Appeal from judgment of the United States District Court for the Eastern District of New York, United States Magistrate John L. Caden, dismissing after trial a complaint seeking damages for defendant Bank's refusal to pay under letters of credit.
Lumbard, Senior Circuit Judge, Oakes, Circuit Judge, and Friedman, Chief Judge, United States Court of Claims.*fn*
FRIEDMAN, Chief Judge, United States Court of Claims:
This is an appeal from a judgment of the United States District Court for the Eastern District of New York entered upon the opinion of United States Magistrate John L. Caden dismissing, after trial, a suit seeking recovery under two letters of credit that the defendant, Chase Manhattan Bank ("Chase"), issued to the plaintiff, Marino Industries Corp. ("Marino"). The magistrate held that Chase justifiably refused to pay under the letters because Marino had not complied with the requirements in the letters for obtaining payment. We affirm in part, reverse in part, and remand for further proceedings.
The dispute grew out of a contract under which Marino, a manufacturer of construction materials, agreed with Bautechnik GmbH, a German company, to ship material to a job site in Kassim, Saudi Arabia. At Bautechnik's request, the Berliner Bank in West Germany issued two similar irrevocable letters of credit in favor of Marino. Chase confirmed the letters. One letter was for $212,456.48, and the other was for $489,956.41. Both letters explicitly were subject to the Uniform Customs and Practice for Documentary Credits (1974 Revision), International Chamber of Commerce Publication No. 290, which, under New York laws, supersedes the Uniform Commercial Code. N.Y.U.C.C. Law § 5-102(4) (McKinney 1964).
Each letter was to be paid in two installments: 40 percent when the goods were shipped and 60 percent when they were received. The letters contained detailed requirements that Marino was required to follow to obtain payment. Marino shipped all the goods to Saudi Arabia. After Bautechnik went bankrupt in late November or early December 1980, Chase refused to pay three of Marino's drafts under the letters, on the ground that Marino had not complied with the requirements for payment.
The complaint, filed in the district court after the suit had been transferred from the New York State Supreme Court where it originally had been filed, contains two counts. Count I seeks recovery of $99,083.80 for Chase's refusal to pay the plaintiff's draft for that amount under the first letter of credit. Count II seeks $270,779.84 for Chase's refusal to make payments of $46,388.00 and $224,391.84 under the second letter. Both parties agreed to a trial before a United States Magistrate.
After trial, the magistrate dismissed the complaint. He held that with respect to each of the three payments Chase refused to make, Marino had not complied with the requirements for payment in the letter. The magistrate rendered a comprehensive opinion discussing in detail the various respects in which he found that Marino had not complied, and made findings of fact and conclusions of law. Marino has appealed from the judgment dismissing the complaint, and Chase has cross-appealed from the magistrate's resolution of one subsidiary issue against Chase.
"The essential requirements of a letter of credit must be strictly complied with by the party entitled to draw against the letter of credit, which means that the papers, documents and shipping descriptions must be as stated in the letter." Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 465 (2d Cir. 1970); accord Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802, 805-06 (4th Cir. 1975); Anglo-South American Trust Co. v. Uhe, 261 N.Y. 150, 156-57, 184 N.E. 741, 743 (1933); Eximetals Corp. v. Guimaraes, S.A., 73 A.D.2d 526, 422 N.Y.S.2d 684, 422 N.Y.S.2d 884 (1st Dep't 1979), aff'd, 51 N.Y.2d 865, 414 N.E.2d 399, 433 N.Y.S.2d 1019 (1980); H. HARFIELD, BANK CREDITS & ACCEPTANCES 73 (5th ed. 1974).
The Courtaulds case illustrates the operation of the rule. There a bank was held properly to have refused payment under a letter of credit because, although the letter required that the draft be accompanied by an invoice stating that it covered "100% acrylic yarn," the invoice stated only that the goods were "Imported Acrylic Yarn." 528 F.2d at 803.
The rule of strict compliance reflects the fact that a letter of credit is a contract between the bank and the beneficiary of the letter that is separate and distinct from the commercial contract between the beneficiary (usually the seller) and the bank's customer (usually the buyer). The letter of credit is not tied to or dependent upon the underlying commercial transaction. Venizelos, 425 F.2d at 464-65; United Bank Ltd. v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 259, 360 N.E.2d 943, 948, 392 N.Y.S.2d 265, 270 (1976); Maurice O'Meara Co. v. National Park Bank, 239 N.Y. 386, 395, 146 N.E. 636, 639 (1925). In determining whether to pay, the bank looks solely at the letter and the documentation the beneficiary presents, to determine whether the documentation meets the requirements in the letter.
It is the complete separation between the underlying commercial transaction and the letter of credit that gives the letter its utility in financing transactions. The parties to the commercial contract bring in a third party -- the bank -- to finance the transaction for them. The bank's sole function is the financing; it is not concerned with or involved in the commercial transaction. This restriction simplifies the bank's role and enables it to act quickly and surely. Because the bank is not involved in the commercial transaction, however, all its rights and duties are set out in and defined by the letter of credit. The bank is not expected or required to be familiar with or to consider the customs of, or the special meaning or effect given to particular terms in, the trade.
The corollary to the rule of strict compliance is that the requirements in letters of credit must be explicit, United States v. Sun Bank, 609 F.2d 832, 833 (5th Cir. 1980) (per curiam), and that all ambiguities are construed against the bank. Venizelos, 425 F.2d at 466. Since the beneficiary must comply strictly with the requirements of the letter, it must know precisely and unequivocally what those requirements are.
Relying on statements such as that in Venizelos, 425 F.2d at 465-66, that "the same general principles which apply to other contracts in writing govern letters of credit," Marino in effect urges us to ignore its deviations from the specific requirements in the letters of credit because there has been substantial compliance with those requirements. We decline to do so. The statements upon which Marino relies were made mainly in resolving questions involving the construction of letters of credit and did not relate to the rule of strict compliance. As we have noted, that rule reflects the practicalities and needs of the commercial and financial community. It serves the important purpose of facilitating the use of letters of credit as a method of financing business transactions. We see no reason to depart from the special rules that have been developed for letters of credit merely because those documents also are contracts governed in other respects by the general law of contracts.
Chase refused to pay three different drafts on the two letters that Marino presented. Since each refusal was made for different reasons, we discuss each claim separately. In determining whether Chase's refusal to pay was justified, we are guided by and apply ...