The Court of Appeals of New York has upheld an earlier decision of the Supreme Court of New York Supreme Court against Korea First Bank (KFB). It failed to convince either court that the renewal of a revolving standby letter of credit (L/C) is implicitly contingent on the repayment of funds previously disbursed by the issuing bank.

KFB must now pay US$82 million in damages to the plaintiff, Japan's Nissho Iwai Europe plc.

US$150 million loan

The dispute arose out of a standby L/C provided by KFB's New York branch as security in a US$150 million loan made in 1994 by Nissho Iwai to Daewoo Hong Kong Ltd. A guarantee by Daewoo's parent corporation was also provided as security.

The L/C was issued for a value of up to US11.5 million. The documentation states that the L/C "shall be revolved and reinstated every three months within the period of validity."

Repayments

Daewoo was required to pay interest for three years after the first disbursement, followed by 15 quarterly principal and accumulated interest instalments of about US$10.7 million.

Daewoo repaid Nissho Iwai without a hitch until missing a scheduled payment in November 1999.

Wrongful dishonour

After Daewoo failed to make timely payments, Nissho Iwai expected payments to continue under the L/C arrangements but KFB claimed the standby was exhausted and refused to pay the Japanese trading house.

This resulted in the action brought by Nissho Iwai against KFB for wrongful dishonour and anticipatory repudiation.

Automatically revolving

The supreme court found in favour Nissho, concluding that the L/C required US$11.5 million should be made available each quarter regardless of whether Daewoo had failed to reimburse KFB for previously extended credit.

The bank argued that repayment of funds by Daewoo was an inherent precondition in the term 'revolving' as that word applied to the L/C in question. Both courts rejected that argument by finding that the L/C was automatically revolving.

In the appeal court's opinion the term 'revolving' - although it is not specified as an ambiguous term in ISP98 Rule 1.10(c)(ii) - should under that rule be considered a term with no single accepted meaning and "shall be disregarded unless their context gives them meaning".

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.