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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2006 LC CASE SUMMARIES 412 F.Supp. 2d 485 (W.D. Pa. 2006) [USA]
Topics: Forgery; LC Fraud; Breach of Warranty of Presentation; Warranty of Truthfulness; Revised UCC §5-109, 10; Prior UCC §5-111
Type of Lawsuit: Surety sued Seller for breach of LC warranty, breach of contract, breach of implied bailment contract, and fraud. Surety sued Freight Forwarder for negligence and conversion.
Parties: Applicant/Surety/Plaintiff- Al Makaaseb General Trading Co. Counsel: Gary L. Kaplan, George C. Bobb, DeForest, Koscelnik, Yokitis & Kaplan, Pittsburgh, PA
Beneficiary/Seller/Defendant- United States Steel Int'l, Inc. Counsel- Thomas R. Wright, USX Corporation Law Dept., Pittsburgh, PA
Freight Forwarder/Defendant- Rulewave, Inc. Counsel- Patrick K. Cavanaugh, Reed Smith, Pittsburgh, PA; Richard A. Swanson, Del Sole Cavanaugh LLC, Pittsburgh, PA
Cargo Handler- Tri-State Maritime Services
Buyer- Vijaya Gajapathy Engineers PVT Ltd.
Issuer- Mashreqbank
Underlying Transaction: Sale and shipping of steel pipes from the USA to Qatar.
LC: Sight LC in the amount of US$656,756. Silent as to governing rules.
Decision: The United States District Court for the Western District of Pennsylvania, Schwab, J., applying Pennsylvania law, denied Surety's motion for summary judgment against the defendants, and granted the defendants' motions for summary judgment against Surety. The court denied other motions as moot in light of this summary judgment.
Rationale: There is no breach of an LC warranty given by a beneficiary to an applicant under Prior UCC §5-111 when documents are issued in the manner required in the LC under common industry practice. A beneficiary warranty under Prior UCC §5-111 is a warranty that the LC conditions have been met, not the conditions of the underlying contract. A dock receipt not reflecting a minor delay in unloading after delivering and signed by a party approved by the signing authority is not materially fraudulent in and of itself, absent additional proof of material fraud.
An LC issued at the request of Surety did not alter the terms of the underlying contract between Buyer and Seller or between Buyer and Freight Forwarder.
Prior History: Al Makaaseb General Trading Co. v. United States Steel Int'l, Inc., 2005 U.S. Dist. LEXIS 37513 (W.D. Pa.) [USA], abstracted at 2006 Annual Survey 273.
Article
Factual Summary: Buyer contracted with Seller for the purchase of 756 metric tons of seamless steel pipe on behalf of Surety. Buyer arranged 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, which applied for and obtained an LC in the amount of US$656,756 in favor of Seller. Seller, however, refused to ship the goods because "some of the terms of that [LC] were not...acceptable to [Seller]." When amendments were obtained, Seller shipped the goods to Mobile. Among other things, the LC required presentation of a dock receipt issued by the "Mobile Port Authority, Alabama." The Mobile Port Authority had previously ceased issuing dock receipts, and had delegated the signing of dock receipts to cargo handlers. Seller obtained a signed dock receipt from Cargo Handler, 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.
Having become dissatisfied with Buyer during the course of events, Surety had become increasingly active in the transaction and had ordered that the pipe not be shipped outside the USA. When the pipe was shipped to Doha, Surety sued Seller for breach of its LC presentment warranties, breach of contract, breach of implied bailment contract and common law fraud, citing the signature of Freight Forwarder instead of the signature of the Mobile Port Authority and the fact that the documents stated that the goods were unloaded on 28 February when they arrived at the port of 28 February and were unloaded on March 3. Surety also sued Freight Forwarder for negligence in breach of its statutory duties as a freight forwarder.
In a prior hearing, Surety's motion for summary judgment was denied. On reconsideration, Surety's motion was reinstated and considered together with the defendants' motions for summary judgment. The court subsequently denied Surety's motion and granted the defendants' motions.
Legal Analysis:
1. Forgery: Surety claimed that presentation of a dock receipt issued by Cargo Handler instead of the Mobile Port Authority as required by the LC constituted a forgery. The court rejected this contention. It stated that:
[T]he LC required that the dock receipt be issued by the "Mobile Port Authority." 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 andthe operations directors at the Port Authority testified that it is the common practice in the industry and in accordance with the Port Authority's regulation for independent licensed cargo handlers to sign these dock receipts.
The dock receipt at issue was signed by a duly licensed cargo handler, [Cargo Handler], and the original of the dock receipt was supplied to [Surety]. Because the dock receipts were issued in accordance with the regulations, customs, practices and procedures at the Port of Mobile, and they were signed by the appropriate cargo handler, they were not "forged," and the fact that they were not executed by the Mobile Port Authority does not make them "forged."
2. Fraud; Revised UCC §5-109: Surety claimed that Seller had committed LC fraud. The court stated that "what [Surety] 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."
Reviewing the Official Comments to Revised UCC §5-109, the court ruled that even were the presentation of dock receipts to be considered a discrepancy, "the Court does not see how this discrepancy amounts to a fraud at all, much less a 'material fraud' such that [Seller] had no colorable right to expect honor."
3. Warranty of Truthfulness; Prior UCC §5-111: Surety claimed that presentation of the forged or fraudulent dock receipt breached the warranty of truthfulness of Prior UCC §5-111. The court read with approval cases that concluded that the presentation of complying documents satisfies the warranty of presentation of Prior UCC §5-111 in the absence of a term that makes veracity a condition ofthe LC.
[Surety] alleges that the dock receipts contained untruthful representations. The 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].
4. Warranty of Presentation; Revised UCC §5- 110: Surety claimed that Seller violated the warranty of presentation of Revised Prior UCC §5-110. The court noted that "[b]ecause [§5-110] specifically refers to 'material fraud' as addressed in [§5-109] ('that there is no fraud or forgery of the kind described in [§5-109(a)]'), this Court uses the standard of materiality set forth in [§5-109] of the Official Comments to the UCC." Since the court had concluded that there was no material fraud, it ruled that this warranty was not breached.
[JEB/dgd]
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