Article

Factual Summary: Investor applied for a standby LC that was secured by a fixed deposit of RM4,180,000 (about US$1,280,000), with Issuer in favor of Beneficiary/Lender for credit facilities to be extended to a US-based Company for the purpose of setting up and operating an activated tire rubber factory. Several months later, but before Beneficiary had disbursed the loan to Company, Applicant requested that Issuer suspend the standby LC. Issuer informed Applicant that an irrevocable standby LC could not be rescinded without the consent of the Beneficiary. Out of courtesy to Applicant, Issuer forwarded the message of Applicant's desire to rescind the LC by telex to the Confirming Bank, which then forwarded it to Beneficiary. Beneficiary did not respond to the notice.

Subsequently, Confirming Bank notified Issuer that Beneficiary had given Confirming Bank a notice of drawing on the standby LC. Issuer relayed the notice to Applicant. Applicant then obtained an injunction restraining Beneficiary from drawing on the standby LC and also restraining Issuer from reimbursing itself from the fixed deposit securing the LC. Confirming Bank later honored the LC and debited Issuer's account with Confirming Bank accordingly. Issuer complied with the injunction against reimbursing itself from the fixed deposit, but then sued Applicant seeking reimbursement. Applicant cross-claimed for a declaration that Issuer was not entitled to reimbursement or exercise setoff. The trial court ruled in favor of the Issuer.

Legal Analysis:

1. Irrevocability; UCP500, Articles 6, 8, & 9. Applicant argued that the standby LC was revocable. On the application form, however, Applicant signed beside the box containing the following words:

We request you to issue your irrevocable documentary credit for our account in accordance with the above instructions (marked with an X where appropriate).

The credit will be subjected to the current Uniform Customs and Practice for Documentary Credit, International Chamber of Commerce, in so far as they are applicable...

The term "irrevocable standby letter of credit" is used throughout the application form, and, in fact, the name of the document issued was "Irrevocable Standby Letter of Credit."

Applicant claimed that he believed the LC to be revocable, was unaware that the UCP applied, and stated that he should have been provided with a copy. The court found this argument unpersuasive and quoted UCP500 Articles 6, 8, and 9, showing that revocation of the LC required the consent of Issuer, Confirming Bank, and Beneficiary.

For those reasons also, the court ruled that Applicant's telexed letter merely proposing rescission of the LC was not a revocation because Beneficiary did not respond.

2. Estoppel. Applicant argued that Issuer was estopped in two ways. First, Applicant claimed that since Issuer had issued a notice of the rescission, it was estopped from accepting any call on the standby LC or from reimbursement from the fixed deposit. Second, Applicant claimed that Confirming Bank's silence in regard to the notice of rescission estopped it from honoring any call on the LC.

The court ruled that neither Issuer nor Confirming Bank was obliged to send notice to Beneficiary and certainly could not be estopped for informing Beneficiary of Issuer's desire to rescind the LC. Rather, it was Beneficiary who did not respond to this notice, but Beneficiary was not a party to the suit. The court ruled also that Beneficiary's silence did not amount to consent to the requested rescission and could not have been imputed to Confirming Bank merely for conveying the notice.

3. Injunction. Applicant had obtained an injunction restraining Beneficiary from drawing on the standby LC and also restraining Issuer from reimbursing itself from the fixed deposit securing the LC. Applicant claimed that Beneficiary wrongfully defied the injunction against it when it drew on the LC. Since Beneficiary was not a party to this lawsuit, the court declined to consider Applicant's claim regarding the Beneficiary's defiance. The court noted that Issuer had complied with the part of the injunction restraining Issuer from reimbursing itself from Applicant's fixed deposit, and that being essentially why Issuer had brought this suit. The court ruled that Applicant's claim against Issuer regarding defiance of the injunction has no merit since Issuer complied with the injunction.

4. Fraud; UCP500 Articles 3 & 4. Applicant argued that Beneficiary never released the loan to Company, and, therefore, the certificates of indebtedness that Beneficiary presented to Confirming Bank were fraudulent. The court, quoting UCP500 Articles 3 and 4, ruled that LCs deal with documents and function independently of the underlying transaction. Confirming Bank, therefore, could not dishonor Beneficiary's drawing on the LC since all the documents presented by Beneficiary were facially compliant. The only exception is for obvious or clear fraud. Furthermore, in Applicant's pleadings, he submitted that Beneficiary had, in fact, released the funds to Company. The court ruled that the Applicant was bound by his pleadings and could not change them afterward.

[JEB/jdc]

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