Article

Factual Summary: U.S. applicant contracted with a third party to provide materials and labor for the construction of a Saudi Arabian airport terminal. The third party required the applicant to provide a performance guarantee for 5% of the value of the contract. The applicant made arrangements through its local bank which used correspondent banks to arrange for a Saudi bank to provide the guarantee. The guarantee was backed up by a "clean sight credit" issued by the defendant bank.

Upon completion of the construction, the applicant was to have a new guarantee issued to assure that maintenance would be provided and to replace the performance guarantee for the same amount. To draw under this maintenance guarantee, the third party/principal had to present a "Certificate of Completion of the Works". The applicant used the same correspondent banking chain for this guarantee. The applicant sent the language for the guarantee through the correspondent chain to the guarantor. The language, however, provided that the correspondent bank, not the Saudi bank, was to issue the guarantee.

The Saudi bank telexed a request for clarification. The telex stated that the Saudi bank would issue the guarantee once the U.S. correspondent bank issued a "clean credit" counter-standby in favor of the guarantor to back up the guarantee. The applicant was requested to sign the telex, which also included language of the clean credit that was to be issued:

WE IRREVOCABLY AND UNCONDITIONALLY CONFIRM THAT, UPON RECEIPT OF YOUR FIRST WRITTEN DEMAND, WE WILL PAY YOU THE AMOUNT DEMANDED NOT EXCEEDING THE LIMIT SET FORTH HEREIN.

In setting out the requirements for the demand, the telex stated that the demand:

SHALL BE EITHER IN THE FORM OF A TESTED TELEX OR A LETTER, IN EITHER CASE STATING THAT YOU HAVE BEEN CALLED UPON TO PAY OR HOLD VALUE FOR THE AMOUNT UNDER YOUR ABOVE MENTIONED GUARANTEE. . .

Upon receipt of the telex, the applicant sought the advice of its attorney (the plaintiff in this case) who referred the applicant to its local bank. The bank informed the applicant that the telex made only administrative amendments. The applicant then signed the telex in the belief that none of the banks had an obligation to pay unless a Certificate of Completion was issued.

Later, the Saudi guarantor honored a draw under the guarantee despite the absence of a Certificate of Completion and drew upon the standby. After the applicant's failed attempt to enjoin payment, the issuer of the standby paid the proceeds to the Saudi guarantor/beneficiary which had drawn and the correspondent banks honored their reimbursement obligations. The applicant, however, was unable to reimburse the issuer of the standbys. The local bank, therefore, foreclosed on the security that had been pledged by the applicant and the plaintiff in this case. The applicant was then dissolved.

Acting as subrogee of the applicant, the attorney filed an action against the issuer and correspondent banks for breach of contract and negligence in connection with the transaction. The banks moved for summary judgment which the trial court granted. On appeal, affirmed.

In his appeal, the applicant argued that the terms of the standby were ambiguous and that the banks breached a duty owed to applicant. Specifically, the applicant argued that the standby could not be honored until the certificate was issued since the original agreement provided that the issuer would issue the guarantee and would not pay until it received a certificate. Applicant also argued that the telex did not amend the agreement, but supplemented it. When read together, the applicant claimed, the original agreement and the addition created an ambiguity as to whether the standby was to be clean or not. The issuer countered that only the guarantor had to await the presentation of the certificate since the standby was a "clean" letter of credit and the applicant signed the telex which asked it to make sure it understood all of the "points of the amendment."

Legal Analysis:

1. Ambiguity in L/C terms: The appellate court found that the counter-standby was unambiguous. Not only did the telex signed by the applicant call for a "clean" credit, but it also stated that payment would be made upon written demand and no more. Moreover, the court noted that the telex clearly stated in three separate places that it was an amendment and not merely an "addition" to the terms of the prior agreement. The court also ruled that, under Nebraska law, a subsequent contract that contains all of the material terms supersedes any prior contract. Thus, the telex that the applicant agreed to in the instant case superseded the earlier agreement which stated that the correspondent bank would issue a guarantee and pay only upon the presentation of the Certificate.

Comment:

The court never questions the notion that "clean" may have more than one interpretation. At one point, some banks regarded "clean" as equivalent to a standby -- i.e. not requiring commercial documents. This use has diminished and the term is generally taken to mean a credit (standby) requiring a simple demand or draft.

Interestingly, ISP 1997 Draft Rule 1.22(b)(i), notes that "clean" has no single accepted meaning and should be disregarded. The court never addresses the other interpretations that banks give to the word "clean". However, had the court noted the multiple meanings of the word, it would not likely have changed the result due to the language of the telex that payment would be made only upon receipt of a written demand.

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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.