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NATIONAL AMERICAN CORP. v. FEDERAL REPUBLIC OF NIG

March 27, 1978

NATIONAL AMERICAN CORPORATION, Plaintiff,
v.
FEDERAL REPUBLIC OF NIGERIA and CENTRAL BANK OF NIGERIA, Defendants



The opinion of the court was delivered by: GOETTEL

GOETTEL, D.J.

 Introduction

 In the spring of 1975, for reasons which never clearly emerged despite a trial lasting three weeks, defendant, Federal Republic of Nigeria ("Nigeria"), acting through its Permanent Ministry of Defense, mounted a massive cement purchase program. The quantity ordered in sixty-eight contracts from various internationally placed suppliers aggregated over twenty million metric tons. One suggested motive was that, in previous years, Nigeria's experience had been that only ten percent of cement ordered was delivered. There were also suggestions that Nigeria had knowingly embarked on what would become a most ill-fated endeavor to corner the world's cement supply. Whatever Nigeria's original purpose, it cannot be disputed that the astronomical quantities ordered far outstripped the unloading capacity of Nigeria's deep water ports, principally Lagos Apapa.

 For their part, the cement suppliers, allegedly spurred by visions of huge demurrage *fn1" claims when the inevitable port congestion delayed unloading, sought to charter small tonnage vessels. (In addition, defendants contended that several suppliers would make partial shipments aboard the same vessel, with each submitting claims for the full demurrage determined at a fixed rate per diem.)

 The confusion in the port of Lagos climaxed in the early fall of 1975, and there was some suggestion that the presence of hundreds of cement-carrying vessels began to seriously threaten the supply of vital consumer goods. In response, Nigeria placed an embargo on the port, refusing additional vessels permission to enter. As the influx of cement vessels ground to a halt, plaintiff, National American Corporation ("NAC"), *fn2" was one of many nominal suppliers caught up in a situation over which it had lost control. (As will appear subsequently, there are suggestions that NAC, an American company, was a mere front for certain Spanish interests, designed to satisfy Nigeria's desire to do business with solvent American companies.)

 I. Facts

 On April 3, 1975, Nigeria entered into a contract with NAC for the purchase of 240,000 tons of Portland cement at $60 per metric ton C.I.F. Lagos, for a total purchase price of $14,400,000. The contract provided for demurrage at a rate "not exceeding $ U.S. 3,500.00 per diem." Nigeria promised to issue, through its state bank, defendant, Central Bank of Nigeria ("CBN"), an irrevocable letter of credit. The contract further states that it is to be governed by the laws of "New York City."

 On May 9, 1975, CBN informed its correspondent bank, Morgan Guaranty Trust Company of New York ("Morgan"), of the establishment of its irrevocable, transferable letter of credit in favor of NAC in the amount of $14,400,000. (Since this amount represented only the total purchase price of cement without regard to potential demurrage claims, subsequent correspondence between the banks was necessary to clarify that demurrage payments would be made beyond the face amount of the letter of credit.) Following CBN's instructions, Morgan advised NAC of the issuance of the letter of credit through NAC's bank, a branch of the Bank of America located in New York City, without adding its own confirmation. The credit, which repeated verbatim the material terms of the cement contract, ran until May 31, 1976 and was made subject to the Uniform Customs and Practice Documentary Credits (1962 Revision) Chamber of Commerce Brochure No. 222. *fn3"

 On July 31, 1975, NAC, acting through its president and major shareholder, Dr. Ilona Gero, transferred $970,000 of the letter of credit (representing payment for 20,000 tons of cement at $48.50 per ton) using forms supplied by Morgan to a Spanish corporation, International Trade and Finance Espanola, S.A., ("Intrafinsa"). *fn4" Its principal officer and major shareholder, Augustin Arrau, plays a vital, if somewhat obscure role in the events which followed. This transfer was later increased by $10,670,000 on August 8, 1975, for a total of $11,640,000, representing the cost of NAC's entire cement commitment to Nigeria, including insurance and freight. This left an interest remaining to NAC in the letter of credit for cement of $2,760,000. (Part of this was also assigned to another Arrau company.) On the same day as the first transfer to it, Intrafinsa assigned all of its interest in the credit to its sister corporation, National Bank and Trust Co. of North America, Ltd. ("Natbank"). *fn5" After the problems giving rise to this action developed, NAC reacquired sole rights in the letter of credit by reassignment from Natbank on April 9, 1976 allegedly in return for NAC's relinquishing its rights to various commissions owed under other similar contracts given to other American suppliers. The reassignment was preceded by negotiations, beginning in January and February of 1976, in which NAC agreed to pay shipowners' claims for demurrage when recovery was obtained by NAC.

