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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES No. 95 Civ.0910 (JFK), 1996 U.S. Dist. LEXIS 1754 (S.D. N.Y. Feb. 16, 1996)
Topics:
Underlying Contract: Breach, unjust enrichment, implied covenants of good faith and fair dealing.
Type of Lawsuit:
By applicant against beneficiary for breach of underlying contract.
Parties:
Plaintiff/Broker/Applicant: Geogas Trading, Inc.
Defendant/Buyer/Beneficiary: Mitsui& Co. (U.S.A.), Inc.
Issuer: Banque Indosuez
Underlying Transaction:
Back-to-back sales/purchase contract for vinyl chloride monomer.
LC:
Standby L/C for US$ 5,154,187.50. No indication in opinion whether subject to UCP.
Procedural History:
Upon plaintiff's and defendant's cross motions for summary judgment, Judge John F. Keenan of the U.S. District Court for the Southern District of New York denied both motions.
Rule:
Performance of L/C does not indicate performance of contract.
Article
Factual Summary: In order to assure performance of its contract to transport and deliver goods to the buyer in the Far East, broker caused a standby to be issued in favor of buyer. The credit provided that it could be drawn against a statement that performance had not occurred within sixty days of issuance of the bill of lading. When the broker failed to perform within sixty days due to mechanical break-downs on the vessel, beneficiary/buyer drew on the standby for an amount representing 110% of the price and was paid. Upon arrival of the goods and their acceptance by the buyer/beneficiary, broker/applicant forwarded an invoice for the contractual price plus the additional 10% paid under the standby. When buyer/beneficiary failed to pay the additional 10%, applicant/broker brought this action for breach of the underlying contract. Buyer/beneficiary contended that the right to draw on the standby must be read together with the contract . Both parties moved for summary judgment which was denied.
Legal Analysis:
1. Independence: Citing the independence principle, the court rejected beneficiary's argument that it was entitled to retain the "extra" 10% under the standby because the standby and the underlying contract should be read as a whole and that performance of the standby constituted performance of the contract. The court ruled that the credit and the sales/ purchase contract contained separate obligations.
2. Underlying Contract (breach): Beneficiary then claimed that even if the letter of credit and underlying contract were separate, the applicant's failure to deliver the goods in sixty days entitled it to draw down the standby by its own terms. In response, applicant argued that the sixty day provision included in the letter of credit was not intended to be a delivery deadline under the contract, but rather was merely the expiry date of the standby letter of credit. Applicant also provided evidence that Mitsui had agreed not to draw on the standby "unless something went wrong on the cargo" and that the contract excused delays caused by mechanical breakdowns. The court held that summary judgment was inappropriate for either side because factual issues remained in dispute.
3. Underlying Contract (Unjust Enrichment): In response to applicant's argument that beneficiary was unjustly enriched by its drawdown, the court concluded that it was necessary to decide the contract issues before a ruling could be given on unjust enrichment.
4. Underlying Contract (Implied Covenant of Good Faith and Fair Dealing): The court also held that applicant's contention that beneficiary failed to abide by its implied covenant of good faith and fair dealing required by every contract under New York law involved disputed issues of fact.
©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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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.