Factual Summary:

After an LC was opened, applicants claimed that beneficiaries had represented that it was legal to sell tires in the U.S. although they lacked United States Department of Transportation identification numbers, making it illegal to sell them in the United States. When the beneficiary informed the applicant that it intended to ship, the applicant sought, obtained, and served on the issuer a Temporary Restraining Order. Although the beneficiary presented documents, the issuer refused to pay because of the Temporary Restraining Order. Although it found that the documents complied, the trial court entered preliminary injunction. After a trial on the issues, applicants received a permanent injunction preventing honor and payment by the issuer. On appeal, reversed and remanded.

Legal Analysis:

1. Choice of Law: UCP; UCC: The court noted that the standby was subject to the UCP. Relying on Southern Energy Homes, Inc. v. AmSouth Bank of Alabama 709 So. 2d 1180, 1184-1186 (Ala. 1998), it concluded that the UCP controlled over the UCC with respect to whether extraordinary relief was available in the case of fraud in the underlying transaction. In so concluding, the court observed that the fraud rules could be varied because no issue of "good faith, diligence, reasonableness, and care prescribed by state law" pursuant to UCC Section 1- 102(4) or excluded provision in Revised UCC Section 5-103(c) was involved.

2. Fraud Exception; UCC § 5-112: The appellate court ruled that the fraud exception was only available when there was fraud in the documents presented or when the fraud so vitiated the underlying transaction as to render it meaningless, relying on Sztejn v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31 N.Y.S.2d 631. Applying this principle (which it labeled the "Vitiation Exception") to the facts of this case, it concluded that the fraud did not exist in the presentation and that injunction was not warranted.

3. Adequate Remedy At Law: Since the damages sought were monetary in nature, the appellate court concluded that the applicant had an adequate remedy at law, making injunction relief unnecessary.

4. Compliance: Pro Forma Invoice; Extraneous Document: The applicant argued that the injunction should be sustained because the documents did not comply with the terms and conditions of the standby since the beneficiary had submitted a pro forma invoice that contained the wrong address instead of submitting a revised invoice. Noting that the pro forma invoice was not a required document and that the only reference to it was in the description of the goods, namely that the shipment had to be in accordance with the pro forma invoice, the court concluded that the submission of the pro forma invoice was irrelevant.

5. Quantity: The applicant argued that the quantity of the tires actually shipped differed from that listed in the pro forma invoice. The court rejected this argument, stating "because inspection [of quantity] was not made a condition of the invoice and the applicants are arguing that the goods have not or will not pass inspection ... this fact is irrelevant because inspection was not a condition of the LC."

6. Permission to Ship: The applicant argued that the beneficiary did not have permission to ship the goods. Rejecting the argument, the court noted that the applicant's permission was not a condition of the credit.

7. Fraud: Standard: The Dissent (Valen, J.) took issue with the conclusion of the majority that the UCP controls over the UCC rules regarding fraud. The Dissent stated that the commission of fraud constituted a violation of the duties of good faith that could not be disclaimed. It also pointed out that there was "no evidence that the parties chose another body of law to govern their performance of the underlying contract." The Dissent contended that the award of an injunction does not undermine the independence principle.

8. Fraud: Adequate Remedy: The Dissent noted that the highest appellate court of the state "has determined that where a statute specifically allows an injunction in certain circumstances, a person seeking injunctive relief need not establish the lack of an adequate remedy at law." Accordingly, the Dissent contended that the applicants are not required to establish that they have no adequate remedy at law in order to obtain an injunction for honoring the letter of credit.


1. UCC vs. UCP: It is unfortunate that this decision is one of the first to interpret the fraud rule of Revised UCC Section 5-112. It contains several errors, many of them imported from prior jurisprudence and thought to have been fixed by the revision.

The first error was the notion that only documentary fraud and not fraud in the underlying transaction could be the subject of injunctive relief. Even in the case of a clean standby, injunctive relief is available if the fraud is sufficiently egregious. This is true whether the fraud is documentary or in the underlying transaction.

The second is the assumption that the conduct of the parties constituted material fraud under Revised UCC Section 5-112. What was involved here were disputes regarding representations and quantity. No doubt is raised that tires were shipped and that there was a colourable basis for a drawing by the beneficiary. As a result, there is no material fraud under the terminology of Revised UCC Article 5 even if it were to be applied and consequently no conflict with the UCP.

The third is that the UCP ousts the UCC with respect to injunctive relief for fraud. Although the UCP restates the independence principle, it does not expressly address exceptions in the case of fraud and, even if it did, a provision that avoided any judicial intervention for fraud would probably be unenforceable as against public policy. While Revised UCC Article 5 contemplates deference to the UCP and standard practice in general with respect to matters of standard International letter of credit practice, the availability of extraordinary relief is not a matter of standard practice. Even though Revised UCC Section 5- 103(c) (permitting variation of provisions in Revised Article 5 with certain stated exceptions) does not expressly restrict variation of Section 5-112, a general reference to the UCP would not suffice to oust the ability of courts to award extraordinary relief. Moreover, it may be argued that Revised UCC Section 5-112 provides the standard by which such relief is available but that the power to grant equitable relief is an inherent judicial power. It may be that this court appreciated this point and reverted to common law rules but such a step was unnecessary. Properly understood, UCC Section 5-112 is merely declaratory of the common law.

2. Extraneous Document: While the court reached an appropriate result regarding the pro forma invoice, it is puzzling why it did not rely on UCP500 Article 13 (a) Sentence 4 which provides that such documents will not be examined.



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.