Article

Note: At the request of its customer, Woong Kook Co. Ltd., (Buyer/Applicant), Woori Bank (Issuer) located in South Korea issued a commercial LC for USD 85,862.00 subject to UCP600 in favor of ACR Systems (Seller/Beneficiary) which was located in Westchester County, New York, USA to pay for military defense goods. After the goods were shipped, Seller/Beneficiary presented documents under the LC claiming the full amount available but was only paid USD 28,099.11.

Alleging wrongful dishonor and additional damages of USD 14,200 for travel, legal expenses, and storage, Seller/Beneficiary sued Issuer in the New York state courts. The case was removed to the federal courts by Issuer which then moved to dismiss for failure to state a claim and for lack of standing. The U.S. District Court for the Southern District of New York, Keenan, J., denied the motions to dismiss for lack of standing and the motion for failure to state a claim for wrongful dishonor except insofar as the action sought damages for failure to return the goods.

Although noting that it was Issuer who invoked federal jurisdiction, the Judge considered its standing argument, which was whether the dispute met the U.S. Constitution’s requirement that there be subject matter jurisdiction. Noting that there was diversity between the parties and that the amount in controversy exceeded the minimum, the Judge construed the complaint to be an action for wrongful dishonor of its LC by Issuer and concluded that sufficient facts were alleged to confer standing.

With respect to Issuer’s motion to dismiss for failure to state a cause of action, the Judge delineated the elements of a cause of action for wrongful dishonor, namely, “(1) there exists a letter of credit issued by the defendant for the benefit of the plaintiff; (2) plaintiff timely presented strictly conforming documents to defendant as required by the letter; and (3) defendant failed to pay plaintiff as provided by the letter of credit.” The Judge concluded that the complaint satisfied each element.

“Although a copy of the letter of credit is not attached to the complaint” the Judge noted that Seller/Beneficiary attached “a copy of the advice of the said irrevocable Letter of Credit as Exhibit A to its complaint”. Given the allegation of partial payment, the Judge concluded that, “discovery would show the existence of the letter of credit.”

Although noting Seller/Beneficiary’s allegation in the complaint that it had timely complied with the LC terms lacked required specificity the Judge concluded that Exhibit A together with partial payment by Issuer supplemented the pleadings to evidence sufficient specificity.

Issuer asserted that Seller/Beneficiary impermissibly sought consequential damages which are not available in an action for wrongful dishonor. The Judge, however, stated that he “will not, at this early stage,” make determinations about the classification of the damage claims, “(i.e., the value of the cancelled contracts, travel costs, legal fees, and storage costs), since those damages at least plausibly flow from the dishonored letter of credit.” However, the Judge ruled that there was no right to claim damages for failure to return the goods, particularly in light of the independence of the LC.

Legal Analysis:

Comment:

There is obviously some confusion in the opinion regarding what constitutes the LC. Seller/Beneficiary had alleged that Issuer, “never supplied it with a copy.” The Seller/Beneficiary apparently received an advice of the LC which would be expected with respect to an LC issued to a U.S. company in the U.S. by a South Korean bank. This advice constitutes the “original” LC from the perspective of the beneficiary.

[SRJ/MJK]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.