Article

Factual Summary: To pay for the sale of oil under a contract governed by English law, the Korean Applicant/Buyer caused Bank, a Korean domiciliary, to issue an LC in favor of Dutch Beneficiary/Seller.

The LC provided in SWIFT field 47A(M) that:

If the documents required are not available at the time of negotiation, payment shall be made against below documents:

a) Seller's commercial invoice...

b) Seller's letter of indemnity ... in the following format.

The form of the LOI was expressly prescribed by the LC, including the following language:

Although we have agreed to sell the said cargo to yourselves, we have been unable to provide you with the full set of original 3/3 clean onboard Bills of Lading...and other original shipping documents covering the said sale...

In consideration of your paying the full purchase price...we expressly warrant that we have marketable title to the goods and that we have the full right and authority to transfer such title to you and to effect delivery of the said cargoes.

We further agree to make all reasonable efforts to locate and surrender you, as soon as possible, the full set of original Bills of Lading (or 2/3 Bills of Lading and Masters receipt for 1/3 of original Bills of Lading) and to protect, indemnify and hold you harmless from any and all damages costs and expenses...

The LOI set out in the LC also provided that is was to be expressly subject to English law and subject to exclusive English jurisdiction.

The Bills of Lading the oil was shipped under were discrepant in that the ports of shipment and discharge were nonconforming and provided for discharge to Negotiating Bank as opposed to Issuer. When the goods arrived in Korea, only the discrepant Bills of Lading were available, so Beneficiary presented Negotiating Bank with a commercial invoice and LOI in the form prescribed by the LC. Beneficiary obtained payment from Negotiating Bank, which was, in turn, reimbursed by Issuer in accordance with the requirements of the LC.

After reimbursing Negotiating Bank, Issuer sent a message to Negotiating Bank requesting that the original Bills of Lading be forwarded to them as mentioned in the LOI. Beneficiary obtained the original discrepant Bills of Lading and then exchanged them with the carrier for new, conforming, Bills of Lading marked null and void. Carrier, however, retained one of the originals, but gave Beneficiary a receipt for it. Beneficiary sent the Bills of Lading it possessed along with the receipt for the one Bill of Lading it did not possess to Negotiating Bank so they would be forwarded to Issuer, which is apparently what happened.

Applicant became insolvent and never reimbursed Issuer for the amount paid under the LC. Issuer sued Beneficiary, Carrier, and others in South Korea. The claims against Beneficiary allege that it committed wrongful acts, including fraudulently or negligently representing that the original Bills of Lading were not available when nonconforming Bills of Lading were, in fact, available. Beneficiary, in turn, commenced proceedings against Issuer in England and sought to enjoin Issuer from pursuing its claims in South Korea. Issuer then applied for a declaration from the English court that it had no jurisdiction over it. The Queen's Bench Division, Cooke, J., denied both applications. As a result, both the Korean and English proceedings will continue.

Legal Analysis:

1. Choice of Law: The English court stated that It is accepted by [Issuer] that not only is the LOI expressly subject to English law and exclusive jurisdiction, but the L/C is arguably subject to English law. ... [I]t is plain that the L/C is governed by English law as the incorporation of the prescribed form of LOI in it includes the English law and jurisdiction clause, the parties envisaged that documents would be presented in London to the ANZ Bank (although this was not mandatory) and the sale contract between [Beneficiary] and [Applicant] was likewise subject to English law and exclusive jurisdiction.

The English court further stated that "[t]he construction of the wording of the L/C is a matter of English law."

2. Documents Required; Misrepresentation: The English court noted that Field 47 A(M) of the LC stated that payment could be made against an LOI "if documents required are not available at the time of negotiation". The court stated that "documents required" must have been documents that conformed to the terms and conditions of the credit as well as ones that would trigger payment. The court concluded that "Field 47A(M) ... is directly applicable not just where there are no documents available but also where there are non-conforming documents which are available." The court therefore dismissed Issuer's argument that Beneficiary made a misrepresentation that no Bills of Lading were available to it by presenting an LOI in place of presenting the nonconforming Bills of Lading. The court stated that Beneficiary merely represented that "it did not have conforming documents available to it which, it was common ground, was true."

