Article

Factual Summary: Licensor granted Licensee the exclusive use of certain trademarks on sporting apparel for a specified term. Guarantor, who owned Applicant/Licensee, guaranteed Licensee's performance. When Licensee defaulted by failing to make the specified minimum royalty payments and to deliver a required bank guarantee to Licensor, Guarantor also defaulted and Licensor served both and Guarantor with termination notices. To avoid termination, Licensee and Guarantor renegotiated the licensing agreement, undertaking to obtain standby letters of credit in favor of Licensor in lieu of a bank guarantee to ensure that Licensor had access to funds in the event of a subsequent breach.

Licensee applied to Issuer for the standbys. Drafts of the standbys contained a control clause that gave issuer "the discretion to determine whether [Licensor/ Beneficiary] fulfilled their commitment to [Licensee/ Applicant]. When Licensor/Beneficiary objected to the clause, Licensee informed it that the clause would be removed from standbys. Licensor/Beneficiary approved a subsequent version of the standbys that had omitted the control clause. However; Issuer later asserted that it never agreed to issue the standbys without the control clause unless Licensee and Guarantor provided 100% security to protect Issuer should Licensee and Guarantor again default.

Subsequently, Issuer issued two irrevocable standbys subject to ISP98 to Licensor/Beneficiary, which were valid for one year and required all claims under the standby to be made no earlier than 345 days after issuance.

The standby also included five presentation requirements. The standbys were issued on 6 October 2010 but the license was not issued until signed on 14 October 2010. However, at the time of the signing Licensor/Beneficiary, Applicant/ Licensee, and Guarantor backdated the agreement to 28 September 2010. The parties also removed part of the language from the standby's original requirements section. Requirement E initially had stated: "AUTHENTICATED SWIFT MSG FROM [Issuer] TO BENEFICIARY'S BANK CONFIRMING BENEFICIARY'S FULFILMENT OF THEIR COMMITMENT TOWARDS THE ACCOUNT PARTY AND THAT WE ARE IN FUNDS". The parties amended the standby to remove the language from Requirement E "AND THAT WE ARE IN FUNDS" from the text of the standby. The parties also added to the standby that, "Therefore the [Licensee] undertakes to have the issuing bank [Issuer] issue a swift message to [Licensor/ Beneficiary] and [Basic Properties America's (BPA)] advising bank confirming as per REQUIREMENT E' beneficiary's fulfilment of their commitment towards the account party and to provide [Licensor/ Beneficiary] and BPA with a copy of the relevant swift messages as soon as possible, and in any case not later than on 21October 2010. Being receipt of such swift messages a condition precedent to the entering into force of this Amendment, it is expressly agreed that in case the [Licensor/Beneficiary] does not receive such swift messages for each of the standby letter of credit before 21 October 2010, this Amendment will be automatically null and void with no need for any formality nor for any notice."

On 6 November 2010, Issuer sent a SWIFT message to Licensor/Beneficiary's bank "confirming its receipt of the fully executed agreement." When Licensee and Guarantor acknowledged that they had defaulted on the agreement, Licensor/Beneficiary made separate drawings demands on the two standbys, presenting one signed original and two copies of the required claim statements, a letter providing notice within a cure period, audited payment statements certifying default, and by submitting the 6 November SWIFT message.

Issuer refused to honor the demands on the grounds that: 1) Licensor/Beneficiary failed "to produce the SWIFT message from [Issuer] confirming [Licensor/ Beneficiary] fulfilment of their commitments towards [Applicant/Licensee] as per Requirement E"; 2) the demands, in relation to Requirement B, used the language "and of SLC" instead of "and this SLC"; and 3) FedEx's notification that it had been unable to deliver the notice of default to Licensee because it was addressed to the wrong location. Subsequently, Issuer sent the following SWIFT message to the advising bank: "THIS REFERS TO YOUR MSG [message] DT [dated] 5TH AUGUST 2011 REG[arding] OUR ABOVE SLC, PLS [please] NOTE THAT OUR MT 799 REFERRED TO BY YOU IN YOUR MSG [message] IS NOT THE SWIFT MSG [message] REQUIRED AS PER POINT (E) of our SLC. WE CONTACTED THE ACCOUNT PARTY AND THEY HAVE INFORMED US THAT THERE IS A DISPUTE BETWEEN THEM AND THE BENEFICIARY AND BENE[ficiary] HAS NOT FULFILLED THEIR COMMITMENT TOWARDS THE ACCOUNT PARTY. IN VIEW OF THIS WE ARE NOT IN A POSITION TO SEND ANY SUCH SWIFT MSG [message] AS OF NOW."

Licensor/Beneficiary sued Issuer for breach of contract by wrongfully dishonouring the LCs. Licensor/Beneficiary asserted that Licensee and Guarantor materially defaulted and that they had satisfied all five documentary requirements. In response, Issuer asserted affirmative defenses and counterclaims, including misrepresentation and fraud of the amended licensing agreement. The trial court denied Licensor/Beneficiary's motion for summary judgment. On appeal, the Supreme Court of New York, Appellate division Andrias, J. reversed the decision of the trial court, granting Licensor/ Beneficiary's motion for summary judgment.

Legal Analysis

1. Requirement E: Licensor/Beneficiary asserts that it complied with all of the requirements of the standby. Licensor/Beneficiary also asserts that Issuer confirmed its receipt of the amended licensing agreement when it contacted Licensor/Beneficiary's advising bank via a SWIFT message to inform them that it had not received a SWIFT message as required by Requirement E and that there was a dispute between the applicant and beneficiary.

