International BIz Transaction

Sztein

...a letter of credit had been issued by a New York bank in favor of a seller in Pakistan. The buyer petitioned for an order restraining the bank from honoring drafts drawn under the letter, alleging that the goods shipped were worthless junk. The court concluded that the rule in the O'Meara case did not preclude the issuance of the restraining order. The alleged nonconformity of the goods in O'Meara amounted to a mere breach of warranty; the buyer's allegations in Sztejn went beyond breach of warranty to claim fraud on the part of the seller. U.C.C. §5-114(2)(b) apparently codifies the Sztejn limitation on (or explanation of) the rule in the O'Meara case. For a controversial extension of Sztejn, see NMC Enterprises, Inc. v. Columbia Broadcasting System, 14 U.C.C. Rep. 1427 (1974). holder in due course. if the party can show the bank that the letter of credit is induced by fraud, the bank does not have the obligation to pay(honor the draft) and the burden shift to the holder to prove that they are holder in due course.

Separate contract rule

Loc contract is separate from the underlying contract.

Dixon, Irmaos & Cia, Ltda. v. Chase Nat'l Bank, 144 F.2d 759 *, 1944 U.S. App. LEXIS 2924 (2d Cir. N.Y. 1944)

Plaintiff was cotton exporter in Brazil and contracted to sell to purchaser in Belgium. A Belgian bank requested defendant bank to issue in favor of plaintiff two irrevocable letters of credit to finance such sales. Plaintiff duly shipped cotton to customer in two lots, receiving for each shipment two originals of the bills of lading. Plaintiff shipped the goods freight collect and deducted freight charges from invoice price. Only one of the set of two bills of lading was delivered, and bank refused the drafts. Plaintiff sued to recover amount of its drafts. The district court ruled in favor of bank, and plaintiff appealed. On review, the court reversed because defendant's grounds for dishonor were not valid reasons. Defendant's refusal for absence of full set of bills of lading was invalid because existence of custom was established beyond dispute. ()Tender of documents showing deduction of freight from invoices was not deviation from requirement of defendant's credits calling for C.I.F. shipment, which had come to mean that seller had option of shipping either freight collect or freight prepaid. custom in the financing industry matters.

Banco Espanol de Credito v. State Street Bank & Trust Co., 385 F.2d 230 *, 1967 U.S. App. LEXIS 4593, 4 U.C.C. Rep. Serv. (Callaghan) 862 (1st Cir. Mass. 1967)

The LoC called for the presentation of an inspection certificate by a named firm stipulating "that the goods are in conformity with the order." Whether the term justified in refusing to honor the drafts of B on the ground that the inspection certificate did not meet the terms of the LoC. Transaction was entered into between manufacturer and purchaser. Appellant foreign bank was to sign invoices, inspection certificates, and bills of lading, was to pay manufacturer upon tendering of goods, and was to access funds from appellee domestic bank. When goods arrived, allegedly not in conformance with contract, regardless of fact that appellant foreign bank signed inspection, appellee domestic bank informed appellant that as inspection certificates were not in conformity with terms of credit, it would not honor payments made. Appellant filed action for payment. Lower court held that appellee was justified in not honoring payment, and appellant sought review. Court reversed lower court, holding that appellant was justified in payment, as it was permitted to take under oath the appropriateness of the sample for determination of conformity and as appellee failed to send inspector, it was bound by appellant's determination. As such, case was remanded for lower court to consider remaining additional defenses. One of the document that required was the certification of the quality of the goods. Once you decide to utilize the doc requirement, you'd better make the requirements clear. Otherwise, the court would clarify the equivocal terms. Make sure who is going to inspect the sample, The party is so messed up that exact documentary is not possible. Use the case as a model of if you don't do clearly and precisely, the court would interpret the terms of the contract according to its own understanding.

Urquhart

The buyer's bank told Urquhart that a "confirmed irrevocable credit" was open in his favour. After two shipments had been made and paid for, the bank on the buyer's instructions refused Urquhart's bill of exchange. It was held that the bank was liable in damages.

Maurice v. National Park Bank of NY

he payment obligation is triggered if the documents conformed to the documents required in the LoC. Proper documents are presented.

Doctrine of Strict Compliance

the documents to be presented by the seller must be in strict compliance with the requirements of the letter of credit. If this is not the case, the bank is entitled to reject them. even if the goods described in the documents and the goods required in the LoC are basically the same thing, the bank has the discretion to refuse to pay as long as they act in good faith.