Factual Summary: To pay Seller/Beneficiary for a shipment of goods, First Buyer/Applicant obtained from Issuer a commercial LC in favor of Seller/Beneficiary. The LC required Seller/Beneficiary to present, in addition to documents indicating shipment, an "[o]riginal shipping compliance certificate signed and issued by an authorized officer of [Certifier]". Certifier was a third party. It also required "Negotiating bank to present a copy of an authenticated [SWIFT] message from [Issuer] the negotiating bank verifying the authenticity of [Issuer's] signature on the original shipping compliance certificate." Seller/Beneficiary claimed to have shipped the goods and, presenting documents, demanded payment under the LC. Issuer refused to honor the presentation because Seller/Beneficiary failed to present a shipping compliance certificate.

Seller/Beneficiary sued First Buyer/Applicant, Second Buyer, Issuer, and Certifier for wrongful dishonor, fraud, and goods sold. Second Buyer, Issuer, and Certifier moved to dismiss all counts. The trial court granted the motion.

Legal Analysis:

1. Personal Jurisdiction: Seller/Beneficiary argued that Certifier was "subject to [the court's] general jurisdiction because of its involvement in an alleged fraudulent inducement scheme." However, the Judge ruled that because Certifier had no contact with the state of Florida, the court lacked jurisdiction over Certifier and dismissed the claims against Certifier.

2. Timing; Revised U.S. UCC § 5-115; Limitation Period: Issuer argued that Seller/ Beneficiary was precluded from asserting a claim for wrongful dishonor because it had not asserted its claim before the statute of limitations expired. The Judge noted that under Revised UCC § 5-115, "actions arising from letter of credit transactions...must be filed within one year after the letter of credit expires or one year after the cause of action accrues, whichever occurs later". Because the commercial LC expired on 13 July 2009, the cause of action accrued on 26 August 2009, and the complaint was filed on 12 July 2010, the Judge ruled that Seller/Beneficiary had filed its complaint in a timely fashion under either measure.

3. Failure to Fulfill Condition Precedent; Law Regarding Compliance; Strict Compliance; Revised UCC § 5-116(b); Elements of a Cause of Action: Issuer and Buyer/Applicant moved to dismiss Seller/Beneficiary's wrongful dishonor claim arguing that Seller/Beneficiary failed to state a cause of action upon which relief could be granted. Issuer and Buyer/Applicant argued that Seller/Beneficiary did not state a cause of action because Seller/ Beneficiary did not comply with the LC terms. Seller/ Beneficiary argued that it had "reasonably complied" with the LC terms. Noting that the LC was silent as to which law should be applied in the event of litigation, the Judge applied UCC § 5-116(b), stating that: "[UCC § 5-116(b)] provides that when a letter of credit is silent regarding the choice of law, the law where the issuing bank is located governs the issuing bank's liability." Because Issuer was an Illinois corporation, the court applied Illinois law, which subjects LCs to a strict compliance rule. The Judge ruled that:

[Under Illinois law,] documents presented for payment must precisely meet the requirements set forth in the letter of credit. [Seller/Beneficiary] concedes that it did not provide [Issuer] with an authenticated shipping compliance certificate prior to demanding payment under the letter of credit, and has therefore failed to satisfy the requisite conditions precedent.

4. Commercial Fraud: Seller/Beneficiary asserted that all of the defendants fraudulently misrepresented that "upon shipment and receipt of the parts, all conditions precedent would be satisfied for redemption of the letter of credit." However, Seller/Beneficiary failed to specify which defendants made such representations, and when and where the representations were made. Therefore, the Judge concluded that Seller/Beneficiary failed to plead fraud with sufficient particularity.

Comments: From an LC perspective, the absence of a required document is fatal. From the perspective of the underlying contract and possibly commercial fraud, the circumstances are troubling.

The shipping compliance certificate was to be signed by an entity named Ashford Finance. On the slim basis of the factual recital in the opinion, this document does not appear to be one that is to be issued by an objective commercial third party such as an inspection agency but by an organization that may be financing the buyer. It is, therefore, in effect an applicant-controlled condition. While the beneficiary was foolish to rely on a promise to sign the certificate from an LC perspective, such a promise (if made) should be enforceable under the law of obligations when the seller has performed by shipping the goods ordered.



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.