Factual Summary: To secure purchaser's obligation to pay supplier for styrene monomer, the issuer supplied an irrevocable standby LC in the amount of US $ 1.2 million. The LC was issued by a Chinese state-owned bank and presentation was to be made at the place of issuance. The place of payment was not specified in the LC.

The issuer sent the LC via telex to the advising bank, which informed the beneficiary of the LC's issuance. Subsequently, the beneficiary delivered 999.731 metric tons of styrene monomer to the place of delivery stipulated in the standby. The beneficiary then made presentation to the presenting bank, which, in turn, presented the documents to the issuer. Shortly thereafter, the shipment was seized by Chinese customs.

The documents were accompanied by a cover letter requesting that the issuer notify the presenting bank of any discrepancies or confirm that the documents had been accepted for payment. The letter also requested that payment be made to the beneficiary's account in the U.S.

The day following the standby's expiration, the issuer sent notice to the presenting bank alleging that discrepancies existed and that it was contacting the applicant as to whether they would be waived. The applicant refused to waive the discrepancies and the issuer refused payment at the applicant's insistence. The beneficiary brought an action for wrongful dishonor against the issuer in the U.S. federal courts. The issuer moved for summary judgment on the pleadings pursuant to F.R.C.P. 12(c), asserting lack of jurisdiction and improper venue because the issuer, as a "foreign state" under the Foreign Sovereign Immunities Act, 28 U.S.C. -1603, was immune from suit in the U.S., unless one of the enumerated exceptions to the FSIA applied. The trial court denied the motion, ruling that the "commercial exception" applied because the action was based upon commercial activity conducted by the issuer in the U.S. and upon commercial activity by the issuer outside the U.S. that caused a direct effect in the U.S. On appeal, affirmed.

Legal Analysis:

The issuer alleged that, as an instrumentality of a foreign state which dishonored an LC outside the U.S. and did not perform any legally significant act within the U.S., it was not subject to U.S. jurisdiction.

The appellate court disagreed, noting that the activity involved was "commercial" within the scope of an exception to the FSIA.

The applicable portion of the exception relates to commercial activities outside the U.S. which cause a "direct effect" in the U.S. "[A]n effect is 'direct' if it follows 'as an immediate consequence of the defendant's...activity.'" 504 U.S. at 607, 112 S.Ct. at 2168. The appellate court ruled that "financial loss incurred in the U.S. by an American plaintiff may cause a direct effect" within the statute. In so doing, it rejected the argument that the bank must have been engaged in a "legally significant act" in the U.S. It also rejected the theory that there must be a significant quantity of foreign activity 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.