Factual Summary: To secure payment of spas, applicant, an exclusive New Zealand distributor, caused an LC for US$ 100,000 to be issued in favor of the manufacturer. The underlying contract stated that it was governed by California law and provided for mediation and arbitration in California. When differences arose regarding warranties and amounts owed, the beneficiary informed the applicant that it intended to draw on the LC for invoices said to be outstanding. The applicant then sought an ex parte order in New Zealand restraining the beneficiary from drawing on the LC until further order and the trial court issued a Mareva injunction. On appeal, the beneficiary appeared under protest to request a stay or dismissal for lack of jurisdiction and to have the Mareva injunction set aside. The appellate court rescinded the ex parte order granting a Mareva injunction.

Legal Analysis

1.Mareva Injunction: The applicant argued that an injunction was warranted because a draw by the beneficiary would constitute a dissipation of assets. Beneficiary contended that irrevocable LCs should not be subverted and, in response, the applicant noted an exception to beneficiary's claim "in cases of fraud, absence of honest belief in entitlement to draw down, or absence of bona fide claim," citing Group Ltd. v. New Zealand Meat Producers Board (High Court, Wellington, CP 118/95, 16 June 1995, Doogue, J.). Applicant claimed that beneficiary "had no honest belief and [had] no bona fide claim." The court concluded that it did not "regard beneficiary's intention to call on the irrevocable letter of credit as a dissipation by the defendant of assets within Mareva doctrine." The court noted that Applicant "must show a risk that assets will be dissipated with the consequence applicant will be unable to enforce the judgment of a New Zealand Court."

2. Service of Process: The court rejected applicant's argument for an injunction to prevent a dissipation of assets, concluding that beneficiary's intention to draw on the LC did not constitute a dissipation of assets. The appellate court reasoned that "It is true that if beneficiary removes an asset from New Zealand, that makes [applicant's] access to that asset, or whatever may follow from that asset, a good deal more difficult and expensive. However, the removal is to the jurisdiction in which plaintiff will obtain an arbitral award (if one is due), and the proceeds of the letter of credit are not extinguished or hidden in some way." The court rejected the applicant's request for an injunction and allowed the issuer to honor the beneficiary's draw. The appellate court ruled that the applicant was required to obtain leave in order to serve the beneficiary personally outside New Zealand and that the Mareva injunction did not give use to an exception. Moreover, noting the contractual commitment to litigate or arbitrate in California and the choice of California law, the court concluded that the proceeding should be dismissed under the doctrine of forum non conveniens.

3. Fraud Exception: The trial court observed that prior decisions indicating that exceptions to the obligation of an issuer to honor an LC would arise were there was "no bona fide claim to payment." The appellate court interpreted this reference to mean "'mala fides', not simply error. It is important that these exceptions be kept closely confined. The role of irrevocable letters of credit in commerce, and not least international commerce, should be upheld." The judge noted that "fraud is a serious allegation, which requires specific pleading in the statement of claim and proof to a high standard. It is not pleaded. I am not surprised. There are professional responsibilities involved. It is not within a country mile of being proved, even in a preliminary way. Fraud is not established simply because one deponent says another has no honest belief; let alone an affidavit, without cross-examination, and in the context of a commonplace although bitter commercial dispute."


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.