 During February, 1976 (prior to the reassignment) Intrafinsa assigned the demurrage already due on one of the vessels, the Cherryfield, to Ince & Co. in London. Morgan and CBN were notified that Cherryfield's demurrage payments should be made directly to the assignees.

 Performance of the cement contract got underway in late July, 1975, with the shipment of 500 tons of cement aboard the vessel Cretan Life, which also carried 10,500 tons consigned by another cement supplier, Interexporte. Thereafter, in the late summer and early fall of 1975, five additional vessels, the Naimbana, Rio Doro, Cherryfield, Joboy and Jotina (who, with the Cretan Life are collectively referred to as the "first six vessels") were loaded and arrived in Lagos. Payment for their combined cargoes of 37,630 tons was completed by September 10, 1975 by Morgan on the basis of documents presented to it, although the vessels had not yet been unloaded. NAC received a total of $233,300, an amount reflecting offsets by Morgan for the transfer to Intrafinsa and several assignments of proceeds. *fn6" Six other ships, the Aristotle, Astrid, Ardenal, Sandrina, Euna and Nicklaus H ("the second six vessels") were either prepared for loading or partially loaded before their departure had to be aborted due to the Nigerian embargo. Their cargoes were purportedly sold elsewhere, but both NAC and Intrafinsa claim they did not benefit from these sales. On the other hand, they established no losses either, except, perhaps, for anticipated profits. With regard to the first six vessels, documents supporting demurrage claims were presented to Morgan in November, 1975 but payment at that time was refused on the instructions of CBN for reasons we will now discuss.

 To backtrack a bit, by late August, 1975, the port congestion led Nigeria to notify its suppliers that no additional vessels would be permitted to enter the port, except those already under sail. (The "embargo" referred to earlier.) To enforce its new policy, Nigeria declared that henceforth all suppliers must give two months' advance notice of sailing and receive Nigerian permission for departure. In a series of cables in fall of 1975, CBN instructed Morgan to dishonor all demurrage claims, even those accruing on vessels entering prior to the embargo, unless CBN had certified the documents for payment. Documents were thereafter to be submitted directly to the Nigerian Ports Authority, rather than Morgan. (Since these instructions varied the terms of the irrevocable letter of credit, they may have amounted to an anticipatory repudiation of all, or a part, of the letter of credit.) Nigeria later formalized its policy of requiring advance notice of sailing in a government decree issued December 15, 1975.

 As of this time, Nigeria was refusing to pay demurrage as it accrued and was unable to unload many of the vessels which lay at anchor in the harbor. Of NAC's first six vessels, the Naimbana was unloaded in November of 1975, and the Joboy and Jotina offered to forego accrued demurrage if they would be given priority berthing. This request was refused, and the vessels departed from Nigeria on January 24 and 25, 1976, respectively, without discharging their cargoes. *fn7" In the early part of that month, Gero had received an invitation to meet with the newly formed Nigerian Cement Contracts Negotiating Committee to renegotiate the cement contract and the letter of credit. About three weeks later, Gero and Arrau met in New York to plan a course of action. The result was a document dated January 28, 1976 which apparently was intended to become a settlement between NAC and Intrafinsa supplanting the agreement of July 31, 1975. (Plaintiff's Exhibit 38.) The document sets Intrafinsa's damages at $3,945,000, which was said to represent the demurrage due on twelve vessels, calculated at $3,500 per day. NAC also promised to "cause" Nigeria to accept delivery of an additional 28,370 tons of cement. Calculations supporting the demurrage claim appear as a schedule to the document. *fn8"

 At trial, copies of two schedules having a similar format (Plaintiff's Exhibits 38B and 71) were introduced into evidence. Both bear a striking resemblance to the schedule attached to Exhibit 38, with some significant changes. The first noteworthy change is that Exhibit 38B calculates demurrage at a pro rata rate based on tonnage. To explain, the rate of demurrage had become a source of irritation between Nigeria and the suppliers. The contracts appeared to provide for a flat rate of $3500 per diem, without regard to the size of the vessel or the amount of cement on board. Nigeria wished to compute demurrage on a pro rata rate based on tonnage by paying $.35 per ton per day. This would amount to a substantial savings if the vessel capacity or cargo amount was less than 10,000 tons. The pro rata calculation yielded an amount of demurrage due of $2,784,140.

