Factual Summary: Buyer and Seller agreed that Buyer was the sole United States distributor of Seller's product known as "Twistee Shots". Under the original agreement, Buyer was required to "pay for all of the stock purchased from [Seller] within 30 days of dispatch (from the Bill of Lading date) from the port of dispatch under an Irrevocable Letter of Credit." After the agreement ended the parties continued to do business with payment terms later extended to 60 and then 90 days of the Bill of Lading date. In May 2009, Buyer claimed that it received and paid for 8,587 cases of spoiled product valued at USD 244,729.50 and that Seller had only replaced 4,212 cases as Seller unilaterally decided to "net the exchange rate loss against the value of the replacement stock owed to [Buyer]" for losses Seller incurred as a result of Buyer's late payments between December 2008 and March 2009. Seller calculated that Buyer's late payments caused Seller a loss of USD 190,000 due to the devaluation of the U.S. Dollar against the New Zealand Kiwi.

To secure future payments owed to Seller, Issuing Bank issued an irrevocable standby letter of credit to Seller on behalf of Buyer for an aggregate sum of USD 400,000.00. In December 2009, Seller informed Buyer that it was terminating the agreement. In March 2010, Buyer withheld USD 124,687.50 from their final payment to Seller contending that this amount was intended to offset the value of spoiled product that Seller never replaced. Seller submitted a written demand to Issuing Bank for the amount withheld. Buyer sought and obtained a temporary restraining order issued by the Kentucky state court preventing release of the funds.

Seller removed the action to the federal court and the federal trial court denied Buyer's motion for partial summary judgment and dissolved the temporary restraining order.

Buyer argued that Seller was not entitled to demand payment under the LC to recover "exchange rate loss" which it had unilaterally imposed and that the right to do so was not included in the Distribution agreement nor any subsequent discussions between the parties. Seller countered that the losses incurred were due to Buyer being more than USD 830,000 in arrears in payments. Buyer admitted to making late payments.

The Judge determined that the Buyer had failed to establish that it would likely succeed on the merits. The Judge found that the Buyer's sole argument for success on the merits relied on the fact that the contract did not provide for "exchange rate loss" and it failed to address their late payments to Seller.

The Judge also noted the importance of keeping LCs separate from the underlying contract dispute as letters of credit are valued for their independence reliability and allowing courts to interfere in instances that do not meet the high threshold of involving exceptional fraud would weaken their value in the market. The Judge stated "the 'independence principle' is threatened if courts are willing to enjoin payment of letters of credit not just in exceptional cases involving fraud, but in ordinary contract disputes as well. . . . When courts are too willing to enjoin payment of letters of credit, the independence principle is weakened because parties must look not only at the 'paper transaction' embodied in the letters but also at the underlying contracts." The Judge described the dispute as "essentially a garden variety contract dispute", further adding that should Buyer succeed at trial, its remedy at law would be sufficient to grant them full relief.



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.