Legal Malpractice for Drafting LC.

Note:In consequence ofJanivo Holding, B.V. v.Continental Bank, 859 F. Supp. 316 (N.D. Ill. 1994), a beneficiary of a letter of credit for US$ 31,147,400 filed a malpractice action against its attorneys for negligently drafting the letter of credit and related agreements. As part of a construction development project, the applicant was to contribute the subject property and approximately $31,000,000 to a yet-to-be formed partnership. The letter of credit secured the payment of the monetary contribution to the partnership, but the applicant agreed to name a financial institution as beneficiary to help secure the construction loan.

A side agreement among the parties provided that no drawing would be made under the letter of credit without the presentation to the applicant, according to the court's interpretation of the language as reported in the prior case, of either a title policy on the property which set forth that the partnership was the beneficial owner of the property (thereby indicating that the partnership had been formed and the applicant had become bound to pay the contribution) or a form title policy with specified sections to be deleted. The letter of credit required a certified statement that all requirements of the separate agreement had been fulfilled.

The beneficiary chose the latter option of delivering a form title policy, which was also prepared by the defendant attorneys and which did not meet the terms of the side agreement. Two days later, the beneficiary drew under the credit, representing that all terms of the side agreement had been satisfied.

During the subsequent litigation between the applicant, beneficiary and confirming bank, the statute of limitations for legal malpractice was set to expire. As the beneficiary needed the testimony of its attorneys in that case, it agreed not to pursue the malpractice claim at that time. In exchange, the attorneys agreed not to raise the statute of limitations defense in a later action, provided that the beneficiary waived all claims arising out of the deal, except any claim related to the non-compliance of the title policy.

After the beneficiary settled with the applicant, it sued its attorneys for drafting the documents in such a manner that gave the applicant the argument that no drawing could be made under the letter of credit unless the partnership had been formed. The defendant attorneys argued that these claims had been waived under the agreement. The beneficiary, however, argued that it had signed the waiver under financial duress because it needed the attorneys' testimony to prevail in the other litigation. Additionally, the beneficiary argued that it was unethical for the attorneys to have demanded such a waiver.

The court ruled that these circumstances did not rise to the level of economic duress, but had merely been a rational business choice. Moreover, the court noted that once the beneficiary and attorneys discussed the malpractice claims, they were no longer in the attorney/client relationship, but had become adversaries. Thus, the waiver was not unethical.

While not focusing on letter of credit law, this case provides a powerful example of another avenue to which disgruntled parties to a letter of credit transaction may turn for recovery. Additionally, it serves as a warning to all attorneys who draft letters of credit in such complex situations.



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.