Article

Factual Summary: To assure construction of a power plant in Mexico, Non-US Bank located in NY issued an LC at the request of Applicants, naming Mexican government agency as Beneficiary. The LC was confirmed by a Mexican bank (Confirmer).

It required presentation of a signed written request [...] specifying the amount of the request for payment and that at that time the commission [CFE] has a right to receive such payment from the companies [Alstom and Rosarito] pursuant to the provisions of the agreement.

The underlying contract contained an arbitration clause. The LC provided that it was subject to UCP500 and that "where there was no contradiction with the UCP, the Letter was to be governed and interpreted under New York law." The Letter additionally provided that "any dispute arising herefrom shall be resolved exclusively before the courts of the United States of America with seat in Manhattan, New York City, State of New York."

When Beneficiary presented complying documents to Confirmer on 1 September, Confirmer notified Issuer. On 3 September, Issuer informed Confirmer that the Applicants questioned the drawing because of the lack of a final arbitration award. Shortly, afterwards, at Applicant's request, two Mexican courts issued exparte orders purporting to stay payment on the Letter pursuant to the application of Mexican law. The first order was a provisional order to stay, which specifically stated that the stay was not based on the merits. The second order was also a provisional order to stay, which subsequently was revoked on appeal.

At the same time, Issuer received Confirming Bank's Demand, Request, and supporting documents. On 7 September 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.

On Wednesday, 1 September 2004, Beneficiary presented documents to Confirmer in Mexico and Confirmer notified Issuer by SWIFT of Beneficiary's demand and subsequently honored and forwarded the documents to Issuer, along with a request for reimbursement. 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."

On demand by Confirmer, 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 for reimbursement and moved for summary judgment. Its motion was denied. On appeal, reversed and summary judgment entered in favor of Confirmer.

Legal Analysis:

1. Comity: The appellate court ruled that the motion court erred in invoking the doctrine of comity, noting that it had "conducted a 'place of performance' analysis and erroneously determined that, in this case, the doctrine of comity supersedes that of independent contract." The appellate court stated that, "the fundamental principle governing letters of credit, reflected in the UCP, and long recognized by New York courts, is the doctrine of independent contracts."

Moreover, the appellate court noted that even under traditional comity analysis, comity would not normally be extended to "non final, exparte orders".

2. Independence; Revised UCC §5-103(d): The appellate court stated that "based on the doctrine of independent contract, [Issuer's] obligation to honor [Confirming Bank's] presentation to [Issuer] is dependent only on the validity of the presentation which the Letter subjects exclusively to New York law and the New York forum." It also noted "[i]n other words, the 'letter of credit' prong of any commercial transaction concerns the documents themselves and is not dependent on the resolution of disputes or questions of fact concerning the underlying transaction." The court further noted the purpose and importance of the independence doctrine. "The doctrine of independent contract, as codified in UCC Article 5, allows the letter of credit to provide 'a quick, economic and trustworthy means of financing transactions for parties not willing to deal on open accounts,'" and, "the utility of the letter of credit rests heavily on strict adherence to the agreed terms and the doctrine of independent contract."

3. Choice of Law & Forum; Revised UCC §5- 116(a): The appellate court noted that Revised UCC §5-116 displaced the rule of the Prior UCC §1-105(1) which required a "reasonable relation" between the jurisdiction and the LC. "Thus, even though the Mexican courts may have jurisdiction of the underlying transaction under the "contact" and the "place of performance" analysis, their injunctions have no bearing on the letter of credit." The court found that "the motion court ignored the provision of revised UCC §5-116(a) that states that 'the jurisdiction whose law is chosen [to govern the letter of credit] need not bear any relation to the transaction.'"

Issuer, relying on Fleet Natl. Bank, N.A. v. Liag Argentina, S.A., 4 Misc. 3d 1025A, 798 N.Y.S.2d 344 (Sup. Ct. N.Y. Co. 2004), argued that New York courts "have continued to apply the doctrine of comity to determine whether to recognize foreign orders relating to letters of credit." However, the appellate court noted that while Fleet permitted the holder of the LC to choose either the law and courts of New York or the law and courts of Argentina, in the instant case, there was an explicit choice of law clause which "established New York law as the exclusive governing law and forum." The appellate court further noted that public policy considerations support the enforcement of an explicit choice of law clause. "As a primary financial center and a clearinghouse of international transactions, the State of New York has a strong interest in maintaining its preeminent financial position and in protecting the justifiable expectation of the parties who choose New York law as the governing law of a letter of credit."

4. Good Faith:. Issuer argued that the motion court erred in failing to find a triable issue in the allegation that Confirming Bank failed to act in good faith. The court ruled that "good faith is relevant only after an issuing bank has established a valid claim of fraud.... Thus, an issuing bank must first establish that a presentation is fraudulent and only then does the burden shift to the confirming or negotiating bank to show that it paid in good faith. . . In the instant case, defendant raised the question of Confirming Bank's good faith but did not allege, let alone raise an issue of fact as to a fraud-in-the-transaction defense."

[JEB/bca]

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