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Bank of Cochin v. Manufacturers Hanover Trust Co.

decided: December 24, 1986.

BANK OF COCHIN, LTD., PLAINTIFF-APPELLANT,
v.
MANUFACTURERS HANOVER TRUST COMPANY AND ST. LUCIA ENTERPRISES, LTD., DEFENDANTS-APPELLEES



Appeal from a summary judgment of the United States District Court for the Southern District of New York (Cannella, J.) dismissing claim for wrongful honor of international letter of credit because issuing bank failed to comply with timely notice provisions of Article 8(d) and (e) of 1974 Revision of Uniform Customs and Practice for Documentary Credits.

Author: Miner

BEFORE LUMBARD, OAKES and MINER, Circuit Judges

MINER, Circuit Judge:

Bank of Cochin, Ltd., ("Cochin"), the issuer of an international letter of credit, appeals from a summary judgment of the United States District Court for the Southern district of New York (Cannella, J.) entered in favor of Manufacturers Hanover Trust Company ("MHT"), the confirming bank, The district court held that although MHT wrongfully had paid under the terms of the letter of credit, Cochin was precluded from claiming wrongful honor because it failed to comply with the timely notice provisions of Article 8 of "Uniform Customs and Practice for Documentary Credits (1974 Revision)," Int'l Chamber of Commerce, Pub. No. 290 (the "UCP"). We affirm the judgment of the district court on the ground that Cochin's failure to notify MHT of the specific discrepancies in the documents and of the documents' dispositions "without delay," as required by UCP 8(e), precludes Cochin from asserting MHT's noncompliance with the terms of the letter of credit.

BACKGROUNDS

This dispute arises from a massive fraud perpetrated against Cochin, its customer, Vishwa Niryat (Pvt.) Ltd. ("Vishwa"), and MHT through the use of an irrevocable letter of credit issued for the benefit of St. Lucia Enterprises, Ltd. "(St. Lucia"). In India, on February 8, 1980, Vishwa requested Cochin to issue an international letter of credit, covering up to $798,000, for the purchase of 1,000 metric tons of aluminum melting scrap. By telex to MHT on February 12, 1980, received on February 14, 1980, Cochin inquired about the Means, standing and respectibility (sic)," App. at 152, of St. Lucia. MHT responded by cable transmitted on February 14 that it had "no pertinent information." App. at 70. Nevertheless, by telex dated February 22, Cochin conveyed the terms and conditions of the letter of credit to MHT, and requested MHT to confirm the letter and advise St. Lucia of its establishment. On February 25, MHT mailed to St. Lucia a written advice that the letter of credit had been established. On February 29, after obtaining additional information pertaining to insurance and certain other matters from Cochin, MHT issued its confirmation of the letter, as amended. Four more amendments were initiated by Cochin and confirmed by MHT in March and April of 1980. By its terms, the letter of credit was subject to the 1974 Revision of the UCP.

On June 9, St. Lucia presented MHT with supporting documents and sight drafts in the amount of $796,603.50, payable to "St. Lucia Enterprises." The documents showed that the aluminum scrap was shipped from Bremen, West Germany to Bombay, India on May 29--eleven days earlier. On June 13, MHT negotiated the drafts, issued a check payable to "St. Lucia Enterprises," and debited Cochin's account for that amount. That same day, MHT sent a copy of its payment advice, the drafts, and supporting documents to Cochin via registered air mail. The check, indorsed "St. Lucia Enterprises, Ltd.," was deposited in St. Lucia's Citibank account on June 17, 1980. The proceeds were withdrawn from that account during the period June 23-27, 1980. Apparently, Citibank had collected the funds at some point between June 17 and June 23.

On June 18, the day following deposit of the check, Cochin inquired of MHT by telex whether St. Lucia had presented the documents. MHT responded, on June 20, that the documents had been mailed to India on the thirteenth. Cochin finally received the documents on Saturday, June 21. That same day, Cochin examined the documents and telexed MHT: "We find certain discrepancies (sic) . . . kindly do not (sic) make payment . . ." Joint App. at 73. MHT replied, on Monday, June 23, "(w)e note your telex fails to give reason fro (sic) rejection documents as required UCP Article 8 Stop According our records documents fully complied credit terms and beneficiary already paid therefore we cannot accept your refusal of documents." Id. at 1536. On June 27, and again on July 3 and 4, Cochin advised MHT of specific discrepancies. On July 4, Cochin telexed MHT that the documents were being returned to MHT.

In fact, the documentation submitted by St. Lucia to MHT had been fraudulently issued. St. Lucia had not shipped nay aluminum scrap to India, but had perpetrated a fraud on both banks and on Vishwa. After receiving payment on the letter of credit. St. Lucia vanished.

Cochin instituted a diversity action against MHT, claiming wrongful honor of the letter of credit on documents that did not strictly comply with the letter's conditions. Finding that the parties presented nearly identical statements of facts, the district court disposed of the suit on summary judgment, in favor of MHT. Bank of Cochin Ltd. v. Manufacturers Hanover Trust, 612 F. Supp. 1533 (S.D.N.Y. 1985). The court found that MHT had paid the letter wrongfully under a strict compliance standard due to two discrepancies in the documents.*fn1 However, the court held that Cochin was precluded from asserting MHT's wrongful honor because it failed to comply with the timely notice provisions of Article 8(e) of the UCP.

On appeal, Cochin contends that the district court erred in finding that Cochin failed to give timely notice of the discrepancies in the documents and of the disposition of the documents. MHT, on the other hand, counters that the district court correctly held that Cochin's untimely notice constituted a waiver of its right to assert the noncompliance of the documents, and argues that a substantial compliance rather than a strict compliance standard should have been used to measure the documents' compliance with the terms of the letter of credit. As discussed below, we affirm the district court's judgment on the rationale that Cochin's untimely notice constituted a waiver of its right to assert the documents' noncompliance. Our affirmation on waiver grounds makes it unnecessary to decide whether a substantial, rather than a strict, compliance standard should have been used to measure the document's conformity.

Discussion

Central to this appeal is the interpretation of key undefined terms in Article 8 of the 1974 version of the UCP, applicable to the international letter of credit at issue. Article 8(b) provides that payment, acceptance, or negotiation by a confirming bank, against documents that facially comport with the terms and conditions of a credit, binds the issuing bank to take up the documents and reimburse the confirming bank. In the instant case, MHT was authorized to make payment against certain documents described in the letter of credit. If MHT paid on documents that, on their face, accorded with the terms of the credit, under the Article 8(b) provision, Cochin would be bound to reimburse MHT. However, under Article 8(c), if Cochin determined, upon examination of the documents, that they did not facially comport with the terms and conditions of the credit, it could claim that payment by MHT was wrongful, thus relieving Cochin of its reimbursement obligation as issuing bank. In order to effectuate the vital policy of promoting certainty in letter of credit transactions, the UCP provides, the following safeguards in Article 8:

(d) The issuing banks shall have a reasonable time to examine the documents and to determine . . . whether to make ...


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