Article

Factual Summary: Beneficiary/Seller contracted with Broker for the sale of three shipments of fabric for the benefit of Applicant, who financed the shipments with a commercial LC payable in favor of Beneficiary "30 days after sight". Beneficiary presented a bill of exchange at 30 days sight to Issuer regarding the first shipment naming as payee Schon Bank which had extended pre-export credit. Issuer accepted and paid accordingly.

After Beneficiary shipped the second and third installments, Issuer informed Applicant of discrepancies in documents related to the second shipment of fabric. Applicant had instructed Issuer to refuse payment due to the discrepancies. Subsequently, Issuer informed Beneficiary that documents for the third shipment were refused: "as per customer, goods were defective and returned. Applicant decided that it would reject the first shipment of fabric under the contract and Broker repurchased that shipment and sold it at a loss.

After payment for the second and third shipments was refused, Beneficiary revised the corresponding bills of exchange, drawing them directly on Broker, which were stamped "accepted" by Broker's bank, and were signed by a representative of Broker. However, after Broker took possession of and resold the second and third shipments of fabric, Broker's bank returned the drafts to Schon Bank marked "accepted" but "unpaid".

Beneficiary sued Broker for failure to pay on the accepted drafts, breach of contract and unjust enrichment. Beneficiary sued Applicant for breach of contract and instructing its bank to refuse payment on the LC for reasons other than documentary discrepancies.

Legal Analysis:

1. Holder; Acceptance: The court determined that Beneficiary could not sue Broker to enforce payment of the bills of exchange that had been accepted but not paid because Beneficiary was not the holder, owner, or payee of the drafts. Instead, the court noted that Schon Bank, which was the payee, held this role and was not a party to the litigation. It observed that an affidavit indicating that the Bank was willing to be joined as a plaintiff was insufficient to effect the necessary joinder of parties.

2. Set-Off; Parol Evidence Acceptance: Broker did not dispute that it received and resold the second and third shipments and was obligated to pay for them. Broker argued instead that the parties had agreed INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE 118 that Broker would not be liable for its acceptances to the extent of any losses incurred in reselling the three shipments. Broker also maintained that the parties had agreed that Broker could set off payment by an amount owed by Beneficiary from a prior dealing between the parties. The court was not satisfied with the quality of Broker's evidence to support these agreements, but noted that even if the documents presented had been sufficient evidence of modification, it would be barred by the parol evidence rule or the Statute of Frauds. The parol evidence rule provides that, where parties have reduced their agreement to writing, evidence of prior or contemporaneous oral agreements may not be offered to contradict, vary or subtract from the terms of the writing and the Statute of Frauds, would require that any subsequent modification of the acceptance be in writing.

3. Agency: Broker argued that any amount due to Beneficiary should be reduced by an amount it had already allegedly paid to a third party that Broker believed to be an agent of Beneficiary. The court noted that an agency relationship arises only from the acts and representations of a principal, and that the representations of a putative agent are insufficient to establish such a relationship. The court was not convinced that the alleged third party was in fact an agent of Beneficiary, despite indications that he may have so represented himself to Broker. Specifically, the court was not satisfied that an agency relationship existed in despite evidence that Beneficiary had made commission payments to the putative agent on prior occasions, or that the putative agent settled unrelated debt obligations on behalf of Beneficiary after receiving payment from Broker.

4. Wrongful Dishonor; Independence: Beneficiary claimed that its LC draw was wrongfully dishonored, since Applicant had no right to refuse payment on the ground of nonconforming goods. The court noted that, while Beneficiary may have a claim against Applicant for breach of the underlying contract, a claim for wrongful dishonor was more appropriately brought against Issuer who was not a party to the litigation. Under North Carolina law and the UCP, Issuer's "involvement is altogether separate and apart from the transaction between the buyer and seller; its duties and liability are governed exclusively by the contract with each other."

5. Conflicts: In a footnote, the court explained its reference to the law of North Carolina regarding the LC: "The law of the issuing bank's locus governs liability for wrongful dishonor of a letter of credit. N.Y. U.C.C.§ 4-102(2); Hamilton Bank, N.A. v. Kookmin Bank, 245 F.3d 82, 89 (2d Cir. 2001). Nationsbank appears to be located in North Carolina."

6. Limitations on Breach of Contract Recovery: Since Beneficiary's claims for breach of contract against Broker were granted by the court, its claims for breach of contract against Beneficiary arising out of the same obligation were dismissed since "[a] party may not recover twice on the same obligation."

Comment:

The court correctly requires written evidence regarding any subsequent agreement to modify the acceptance. Whether this requirement stems from the Statute of Frauds or the law relating to Commercial Paper is academic.

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