Note: A buyer ordered telephones from a manufacturer, agreeing that they could be made by the manufacturer's sister corporation. Payment was to be by LCs payable to the manufacturer's sister corporation. Under the heading "special conditions," the LCs stated "we are informed that any dispute arising out of any transaction of this letter of credit will be settled through the American Arbitration Association in New York City or the Supreme Court of New York, at [applicant's] option." A required document included a guarantee of "everything which is written of [sic] this LC". After the LCs were paid, applicant claimed that a large number of the phones were defective, and stopped ordering phones from the beneficiary, the manufacturer's sister corporation. In a previous purchase of telephones from the manufacturer, the buyer had undertaken to provide LCs payable to the manufacturer's suppliers. The agreement provided, in part, that "the resolution of any dispute between the parties with respect to the subject matter of this agreement and guarantee shall be settled by arbitration..."emphasis added. Subsequently, the manufacturer and buyer agreed that until returned phones were replaced, the buyer would not be obligated to pay certain tooling costs. When the applicant failed to pay tooling charges, the manufacturer and the beneficiary sued applicant in the Princely District Court of Liechtenstein and sought a declaration that they were not obligated to repair returned units. When they applied for an order from the U.S. Federal District Court to conduct discovery for the Liechtenstein action, applicant cross-petitioned the U.S. court to compel manufacturer and beneficiary to participate in arbitration, and to enjoin them from continuing the Liechtenstein action. The manufacturer and beneficiary petitioned the Supreme Court, New York County, to stay the arbitrations brought by applicant. Applicant removed that action to Federal court. The removed action was consolidated with the application to conduct discovery in the Liechtenstein action, and applicant's cross petition. The U.S. District Court for the Southern District of New York, Cote, J., denied the petition by the manufacturer and the beneficiary, as well as applicant's cross petition, finding that the "scope of the arbitration clause is limited to the 'subject matter' of the agreement. That subject matter is [applicant's] provision of letters of credit to Smoothline's suppliers.". The U.S. Court of Appeals for the Second Circuit, Van Graafeiland, C.J., Calabresi, C.J., and Sotomayor, C.J., reversed, and found that the manufacturer's obligations under the "subject matter" of the arbitration clause of the original agreement could be interpreted to include the obligations underlying their commercial relationship. The court remanded for consideration of whether arbitration was required for nonsignatory alter-ego companies of the signatory company, whether the guarantee written on the LC was relevant to determination of whether arbitration was required, and, if not, whether the guarantee provided an independent basis for arbitration.


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.