Article

Note: Hilaturas Miel, S.L. (Seller), a Spanish company, entered into a contract with the Republic of Iraq (Buyer) under the United Nations Oil for Food Program (U.N. O.F.F.P.) for the sale of 500,000 metric tons of acrylic yarn. Under the U.N. O.F.F.P., all goods were to be paid for through an LC subject to UCP500 issued by the New York branch of Banque Nationale de Paris (Issuer). The LC required presentation of documents including official reports from U.N. inspectors located at entry points into Iraq who were to verify that no contraband or prohibited goods were present in shipments.

This contract provided for shipment by installments, part of which occurred before, and part occurred after the commencement of hostilities in Iraq in March 2003. The United Nations removed all U.N. O.F.F.P. inspectors prior to commencement of hostilities. Accordingly, Seller's shipment could not be inspected and was held at the port of entry in Jordan. Without the official documents from United Nations' inspectors, Seller could neither deliver the goods nor draw on the LC. The LC expired in April of 2003 before Seller's goods could be inspected and delivered.

Seller subsequently filed suit against Buyer in the United States District Court for the Southern District of New York for breach of contract. Buyer moved to dismiss or for summary judgment and Seller filed a cross-motion for summary judgment. The District Court for the Southern District of New York, Sweet, J., granted Buyer's motion for dismissal due to lack of service in accordance with FSIA, and alternatively granted Buyer's motion for summary judgment, and denied leave for Seller to re-serve Buyer and denied Seller's motion for summary judgment.

Buyer alleged that subject matter jurisdiction and service of process were inadequate under the US Foreign Sovereign Immunities Act 28 U.S.C. § 1602 et seq. (FSIA), a statute making foreign sovereign states immune from civil process. Buyer alleged sovereign immunity and that the United States was not affected by the transaction and did not have subject matter jurisdiction over the suit. The Judge ruled that the involvement of banks within the United States created enough of an effect on the United States to confer subject matter jurisdiction. The Judge stated that "jurisdiction over the Iraqi instrumentalities was proper due to a direct effect taking place in the United States, even though United States was not the place of performance of contractual obligations owed to [Seller]." The Judge also stated that the inherently commercial nature of the transaction precluded Buyer from raising defenses based on the FSIA, and that subject matter jurisdiction could not be defeated simply due to Buyer being a foreign government.

Under the FSIA, service of process must be made upon a foreign state via mail requiring a signed receipt, and if such service cannot be completed within thirty days, then diplomatic channels can be used to serve process. Seller served the complaint via diplomatic channels without exhausting all delivery methods in violation of provisions of FSIA requiring that service be effected via mail with return receipt.

With respect to the breach of contract claim, the Judge applied article 79 of the U.N. Convention on the International Sale of Goods which provides

(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

The Judge ruled that because of the doctrine of impossibility, Buyer did not breach the contract, since "hostilities prevented inspection and acceptance of the goods per the terms of the Contract while the Letter of Credit was in effect, performance under the Contract was impossible." The Judge also ruled that "[B]uyer, does not bear a legal duty to compensate [Seller] for goods that were never delivered due to unforeseen events outside the control of the parties."

Comments:

1. The text of contract contained the following provision regarding the LC: "Payable from the cash collateral required under L/C amount and its fees pursuant to the (M.O.U.) Agreement." This provision raises an interesting issue, namely whether the issuer can limit its obligation to certain funds or sources of revenue. While unusual, there is no reason that such a clause should not be enforced provided that it was conspicuous. If so, then the beneficiary would be able to assess whether it was prepared to accept the risk before performing. As such, it is no different than assessing confirming bank risk.

[JEB/krp]

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