3. Conversion; Intentional or Negligent Damage: The English court summarized Issuer's Korean law claims, stating "any person who causes loss to or inflicts injuries on another person by an unlawful act, willfully or negligently, shall be bound to make compensation for damages arising therefrom. The unlawful acts on which [Issuer] relies are set out as the acts by [Beneficiary] in the course of the letter of credit transaction which caused [Issuer's] loss of its security interests in the cargo." Issuer claimed that it should have received Bills of Lading, which would have given it rights in the cargo which it could have asserted in order to avoid its loss. The English court, however, pointed out that the alternative method of presentation, in which the LOI and commercial invoice were presented, was acceptable under the LC and that there was no provision in this method for Issuer to receive the Bills of Lading. Therefore there were no unlawful acts and there could have been no conversion since Issuer had no rights in the cargo.

4. Bill of Lading, null and void: Issuer argued that "the sending of null and void Bills of Lading through the banking chain and the retention of one of the sets of Bills of Lading by the Master were unlawful acts." The English court found that as a matter of English law such a claim was bound to fail but, as a matter of Korean law, "[i]t is just arguable that sending such Bills of Lading in accomplished null and void form, which was a breach of the LOI unless waived, was a negligent act which caused damage to them."

5. Choice of Forum: The English court stated that "[t]he English Court is clearly the appropriate forum to decide questions of construction of the L/C and LOI, the UCP and, to the extent that it matters, the Sale contract." It further stated that witnesses required to deal with the claim of fraud would be found in England, it is unlikely that there will be any dispute over the discharge and delivery of cargo that documents do not show, the negotiation of documents took place in England, Issuer can pursue all of its claims and join all necessary parties before the English court, that all of the parties other than Issuer want England as the forum, and finally that the evidence of Issuer's personnel, in Korea, is likely irrelevant. The court went on to state that it was unlikely that factual evidence would be required for determination of the issues, as they would be decided based on the interpretation of the English law contracts and the LC at issue. The court did note that it was possible that Korean law may be the proper law of tort to govern the action. The court therefore rejected Issuer's argument that the English court had no jurisdiction in the case.

6. Injunction: In deciding whether or not to grant the injunction against proceedings in Korea requested by Beneficiary, the English court noted that to the extent the claims are based on the LOI, the exclusive English jurisdiction clause it contains would govern, in which case it would be appropriate to grant an injunction. The court notes, however, that the LC does not contain an exclusive jurisdiction clause and that Issuer's claim is based on the LC not the LOI. The court then notes that the principles of comity must be born in mind and cites "the need for an English Court to have sufficient interest in foreign proceedings in order to restrain them."

The court concluded that it "cannot conclude that the pursuit of Korean proceedings is doomed to fail ... [Beneficiary's] application falls short of the standard required for the grant of such an injunction" and that "it would make sense for the Korean court to either stay its own proceedings on the basis that England is the appropriate forum ... or ... to await the English court's decision on the claims submitted to it ... That however is a matter for the Korean court to decide for itself and out of respect for that court I would not want to be thought to be pre-empting its decision."

Comments by Lee H. DAVIS:

1. The English court and seemingly Issuer assume that the LC is subject to English law, despite the lack of a choice of law clause in the LC itself. Where no choice of law clause is present, it is standard international banking practice that the governing law of the issuer's obligation is the law of the issuer, in this case Korean law.

2. The English court loosely interpreted the provision of the LC allowing for presentation of an LOI and commercial invoice in place of Bills of Lading when they were "unavailable" to include situations in which non-complying Bills of Lading were available. This conclusion does not necessarily follow from the LC or from standard international banking practice. Courts should be careful about forfeiting an issuer's security based on an interpretation of an LC that an LOI could be presented in lieu of non-complying as well as complying documents.

3. The English court thought it was clearly the appropriate forum to "decide questions of construction of the L/C and LOI, the UCP and, to the extent that it matters, the Sale contract." Only the LOI and the Sale contract, however, contained exclusive jurisdiction clauses. The UCP is not more appropriate to any one forum than another, and the LC, under standard international banking practice, was governed by Korean law and most amenable to a Korean forum.

[JEB/LHD]

* Mr. DAVIS is an Associate of the Institute of International Banking Law & Practice and a member of the New York Bar.

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