Factual Summary:

When the beneficiary of a LC issued to pay for the purchase of cellulose presented documents to the confirmer, two documents contained discrepancies. The confirmer sought waiver of the discrepancies from the issuer which, in turn, secured the applicant's consent. Consequently, the confirmer paid and forwarded the documents to the issuer which debited the applicant's account. On 11 November, the issuer received the documents, but on 2 December sent a message noting additional discrepancies. The applicant also complained and raised allegations of beneficiary fraud. The goods were, in fact, never delivered. The applicant subsequently sued the confirmer on theories of wrongful payment and negligent misrepresentation. After a "summary trial", judgment was entered in favor of the confirmer.

Legal Analysis:

1. Role of the UCP: The court noted that "[t]his action is governed by the UCP, which is 'a compilation of internationally accepted commercial practices.' Alaska Textile Co. v. Chase Manhattan Bank, 982 F.2d 813, 816 (2d Cir. 1992). Although the UCP is not law, it applies to most letters of credit 'because issuers generally incorporate it into their credits.' Id.; see also Semetex Corp. v. UBAF Arab American Bank, 853 F. Supp. 759, 769 (S.D.N.Y. 1994), aff'd 51 F.3d 13 (2d Cir. 1995) (UCP "may be incorporated into the private law of a contract between parties")."

2. The Want of Privity is a Defense in an Action by an Applicant against a Confirmer: Relying on UCP500 Article 3(a), the court concluded that "a buyer-applicant may not sue the confirming bank" since the "principle of independence extends as well to the relationship between the issuer bank and the confirming bank that is brought into the transaction not by the buyer-applicant but by the issuing bank ..." The applicant argued that this result would prevent it from seeking relief from the issuer under UCP500 Article 18(b), which disclaims liability for the failure of other banks to carry out instructions. The court rejected this interpretation as being too broad. The provision "does not address the situation where an issuing bank breaches its obligations to the applicant and it does not preclude [the applicant] from asserting claims against [the issuer] if indeed ... the issuing bank breached any of its obligations to [the applicant]."

3. Delay of 13 Days Precludes Assertion of Discrepancies: The court noted that, even were the applicant subrogated to the issuer's rights against the confirmer, the issuer would have been precluded from contending that the documents did not comply under UCP500 Article 4(e) since the issuer waited until 13 days after receipt of the documents to note the discrepancies.



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.