Article

Prior History: CVD Equipment Corp. v. Taiwan Glass Industrial Corp. No. 10 Civ. 573(RJH), 2011 WL 1210199 (S.D.N.Y. March 31, 2011) [USA], abstracted at 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 397.

Note: Taiwan Glass Industrial Corp. (Buyer) and CVD Equipment Corp. (Manufacturer) agreed that Manufacturer would create "Continuous TCO Atmospheric Pressure Chemical Vapor Deposition System" and related systems and equipment (Equipment) for Buyer for USD 15,800,000. Payment was to be by a commercial letter of credit issued by Mizuho Corporate Bank, Ltd. (Commercial LC Issuer). Under the agreement, Manufacturer provided a Refund Standby issued by Capital One, N.A. (Standby Issuer). On receipt of the Refund Standby, Manufacturer drew 30% of the purchase price.

Although the agreement did not contain firm deadlines or any information about whether Manufacturer could ship the Equipment in parts, the Commercial LC stated that the equipment must be shipped in its entirety. The LC was also amended to provide that the last day of shipment was 30 November 2009. Parts and components of the equipment, but not the equipment in its entirety, were loaded on and shipped on 5 December 2009 in New York and arrived in Taiwan on 10 January 2010.

Claiming that Manufacturer was in breach of the agreement, Buyer refused to accept the shipment and drew USD 3,564,000 under the Refund Standby. Standby Issuer, however, refused payment.

Manufacturer sued Buyer and Commercial LC Issuer, and Buyer counterclaimed and joined Standby Issuer. In a previous ruling, Commercial LC Issuer's motion for summary judgment was granted. Buyer then moved for partial summary judgment. The US District Court for the Southern District of New York, Oetken, J., denied buyer's motion for partial summary judgment, on the grounds that the Commercial LC is independent from the underlining contract.

Buyer argued that Manufacturer had breached the agreement by failing to ship the equipment by the required date and by shipping the equipment in parts. Manufacturer argued that the Commercial LC was not part of the agreement, and therefore Buyer breached the agreement by refusing to accept the containers containing parts of the Equipment.

The Judge noted that the letter of credit is independent from the underlying contract. Buyer argued that "the independence principle is solely concerned with the rights and obligations of the issuing bank under the letter of credit, and not the extent and scope of a seller's ... obligation under a sales contract." Manufacturer, however, cited cases in which the courts refused to read LC terms into the sales contract.

The Judge also noted US Uniform Commercial Code Section 2-325 ("Letter of Credit" Term; "Confirmed Credit") (Sales) which provides that "[t]he delivery to seller of a proper letter of credit suspends that buyer's obligation to pay. If the letter of credit is dishonored, the seller may on reasonable notification to the buyer require payment directly from him." The Judge remarked that the situation envisioned by this section, that dishonor of a LC entitles a performing seller to payment directly from the beneficiary, suggests that dishonor of an LC presentation does not necessarily entail a breach of the underlying contract.

Buyer urged that the terms of the LC were incorporated into the sales contract by virtue of the amendment to the LC regarding the latest date of shipment. The Judge noted, however, contrary sworn statements by officials of the Manufacturer and the inclusion of a merger clause in the contract to the effect that it was the entire expression of the parties' agreement and that shipment dates "are approximate". Given these disputed issues of fact, the Judge denied Buyer's motion for partial summary judgment.

[JDC/so]

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