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Note: American military supplier ACR Systems (Seller/Beneficiary) and Woong Kook (Applicant), an Agent of the Defense Ministry of South Korea (Buyer), entered five contracts to provide certain custom military goods to Buyer. Payment was to be by a commercial letter of credit which was issued by Woori Bank’s Seoul, South Korea branch (Issuer) in favor of Seller for the first contract, which was valued at USD 85,862.00. The LC was subject to UCP600 and URR725.

The LC required Seller to present, among other documents, an “inspection acceptance certificate” from Buyer. An amendment to the LC specified that Applicant would forward the acceptance certificate to Seller within seven days of the date it was issued by Buyer, and that its non receipt would be a “cause to draw against the letter of credit.”

When Seller presented the requested documents, Issuer only paid USD 28,099 of the USD 85,862 demanded by Beneficiary. Seller sued Issuer in New York for wrongful dishonor, civil conspiracy, and punitive damages. Issuer moved to dismiss all claims, arguing that under U.S.U.C.C. Article 5, Seller’s wrongful dishonor claim was time-barred from the facts alleged on the face of the complaint. Issuer also asserted that the complaint failed to state a claim for civil conspiracy, and that Seller’s standalone claim for punitive damages must be dismissed because they are unavailable, even if the claim was timely.

Applying N.Y. choice of law rules, the U.S. District Court for the Southern District of New York, Keenan, J., dismissed of the conspiracy and punitive damages claims, but refused to dismiss the claim for wrongful dishonor.

Since the LC did not select an applicable law, the Judge looked to the choice of law rule of the forum, New York, which is contained in U.S.U.C.C. Section 5-116(a) (Choice of Law and Forum). Noting that the LC was issued in South Korea, the Judge concluded that liability is to be determined by South Korean law.

Noting, however, that the LC was also subject to UCP600 and U.S. U.C.C. §5-116(c), the Judge concluded that the UCP rules govern. The Judge then concluded that UCP and URR govern Woori’s liability supplemented by the substantive law of South Korea.

As to the applicable Statute of Limitations, the Judge apparently looked to the law of the forum, N.Y., and concluded that because the rights and obligations at issue do not arise from U.C.C. Article 5 but Korean law and the UCP, Section 5-115’s one-year Statute of Limitations does not apply. Therefore, the Judge looked to the general 6-year NY statute of limitations and concluded that the action was timely under either statute.

The Judge also ruled that the complaint stated a claim for wrongful dishonor. The Judge enumerated the elements of a cause of action for wrongful dishonor, namely:

  1. An LC issued by defendants in favor of plaintiff;
  2. Timely presentation of complying documents; and
  3. Failure of defendant to pay

The Judge ruled that Beneficiary had adequately alleged all these elements. He rejected Issuer’s argument that the allegations in the complaint was conclusory, noting that the rest of the complaint supplies sufficient context to satisfy Beneficiary’s pleading burden.

Finally, the Judge dismissed the claim for punitive damages, citing New York law’s non-recognition of a separate cause of action for punitive damages. The Judge also stated that insofar as the damages on Beneficiary’s wrongful dishonor claim are governed by Korean law, punitive damages are unavailable.

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