Factual Summary: To finance the purchase of automobile radio parts, the applicant procured a letter of credit for US$170,955. The credit provided that "upon receipt of documents in conformity with terms of this credit we will reimburse the negotiating bank according to their instruction."

The negotiating bank paid the beneficiary US$157,493, the amount of the sight draft, forwarded the documents to the issuer, and instructed that reimbursement be remitted to its New York bank account. The issuer refused payment and the negotiating bank brought suit in New York.

After the issuer had the action removed to federal court, it asserted that the court lacked jurisdiction over the matter because the issuer could not be sued in a U.S. court under the FSIA.

Legal Analysis:

The court first noted that it was not contested that the issuer had acted in a "private or commercial" manner which would deny the issuer the protection of the FSIA. The issuer, however, contended that the second prong of the commercial activity exception had not been met: namely that the commercial activity had caused a "direct effect" in the U.S. The issuer contended that it had not acted in the U.S., had not specifically designated the U.S. as the place for negotiation, and had not made any payment into the U.S. bank. As such, its actions had caused no "direct effect" in the U.S.

The court rejected all of the issuer's arguments by ruling that failure to pay the U.S. bank constituted a "direct effect". Moreover, having undertaken in the credit to reimburse any negotiating bank, the issuer could reasonably foresee that the negotiating bank would be a U.S. bank, especially since the same beneficiary had used the same U.S. bank in a prior transaction with the issuer.

Finally the issuer argued that the "place of performance" under letter of credit law was Indonesia. The court rejected this argument by noting that merely because Indonesia was the place of performance, that fact did not preclude there having been a "direct effect" in the U.S. Accordingly, the court held that the FSIA did not afford the issuer immunity in this case and that the issuer's actions satisfied the due process clause as it could reasonably foresee being haled into court in the U.S.



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.