Factual Summary: Buyers contracted with Yacht Seller to construct a yacht. Yacht Seller subsequently agreed with Yacht Builder to build the yacht at Yacht Builder's boat yard. Under the agreement, all disputes were to be resolved through arbitration. Yacht Builder then entered into a verbal agreement with Sub-Contractor for Sub-Contractor to supply the labor for construction. Yacht Buyers were to pay Yacht Seller, who would pay Yacht Builder, who would pay Sub-Contractor.

When a payment dispute arose between Yacht Seller and Yacht Builder, construction ceased and Sub-Contractor sued Yacht Builder, and was granted a warrant for the arrest of the vessel. An agreement was subsequently reached whereby the vessel would be returned to Yacht Seller on the condition that it provide a standby letter of credit in favor of the arbitrator, which Yacht Buyers (Applicants) obtained.

After the arbitrator found Yacht Seller to be in breach, Yacht Seller sought an injunction enjoining the arbitrator from drawing on the LC, which was denied. After assessing damages and costs at US$1,633,352.40, the arbitrator drew on the LC, but held the proceeds in trust, pending further court orders. Yacht Buyer then sought an order that the arbitrator return the proceeds of the LC to it. The court denied the motion

Legal Analysis:

1. Strict Compliance: Applicants argued that the hull number was incorrectly indicated on the LC, which precluded beneficiary from drawing. The Judge ruled that the omission of one digit in a twelve digit string "was clearly a clerical error", and did not invalidate the LC as there was no reasonable belief that the LC referred to a different vessel. Additionally, since Applicants had initially made the error when obtaining the LC, they could not then rely on that error to prevent Beneficiary from drawing on the LC.

2. LC Fraud: Applicants alleged LC fraud on part of Yacht Builder and Sub-Contractor, and sought an injunction enjoining Beneficiary from drawing on the LC. Yacht Buyers stated that Yacht Builder and Sub-Contractor fraudulently induced issuance of the LC by representing that the vessel was 40% complete, but upon delivery of the yacht to Yacht Buyers/Applicants, a marine surveyor determined it was between 15% and 20% complete. The Judge found Buyers' argument that they would not have agreed to the LC had they known the actual state of completion insufficient to support an allegation of fraud. Such an allegation would have required evidence that Seller intended that Buyer rely on the representations. The Judge noted that a strong prima facie case of fraud must be shown to enjoin payment under an LC.

3. Injunction; Status Quo: The Judge found that before the LC was obtained, Sub-Contractor had custody of the vessel itself, which was only surrendered in exchange for the security provided by the LC. The Judge opined that invalidating the LC would have the effect of altering the status quo, leaving Sub-Contractor without security. As there was no evidence that Applicant would end up paying more than originally agreed if the LC were honored, there was no reason to enjoin the Beneficiary from drawing on the LC.



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.