Article

Underlying Transaction:

Sales contract for used rail and scrap metal

LC:

UCP600 commercial letter of credit for USD 1,185,000

Decision:

The United States District Court for the Southern District of Texas, Tagle, J., denied Seller/Beneficiary’s motion for judgment on the pleadings; granted Issuer’s motion for summary judgment on all claims; and denied Seller/Beneficiary’s remaining discovery motions.

Rationale:

Where uncontroverted evidence shows that UCP600 LC beneficiary agreed to cancellation of LC with applicant, issuer has discretion to cancel LC; moreover, unless expressly agreed by issuer and beneficiary, issuer not obligated to issue replacement LC.

Factual Summary:

Shinjeong Steel & Trading Co., Ltd. (Buyer/Applicant) engaged Franklin Global Resources (Seller/Beneficiary) for the purchase of used scrap metal. To facilitate the sale, Jangsoo Iron and Steel Co. (Applicant Agent) obtained a UCP600 LC for USD 1,185,000 issued by Industrial Bank of Korea (Issuer) in favor of Seller/Beneficiary and its partner, Emirates Investments, Inc. (Second Beneficiary). After the LC was issued, a dispute arose and neither Buyer/Applicant nor Seller/Beneficiary performed. Seller/Beneficiary sued Issuer for breach of contract, tortious interference with contract, civil conspiracy, and wrongful dishonor, joining Won SeobByeon (Issuer Manager), who handled the LC application, as well as Applicant Agent and Sang Don Lee (Applicant CEO). As part of a lengthy pretrial phase, the district court granted default judgments against Applicant Agent and Applicant CEO, precluding their further participation in the case but reserving any finding as to damages. Subsequently, Seller/Beneficiary motioned for judgment on the pleadings and Issuer and Issuer Manager moved for summary judgment.

Legal Analysis:

  1. Judgment on the Pleadings. The Judge denied Seller/Beneficiary’s motion for judgment on the pleadings. Seller/Beneficiary argued that because Issuer and Issuer Manager responded to Seller/Beneficiary’s original complaint with a blanket denial, prior to removal to federal court, Issuer and Issuer Manager “conceded those allegations.” The Judge noted that the “general denial in state court was sufficient,” and no additional response had been ordered in federal court.

  1. Motion to Supplement Summary Judgment Record. In response to the summary judgment motion, Seller/Beneficiary sought to include an expert report by T.O. Lee Consultants, Ltd. (Consultants), which purported to rely on particular documents that were not provided to the court. Although the previously unsworn report was rendered admissible by Consultants having submitted an affidavit, the Judge concluded that it provided no additional factual evidence and thus its conclusory nature would only be considered “to the extent that it opines on the customs and practices of the industry.” Ultimately, the report formed no basis of the Judge’s opinion.

  1. Wrongful Dishonor. Seller/Beneficiary stated a cause of action for “wrongful dishonor of contract” against Issuer. Issuer and Issuer Manager, however, argued that the LC was cancelled as part of an agreement between Seller/Beneficiary and Buyer/Applicant. Seller/Beneficiary made three distinct arguments in opposition to summary judgment, which the Judge considered in turn.


    A. LC Cancellation. Seller/Beneficiary argued that despite the LC having been cancelled, Issuer was required to issue a replacement LC in its favor. The Judge first noted that UCP600 Article 10(a) (Amendments) provides that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.” Moreover, the Judge noted that an issuer is “not obligated to amend a letter of credit, even when both the account-party and the beneficiary request the amendment.” The parties agreed that the LC was irrevocable when issued. After it was issued, however, Issuer Manager received from Applicant Agent a document entitled “Application for Amendment to Irrevocable Documentary Credit” (Amendment B) which stated:

This Amendment is entered into this 17th day of September 2012 by and between Shinjeong Steel and Trading Co., Ltd. “The Buyer” and Franklin Global Resources “The Seller”.

