Article

Factual Summary: When US Buyer of swimwear was in arrears US$5,923,172.26, Taiwanese Seller required Buyer to provide letters of credit. Unable to obtain LCs, Buyer contracted on open account with Factor who obtained a series of more than forty LCs from bank (Issuer).

Buyer repaid its past debts from portions of the proceeds from these LCs. In order to accelerate repayment, Seller expedited shipments to Buyer, sometimes shipping before an LC was even issued and often either releasing the goods or using a waybill instead of a document of title. Almost invariably, Issuer refused presentations on these LCs due to various discrepancies. The LCs required presentation within twenty-one days of shipment. Over time, however, the LCs were issued closer to the shipment date and eventually all the LCs were issued after the goods had been shipped, making it difficult or impossible for Beneficiary/Seller to make timely presentation. There were seventeen such LCs accounting for one hundred seventy shipments. For forty-seven times when these presentations were discrepant, Issuer and Factor/Applicant approved waiver of discrepancies.

As Buyer's financial situation deteriorated, Factor declined to waive discrepancies on the three presentations that were the subject of this action amounting to a combined total of US$1,394,971.50. Seller had released the goods on these LCs, giving Buyer control of them when they were shipped. When Buyer's assets were liquidated they included the goods shipped by Beneficiary/Seller and the proceeds were paid to factor.

Beneficiary/Seller claimed that Factor "decided to allow Beneficiary to ship goods . . . to [Buyer] with the intention of subsequently authorizing the issuance of L/Cs for the goods that [Issuer] would not have to pay . . . by not waiving the discrepancies in the documents." "[Factor] decided to allow [Beneficiary] to ship goods . . . to [Buyer] with the intention of subsequently authorizing the issuance of L/Cs for the goods that [Issuer] would not have to pay . . . by not waiving the discrepancies in the documents . . . ." Seller then sued Factor for fraudulent concealment, breach of contract, unjust enrichment, and conversion and sued Issuer for wrongful dishonor. On cross motions for summary judgment, the trial court entered summary judgment in favor of Factor and Issuer and denied it to Beneficiary/Seller.

Legal Analysis:

1. Contract: The court described LCs as "unique" and noted that an LC "is not an ordinary contract." It noted that contract law "supplements the law of letters of credits only to the extent that contract principles do not interfere in the unique nature of credits," quoting from In re Coral Petroleum, Inc., 878 F.2d 830 at 832 which, in turn quoted J.F. Dolan, The Law of Letters of Credit, ¶ 2.02 at 2-4 (1984)).

2. Breach of Contract: Beneficiary argued that Factor had by its conduct in waiving past discrepancies and allowing issuance of the LCs after shipment impliedly contracted with Beneficiary to concur in the waiver of discrepancies. The court ruled that since past waivers could not give rise to future LC waivers, they could not give rise to an implied contract, either.

3. Waiver; Course of Dealing; Rev. UCC §5- 108 Off. Comment 7: Beneficiary argued that a series of waivers by Factor created an implied contract to waive future discrepancies. The court stated that "quite apart from the question of whether the repeated waivers of [Factor] would as a general matter, without further conduct, be sufficient to meet the requirements of contract formation, they clearly cannot do so in the letter of credit context." The court cited with approval Official Comment 7 to Revised UCC Section 5-108 to the effect that "Waiver of discrepancies by an issuer or an applicant in one or more presentations does not waive similar discrepancies in a future presentation. Neither the issuer not the beneficiary can reasonably rely upon honor over past waivers as a basis for concluding that a future defective presentation will justify honor."

4. Applicant; Rev UCC §5-102 (a)(2): The court indicated that it regarded Factor as "a party to the letters of credit," citing Rev UCC § 5- 102(a)(2)("Applicant").

5. Fraudulent Concealment: Noting that Beneficiary's first claim had been dismissed in part for failure to state a cause of action for fraudulent concealment, the court ruled that the amended complaint failed to allege a duty to disclose because it failed to allege some relationship between the parties. "Though both [Beneficiary] and [Factor] were technically parties to the letters of credit under the applicable law, [Beneficiary] does not dispute in the SAC that it had no contact or communication with [Factor] in connection with the letters or otherwise and therefore engaged in no transaction or agreement with [Factor], apart from the alleged implied contract. . . If an implied contract existed, this would of course create the necessary relationship. However, for the reasons discussed above, such a contract cannot exist on the facts alleged."