 Exhibit 38B also reflects a claim for the cement aboard the second six vessels of $1,992,000 representing payment for 33,200 tons. The exhibit also changed a column heading to "Vessels Awaiting Delivery of Which Cargo and Demurrage Still Unpaid." *fn9" Finally, a column of dates designated on Exhibit 38 as "ETA Lagos" reappears on Exhibit 71 under a pencilled notation "TA Lagos," an implication that these vessels had actually arrived. In this manner, the stage appears to have been set for a request for payment for demurrage on the second six vessels. *fn10"

 The puzzle created by these schedules stems from their Alice In Wonderland character. It is impossible to calculate demurrage -- which under this contract commenced at some point after the vessel arrived in Lagos -- on vessels which never sailed. The key appears to lie in the fact that demurrage calculated on a pro rata rate ($.35 per ton per day) for twelve vessels if added to the amount "due" for the second six cargoes roughly approximates the demurrage due on six vessels calculated at the flat per diem rate ($3500 per day). Gero maintains that in January, 1976, she believed twelve vessels in fact had arrived in Lagos and did not learn the truth until after this suit was commenced. It appears doubtful that Gero, who was unquestionably aware of the embargo, remained ignorant of its effect on her ships when, in the fall of 1975, the sailing of the second six vessels had to be aborted and other arrangements made for disposition of their cargoes. This state of affairs could only have existed if, as suggested earlier, she was only a front for Arrau. It is not disputed that Arrau knew the true state of affairs.

 At their meeting in New York, Gero and Arrau called in Doris Delia, another holder of a Nigerian cement contract. On her representation that she had influence with the Nigerians, they engaged her as their agent in the upcoming negotiations with the Cement Committee. Arrau executed a written power of attorney, which Gero did not sign, authorizing Delia to negotiate terms closely paralleling the claims incorporated in Exhibit 38. (Both denied giving Delia a copy of either Exhibit 38B or 71.)

 Immediately thereafter, Delia went to Nigeria, returning to London the first week of February to meet with Gero and Arrau. At that time, they executed two almost identical form agreements entitled "Agreements of Discharge", one with the Federal Ministry of Defense on the cement contract and one with CBN on the letter of credit. The material terms of these terse documents, which state that they were executed as of February 6, 1976, may be summarized as follows:

 
1. payment would be made within thirty days of execution for 70,830 tons of cement, represented as having "either been delivered . . . or at present awaiting delivery in vessels lying within Nigerian territorial waters;"
 
2. payment would be made within fourteen days of presentation of the requisite documentation to the Nigerian Ports Authority for demurrage, with payment to continue thereafter until final discharge of the vessels;
 
3. the parties acknowledged that further deliveries of cement had been rendered impossible by the port congestion;
 
4. NAC and Intrafinsa released CBN and the Ministry of Defense from all liability on the remaining 169,170 tons of cement and indemnified the Nigerian entities for all third party claims.

 Delia then returned with the signed agreements to Nigeria where they were executed by the Nigerians later in the month. It appeared at trial that the Cement Committee had no ready means at hand for verifying claims submitted to them by suppliers. Responsibility for implementation of the settlement and verification of the claims rested with the Federal Ministries of Defense and Transport.

