Article

Factual Summary:To pay for the purchase of scrap metal, Applicant arranged for bank to issue an LC which was confirmed. The LC named the beneficiary as "Canyon Properties" and required documentation verifying that the steel had been shipped. Unable to form a corporation with the name "Canyon Properties", the principal of the beneficiary formed a corporation named "Canyon International, Inc." When documents were presented using the name "Canyon International, Inc.", Confirmer honored and claimed reimbursement from Issuer which charged Applicant's account.

No steel was shipped. Indeed, the vessel named in the documents had sunk three years earlier. Claiming that no goods were shipped, Applicant sought reimbursement from Confirmer and brought an action on theories of wrongful honor, breach of contract, fiduciary duties, and the duty of reasonable care. Confirmer moved to dismiss the claims. Held: Granted.

Legal Analysis:

1. Choice of Law: The court ruled that the law applicable to the wrongful honor of a letter of credit is ""the law of the place where the letter was honored or dishonored", citing Optopics Lab, Corp. v. Savannah Bank of Nigeria, 816 F. Supp. 898, 903- 904 (S.D.N.Y. 1993). Since the documents were presented in New York, the court applied the law of New York.

2. NY Prior Section 5-102(4); UCP and UCC: For the controlling rule, the court looked to UCP500, to which the LC was subject, instead of Prior UCC Article 5. It stated that under NY Section 5-102(4), the applicability of UCC Article 5 "is exempted from the Uniform Commercial Code provisions dealing with letters of credit, codified at Article 5." Noting that New York courts "frequently review Article 5 as persuasive authority for gaps in the U.C.P.", the court observed that there were no gaps in coverage of the obligation of the confirmer since UCP500 addressed the duty of a confirmer directly.

3. Confirmer, Obligation; UCP500 Article 3: Looking to the provisions in UCP500 Article 3 that indicated that the bank's obligation is not subject to the claims or defenses of the applicant arising from the underlying contract, the court concluded that the confirmer owed no duty to the applicant and stated that there was no privity between the confirmer and applicant.

4. Subrogation; Preclusion; UCP500 Article 14(e): The court also rejected the argument that the applicant was subrogated to the issuer's claim against the confirmer. It noted that the issuer had no claim because it was precluded from claiming a discrepancy since it had not timely refused the documents pursuant to UCP500 Article 14(e). The court concluded that there would be no rights to assert even if subrogation were available.

5. Confirmer, Privity: The court rejected the claim that there was a breach of contract by the confirmer, stating that "[b]y law, there is no contract between [a confirmer] and [an applicant]" and that "[n]o privity of contact or third party beneficiary status exists ...as a result of the contract between [the issuer] and [the confirmer]". It concluded that the applicant had "no standing under the UCP to sue...."

6. Confirmer, Fiduciary Relationship with Applicant: The court rejected the argument that there was a fiduciary duty between the confirmer and applicant. Looking to the UCP, it noted that the relationships are "regulated relationships, where the concomitant duties are governed by the U.C.P. The U.C.P. creates no fiduciary obligation." Lacking any other independent basis, the court concluded that there was no basis to impose such a duty.

7. Confirmer, Duty to Applicant, Negligence: The court rejected the argument that there was a duty of care running from the confirmer to the applicant. It indicated that any relationship was governed by the UCP and that there was no proof of any other independent duty.

Comment: While this decision correctly reaches the conclusion that there is no duty on the part of the confirmer to the applicant on the basis of UCP500, the same result would also follow were it to have applied either Prior or Revised UCC Article 5.

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