The Seller has requested that the Buyer instruct the bank to issue a Cancellation / Termination of the existing Documentary Letter of Credit [DLC] No. M0493208NS00185 immediately and upon notification of the SWIFT Cancellation / Termination the Seller will issue new bank coordinates within 72 hours or less for the DLC to be re-issued…

The document was signed by representatives of both parties. Thus, Issuer agreed to cancel the LC. Seller/Beneficiary argued, however, that it only agreed to Amendment B on the understanding that Issuer would issuer another LC. The Judge rejected that argument on the basis that Seller/Beneficiary had provided another document to the court entitled “Amendment C” which instructed Buyer/Applicant to obtain a new LC from its bank. Amendment C did not mention Issuer. The Judge noted that Amendment C “further supports the conclusion that [Seller/Beneficiary] knew that the Original LC was cancelled and consented to the cancellation.” The Judge noted that prior decisions “have interpreted the reinstatement of a letter of credit to constitute an amendment, thus requiring the consent of the issuing bank and the beneficiary.” There was evidence that Seller/Beneficiary and Buyer/Applicant, through Applicant Agent, had submitted an application for a replacement LC. On the issue of cancellation, the Judge concluded that the “uncontroverted summary judgment evidence” demonstrates that Issuer agreed to cancel the LC and refused to issue another credit or to reissue the same. Issuer was within its rights to do so and Seller/Beneficiary also failed to allege facts to support a theory of detrimental reliance as it offered no evidence that Issuer expressly promised to issue a replacement LC.

B. Presentation. Seller/Beneficiary alternatively argued that the LC was never cancelled and that Seller/Beneficiary made a proper presentation to Issuer. The only evidence Seller/Beneficiary provided was a letter allegedly sent by its attorney to Issuer. The Judge noted that Issuer and Issuer Manager denied ever having received the letter and no available evidence demonstrated its receipt. The letter inquired as to whether Issuer was aware of the underlying contract between Seller/Beneficiary and Buyer/Applicant, the status of the second application regarding a new LC, and stated “please accept this letter as presentment under the existing Letter of Credit, and if such was cancelled, then under the re-issued Letter of Credit. If the Letter of Credit is not re-issued this letter constitutes a demand to make presentment pursuant to the Application” for the second LC or, if Issuer anticipated not issuing a second LC, the letter requested that Issuer deposit USD 1,185,000 into the attorney’s trust account. As Issuer maintained that it never received the letter, it argued that Seller/Beneficiary could not have reasonably believed the letter constituted a demand requiring Issuer to dishonor citing discrepancies in order to prevent its own preclusion. The original LC required, among other documents, a signed commercial invoice in triplicate, a full set of bills of lading, certificates of quantity and quality and an insurance policy. The letter neither attached nor referenced any such documents. The Judge noted that the presentation was clearly deficient but proceeded to examine whether Issuer was required to send a notice of dishonor under UCP600 Article 16 (Discrepant Documents, Waiver and Notice).The Judge noted that UCP600 Article 2 (Definitions) provides that presentation “means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.” The Judge ruled that the letter was not a presentation because it failed to disclose or reference any documents and thus it could “not [have] constitute[d] an attempt to deliver any documents.” The Judge also noted that U.S. courts have “rejected a rule that permits a beneficiary to recover on a credit based on the issuing bank’s failure to notify the beneficiary of deficiencies in presentment where the beneficiary was aware of those deficiencies.”

C. Anticipatory Repudiation. Seller/Beneficiary’s final argument alleged that Issuer had anticipatorily repudiated its obligations under the LC, that is, Issuer “indicat[ed] a clear intention not to perform its obligation, before the expiration of the period of presentment.” The Judge rejected this argument not only because the evidence showed that the LC was cancelled pursuant to an agreement, but also because Seller/Beneficiary had to show that it remained “ready, willing, and able to perform.” Seller/Beneficiary was unable to demonstrate either element of anticipatory repudiation because it had not performed on the underlying agreement and thus could not have presented the documents called for by the LC. Ultimately, the Judge granted summary judgment in favor of Issuer on the wrongful dishonor claim as Seller/Beneficiary failed to raise a genuine dispute of material fact with the foregoing arguments.

