Article

Factual Summary:

To pay for a shipment of quality copper concentrates, a deferred payment letter of credit was issued by a Chinese bank and advised by a Swiss bank. The contract for the copper specified that shipment would be made and completed in April 1996, but this provision was qualified by the requirement that a letter of credit acceptable to the beneficiary be issued prior to 10 April 1996 and that a vessel for shipment was available. The opinion stated that "[t]he letter of credit also stated that shipment must be completed by the end of April," but did not contain any of the contract contingencies. The contract also contained an arbitration clause.

Between the contract date and the end of April, the market for copper plummeted. The beneficiary secured a vessel, but the vessel did not sail until 10 May (also the date of the bill of lading), and did not arrive until 10 July. The applicant presented evidence that the beneficiary approached the portmaster and requested alterations to his log to reflect that the ship had sailed in April. It was also stipulated that the beneficiary had the carrier re-issue the bill of lading with a 30 April date to "ensure that it would be paid for the goods." The applicant also alleged that the beneficiary made further alterations to the documents.

On 29 May, the beneficiary negotiated the documents to the advising/negotiating bank. In August, the applicant asked the beneficiary to agree to an extension of the payment date. The beneficiary and the negotiating bank agreed to extend the date 120 days and the issuer confirmed that payment would be made directly to the negotiating bank on 27 December.

In the meantime, the applicant and the beneficiary disputed about whether the delay in shipment constituted a breach of the contract. The beneficiary argued that the vessel was not available until 10 May and the letter of credit was not "acceptable" until 21 May. The applicant answered by stating that the contingencies were irrelevant since they were not stated in the letter of credit, and that, under English law, the terms of the letter of credit are written into the contract.

The applicant then applied to a Chinese court for an injunction against payment, alleging that the changes to the documents constituted fraud. That court issued the restraint, but then rescinded it on 23 December. The applicant then initiated these proceedings, and on 30 December, the court issued an attachment order to attach any funds of the beneficiary that passed through New York banks should the negotiating bank be successful in obtaining payment. The next day, the court issued a temporary restraining order to prevent the beneficiary from making a draw.

In early January 1997, the applicant alleged that the negotiating bank drew down on the letter of credit with the aid of the beneficiary in violation of the court's previous order since the funds were re-routed so that they would not pass through New York. The beneficiary answered by stating that the payment was set in motion on 27 December, three days prior to the court's order. The beneficiary did receive some unrelated funds into New York banks which were set aside pursuant to the attachment order.

The applicant made a motion to enjoin the beneficiary from recovering the funds subject to the attachment order and to compel arbitration. The court granted the motion for an injunction and ordered arbitration.

Legal Analysis:

1. Attachment in Aid of Arbitration: The beneficiary first argued that, under New York law, the lower court did not have the power to issue an attachment in aid of arbitration. The court rejected this argument by noting that there is little distinction between an attachment order and an injunction; and there is no question of the court's power to issue an injunction in aid of arbitration.

2. Injunction in Aid of Arbitration: The court then stated that to receive an injunction, the applicant must demonstrate an irreparable injury and a likelihood of success on the merits of the case. Normally, injuries compensable by monetary damages do not meet the "irreparable injury" test. However, the court noted that under New York law a "demonstration of intent to frustrate a judgment" satisfied the requirement. The court then noted that the beneficiary's actions in having the date on the bill of lading changed and circumventing the attachment order as well as evidence that the draw on the letter of credit took place after the beneficiary had notice of the injunction all demonstrated the beneficiary's intent to frustrate judgment in this case. The court also stated that the beneficiary's actions in altering the documents belied its argument that it had a right to payment under the contract. Additionally the court noted that, based on the current evidence, the applicant had a likelihood of success on the merits of the case. Accordingly the court enjoined the beneficiary from recovering any of the funds subject to the attachment order.

3. Arbitration: The court next turned to the issue of compelling arbitration. The beneficiary and the applicant argued that different federal statutes applied to this situation. The beneficiary argued that 9 U.S.C. - 4 (the Federal Arbitration Act), which requires the petitioning party to be "aggrieved", applied. The applicant argued that 9 U.S.C. - 206 (the New York Convention), which has no such requirement, applied. The court noted that the code had a provision to resolve conflicts which gave precedence to the Convention. The beneficiary, however, argued that since the Convention was silent as to a requirement of being "aggrieved" there was no conflict and the FAA controlled. The court rejected the beneficiary's argument by ruling that rather than deeming statutes "silent" courts had an obligation to interpret them. In so interpreting the Convention the court noted that "[w]hat one interpreter views as "silence" might be viewed as a deliberate omission by another." Since the plain language of the Convention allowed the court to compel arbitration without the petitioner being "aggrieved," the court did so.

As a final argument, the beneficiary claimed that the applicant had not engaged in friendly negotiations, as required by their contract, prior to demanding arbitration. The court rejected this argument and found sufficient evidence surrounding the extension of the payment date on the credit to indicate that the applicant had indeed attempted to negotiate with the beneficiary. Accordingly, the court enjoined the beneficiary from recovering the attached funds and compelled arbitration.

Comment:

The opinion is unclear as to the scope of the initial temporary restraining order preventing a drawing on the LC but it is difficult to understand how such an order could affect a negotiating bank which was not a party. Because payment was effected, the issue is moot. The court considers these facts, however, in assessing the conduct of the beneficiary which was subject to the TRO.

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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.