The appellate court's summary reversal of the trial court decision and dismissal of the action suggests that it saw no basis whatsoever for maintaining the action when the issuer knew that the purpose for which the LC was issued included maintenance of a security deposit. Unsaid is the conclusion that such circumstances do not arise to the level of LC fraud needed to justify reclamation of the proceeds, the only ground (if that) for disturbing the finality of payment (assuming that the issuer, as it appears, is proceeding in its own right and not by virtue of subrogation to a claim of the applicant). No verbiage here about independence (the LC had been honored), just the unstated notion that an implied notion cannot be a false representation.

Topics: Use, Letter of Credit

Note: A Pakistani power company, WAK Orient Power & Light Ltd., contracted to sell power from a plant it planned to build to a Pakistani agency, Karachi Electric Supply Corporation, and its regulatory body.

These contracts required it to provide a US$11 million LC as liquidated damages in the event that completion of the plant was delayed. To obtain credit, the power company "requested a letter of credit" from Westinghouse Electric Corporation, a parent of one of the members of the construction consortium that was building the plant. The parent sent the following letter to the power company, pledging "its financial support to fund engineering, procurement, and construction activities under the engineering, procurement, and construction (EPC) contract dated April 3, 1996 between power company and the construction consortium immediately upon receipt of written confirmation from the regulatory agency that regulatory agency financial close has been achieved." The government determined that the power company had failed to supply the agreed LC. Subsequently, the builders commenced arbitration proceedings for payments due pursuant to the contract in the ICC Court of Arbitration. Despite the arbitration clause, the power company commenced judicial proceedings in Pakistan on the theory that the parent's letter "constituted a pledge to provide the eleven million dollar letter of credit." It claimed that this promise and the proceedings were not covered by the arbitration agreement. The Pakistani trial court determined that the builders did not "file a written statement," and, as a result, determined that their defenses were stricken," awarding judgment against the builders. The power company then registered this judgment in state and federal courts in the U.S. without providing notice to the builders. When the builders became aware of these registrations, they filed an action for a mandatory injunction to require the power company to arbitrate claims pursuant to the contract. The federal court vacated the federal judgment and ordered the power company not to further register the judgment. The state court actions and challenges were also removed to the federal court. Subsequently, an arbitral award was entered in favor of the builders determining that they had reliability with respect to obtaining a LC, and the Pakistani appellate court vacated the trial court judgment. The U.S. District Court for the Eastern District of Pennsylvania, Giles, C.J., confirmed the arbitration award since the power company failed to establish any grounds on which it was defective and entered a permanent injunction against registering the arbitral award in any court in the U.S., state or federal.


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.