Article

Factual Summary: To purchase 800 metric tons of polyester chips, applicant/buyer procured a L/C for US $1,536,000 issued in favor of the seller/benefi-ciary. The sales contract provided for shipment of half the goods in February or March, 1995 with the balance to be shipped in March or April, 1995 from Mexico to Hong Kong. Although the L/C prohibited transhipment, and there was no indication of transhipment in the documents presented, the first half was transhipped through Rotterdam, delaying its arrival until June 23, 1995. Applicant/buyer ac-cepted the first shipment under protest and rejected the second shipment due to late delivery.

After selling the first shipment, the applicant/ buyer brought this action against the seller/benefi-ciary for breach of contract, fraudulent concealment and conversion. Upon the seller/beneficiary's mo-tion for summary judgement on the contract claim and to dismiss the other claims, the trial court en-tered an order of summary judgement and dismissal.

Legal Analysis:

1. Independence Principle-Breach of Contract:Although the sales contract was silent as to transhipment, applicant/buyer argued that beneficiary/ seller knew or should have known that the L/C prohibited transhipment and that this L/C term impacted its contractual obligations. Noting that the contract delivery term was "C&F" and that there was no clause providing that time was of the essence, the court concluded that summary judgement was appropriate. Under UCC Section 2-504, the seller fulfills its obligation by loading the cargo and forwarding to the buyer a bill of lading. Since the shipment occurred in March in accordance with the contract, the carrier's reservation of the right to tranship and its exercise of that right did not breach the seller's duties, especially in light of UCP 500 Article 23(d) which permits a reservation of the right to tranship even where the L/C prohibits transhipment.

The court looked to the independence principle to justify its decision, noting that the L/C and the sales contract are sperate.

2. Course of Performance:The court also rejected the applicant/buyer's theories that there was a course of performance or acquiescence to the prohibition of transhipment in the L/C. Since there was only one occasion of conduct, the court concluded that there was no course of performance. Nor was there acquiescence under the circumstances.

3. Claim for Conversion: The claim for conversion failed because there was no wrongful or unlawful act other than a breach of contract rights. Nor was there fraudulent concealment or fraud by virtue of the seller's silence regarding transhipment.

Comment:

1. While the court properly refuses to look at the terms and conditions of the L/C in interpreting the underlying contract, this result is justified by the fact that parties did not agree to the prohibition of transhipment and not the independence principle. Had there been a dispute about such an agreement, the terms of the L/C would be evidence. The independence principle is irrelevant in such a situation where the issue turns on the meaning of the underlying contract.

2. The case also illustrates the mischief caused by a prohibition against transhipment - for the applicant. As is illustrated by this case, it only reaches a pre-arranged transhipment and certainly cannot assure prompt delivery of the goods, as this applicant seemed to suggest.

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