Article

Factual Summary:Beneficiary licensed the retail distribution of its fashion products to Applicant under a License Agreement in Shanghai under the trademark "Terranova". It was envisaged under the agreement that Applicant would purchase the products and pay for them by means of standby letters of credit for EUR 250,000 for the purpose "of guaranteeing its obligations ... and [to cover] all that is due to defendant by way of compensation for damages and penalties ..." The agreement contained a choice of forum clause indicating that disputes were to be tried in Rimini, Italy.

Upon receiving the information from Issuer that Beneficiary had drawn the full amount of the two standby LCs, Applicant sought an ex parte restraining order. On the basis on the evidence submitted to court the Applicant owed only EUR 20,000, the court granted the ex parte application for interlocutory injunction. Beneficiary appealed to lift the order. Held: Order discharged.

Legal Analysis:

1. Injunction; Breach of Contract: Applicant had argued that the standby was for the purpose of paying for goods ordered and asserted that it owed only EUR 19,744.77 for such orders. The court noted that the standby was intended to cover default provisions under the license and "...not just for the purpose of ensuring payment for the purchase of the [Beneficiary's] goods."

The court detailed the various stipulated damage provisions in the agreement. Beneficiary alleged that Applicant was in material breach of the license agreement including promoting a company brand. The court observed that the liquidated damages clauses in the agreement for these breaches alone would justify a drawing of the full amounts on the LCs.

2. Independence: The court observed that "The unique value of such a letter, bond or guarantee is that the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank's customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met. In requesting his bank to issue such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional cases, he is to be allowed to derogate from the bank's personal and irrevocable undertaking, given be it again noted at his request, by obtaining an injunction restraining the bank from honouring that undertaking, he will undermine what is the bank's greatest asset, however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, if this happens at all frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined.'" quoting Lord Donaldson of Lymington in Bolivinter Oil S.A. v. Chase Manhattan Bank (C.A.) [1984] 1 WLR 392, at 393C-E.

3. Injunction, Test: The court stated that: "Where a valid letter of credit is concerned, in order to satisfy the court that an interlocutory injunction should be granted to restrain payment, the applicant must show by clear and cogent evidence both the fact of the fraud and the banks' knowledge of it. Clear and cogent evidence means that a mere assertion will certainly not be enough: there must be strong or compelling corroborative evidence and the usual form of this would be contemporaneous documents."

4. Injunction, Test: On reviewing the evidence before it, the court stated: "The evidence now before the court, to which I have referred above, shows a number of genuine disputes between the parties. These disputes, supported by contemporaneous documentation, not only give rise to a claim for damages by [Beneficiary] against [Applicant] (although as yet unquantified save for the sum of EUR 39,677.88 said to be the amount due from [Beneficiary] in relation to goods sold and delivered), but more importantly, they give rise to the application of clause 3.2 of the Licence Agreement. This was the reason for [Beneficiary] seeking payment under the Letters of Credit." The court concluded "I do not consider on the material before me that the only realistic inference to draw is fraud."

5. Injunction, Non-Disclosure: The court noted that in its request for ex parte order: "In the present case, I regret to say that there has been material non-disclosure on the part of [Applicant]. I have already referred to the fact that the various breaches of the Licence Agreement referred to by [Beneficiary] were supported by contemporaneous documents, many of them emanating from or to [Applicant]. I give merely one example. The [Applicant's] promotional literature linking the 'Gelati' mark with the 'Terranova' mark is one of the main pieces of evidence relied upon by [Beneficiary] to establish its case on the breach of clause 3.4 of the Licence Agreement dealing with noncompetition. All these documents should have been placed before the court at the ex parte stage. The somewhat simplistic (and therefore attractive) way in which [Applicant] put its case at the ex parte stage, was far from the picture presented at the inter partes stage, even on [Applicant's] own evidence."

6. Forum: Noting the choice of forum clause, the court indicated that the Applicant must plead its disputes with Beneficiary in the courts of Rimini.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.