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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES 96 F.3d 51 (2nd Cir. 1996)
Topics:
Formalities; Establishment of a Letter of Credit; Form of a Letter of Credit; UCC - 5-103; Undertaking to Issue a L/C.
Type of Lawsuit:
Consultant against bank to enforce the terms of a letter issued by the bank as if it was a letter of credit.
Principals:
Plaintiff/Consultant: Dr. Haitham Khaled Bouzo;
Defendant/Putative Issuer: Citibank, N.A.;
Buyer: Delta Oil Co.
Underlying Transaction:
Purchase of crude oil.
LC:
Letter of intent by bank to issue a irrevocable bank pay order.
Procedural History:
The United States Court of Appeals for the Second Circuit, Mahoney, J., found genuine issues of fact as to whether the disputed document was a letter of credit and vacated the summary judgment that had been entered in favor of the bank.
Rule:
Putative issuer was not entitled to summary judgment where issues of fact remained as to whether a letter promising to issue a "bank pay order" was a letter of credit.
Article
Factual Summary: Consultant executed an agreement with buyer whereby consultant was to assist buyer in its efforts to contract with seller for the sale of crude oil. The agreement provided that consultant was to be issued a "bank pay order" for his services. Consultant then prepared and delivered a letter described as a "bank pay order" to buyer. Upon buyer's request, bank issued a signed letter, the substance of which was identical to the letter prepared by consultant. The letter provided that the bank "will issue an unconditional, irrevocable bank pay order...after presentation: of a signed contract between buyer and seller."
Buyer and seller subsequently entered into an agreement for the sale of crude oil, and consultant thereupon demanded payment under the bank's letter. The bank, however, did not pay and consultant brought this action for breach of contract.
During depositions, consultant claimed that he had entered prior transactions involving "bank pay orders." After numerous requests during discovery, however, he failed to produce any documentation regarding such transactions. Accordingly, the court issued an order precluding him from proffering any such evidence at trial. The putative issuer then moved for summary judgment which was granted.
Consultant alleged that the letter issued by the bank was a letter of credit under which the bank was required to pay. The bank argued that, as a matter of law, the letter was not a letter of credit. The trail court agreed with the bank, noting that although no particular form is required for a letter of credit under prior UCC - 5-103 (the law then applicable), the letter does not state that it is a "letter of credit," an "irrevocable credit," or "credit." What the letter did state was that the bank will issue a "bank pay order" when certain conditions are met. The trial court also noted that any ambiguity in a letter of credit must be resolved against the drafter, and since the consultant drafted the letter, it must be construed against him. Finding the consultant understood and was capable of using the term "letter of credit," the trial court noted his failure to do so indicated that the letter was not, in fact, a letter of credit. The trial court held that there was not sufficient evidence to raise a factual issue as to consultant's claim that the bank's letter is a letter of credit. Moreover, the trial court noted that because of the order precluding evidence on the consultant's prior dealings with "bank pay orders," the consultant would not be able to prove that the "bank pay order" was indeed a payment against the presentation of a document. On appeal, vacated and remanded.
Legal Analysis:
1. Form of a Letter of Credit: The appellate court held that a factual issue remained as to whether the bank letter was a letter of credit and ruled that summary judgment could only be entered where there was no documentary ambiguity. The court noted that the trial court used the wrong standard when it interpreted the letter against its drafter (the consultant). The court stated that on summary judgment the correct standard was to interpret the letter in the light most favorable to the non-moving party. Moreover, the court noted that the inability of the consultant to introduce evidence as to his prior dealings with "bank pay orders" did not preclude him from entering other evidence as to the existence and explanation of such a device.
2. "Documents": The bank argued that the requirement that a letter of credit promise to pay upon a documentary demand was not satisfied by the pay letter because it only called for "the signed contract" between two companies, a highly ambiguous statement. The appellate court ruled, however, that the referenced contract had to be presented by the applicant, thus foreclosing any later claim by the applicant that payment was improper.
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COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.