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Note: To obtain bath accessory items for resale to Kroger Co. (Retailer), Aisle 5 LLC (Supplier) contracted with Harman Investments, Ltd. (Wholesaler/Beneficiary) for Wholesaler to provide the goods. Concerned about Supplier's ability to pay, Wholesaler demanded a commercial LC in its favor, which Supplier's partner, Shah Safari, Inc. (Applicant), applied for and obtained from Wells Fargo Bank (Issuer).

As issued, the LC provided that the port of loading/airport of departure be in China or Taiwan. Since the goods were to be consolidated by Wholesaler/Beneficiary in Portland, Oregon, U.S.A., Wholesaler/Beneficiary asked that the LC be amended. Instead of obtaining an amendment, Applicant gave Wholesaler/Beneficiary a written promise that such a discrepancy would "not affect the letter of credit in any way [sic]." Relying on the applicant's promise, Wholesaler/Beneficiary delivered the goods to Retailer and attempted to draw on the LC for US$213,448.20. Issuer, however, refused "because of the discrepancy between the Port of Loading/Airport of Departure listed in the letter of credit and the "FOB Clackamas, Oregon" shown on the documents [Wholesaler/Beneficiary] submitted." Furthermore, Supplier subsequently filed for protection under Chapter 7 (liquidation) of U.S. bankruptcy law and was unable to pay for the goods.

Wholesaler then sued Applicant for breach of contract, alleging "a contract to deliver goods on behalf of [Applicant]", that it had performed on the contract, and that Applicant had refused to pay. Wholesaler moved for summary judgment. The U.S. District Court for the Western District of Washington, Lasnik, J., denied Wholesaler's Motion for Summary Judgment and entered Summary Judgment in Applicant's favor sua sponte.

The Judge stated that Wholesaler/Beneficiary's action was predicated on the theory that Applicant was the buyer. He concluded, however, that there was no contract for the sale of goods because there was no "meeting of minds." The Judge noted that no document identified Applicant as the buyer and that it did not have the right to inspect the goods.

Indeed, the Judge observed that the only negotiations between Wholesaler/Beneficiary and Applicant related to the LC. The Judge stated that, "[t]he fact that the letter of credit, specifically titled as such, included a list of the goods included in the ... transaction does not transform it into a contract for the purchase of those goods." The Judge also stated that the letter from Applicant to Wholesaler "strengthens [Wholesaler's] position against [Issuer] regarding the enforceability of the letter of credit."

Comments:

1. By relying on the promise of the Applicant/ surety to waive discrepancies, the Beneficiary assumed the risk that the Issuer would consent. By delivering the goods against this promise rather than the LC, it abandoned the assurance embodied in the LC and control of the goods.

2. The more interesting question in this case is whether the seller has any remedy against the surety. Presumably, the refusal under the LC resulted from the Issuer's unwillingness to waive discrepancies and not Applicant/Surety's. Otherwise, Wholesaler/ Beneficiary would have an action for breach of the promise to waive discrepancies.

3. The only alternative available to Wholesaler/ Beneficiary is a suretyship action against the applicant. Its initial suretyship obligation ran to the issuer on behalf of the Buyer/Principal. The written promise to waive discrepancies, however, might arguably have given rise to a suretyship undertaking running to Wholesaler/Beneficiary. If that theory is viable and not pursued, there remains a malpractice action against Wholesaler/Beneficiary's attorneys.

4. The Judge's suggestion that the Applicant's undertaking to waive "strengthens" Wholesaler/ Beneficiary's position against Issuer is simply wrong. Waiver by the Applicant does not affect the Issuer who is entitled to insist on the presentation of complying document.

[JEB/jds]

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