 The 70,830 ton figure derives from the cargoes purportedly aboard plaintiff's twelve vessels, as reflected on the previously discussed Exhibits 38B and 71. To reiterate, of the first six vessels only one had been unloaded and only three remained in Lagos by this time; the last six had never sailed. (The cement aboard the first six vessels had been fully paid for the previous September.) Gero testified that when she and Arrau signed the agreement, this tonnage figure had not been filled in, although the provisos stating the payment terms for cement and demurrage, which were not part of the form agreements used by the Cement Committee, were part of the Agreements of Discharge when she first saw them in London. Had the inclusion of this tonnage figure been the only link with the misleading schedules, it would be more difficult to conclude that false demurrage claims were submitted to the Nigerians by Delia with the cooperation of either Arrau or Gero. However, there also exists a certification of the settlement agreements prepared by the Cement Committee, dated February 17, 1976, which Gero claims Delia delivered to her along with the executed Agreements of Discharge in mid-March. This document confirms that a settlement has been reached, states that NAC would be invited to supply cement if imports were resumed, notes that demurrage clauses will be given pro rata construction *fn11" (i.e., with reference to tonnage) and incorporates the list of twelve vessels, their cargo amounts and, as to the second six vessels, the fictional dates of arrival, as they appear on Exhibit 71. Thus, the inference is almost inescapable, and is supported by the testimony of a member of the Cement Committee, that Delia presented Exhibit 71 to the Nigerians in support of the NAC-Intrafinsa claim.

 It was not long before snags in the performance of the Agreements of Discharge developed. Although the agreements contemplated payment for cement by March 8, 1976, Morgan did not make payment until March 12. At that time, $1,992,000, representing payment for the cargoes of the second six vessels (33,200 tons) at $60 per ton, was distributed by Morgan in accordance with the still outstanding transfer to Intrafinsa and assignments of proceeds. This meant that the Nigerians had paid a total of $4,249,800 for twelve shiploads of cement, but would ultimately receive only four cargoes. Thus, a total of $2,778,000 was paid for cement never received.

 Twelve sets of documents, each corresponding to one vessel, were presented to the Nigerian Ports Authority *fn12" in support of demurrage claims. The accompanying drafts sought payment at the pro rata rate *fn13" through February 7, 1976. Documents submitted on the first six vessels included time sheets *fn14" detailing days on demurrage for several weeks in November and bear the stamp of the ship's master. No detailed time sheets were submitted for the period spanning the end of November to February 7, 1976, although such documentation was required under the original letter of credit and cement contract. The documents for the second six vessels were even less complete in that no detailed time sheets were attached and they lacked the stamp of the ship's master and the date of the acceptance of the notice of readiness. (Which is understandable, since they never got to Nigeria.) Instead, they were certified as correct by Intrafinsa and by Natbank, the latter being designated as "disponent owner."

 The Nigerians appear to have processed the documents for payment, disallowing some amounts on the basis of their calculations, but authorizing payment of $2,337,713 by late March. Throughout March and April, NAC sent cables to Morgan and CBN pressing for payment of demurrage on its twelve ships. Then, in April, the Nigerians became aware that some of the vessels covered by various settlement agreements that had not unloaded were not then in Nigerian waters. A census of the vessels in the port confirmed their suspicions and by May, NAC was listed as one of eleven suppliers whose ships could not be fully accounted for. An earlier memorandum of the Nigerian Ministry of Transport to CBN had suggested suspending all demurrage payments to suppliers who had received payment for undelivered cement, and this course was adopted with regard to NAC.

 NAC did not respond to a cable demanding an explanation for the missing ships. Instead, the complaint in this action was filed on June 22, 1976 and an order of attachment issued the next day. By letter dated July 9, 1976, defendants indicated through their attorneys that they had "appeared specially" to oppose the attachment and an answer was ultimately filed after Judge Weinfeld of this Court granted plaintiff's motion to prove the grounds of the attachment in a written decision reported at 420 F. Supp. 954 (S.D.N.Y. 1976). After the denial of motions for summary judgment (defendants having delayed until the eve of trial), the trial of this action commenced on December 19, 1977 and concluded on January 4, 1978.

 II. Law

 The legal issues fall into four major categories:

 A. Defendants' contention that plaintiff allowed its quasi-in-rem basis for jurisdiction to slip away, which collaterally raises the issue of whether a basis for in personam jurisdiction existed; *fn15"

 B. The defense of sovereign immunity and the applicability of the act of state doctrine;

 C. Defendant's claim that Intrafinsa is an indispensable party under Fed. R. Civ. P. 19(b);

 D. Plaintiff's challenges to the Agreements of Discharge as a defense to its claims.

 A. JURISDICTION

 1. Quasi In ...


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