Ready to test your Knowledge?
Try out our new practice tests completely free!
exam preparation banner icon
expand icon
book International Business Law and Its Environment 9th Edition by Richard Schaffer,Filiberto Agusti,Lucien Dhooge cover

International Business Law and Its Environment 9th Edition by Richard Schaffer,Filiberto Agusti,Lucien Dhooge

Edition 9ISBN: 978-1285427041
book International Business Law and Its Environment 9th Edition by Richard Schaffer,Filiberto Agusti,Lucien Dhooge cover

International Business Law and Its Environment 9th Edition by Richard Schaffer,Filiberto Agusti,Lucien Dhooge

Edition 9ISBN: 978-1285427041
Exercise 2
In 1988, Semetex entered into an agreement with the Al- Mansour Factory in Baghdad, Iraq, an enterprise owned and operated by the government of Iraq, in which Semetex agreed to provide Al-Mansour with an "ion implanter" used to mark circuitry pathways on microchips. Payment to Semetex was to be made through an irrevocable documentary letter of credit in the amount of $7,462,500. The letter of credit was issued by the Central Bank of Iraq in February 1990 and confirmed by a bank in the United States, specifically, UBAF.
The letter of credit conditioned payment solely on presentation of commercial invoices; a certificate of origin; an air waybill evidencing air shipment, freight prepaid, from the United States to Baghdad via Iraqi Airways or carriers authorized by Iraqi Airways; and a cable to Al-Mansour advising Al-Mansour of the flight number and date of arrival in Baghdad. It did not require evidence that control of the ion implanter had passed to a designated carrier before payment could be made.
Semetex engaged Eaton Corporation to manufacture the ion implanter to Al-Mansour's specifications. Semetex engaged Alison Transport, Inc., a freight forwarding company, to ship the equipment from Eaton's factory in Austin, Texas, to Baghdad. The shipment was scheduled in several stages by van from Austin to John F. Kennedy International Airport in New York, followed by a Lufthansa flight to Frankfurt and a connecting Iraqi Airways flight to Baghdad. While the truck carrying the ion implanter was in transit to New York, Iraq invaded Kuwait, which caused President George H. W. Bush to issue an executive order blocking Iraqi assets in the United States. The ion implanter was subsequently diverted to a warehouse in Massachusetts in order to comply with the assets freeze.
Semetex made demand for payment upon UBAF, which demand was rejected. UBAF claimed that the documents evidencing transport of the ion implanter as prepared by Alison contained inconsistent information and fraudulent representations regarding the dates of shipment and the identities of carriers. Semetex applied for a license from the U.S. Office of Foreign Assets Control to sue UBAF for payment on the letter of credit, which application was granted.
UBAF invokes the fraud exception to the letter-of-credit independence principle. UBAF admits that the documents presented to it on August 1, 1990, complied on their face with the requirements of the Letter of Credit. It contends, however, that the documents were in compliance only because Plaintiffs misrepresented the flight information on the air waybill and forged the signature of an Iraqi Airways representative. Alison noted flight dates of July 26 and 29 on the air waybill when it made its second drawing attempt on August 1, UBAF contends, even though Alison and Plaintiffs knew that the ion implanter had only been picked up by truck in Austin on July 31 and that it was not scheduled to reach JFK Airport until August 2. UBAF contends that these discrepancies rise to the level of "outright fraudulent practice" that is required under New York law to supersede the independence principle....
Fraud provides a well-established exception to the rule that banks must pay a beneficiary under a letter of credit when documents conforming on their face to the terms of the letter of credit are presented.... The fraud defense, however, is a narrow one. The defense is available only where intentional fraud is shown, not where the party alleges improper performance or breach of warranty.... As the Second Circuit stated in Rockwell:
The "fraud in the transaction" defense marks the limit of the generally accepted principle that a letter of credit is independent of whatever obligation it secures. No bright line separates the rule from the exception, to be sure, but … "fraud" embraces more than mere forgery of documents supporting a call. The logic of the fraud exception necessarily entails looking beyond supporting documents.... We must look to the circumstances surrounding the transaction and the call to determine whether [the] call amounted to an "outright fraudulent practice." Rockwell Int'l Systems, Inc. v. Citibank, N.A. , 719 F.2d 583, 588-89 (2d Cir. 1983).
