Note: Mike de Brie (Buyer/Applicant), a company registered in France contracted with Pensacola Beef Company (Seller/Beneficiary), an entity registered in the United States, to buy 13,000 pieces of wet-blue calfskin for USD 531,050. In accordance with the contract, Buyer/Applicant obtained a commercial letter of credit subject to UCP600 issued by Credit Agricole (Issuer) in favor of Seller/Beneficiary which was payable 180 days after the date of the bill of lading. Bank of America was named as the Nominated Bank.

On 27 November 2010, Seller/Beneficiary presented to Nominated Bank documents required by the letter of credit which contained a description of the goods as 14,000 wet-blue calfskins for USD 571,900 (a 1000 quantity discrepancy was common practice in this sector). Subsequently, Nominated Bank provided the documents to Issuer. On 29 December 2010, Issuer informed Nominated Bank that Issuer would pay USD 571,900 to Nominated Bank on 26 May 2011, and consequently, Nominated Bank paid USD 571,900 to Seller/Beneficiary on 30 December 2010 before the maturity date of the letter of credit.

When Buyer/Applicant delivered the calfskins to Capital Pelli (Customer), the Customer informed Buyer/Applicant that the calfskins were not in conformity with the contract, i.e., not whole wet-blue calfskins but rather hides with only small portions of wet-blue calfskins. Buyer/Applicant consequently informed Issuer of the non-conformity in the goods and sought an interim injunction against Issuer which was granted by the Commercial Court of Clermont-Ferrand, France.

Buyer/Applicant subsequently transferred its office from Paris to the United States and was succeeded by an entity named Franpelco (Buyer Successor). Buyer Successor summoned Seller/ Beneficiary to appear before the Paris Commercial Court. Buyer Successor sought rescission of the contract, damages, and attorneys' and court fees on the ground that Seller/Applicant did not deliver the goods which was agreed on in the contract and alleged fraud.

Nominated Bank voluntarily intervened in the proceedings, summoning Issuer to appear through non-voluntary joinder and seeking an order on its right to obtain reimbursement under the letter of credit from Issuer. Nominated Bank argued that any existence of fraud in the underlying contract did not affect the obligation of Issuer to reimburse Nominated Bank when complying documents were presented.

In opposition, Issuer argued that (1) Nominated Bank prepaid Seller/Beneficiary before the maturity date of the letter of credit at its own risk, (2) the fraud alleged by Buyer Successor was linked to the letter of credit, not the underlying contract - the invoice contained an untrue description of the goods, (3) UCP600 does not indicate that nominated banks are authorized by issuers to prepay beneficiaries, and (4) in the event that fraud existed, Nominated Bank must bear the cost of its prepayment and has recourse only against the perpetrator of the fraud.

In regard to Nominated Bank's claim for reimbursement from Issuer, the Presiding Judge for the Paris Commercial Court ordered Issuer to pay Nominated Bank USD 571,900 with interest, reasoning that neither Nominated Bank nor Buyer Successor provided any evidence of fraud related to the letter of credit. The Presiding Judge stated that an issuer can protect itself against any possible fraud by excluding UCP600 Articles 7(c) (Issuing Bank Undertaking) and 12(b) (Nomination); otherwise, "UCP600 does not provide for an irrevocable right to reimbursement in favour of the nominated bank n the event of a deferred payment and fraud prior to the date of maturity of the documentary credit and that the nominated bank which pays in advance does so at its own risk". The Presiding Judge also relied on the fact that "acceptance for payment was given to [Nominated Bank] prior to discovery of the non-conformity of the delivered goods" and the independence principle - "due to the independent nature of documentary credits with regards to the underlying agreement, the applicant can only prevent payment, when it is specified that it is irrevocable, if it can establish the existence of fraud relating to the setting up or performance of such documentary credit".

In regard to Buyer Successor's claim for rescission of the contract, the Presiding Judge ordered the contract rescinded, reasoning that a failure to conform to the contract is a fundamental breach of contract under the UNCISG and relying on an expert report confirming the non-conformance of the delivered calfskin.


Is the right to reimbursement of a nominated bank that prepays against facially complying documents protected under a deferred payment credit notwithstanding beneficiary fraud? One would have thought that UCP600 Article 7(c) (Issuing Bank Undertaking) and 12(b) (Nomination) settled the matter. Since the court concluded that Issuer and Applicant/Buyer had failed to prove fraud, the question did not arise. But the Opinion contains troubling dicta suggesting that had beneficiary fraud, been proven, the prepayment by Nominated Bank would not have been protected.



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.