Article

Factual Summary:In order to pay for the transfer of certain technology by Subcontractor, Contractor arranged for the issuance of a letter of credit which was confirmed. It provided for payment 90 days after presentation of required documents that included an invoice and a statement by the Applicant.

When Beneficiary presented complying documents to Confirmer, it forwarded them to Issuer certifying compliance with all the terms and conditions of the letter of credit. Approximately 45 calendar days later, Confirmer was informed by Issuer that the presentation "was accepted", given a payment date, and told that it would be reimbursed through the Issuer's New York office. Approximately 15 calendar days later, Beneficiary informed Applicant that "due to financial restraints, [it] might not be able to complete the subcontract." Subsequently, Applicant purported to terminate the contract and warned Issuer that it should not pay at maturity.

At that time, Issuer alerted Confirmer of the developments, advising confirming not to pay at maturity. At the same time, Applicant obtained an ex parte restraining order from an Italian court directing Issuer not to honor the letter of credit and further stating "an abuse of the status of [Issuer] by [Beneficiary] may well exist since it requested payment of the second invoice at a time, on March 30, 2001, in which it must be held that it was already aware of its difficulty in completing the contract with the Applicant." The US court noted "[t]he Italian Court cited no other evidence in support of its conclusion."

Concerned that it would not be reimbursed and that payment would facilitate a material fraud, Confirmer refused to pay on maturity and brought an action against Beneficiary, Issuer and a third party bank for declatory relief. Beneficiary filed crossclaims seeking relief based on the theories of breach of good faith and fraud or promissory estoppel. On motions to dismiss for failure to state a cause of action, the trial court granted the motion on the claim based on fraud but denied the motion based on good faith.

Legal Analysis:

1. Breach of Duty of Good Faith: Beneficiary alleged that there was a breach of the Issuer's and Confirmer's duty of good faith in refusing payment. Both Issuer and Confirmer sought dismissal on the ground that there was no action stated. The trial court agreed, stating that "Illinois courts do not recognize breach of the duty of good faith as an independent cause of action", but agreed with the Beneficiary that a claim for wrongful dishonor was adequately alleged and stated. Accordingly it denied the motion.

2. Fraud: Confirmer sought dismissal of the counter-claim alleging fraud because it failed to state with particularity allegations and circumstances including "the who, what, where, when, and how of the alleged fraud perpetrated by [the Confirmer]." The trial court concluded that under applicable rules of procedure "the identity of the person who made the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff" must be stated. The court further noted "that the defendant relied on plaintiff's representation that it was acting as confirming bank and acknowledged that the letter of credit related specifically to [Beneficiary's] delivery of certain manuals to [Applicant]." The court ruled that the allegation was not sufficiently stated. Although it allowed Beneficiary and Applicant 20 days to amend the counter-complaint, the court indicated that it was "not confident that the fraud claim is anything more than a fishing expedition on the part of the defendants."

Comment:

Any full discussion of this case is premature as the posture of the case at this point is in its initial stages; nonetheless, some observations are in order.

1. Initially, the credit was a deferred payment undertaking. Because of the time delay involved, such undertakings are more exposed to the defense of LC fraud.

2. Since it appears that the documents comply with the letter of credit terms, the only defense available to the confirmer is LC fraud. Oddly, it is the Beneficiary that has claimed fraud. Of some interest is the fact that payment on the LC was deliberately structured to be done on presentation of documents rather than the transfer of the technology itself and that one of the documents was generated by the Applicant. That the Beneficiary could not completely perform the underlying contract may give rise to a breach of contract but one wonders if it constitutes LC fraud.

3. A question apparently not raised is the effect of the ex parte order by the Italian Court. Perhaps it has suffered in the translation but as translated, it hardly appears to be a determination that there is a probability that LC fraud will be proven.

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