Article

Factual Summary: Buyer contracted with seller to pay for scrap steel by means of a letter of credit. Prior to its issuance, the seller shipped the steel. The L/C required a bill of lading which was not to be issued before a stipulated date. When the steel arrived in India, the beneficiary had not yet assembled all of the necessary title documents, so it authorized the carrier to discharge the cargo to the applicant against a letter of indemnity. The applicant obtained the steel and deposited the proceeds of its sale with the Indian issuer to cover its obligations under the credit.

Subsequently, the beneficiary presented documents to the U.S. paying bank. The beneficiary informed the paying bank that the documents contained discrepancies. In particular, the bill of lading was dated before the stipulated earliest date for shipment. Believing these discrepancies to be unimportant, and expecting the applicant to waive them, the beneficiary asked the advising bank to send the documents with instructions that the documents were not to be released "until all discrepancies have been waived and the documents have been accepted." The advising bank sent the documents and telexed a message to the issuer referring to the L/C numbers and reciting the discrepancies. It also stated that the documents were forwarded "on a collection basis," as well as stating:

DOCUMENTS SHOULD NOT BE RELEASED TO OPENERS UNTIL ACCEPTED BY THEM. ON ACCEPTANCE, PLEASE AUTHORIZE US BY TESTED TELEX TO CLAIM REIMBURSEMENT AT MATURITY AS PER L/C TERMS.

It also requested authority to claim reimbursement "as per letter of credit terms."

The issuer responded to the paying bank's L/C department that it would hold the documents on a collection basis and that the advising bank was not authorized to claim reimbursement upon maturity. The advising bank did not inform the beneficiary of this response. The issuer later released the documents to the applicant upon the applicant's acceptance of the beneficiary's draft, but without obtaining waiver of the discrepancies.

After the credit expired, the issuer informed the advising bank that the documents held for collection remained unpaid. The issuer then used the applicant's funds to cover other debts owed to it and the applicant became bankrupt.

The beneficiary brought an action against the issuer and paying bank for wrongful dishonor and failure to send correct instructions. The issuer moved to dismiss for failure to join the buyer/applicant which it regarded as an indispensable party. Because the case involved two different theories of recovery (letter of credit and documentary collection) failure of the beneficiary to strictly comply with the terms of the letter of credit led the trial court to conclude that the beneficiary could not prevail at trial on the letter of credit claim. The court further found that the applicant, who was not amenable to process, was an indispensable party to the collection action and dismissed the complaint. Even though the applicant subsequently submitted an affidavit indicating that it would submit to the court's jurisdiction, the court declined to reconsider its judgment. On appeal, vacated and remanded.

Legal Analysis:

1. Indispensable Party: The appellate court ruled that the trial court erred when it dismissed the action for failure to join an indispensable party. It noted that the beneficiary was entitled to plead alternative claims and both should not be dismissed simply because the applicant may be an indispensable party to one. Moreover, the appellate court found that the trial court erred when it found that the beneficiary could not succeed on its letter of credit claim because it had not strictly complied with the terms, noting that this point went to the legal sufficiency of the claim and should not have been decisive in considering a motion concerning the failure to join an indispensable party. The court also noted that, even if the applicant was indispensable, the beneficiary's claims against the advising bank for negligence and failure should not have been dismissed. The court concluded by noting that whether the buyer was indispensable to the collection action had become moot by the applicant's agreement to submit to jurisdiction.

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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.