [Issuer] is not required under the LOC to perform its obligations of LOC in New York. It is of no moment that [Beneficiary] selected New York as the situs for the deposit of monies paid by [Confirmer] under the LOC. It also follows that it is of no moment that [Confirmer] transmitted payment under the LOC to New York and sought to be reimbursed via transmission of payment to a New York account. The requests for payment by the beneficiary of the LOC...and the conforming bank...do not constitute 'performance' under the terms of LOC as there was no requirement in the LOC that payments be made in New York."

The court noted that the parties had presented contradictory affidavits regarding whether there was proper service under Mexican law and the effect of the Mexican Orders with regard to reimbursement of Confirmer. In view of the material disputes on these questions, the court denied the motion for summary judgment.

[JEB/ees]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.