Financing The International Sale Outline

Financing the International Sale

1. Letters of Credit

   1. Types of Actions that Can Arise out of Fraud in the letter of credit transaction:

      1. (1) The applicant (customer) can sue the issuing bank to enjoin payment under the letter of credit.

         1. The burden of proof will be on the applicant to show (1) that a preliminary injunction is proper and (2) that there was fraud in the transaction

         2. Enjoining an Issuing Bank from paying on a letter of credit:

            1. UCC §5-109(b): sue for an injunction against the bank prohibiting payment

               1. TEST: To obtain a preliminary injunction, the movant must show (1) that it will suffer irreparable harm absent the injunction and (2) either (a) that it is likely to succeed on the merits or (b) that the motion presents sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. Archer Daniels Midlands Co. (CB 326).

                  1. In actions to enjoin honor on the basis of fraud, court usually find that the applicant has an adequate remedy at law where the alleged injury is capable of being measured in pecuniary terms. Mid-America Tire, Inc. (CB 274).

                  2. Most courts find that the availability of a monetary damage award for fraud in the underlying contract constitutes an adequate remedy at law, even if the applicant must travel overseas and submit to the uncertainties of foreign litigation in order to obtain it. Mid-America Tire, Inc. (CB 274-75).

                  3. BUT On the other hand, the availability of a damage award is usually held to be inadequate (1) where resort to foreign courts would be futile or meaningless, (2) where the beneficiary is insolvent or may abscond with the money drawn, (3) where honoring a draft would likely force the applicant into bankruptcy, or (4) where the determination of damages would be difficult or speculative. Mid-America Tire, Inc. (CB 275).

                  4. THUS in determining the propriety of injunctive relief, adequate remedy at law means that the legal remedy must be (1) as efficient as the indicated equitable remedy would be; (2) that such legal remedy must be presently available in a single action; and (3) that such remedy must be certain and complete. Mid-America Tire, Inc. (CB 275).

                  5. When a letter of credit expressly incorporates the terms of the UCP, but the UCP does not contain any rule covering the issue in controversy, the UCP will not replace the relevant provisions of UCC Article 5. Mid-America Tire, Inc. (CB 277).

                     1. In Mid-America Tire, Inc., the court held that the express incorporation of the UCP into the contract did not displace the fraud provisions of Article 5 of the UCC, that is, “[UCC § 5-109(b)] remains applicable in credit transactions made subject to the UCP. (CB 277)

         3. “Fraud in the transaction” exception

            1. TEST: Establishing Fraud Under UCC § 5-109

               1. Notwithstanding the independence principle, material fraud committed by the beneficiary in either the letter of credit transaction or the underlying sales transaction is sufficient to warrant injunctive relief under UCC § 5-109(b). Mid-America Tire, Inc. (CB 278).

               2. Under UCC § 5-109(b), only “material fraud” by the beneficiary will justify an injunction against honor. Mid-America Tire, Inc. (CB 278).

                  1. “Material fraud” means fraud that has so vitiated the entire transaction that the legitimate purposes of the independence of the issuer’s obligation can no longer be served. Mid-America Tire, Inc. (CB 278).

                     1. Another court explained that the applicant must show that the letter of credit was, in fact, being used by the beneficiary “as a vehicle for fraud,” or in other words, that the beneficiary’s conduct, if rewarded by payment, would deprive the applicant of any benefit of the underlying contract and transform the letter of credit into a means of perpetrating a fraud. Mid-America Tire, Inc. (CB 278).

            2. “Fraud in the transaction” constitutes 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.” Archer Daniels Midlands Co. (CB 327).

               1. Under this exception, an issuing bank may refuse to honor documents which “appear on [their] face strictly to comply with the terms and conditions of the letter of credit” but which are “forged or materially fraudulent,” or if “honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant.” Archer Daniels Midlands Co. (CB 328).

               2. However, the fraud exception to the independence principle “is a narrow one” that is only available on a showing of “outright” and “intentional fraud.” Archer Daniels Midlands Co. (CB 328).

               3. Courts in the Second Circuit enjoin payments under letters of credit “only rarely” and only upon a strong showing that the request for payment was fraudulently made.” Archer Daniels Midlands Co. (CB 328).

      2. (2) The issuing bank can refuse to pay and be sued by the beneficiary for wrongful dishonor.

         1. If the bank dishonors: if the seller-beneficiary then brings a lawsuit against the bank for wrongful dishonor, the bank must defend its dishonor in the litigation by proving forgery or material fraud

         2. The burden of proof will be on the issuing bank to show fraud.

      3. (3) The issuing bank can pay and then be sued by the applicant for wrongful payment.

         1. If the bank honors: the bank is protected and entitled to receive reimbursement of the letter of credit from the buyer-applicant so long as the bank acts in good faith.

         2. The burden will be on the applicant to show that the bank didn’t act in good faith.

      4. (4) The issuing bank can pay and then sue the beneficiary for fraud.

         1. The burden of proof will be on the issuing bank to show fraud.

      5. (5) The issuing bank can pay and charge the applicant’s account, and the applicant then sues the beneficiary.

         1. The burden of proof will be on the issuing bank to show fraud.

   2. Overview of the Letter of Credit Transaction:

   3. ...

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