Article

Note: As part of an agreement with Teixeira (Seller), a Brazilian cheese producer, to import cheese into the U.S., Arthur Schuman, Inc. (Buyer/Applicant), a U.S. cheese producer, procured a commercial letter of credit in favor of Seller from Wachovia Bank, N.A. (Issuer). Buyer/Applicant and Seller unsuccessfully attempted to use the LC to finance Seller's production costs in order to ensure that Seller could purchase raw materials to produce the cheese for Buyer/Applicant. At the request of Seller, Banco Santander Brasil (Lender/Beneficiary), a Brazilian commercial bank agreed to provide Seller with a US$ 1 million loan if Buyer/Applicant arranged for a standby letter of credit in its favor to secure the loan. Lender/Beneficiary was to provide the loan through an "Advance On Export Contracts" - a Brazilian tax-advantaged short-term export-financing loan (ACC loan). Buyer/Applicant requested Issuer to issue a standby in favor of Lender/Beneficiary. In light of the short term life of the ACC loan, Lender/ Beneficiary insisted that it be able to draw on the standby when the loan came due, regardless of whether Seller shipped the cheese.

The language of the standby as issued provided that in order to claim payment, Lender/Beneficiary had to certify that Seller had failed to repay the ACC loan which Lender/Beneficiary granted to Seller "in relation to the invoices(s)...,which were invoiced by [Seller]...to [Buyer/Applicant] that are past due and remain unpaid." By the time the ACC loan came due, Seller had not shipped the merchandise to Buyer/ Applicant nor had it repaid the loan. Lender/ Beneficiary then requested and obtained pro forma invoices from Seller on the goods that had not yet been shipped and drew on the LC. Issuer refused Lender/Beneficiary's initial SWIFT request for payment on the standby, but honored Lender/ Beneficiary's second demand which specifically listed the pro forma invoices. In the meantime, Buyer/ Applicant had unsuccessfully attempted to cancel the standby.

Buyer/Applicant sued Lender/Beneficiary, alleging that Lender/Beneficiary breached its warranty to Buyer/Applicant under New Jersey's U.C.C. § 5-110(a)(1)(Warranties) "that there is no fraud or forgery." Concluding that a material issue of fact existed, the U.S. District Court for the District of New Jersey, Sheridan, J., denied cross motions for summary judgment.

The Judge ruled that "[a]ccording to one definition, a pro forma invoice is a "template" for a later issued commercial invoice. See John F. Dolan, The Law of Letters of Credit ¶ 1.07[1][b] (4th ed.2009). Similarly, the dictionary definition of a "pro forma" invoice is "a document provided prior to or with a shipment of goods (as for export) that describes the items and terms of sale but does not have the function of a real invoice." See Merriam-Webster's Collegiate Dictionary (11th ed). On the other hand, an "invoice" is simply described as "an itemized list of goods shipped usually specifying the price and the terms of sale." Thus, the understanding of a pro forma invoice is that it is a preliminary template with no function except to illustrate what a "real" invoice will detail." In denying Buyer/Applicant's and Lender/ Beneficiary's cross-motions for summary judgment, respectively, the Judge ruled that summary judgment was inappropriate because Lender/Beneficiary's action may have constituted fraud and determined that a trial of fact was necessary to establish whether fraud had occurred. However, the Judge stated that Lender/Beneficiary's insistence on a pro forma invoice from Seller was "suspect" considering that the product may not have been made and certainly was not ready for shipment. He noted that a reasonable understanding of a requirement that invoices be presented signified that Lender/ Beneficiary had to submit actual invoices to Buyer/Applicant in the regular course of business. The Judge observed that "it is difficult to fathom that a pro forma or template invoice meets the [standby] requirements."

While noting that Buyer/Applicant originally proposed that actual invoices be attached to demand under the standby, the Judge recognized that Issuer told Buyer/Applicant that it was not practical to attach actual invoice documents, and recommended simply using invoice numbers and invoice date written into any future requests. The Judge observed Lender/Beneficiary was aware that Buyer/Applicant intended that actual invoices should be used to make the payment request under the standby.

Comment:

This case illustrates the problems that can arise when the expectations of parties to an LC are not aligned with its terms. Lender/Beneficiary expected the standby to assure repayment of the loan. Buyer/Applicant, on the other hand, wanted assurance of shipment of the goods. The parties adjusted the language of the standby but the result left each with the impression that each received what they wanted. Such compromises "paper over" differences and serve no one when problems arise.

[JEB/avk]

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