UBAF argues that... Semetex presented a false air waybill to the confirming bank UBAF purporting to evidence shipment and export days earlier than in fact the shipment was scheduled. The air waybill was dated July 24 and signed by Iraqi Airways at Robert Mueller Airport in Austin, Texas, purporting to evidence consignment to that carrier on that date and a flight on July 26. In reality, by August 1, the ion implanter had not been delivered to the designated air carrier, Lufthansa.... Although UBAF raises evidence of substantial discrepancies between the actual facts of the ion implanter's transport and the information on Semetex's transport documents, we conclude that UBAF has not presented evidence that rises to the level of "outright fraudulent practice." In particular, evidence of Plaintiffs' fraudulent intent is lacking.
UBAF has presented no evidence that Plaintiffs "first caused the default and then attempted to reap the benefit of the guarantee." Semetex and Eaton, defaulted on their obligations on the underlying contract because of an event over which they had absolutely no control-the Iraqi assets freeze.
UBAF likewise has presented no evidence that Plaintiffs either (1) failed to comply with an explicit term of the letter of credit or (2) did so with intent to defraud.... UBAF has presented no evidence that Plaintiffs' alleged "forgery" of dates and a signature on the air waybill was material to the requirements of the Letter of Credit or was committed with intent to defraud. There is no dispute that Eaton in fact manufactured an ion implanter to Al-Mansour's specifications, and there is likewise no dispute that, had it not been for the invasion of Kuwait and the subsequent Iraqi sanctions orders, the equipment would have reached its destination in Baghdad.... UBAF has presented no evidence of... fraudulent intent behind the seven-day discrepancy between the July 26 departure date represented on the air waybill and the actual planned flight date of August 2, and have presented no evidence that that discrepancy would have been material in any way in the absence of the unannounced invasion of Kuwait. Similarly, they have presented no evidence of fraudulent intent behind Plaintiffs' signing the air waybill as agents of Iraqi Airways and designating Robert Mueller Airport as the point of departure.
In this regard, it is significant that the Letter of Credit did not specify that shipment in the United States must begin at Robert Mueller Airport, or otherwise specify how the equipment was to be moved within the United States.... [T]he UCP... does not assign significance to the date of delivery to a designated air carrier unless the parties expressly incorporate such a term into their letter of credit....
In sum, none of the discrepancies on which UBAF focuses would have been material to Plaintiffs' ability to draw on the Letter of Credit if the parties' plans had not been unexpectedly dashed by the invasion of Kuwait and the subsequent freezing of Iraqi assets. [UBAF's cited authorities] would be analogous to this case only if Semetex had had foreknowledge of the invasion of Kuwait and the resulting freeze of Iraqi assets, and so had conspired with Alison to falsify the dates on the air waybill in order to draw on the letter of credit funds before actually shipping the ion implanter. Of course, no such evidence was presented....
The parties are thus left with the rights and obligations they bargained for: Semetex bargained for the right to be paid fromUBAF's non-Iraqi assets, and UBAF attempted to protect itself against the risk of nonpayment by the Iraqi bank by fully collateralizing its obligation to Semetex. The parties having thus entered into the Letter of Credit arrangement, the material question regarding UBAF's liability is not whether control of the ion implanter had passed to Al-Mansour at the time that Plaintiffs attempted to draw on the Letter of Credit; rather, the question is whether UBAF has demonstrated either that the documents presented by Semetex failed to satisfy the Letter of Credit's terms, or that they were forged or fraudulent or there was fraud in the transaction. As set out above, UBAF admits that the documents satisfy the Letter of Credit's terms on their face, and it has failed to present evidence from which a reasonable factfinder could conclude that the fraud exception applies.
Conclusion. For the reasons set forth above, we conclude that Plaintiffs have demonstrated that they are entitled to judgment as a matter of law.
Is the court's decision correct given the many problems with the documentation as prepared by the freight forwarder and the additional complication of the Iraqi government asset freeze? Why or why not?
like image
like image

In the company X v/s bank Y case, follow...

close menu
International Business Law and Its Environment 9th Edition by Richard Schaffer,Filiberto Agusti,Lucien Dhooge
cross icon