Article

Note: To assure payments of premiums and loss deductibles under a workman's compensation policy, Las Vegas Professional Football L.P. d/b/a Las Vegas Gladiators (Applicant) caused an LC in the amount of US$650,000 to be issued in favor of National Union Fire Insurance Company of Pittsburgh, PA (Beneficiary), a subsidiary of American International Group, Inc. (AIG). When Beneficiary claimed a final premium of US$86,891.00 and reimbursement for deductible loss payments of US$89,007.22 to be due, Applicant brought an action against the parent, AIG, in the U.S. District Court for the Southern District of Florida seeking declaratory judgment and an injunction against drawing on the LC.

In response, Beneficiary brought a petition in the Southern District of New York to compel Applicant to arbitrate claims asserted in the complaint Applicant filed in the U.S. District Court for the Southern District of Florida. Castel, J. granted Beneficiary's petition. The Judge noted that the Payment Agreement between the two parties contained two arbitration clauses and concluded the clauses covered all disputes arising out the agreement. Specifically, the Judge noted that the agreement between Beneficiary and Applicant covered the agreement to provide collateral and provided for exclusive jurisdiction, which, he concluded, would cover the LC, and the issues involved in the action for injunctive relief.

Comment:

The question to ask about this decision is what effect it has on the independent character of the LC. The answer must be that independence is not relevant given the alignment of the parties. It is the applicant who is seeking injunctive relief and seeking to avoid arbitration. The applicant is not a party to the LC in the sense that it is entitled to assert the independent character of the LC against the beneficiary.

However, were the alignment reversed, and the applicant seeking to prevent an action for wrongful dishonor by the beneficiary by seeking to compel arbitration under an arbitration clause in the underlying agreement, such relief should not to be available. Such a provision in an underlying agreement cannot affect the rights of a beneficiary under an LC, which is a separate and independent agreement from the underlying transaction regardless of the breadth of the arbitration clause.

[JEB/sal]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.