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Note: To pay for textiles brokered through Virtual Sales Group (Broker), Home Shopping Network (Ultimate Buyer) applied for and obtained an LC issued to the Egyptian offices of Fashion Shop LLC (Manufacturer). A second order was to be fulfilled through Dubai but the LC was not transferable and, for reasons not stated in the opinion, Ultimate Buyer declined to have an LC payable in Dubai. Accordingly, it was agreed that payment would be made by a down payment of US$250,000 with the balance to be handled by documentary collection subject to the Uniform Rules for Collection, URC522.

There were two collections. The first collection contained two drafts, one drawn at sight for US$250,000 and the other 15 days sight for an additional US$214,924.03. The instruction letter accompanying the drafts indicated that the sight draft was to be released on payment and the 15 day draft upon acceptance (D/A). The second collection involved a 10 day draft D/A for US$274,189.95. All drafts were drawn on Broker. The documents were sent by Manufacturer to Habib Bank AG Zurich (Remitting Bank) and forwarded to TD Banknorth (Collecting Bank) for collection. Broker instructed Collecting Bank to wire US$250,000 to Manufacturer's bank to satisfy the sight draft and took up the documents and returned the two outstanding drafts to Collecting Bank; the 10 day draft was signed by the drawee but the 15 day draft was unsigned.

When the shipments arrived, they were inspected by a third party quality control company pursuant to the contract and found to be non-complying. Accordingly, they were rejected by Broker who contacted Manufacturer and demanded return of its US$250,000 down payment and offered to return the goods. Broker also informed Manufacturer that it would not honor the 10 and 15 day drafts. When Manufacturer refused to take the goods back, Broker sold them for US$282,132.

Manufacturer then sued Broker for fraud and the balance due on the 10 and 15 day notes, and sued Collecting Bank for fraud and negligence. Collecting Bank cross claimed against Broker for contribution. On cross motions for Summary Judgment, the United States District Court for the Southern District of New York, Sweet, J., applying New York law, granted summary judgment in favor of Broker and Collecting Bank.

Manufacturer argued that Collecting Bank had breached its duty by releasing the documents without requiring Broker's execution of the drafts. The Judge noted that Collecting Bank's duty was set forth in URC522 Article 6, to which the collection was subject. Article 6 provides that collecting banks must present documents for either payment or acceptance (according to the terms of the accompanying instructions) without delay. While recognizing that the broker had not signed the 15 day draft, the Judge observed that Broker had made a legally binding admission as to having accepted the draft and incurred the attendant liability. Accordingly, the Judge ruled that Collecting Bank had fulfilled is obligations under the collection letter.

Manufacturer further argued that Collecting Bank had a duty to pay the drafts once they were accepted by Broker. Manufacturer's argument was that the text of the accepted drafts "represents a clear, irrevocable instruction ... to the bank to 'Pay to [Remitting Bank] or Order the [amount of the draft]". Noting that the drafts were not drawn on any account at the Collecting Bank, the Judge rejected this argument, citing New York's version of US U.C.C. § 4-501 on bank collections of documentary drafts. He stated "acceptance of a bill of exchange drawn on a non-bank drawee does not authorize the collecting bank to pay the item when it becomes due." The Judge also rejected Manufacturer's argument that Collecting Bank had a "customary procedure" of paying such drafts.

Manufacturer argued that Broker's acceptance of the drafts "irrevocably confirm[ed] [Broker's] irrevocable commitment to pay the invoiced amounts". The Judge rejected this argument because Manufacturer presented no evidence that Broker had accepted the drafts in exchange for obtaining possession of the nonconforming goods, and because Broker had properly rejected the goods under applicable New York sales law, US U.C.C. § 2-601, and Manufacturer had refused to take back the goods. Similarly, the Judge rejected Manufacturer's fraud claim against Broker because Manufacturer failed to show "a legal duty separate from the duty to perform under the contract" or misrepresentation outside the contract.

Collecting Bank filed a cross claim against Broker for contribution. The Judge dismissed this claim because any liability by Collecting Bank would have been the result of its own acts or omissions. Further New York law does not permit contribution in cases based on breach of contract or brought under the Uniform Commercial Code.

[JEB/ssb]

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