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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES 954 F. Supp. 1275 (N.D. Ill. 1997)
Topics:
Breach of Contract; Fraud in the Transaction Prior UCC 5-114(2); Fraud.
Type of Lawsuit:
Issuer sued beneficiary/seller who had been paid under an LC in its own right and as assignee of the applicant/buyer for breach of contract, breach of implied warranty of fitness for a particular purpose, and fraud.
Parties:
Plaintiff/Issuer/Assignee of Applicant/Buyers Rights- Banco Del Estado
Defendant/Beneficiary- Navistar International Transportation Corporation
Counsel:
For issuer: William D. Heinz (Jenner & Block); Roger A. Clark and T. Douglas Hollowell (Rogers & Wells)
For beneficiary: Richard M. Franklin, Martin R. Castro, William L. Schaller, Ellenore Angelidis (Baker & McKenzie)
Underlying Transaction:
Contract to purchase & deliver 80 buses to Columbian company. Silent as to the UCP.
LC:
Two LCs; US$ 968,625 and US$ 753,375.
Decision:
The United States District Court for the Northern District of Illinois, Shadur, J., applying Illinois law, granted the beneficiary's Motion to Dismiss claims based on the issuer's status as issuer of the LC because it was not a party to the sales contract, a third party beneficiary, nor a beneficiary of an implied warranty of fitness. The court denied beneficiary's Motion to Dismiss claims based on issuer's status as assignee of the buyer/applicant's rights under the sales contract for breach of contract.
Rationale:
The issuer may seek injunctive relief or refuse payment on the basis of fraud in the underlying transaction prior to payment on the LC but, having paid, it cannot seek recourse against the beneficiary as an implied party to the underlying contract, third party beneficiary, or beneficiary of an implied warranty of fitness. It may, however, assert these actions as an assignee of the buyer (applicant).
Where the beneficiary made material misrepresentations directly to the issuer in order to induce financing of the sale and before issuance of the LC, the issuer may bring a common law action for fraudulent inducement to enter into a contract on its own behalf as well as on behalf of the applicant/buyer.
Article
Factual Summary:
To induce a bank to finance the purchase of buses from prior model years and issue an LC and prior to its issuance, the seller allegedly represented to the issuer and the purchaser that the buses were new 1993 model year buses. After shipment and upon presentation of the required documents, the beneficiary was paid the amounts requested under the LCs. Upon arrival of the buses in Columbia, the customs service concluded that the buses were not new as required by Columbian law. It indicated this in the documents and attempted to seize the entire shipment.
The issuer, having been assigned all of the applicant's causes of action (pursuant to the application for the LC) asserted various claims against the beneficiary: breach of the presentment warranty under prior Section 5-111 of the UCC, negligent misrepresentation, and violation of the Illinois Consumer Fraud Act. When the beneficiary's Motion to Dismiss was granted, 942 F. Supp. 1176 (N.D. Ill. 1996), the issuer subsequently filed an amended complaint, alleging it was entitled to relief as a party to the sales contract, a third party beneficiary, the beneficiary of an implied warranty of fitness, or for fraudulent inducement in its own right and as an assignee of the buyer/applicant. The beneficiary filed a Motion to Dismiss for Failure to State an Action. Held: granted in part and denied in part.
Legal Analysis:
1. Breach of the Sales Agreement: Noting the prior ruling in the case that the issuer had no cause of action based upon an implied warranty under prior Section 5-111, the court ruled that the issuer, not being a party to the underlying contract, could not bring an action on that contract nor as an implied beneficiary "absent a manifest interest on the face of the contract to benefit the third party directly." The court concluded that no such interest was manifested. For similar reasons, it concluded that there was no cause of action available on an implied warranty of fitness theory. It specifically rejected issue's argument that LC fraud constituted an exception to the independence principle or enabled the issuer to seek redress on the underlying contacted. It permitted, however, the issuer to state a cause of action on these theories as assignee on behalf of the buyer/applicant by virtue of the application/reimbursement agreement.
2. Fraudulent Inducement to Enter a Contract: Beneficiary's argument that the issuer's final cause of action, fraud, also be dismissed because of the independence principle inherent in the LC issuer-beneficiary relationship was rejected. The court found that the fraud occurred prior to the issuer-beneficiary relationship, taking place when the beneficiary sought out the issuer to finance the underlying transaction. The court held that the independence principle did not absolve the beneficiary from liability for misrepresentations that occurred prior to and in the course of inducing the issuer's agreement to finance the purchase. For similar reasons, the issuer's claim of fraud on behalf of the assignee was deemed sufficient to withstand a motion to dismiss.
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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.