Factual Summary:

Applicant arranged to purchase chemicals for resale from the beneficiary in March 1996. Pursuant to the agreement, payment was assured by means of a standby LC, as in prior transactions between the parties.

By its terms, the standby provided for presentation of a copy of a negotiable bill of lading, a copy of a letter sent to the applicant indicating that originals had been sent directly, and a statement from the beneficiary to the effect that "payment, which was due 360 days after completion of loading, has not been received and is due from [applicant]."

Presentation of the documents to the issuer was not permitted until 360 days after completion of loading. The credit nominated a negotiating bank and restricted negotiation to the bank's Singapore branch.

Within two weeks of the date of the bill of lading, the beneficiary requested that the nominated negotiating bank discount and purchase the documents required under the credit, including an undated statement of non-receipt of payment. In connection with the request, the negotiating bank had requested and received a telex from the issuer indicating that payment had not been made to the beneficiary outside the LC and that, "all payments under the LOC will be made only to [the negotiating bank]." The negotiating bank approved the request for negotiation and paid value for the documents.

On June 22, 1996, as a result of non-delivery by the beneficiary, the third party canceled its contract with the applicant and, in turn, the applicant canceled its contract with the beneficiary. Applicant contended that by oversight, they did not take steps to cancel the LC until March 1997.

In fact, no payment had been received.

On March 14, 1997, 360 days after the completion of loading as reflected by the bill of lading, the negotiating bank presented the documents to the issuer, including the statement of non-payment, which the bank dated. Issuer determined that the documents sent by negotiating bank failed to meet the requirements of the LC and notified negotiating bank of the inconsistencies on March 18, 1997. Negotiating bank replied on March 21, 1997, disputing the alleged discrepancies.

After further requests from issuer to negotiating bank on March 21,1997, for the production of complying documents, negotiating bank received a letter from beneficiary demanding that negotiating bank withdraw the presentation.

Negotiating bank refused to withdraw its request and the issuer confirmed its dishonor of the claim. Applicant petitioned the court for an injunction against payment. The injunction was granted. The negotiating bank moved to dismiss based on the Foreign Sovereign Immunities Act, which was denied.

Legal Analysis:

1. Negotiation: Post Dated Document: Characterizing the required document as a "default letter", the court stated that: "the statement contained therein that payment had not been received 360 days after completion of loading was not true, nor could have it been true." It, therefore, concluded that the statement "was therefore not valid on its face when it was negotiated..." Finding the evidence on letter of credit practice "ambiguous", the court did not decide whether the negotiation of documents under a standby credit prior to maturity of the credit is a standard international practice followed in Singapore and other Asian markets.

2. Obligation to Pay: Fraud Exception/Negotiating BankNoting that an exception to the obligation to pay exists where a negotiating bank was aware of fraud, the court considered whether the negotiating bank could have known that payment was due when it forwarded statement a year later and, concluding, that it could not have known, ruled that the negotiating bank in this case was not immune from the issuer's fraud defense.

3. Irreparable Harm: Noting that "irreparable harm may be found where insolvency threatens to frustrate a damage award", the court concluded that the beneficiary's insolvency may frustrate the applicant's ability to collect damages. The court did not consider whether there was any likelihood of payment by the issuing bank (which had already dishonored) in the absence of an injunction.

4. Foreign Sovereign Immunities Act:Negotiating bank, which was a wholly owned subsidiary of a sovereign state argued that the Foreign Sovereign Immunities Act, 26 ASCA Section 1609, bars prejudgement attachment. Since an injunction would provide an equivalent remedy, it contended that injunctive relief was also barred. The court, however, concluded that the negotiating bank did not acquire a property interest in the standby LC where a document presented was "invalid on its face." Since the court had concluded that the invalidity prevented negotiation, it concluded that the FSIA restriction did not apply.



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.