Licensor/Beneficiary argued that pursuant to the amendment added by the parties, it satisfied their requirements when they executed the agreement and Issuer sent the SWIFT message to Licensor/ Beneficiary's advising bank confirming receipt of the agreement. Conversely, Issuer argued that under Requirement E, only it could decide if Licensor/ Beneficiary had fulfilled its commitment to Applicant/ Licensee. The court noted that, under New York law, for Licensor/Beneficiary successfully to claim wrongful dishonor it must demonstrate that it strictly complied with the terms of the LC. Similarly, the terms and requirements of the LC must be explicit and any ambiguity is to be construed against the Issuer. Also, when terms of the LC are susceptible to two constructions, the more fair and customary construction will prevail over the inequitable.

The appellate court found that that Requirement E was ambiguous where it required "an authenticated SWIFT message from [Issuer] confirming their 'FULFILMENT OF THEIR COMMITMENT TOWARDS THE ACCOUNT PARTY." The court notes that the term "commitment" is not defined and the clause does not reference the added amendment. The court construed the ambiguity in Licensor/ Beneficiary's favor found that its interpretation was the only reasonable interpretation as Licensor/ Beneficiary had fulfilled its commitment to Licensee and Guarantor when the amended agreement was restructured and executed. According to the appellate court, "[when] [Issuer] issued the SWIFT message acknowledging receipt of the fully executed agreement, Requirement E was satisfied." The court also noted that Issuer's interpretation of Requirement E conflicted with the Independence Principle.

The appellate court discussed the importance of independence, noting that the LC was subject to ISP98 and the laws of New York and that both "recognize that the issuer's obligation to honor an SLC is independent of the rights and liabilities of the parties to the underlying contract." Under Issuer's interpretation, this principle would be violated as they would have the unilateral ability to determine whether Licensor/Beneficiary complied with the terms of the standby. Issuer nonetheless argued that the court should follow its interpretation because the parties to a standby may alter the rules of ISP98 and replace them with their own. The appellate court noted that while the Issuer is correct in that the parties may vary the terms of ISP98 through agreement, they must do so expressly and here there was no express modification. Furthermore, even if the court did adhere to Issuer's interpretation of Requirement E, it would nonetheless be estopped from enforcing Requirement E do to improper communication they had with Licensee in regards to dishonoring the standby. The court noted that, "to permit the payor to pressure or collude with the bank to dishonor the draft destroys the very principle upon which the commercial utility of letters of credit rests."

2. Requirements B and C: The appellate court ruled that discrepancies invoked by Issuer, the terms "and of SLC" instead of "and this SLC" would not excuse them from paying the standby under Rule 4 of ISP98. The court noted that under the UCC, strict compliance does not require the documents to be exact in every detail. The court found that the documents present by Licensor/Beneficiary contained the information specified in Requirement B and there was no possibility that the slight difference between the presented documents and the required language could mislead Issuer.

The appellate court also found that wrong address on one of the FedEx confirmations evidencing inability to deliver default notice to Licensee was "a nonmeaningful error" because both notices stated that Licensee had moved. Thus, even if they had been addressed correctly Licensee would not have received them.

Excerpts from Text of Standby in Opinion:

"WE HEREBY ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT" and included the following five presentation requirements:

A) A SIGNED LETTER OF CLAIM FROM THE BENEFICIARY ADDRESSED TO THE ISSUER CFP ... FOR THE CLAIM AMOUNT UNDER STANDBY LETTER OF CREDIT ISSUED BY THEM IN ONE ORIGINAL AND TWO COPIES.

B) A WRITTEN SIGNED STATEMENT FROM BENEFICIARY STATING THAT THEY HAVE DISCHARGED ALL THEIR OBLIGATIONS TOWARDS THE APPLICANT AND APPLICANT HAS FAILED TO DISCHARGE ITS OBLIGATIONS AS PER THE TERMS OF THE UNDERLYING CONTRACT AND THIS SLC IN ONE ORIGINAL AND TWO COPIES.

C) A SIGNED LETTER OF DEFAULT NOTICE FROM []THE BENEFICIARY TO APPLICANT KAPPA ... WITH A TEN BUSINESS DAY CURE PERIOD PROVISION CALLING FOR THE AMOUNT OF PAYMENT DUE AS PER THE CONTRACT SENT VIA FEDEX OR DHL SUPPORTED BY PROOF OF DELIVERY OF THIS DEFAULT NOTICE TO KAPPA... AT 525 SEVENTH AVENUE SUITE 501 NEW YORK, NY 10018 ISSUED BY FEDEX/DHL OR FEDEX/DHL WRITTEN CONFIRMATION EVIDENCING INABILITY TO DELIVER FOR ANY REASON WHATSOEVER.

D) AN AUDITED PAYMENT STATEMENT ISSUED AND SIGNED BY J.P. LALL, P.C. ... CERTIFYING THAT .... KAPPA... HAS DEFAULTED ON ITS MINIMUM ROYALTY PAYMENTS DUE TO [BENEFICIARY] IN A SPECIFIC AMOUNT NOT TO EXCEED THE AMOUNT STATED IN THE DEFAULT NOTICE AS PER (C) ABOVE WITHIN THE VALUE OF THIS SLC AND THAT KAPPA ... FAILED TO MAKE THE PAYMENT TO CURE THE DEFAULT DURING THE CURE PERIOD AS PER DEFAULT NOTICE SENT TO KAPPA ....

E) AUTHENTICATED SWIFT MSG FROM CFNYUS33 [CFP] TO BENEFICIARY'S BANK CONFIRMING BENEFICIARY'S FULFILMENT OF THEIR COMMITMENT TOWARDS THE ACCOUNT PARTY AND THAT WE ARE IN FUNDS.

[JBB]

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This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.