  1. Breach of Contract. Having failed to raise a triable issue regarding wrongful dishonor, Seller/Beneficiary argued that Issuer should be considered a party to the underlying contract and that Issuer breached the same. In support, Seller/Beneficiary pointed to Issuer being referenced in the contract and that Issuer financed the transaction for Applicant. Seller/Beneficiary also argued that “because the collateral for the contract between [Issuer] and [Applicant Agent] was a loan with [Issuer], rather than actual collateral…[that] form of collateral is not standard in industry practice, so [Issuer] should not be ‘protected by’ the independence principle.” Issuer and Issuer Manager denied being a party to the contract and argued that the terms of the LC were typical of such transactions. The Judge agreed with Issuer, noting UCP600 Article 4(a) (Credits v. Contracts), which expresses the independence principle, as well as UCP600 Article 5(Documents v. Goods, Services or Performance) which provides that “Banks deal with documents and not with goods, services or performance to which the documents may relate.” As Seller/Beneficiary could not show any evidence that Issuer was a party to the underlying contract, the Judge granted summary judgment on the breach claim in favor of Issuer and Issuer Manager.

  1. Remaining Claims. The Judge granted summary judgment in favor of Issuer regarding the tortious interference with contract claim because Seller/Beneficiary failed to demonstrate that Issuer made a representation that the sales contract was cancelled; moreover, because Issuer’s undertaking was independent, Issuer “was not in a position to cancel the underlying contract.” The Judge also granted judgment in favor of Issuer regarding the civil conspiracy claim as Seller/Beneficiary failed to raise any genuine dispute of material fact that showed Issuer intended a tortious conspiracy. Seller/Beneficiary further undermined its position by forwarding arguments sounding in negligence. The Judge granted leave for Seller/Beneficiary to file amended claims for default judgment against Buyer/Applicant and Applicant CEO ordering Seller/Beneficiary to show how they failed to “obtain funding for the transaction” and also to demonstrate damages, if any, given that Seller/Beneficiary failed to perform. The Judge also dismissed several discovery-related motions made by Seller/Beneficiary as moot because all claims against Issuer and Issuer Manager were resolved by summary judgment.

Comment: Regarding Seller/Beneficiary’s argument that it made a complying presentation, the Judge stated in a footnote that “[n]either party addresses this issue in their filings, but [Second Beneficiary] is also listed as a beneficiary in the Original LC…[w]here two beneficiaries are listed in a letter of credit, without a clause explicitly stating otherwise, a joint draw from both beneficiaries is required.” The same principle ought to apply to the LC cancellation agreement. Curiously, however, the Judge stated in another footnote that “[t]he Court need not analyze the impact on the letter of credit when one beneficiary requests cancellation and the second beneficiary has not provided its consent.” Presumably, this was because Seller/Beneficiary did not raise the argument.

UCP600 does not preclude the possibility that a credit may be issued to more than one beneficiary: UCP600 Article 3 (Interpretations) provides in part that “Where applicable, words in the singular include the plural and in the plural include the singular.” Professor James E. Byrne wrote that “there can be more than one beneficiary of a letter of credit… The existence of multiple beneficiaries can give rise to problems in the compliance of documents that require that the beneficiary be named such as the commercial invoice. Where not anticipated in the terms of the letter of credit itself, the presence of multiple beneficiaries can present problems in how to direct payment.” UCP600: An Analytical Commentary 70.

Interestingly, a copy of the original LC was submitted to the court. The MT700 message advised to Second Beneficiary’s bank states in Field 59 (Beneficiary): “Emirates Investments Inc. / Carmie-FGR”. Apparently, Carmiexport C.I LTDA was a party to the underlying sales agreement and appeared to be the party responsible for shipping the goods from Colombia to the Republic of Korea. What would UCP600 and local law require of documents presented under a credit issued to three beneficiaries?

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.