6. Conversion: Although Beneficiary conceded that it had shipped and released the goods that were subject to the documents presented under the LC to Buyers, Beneficiary claimed that Factor had converted the goods because Seller/Beneficiary had retained title because "the goods were sent with either a bill of lading or an air waybill, which are documents . . . . [Beneficiary] claims these documents were never in possession of [Buyer] or [Factor] because they were returned to [Beneficiary] when the goods were not paid for. . . . Therefore, the Receiver had no right to convert the goods released by the [Beneficiary]." The court rejected this claim, noting that title passed at the time of release "regardless of whether or not [Beneficiary] also passed documentary title to the goods simultaneously. This result could only have been avoided if the [Beneficiary] and [Buyer] had reached some other explicit agreement as to the passing of title. The [Beneficiary], however, does not dispute that none of the thirty purchase orders contained any language retaining title in the [Beneficiary] or allege any express agreement between it and [Factor] with regard to the passing of title."

7. Unjust Enrichment: Beneficiary claimed that Factor was unjustly enriched by obtaining the proceeds of the sale of the goods. While concluding that an action for unjust enrichment was available in California, the court noted that "a number of courts have refused to find unjust enrichment against an issuer or applicant to a letter of credit when they refused to waive discrepancies, even after the issuer or applicant waived multiple prior discrepancies." It explained these cases on the ground that "the beneficiary was a sophisticated commercial entity aware of the rules of strict compliance and waiver regarding letters of credit and therefore able to protect itself by following proper letters of credit procedures. . . . The defendant in each of these cases had only benefited by exercising its rights under the relevant agreements." The court concluded that unjust enrichment was not available in this case. It stated "[Beneficiary] does not dispute that it was fully aware of the rules of strict compliance and waiver regarding letters of credit. Beneficiary possessed the ability to ensure that it complied with the letters by withholding shipment until it received the letters and reviewing the letters to be sure it complied. [Beneficiary], as discussed above, had no basis on which to rely on [Factor's] past waivers , however frequent. [Factor's] refusal of waiver was within its rights under its agreement with [Buyer] and [Issuer] under the letters of credit. Furthermore, [Issuer] received [Buyer's] remaining accounts receivable pursuant to its secured interest. As such, [Beneficiary] simply cannot claim that [Factor] received its benefit unjustly. [Factor's] benefit was received fairly on the basis of clear agreements and letter of credit principles."

8. Strict Compliance; Waiver; Immaterial Discrepancies: Beneficiary argued that the discrepancies alleged by Issuer were "immaterial." Noting that the waivers in a prior presentation did not constitute waiver of a subsequent presentation, the court stated that "therefore, claims of discrepancies being immaterial are generally inappropriate in the letter of credit context."

9. UCP500 Art. 43; Late Shipment: Beneficiary claimed that the refusal of late presentations was improper however the court ruled that the presentation was "clearly discrepant" since transport since transport documents were presented later than 21 days after their issuance.

10. UCP500 27(a)(1): Transport Documents, Carrier's Signature: Although Beneficiary claimed the refusal of late presentations was improper, the court ruled that Issuer had properly refused air way bills that failed to name the carrier.

11. Presentation: One of the presentations contained sets of documents relating to six different purchase orders sent in five shipments combined under one draft representing the total amount of the six purchase orders. Two of the six sets of documents had discrepancies and Issuer refused the entire presentation. Beneficiary argued that each of the six sets of documents constituted a separate presentation, and that Issuer should not have rejected the purchase orders that were not late. Issuer argued that the four sets of documents that were not late "were nonetheless dishonored in accord with standard practice because they were presented in the same presentation as two other purchase orders, which were presented late." Beneficiary then claimed each invoice should be treated as a separate presentation because Factor charged a separate fee for each invoice included under a draft. The court ruled that the fee charged by Factor for each individual invoice did not indicate that the individual invoices were separate presentations and therefore gave summary judgment to the Issuer as to all the letters of credit at issue.

12. Draft: SWIFT MT 42C stated that beneficiary was to supply "drafts . . . at sight." Beneficiary presented a draft with the rejected presentations that reflected the cumulative total of the six sets. Beneficiary argued that Issuer should have disregarded the draft as an extraneous document since it was not listed in SWIFT MT700 Field 46 (Documents Required) and that the draft should also have been disregarded under UCP500 Article 13(a). Issuer "contended that it is standard international banking practice to treat purchase orders presented with a single draft as a single presentation" and that Issuer notified Beneficiary that purchase orders presented in a single draft would be treated as a single presentation. The court concluded that "the letters of credit at issuance did require a draft." On reconsideration of the issue in the court's 4 December order, however, the court drew back from this conclusion and requested supplemental briefing from the parties regarding the "function of [SWIFT] Section 42C in the [LC]" and "the impact of a draft not being required under the [LC] on the question of whether documents presented with a single draft should be considered a single presentation."

[JEB/jmf]

1 Although the decision does not so indicate, the Institute has had access to the three LCs.

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