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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES 94 Civ. 9226(SS), 1996 U.S. LEXIS 10276 (S.D.N.Y. July 23, 1996)
Topics:
Fraud; Estoppel of Assertion of Discrepancies by Applicant; Preclusion.
Type of Lawsuit:
Action by Applicant against issuer and beneficiary for fraud connected with a letter of credit-related sale of commercially worthless material to the applicant.
Principals:
Applicant/Plaintiff: Linkers (Far East) PTE., Ltd.;
Beneficiary/Defendant: International Polymers, Inc.;
Issuer/Defendant: National Bank of Pakistan.
Underlying Transaction:
The purchase of Vista polyvinyl chloride resin 5385 ("Vista 5385").
LC:
L/C backing US$ 108,000; subject to UCP 500.
Procedural History:
The United States District Court for the Southern District of New York, Sotomayor, J., dismissed Plaintiff's claim against the issuer and pierced the corporate veil finding the principals of the beneficiary liable on the underlying transaction as well as imposing punitive damages against them.
Rule:
Issuer did not knowingly assist in fraud where the dicrepancies were"de minimus"and did not give notice of fraud. Applicant estopped from asserting the UCP preclusion rule because it waited months after discovering the discrepancies to inform the issuer.
"de minimus"
Article
Factual Summary: Although presenting conforming documents, the beneficiary delivered "commercially worthless material" to the applicant on the underlying transaction. When the issuer paid the beneficiary and was reimbursed, the applicant claimed that the issuer had "intentionally, recklessly, or wantonly participated" in the fraudulent scheme by honoring documents containing discrepancies.
Legal Analysis:
1. Fraud: The applicant seeks to charge the issuer with knowingly assisting in the fraud in the underlying transaction by paying against blatant discrepancies. The court dismissed the claims because of lack of proof and the"de minimus"character of the discrepancies that would not have given notice of beneficiary fraud.
2. Preclusion: It appears that the issuer did not notify the beneficiary of discrepancies which included: (1) obtaining 3 originals and 5 copies of the bill of lading; (2) couriering the documents overseas "immediately"; (3) spelling "Sri Lanka" correctly; (4) detecting and rejecting the fraudulent "cut and paste" certificate of analyis; (5) obtain a "cover note number" as opposed to a "policy number/certificate number/cover note number"; and (6) obtaining an insurance declaration before the shipping date. The court describes the alleged discrepancies as "de minimus"but does not determine whether they are discrepancies under the UCP. Instead, it concludes that the applicant is estopped (the court uses the term "preclusion" and refers to UCP 500 Article 14(e)) from asserting the UCP preclusion rule because it waited "months" after discovering them to inform the issuer.
Comment:
While the court incorrectly links its use of estoppel against the aplicant to UCP 500 Article 14(e), its use of this doctrine in a situation where preclusion would otherwise obtain is most interesting. Certainly where the applicant excercises dominion over the goods, it is understood to have forfeited any claim with respect to discrepant documents. The question remains whether the failure to act in a timely fashion (especially after having received the documents) avoids the harsh effect of the preclusion rule. While equitable doctrines should not lightly been applied to the UCP notice and preclusion scheme the facts in this case represent a strong argument for their use.
©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.