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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES N.Y.L.J., 8 May 1997, at 25 (N.Y. Sup. Ct. 1997)
Topics:
Underlying Transaction, Wrongful Drawing.
Type of Lawsuit:
Applicant sued beneficiary for making a wrongful presentation and for damages resulting from breach of the underlying contract.
Parties:
Plaintiff/Applicant- Clark Oil Trading Co.
Defendant/Beneficiary- J. Aron & Co.
Underlying Transaction:
Purchase of 210,000 barrels of Algerian number two gas oil (home heating oil).
LC:
Standby for US$ 8,090,000.00. Silent as to the UCP.
Decision:
The Supreme Court, New York County, Davis, J., awarded damages to the beneficiary.
Rationale:
The beneficiary's wrongful draw was an immaterial breach of the underlying contract and the applicant's breach entitled the beneficiary to recovery.
Article
Factual Summary:
To guaranty its obligations under a contract for the purchase of oil, a standby was obtained. After delays arose in the performance of the underlying contract, the parties agreed to amend it to allow for a later shipment date and partial shipment. The parties failed, however, to amend the underlying contract to reflect the later shipment date, and the applicant contended that the amendment still required the beneficiary partially to deliver by the original date, and to complete delivery by the extended date.
During the course of performance, the market for oil declined sharply. When the beneficiary failed to deliver any oil by the original delivery date, the applicant notified it that it was in breach and that the applicant would no longer perform on the contract. The beneficiary notified the applicant that it would continue to perform and make delivery by the extended date. The beneficiary did so and then presented the applicant with an invoice which the applicant refused to pay. The beneficiary then notified the applicant of its intent to draw under the standby and did so for $8,090,000.00.
The applicant eventually took control of the shipped oil and sold it for $4.9 million in the declining market. The applicant then brought suit against the beneficiary for damages.
Legal Analysis:
1. Underlying Contract: Effect of Amendment of LC: The court found no evidence to support the applicant's contention that the parties intended a partial shipment to take place prior to the original delivery date. Since the letter of credit terms had been amended, and the parties intended payment and delivery to occur contemporaneously, the court ruled that the beneficiary had not breached the underlying contract by not making delivery prior to the original delivery date.
2. Underlying Contract: Improper Draw on LC:On the other hand, the court found that the applicant had breached the underlying contract when it notified the beneficiary that it would not perform. The court found, however, that the UCC did not provide the beneficiary with the self-help remedy of drawing on the letter of credit. Under the UCC, the beneficiary should have, after the applicant's breach, mitigated its damages by selling the oil and suing the applicant for the difference between the selling price and the contract price.
3. Underlying Contract:Beneficiary's Breach of Covenant of Good Faith: Thus, the court ruled that, while the drawing was in compliance with the terms of the letter of credit, it did breach the beneficiary's duty of good faith and fair dealing under the underlying contract and the UCC. The court further ruled, however, that this breach was not material and did not bar recovery from the applicant for its material breach. The court allowed the beneficiary to recover additional damages caused by the applicant's breach (storage charges, etc.), but did not allow the beneficiary to recover the full amount of the contract price, as it had breached its duty of good faith and fair dealing by drawing on the credit.
©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.