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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2013 LC CASE SUMMARIES (March 28, 2013) (Siciliano, Berg, and Langlois, Arbs.) [USA]
Summary by Ramsey Saleeby, Associate, Buonassissi, Henning & Lash, P.C.
Article
Topics: Good Faith; Commercial Reasonableness; Bills of Lading; Letter of Indemnity
Note: Itec Refining & Marketing Company (Applicant/Buyer) entered into an agreement (Sale Confirmation) with Astra Oil Company LLC (Beneficiary/Seller) whereby Beneficiary/Seller agreed to sell and Applicant/Buyer agreed to purchase 1,200,000.00 gallons of fuel grade ethanol. Sale Confirmation required that Applicant/Buyer cause the issuance of a documentary letter of credit (or commercial letter of credit) in favor of and in a form acceptable to Beneficiary/Seller. Furthermore, Beneficiary/Seller was to appear as exporter of record. Applicant/Buyer contracted to sell the ethanol to Bunge (Ultimate Buyer) in a "back-to-back deal", which Beneficiary/Seller was aware of.
After Sale Confirmation was executed, Ultimate Buyer nominated GOLDEN YOSA (Vessel) to Applicant/Buyer who in turn nominated the Vessel to Beneficiary/Seller. Shortly thereafter, Beneficiary/ Seller sent Applicant/Buyer an "acceptable [Documentary] L/C format" with bills of lading "issued to the order of (blank endorsed)". Applicant/ Buyer then instructed its bank, BNP Paribas (Issuer), to issue a conforming letter of credit (LC) in Beneficiary/Seller's favor, which it did.
Shortly thereafter, Beneficiary/Seller rejected the LC and insisted that a standby letter of credit be issued instead, but later rejected Applicant's offer when it ultimately agreed to provide the standby. Beneficiary/ Seller then expressed concern over control of the bills of lading despite being exporter of record, and requested that the bills of lading be endorsed in blank after the shipper's initial endorsement, which Issuer refused to do.
Beneficiary/Seller also requested a letter of indemnity (LOI) be used as an alternate drawdown mechanism in the event that any shipping documents went missing or their issuance "unreasonably delayed". Applicant/Buyer refused, but proposed that the LOI be countersigned by Beneficiary/ Seller's bank. Beneficiary/Seller refused to have the LOI countersigned and, after repudiating the Sale Confirmation, refused an offer by Applicant/ Buyer to prepay for the cargo. Applicant/Buyer, pursuant to the Sale Confirmation, commenced an arbitration governed by the laws of New York to recover damages for the wrongful termination of the Sale Confirmation.
The arbitral tribunal, A.J. Siciliano, Jack Berg, and David P. Langlois, Chairman, ruled in favor of the Applicant/Buyer and concluded that Beneficiary/Seller "was not commercially reasonable in its dealings with [Applicant/Buyer] and that its termination of the [Sale Confirmation] was improper and wrongful."
Applicant/Buyer contended that Beneficiary/ Seller breached its duty of good faith and fair dealing inherent in commercial transactions through its pattern of unreasonable behavior and demands despite Applicant/Buyer's compliance with the Sale Confirmation by providing an acceptable LC, responding to Beneficiary/Seller's requests, and proposing reasonable alternatives to assuage Beneficiary/Seller's stated concerns. Beneficiary/ Seller contended that it had sole discretion to determine whether the LC was acceptable and justified its actions by pointing to post-agreement credit payment risks.
On the question of what constitutes good faith, the tribunal's Final Award, quoting from Professor James E. Byrne's expert report, stated:
Under international standard commercial and letter of credit practice, the standard by which the performance of a contract is to be measured is that of good faith. While there is no general requirement of good faith in the negotiation of the contract, once the parties have agreed to purchase and sell goods, they are obligated to behave in good faith in the performance of their obligations. Performance would include performance of the payment obligations which would include reaching agreement on the payment terms
Further, the principle of good faith is fundamental to commerce and to letters of credit. It is based on the supposition that commercial parties do not enter into contract transactions in order to litigate but to perform and that they must act towards one another in a manner that permits fulfillment of the reasonable commercial expectations reflected in the contract and agreements of the parties.
There must be a legitimate commercial reason for [a party's] behavior or position. Phrased another way, totally arbitrary behavior without any commercial justification is not in good faith.
Applicant/Buyer met its obligation under the Sale Confirmation by providing the LC based on Beneficiary/Seller's "acceptable [Documentary] L/C format". Beneficiary/Seller had no right to change the LC because "that would be tantamount to a right to unilaterally modify the contract." The tribunal concluded that Applicant/Buyer "made more than reasonable efforts to comply with [Beneficiary/ Seller's] unreasonable, shifting and at times inconsistent demands." Furthermore, Beneficiary/ Seller's request that Applicant/Buyer tender a standby letter of credit, offering Applicant/Buyer less protection than the LC, and its concern over control of the shipping documents, despite being named exporter of record and in control of all documents required to draw on the LC, do not comport with standards of good faith. In regards to Beneficiary/ Seller's request for an LOI, Professor James E. Byrne opined:
In my opinion, such an accommodation [to permit a letter of indemnity] was not required by [Applicant/Buyer] as a matter of good faith since it was commercially reasonable not to agree to a letter of indemnity at all or on any terms, particularly since the parties had never dealt with one another before.
Nor in my opinion was there any compelling reason for [Beneficiary/Seller] to make a request to [Applicant/Buyer] to accept an indemnity under the letter of credit in lieu of the required documents. Unlike the situation where there is a chain of resales, [Beneficiary/Seller] is at the beginning of the chain and would receive transport documents from the vessel or agent on tender of the goods and the inspection certificates.
[RS/mjb]
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