Voest-Alpine Intern. Corp. v. Chase Manhattan Bank, N.A.

• Decision Date: 12 May 1983
• Docket Number: VOEST-ALPINE,No. 703,D,703
• Citation: 707 F.2d 680
• Parties: 41 UCC Rep.Serv. 912 INTERNATIONAL CORPORATION, Plaintiff-Appellant, Cross-Appellee, v. The CHASE MANHATTAN BANK, N.A., Defendant-Appellee, Cross-Appellant, v. BANK OF BARODA, Third-Party Defendant, Cross-Appellee. ockets 82-7679, 82-7681.
• Court: U.S. Court of Appeals — Second Circuit

Page 680

707 F.2d 680

41 UCC Rep.Serv. 912

VOEST-ALPINE INTERNATIONAL CORPORATION, Plaintiff-Appellant, Cross-Appellee, v. The CHASE MANHATTAN BANK, N.A., Defendant-Appellee, Cross-Appellant, v. BANK OF BARODA, Third-Party Defendant, Cross-Appellee.

No. 703, Dockets 82-7679, 82-7681.

United States Court of Appeals Second Circuit.

Argued Jan. 13, 1983.

Decided May 12, 1983.

Christopher F. Meatto, New York City (Andrew Berger, Stanley T. Stairs, Breed, Stairs & Berger, New York City, of counsel), for plaintiff-appellant, cross-appellee.

Andrew J. Connick, New York City (Eugene F. Farabaugh, Scott H. Wyner, Milbank, Tweed, Hadley & McCloy, New York City, of counsel), for defendant-appellee, cross-appellant.

Robert A. Jaffe, New York City (Thomas W. Evans, Shari J. Levitan, Mudge, Rose, Guthrie & Alexander, New York City, of counsel), for third-party defendant, cross-appellee.

Before FEINBERG, Chief Judge, CARDAMONE and DAVIS ^*, Circuit Judges.

CARDAMONE, Circuit Judge:

This appeal involves an interpretation of the law applied to commercial letters of credit. When analyzing that law the unique characteristics of a letter of credit must be kept firmly in mind. Otherwise, a court may unknowingly paint broadly over the letter of credit's salient features and compromise its reliability and fluidity.

BACKGROUND

Originally devised to function in international trade, a letter of credit reduced the risk of nonpayment in cases where credit was extended to strangers in distant places. Interposing a known and solvent institution's (usually a bank's) credit for that of a foreign buyer in a sale of goods transaction accomplished this objective. See Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking L.J. 816, 816-17 (1977) (Letters of Credit: Developing Concepts ). A typical letter of credit transaction, as the case before us illustrates, involves three separate and independent relationships--an underlying sale of goods contract between buyer and seller, an agreement between a bank and its customer (buyer) in which the bank undertakes to issue a letter of credit, and the bank's resulting engagement to pay the beneficiary (seller) providing that certain documents presented to the bank conform with the terms and conditions of the credit issued on its customer's behalf. Significantly, the bank's payment obligation to the beneficiary is primary, direct and completely independent of any claims which may arise in the underlying sale of goods transaction.

Several distinct features characterize letters of credit. By conditioning payment solely upon the terms set forth in the letter of credit, the justifications for an issuing bank's refusal to honor the credit are severely restricted, thereby assuring the reliability of letters of credit as a payment mechanism. Banks readily issue these instruments because they are simple in form. Hence, they are convenient and economical for a customer (buyer) to obtain. Further, employing concepts which underlie letters of credit in non-sale of goods transactions enables these devices to serve a financing function, see Letters of Credit: Developing Concepts at 818-19. And it is this flexibility that makes letters of credit adaptable to a broad range of commercial uses. See id. at 820-51; Note, Judicial Development of Letters of Credit Law: A Reappraisal, 66 Cornell L.Rev. 144, 146-47 (1980) (Judicial Development of Letters of Credit Law ).

Letters of credit evolved as a mercantile specialty entirely separate from common law contract concepts and they must still be viewed as entities unto themselves. Completely absorbed into the English common law by the 1700s along with the Law Merchant--of which it had become an integral part by the year 1200--2 W. Holdsworth, A History of English Law 570-72 (1922), letter of credit law found its way into American jurisprudence where it flourishes today. Its origins may be traced even more deeply into history. There is evidence letters of credit were used by bankers in Renaissance Europe, Imperial Rome, ancient Greece, Phoenicia and even early Egypt. See Trimble, The Law Merchant and The Letter of Credit, 61 Harv.L.Rev. 981, 982-85 (1948). These simple instruments survived despite their nearly 3000-year-old lineage because of their inherent reliability, convenience, economy and flexibility.

Since the great utility of letters of credit arises from the independent obligation of the issuing bank, attempts to avoid payment premised on extrinsic considerations--contrary to the instruments' formal documentary nature--tend to compromise their chief virtue of predictable reliability as a payment mechanism. See Judicial Development of Letters of Credit Law at 160; Justice, Letters of Credit: Expectations and Frustrations--Part 2, 94 Banking L.J. 493, 505-06 (1977). Viewed in this light it becomes clear that the doctrine of strict compliance with the terms of the letter of credit functions to protect the bank which carries the absolute obligation to pay the beneficiary. Adherence to this rule ensures We note that there is a distinction between rights obtained and obligations assumed under letter of credit concepts. While a party may not unilaterally alter its obligations, nothing in the purpose or function of letters of credit forecloses the party from giving up its rights.

                that banks, dealing only in documents, will be able to act quickly, enhancing the letter of credit's fluidity.  Literal compliance with the credit therefore is also essential so as not to impose an obligation upon the bank that it did not undertake and so as not to jeopardize the bank's right to indemnity from its customer.  Documents nearly the same as those required are not good enough.  See H. Harfield, Letters of Credit 51 (1979).   See generally Marino Industries v. Chase Manhattan Bank, N.A., 686 F.2d 112, 114-15 (2d Cir.1982);  Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir.1970)
                

FACTS

Metal Scrap Trading Corporation (MSTC) is an agency of the Indian government that had contracted to buy 7000 tons of scrap steel from Voest-Alpine International Corporation (Voest), a trading subsidiary of an Austrian company. In late 1980 MSTC asked the Bank of Baroda to issue two letters of credit in the total amount of $1,415,550--one for $810,600 and the other $604,950--to Voest to assure payment for the sale. The credits were expressly made subject to the Uniform Customs and Practice for Documentary Credits.

The parties originally contemplated that Chase Manhattan Bank, N.A. (Chase or Bank) would serve as an advising bank in the transaction. As such, Chase was to review documents submitted by Voest in connection with its drafts for payment. Amendments to the letters of credit increased Chase's responsibilities and changed its status to that of a confirming bank, independently obligated on the credit to the extent of its confirmation.

The contract between MSTC and Voest provided that Voest, as seller, would ship the scrap metal no later than January 31, 1981. The terms and conditions of the credits required proof of shipment, evidenced by clean-on-board bills of lading; certificates of inspection indicating date of shipment; and weight certificates issued by an independent inspector. Sometime between February 2 and February 6 (beyond the January 31 deadline), the cargo was partially loaded aboard the M.V. ATRA at New Haven. Unfortunately, the ATRA never set sail for India. A mutiny by the ship's crew disabled the ship and rendered it unseaworthy. The scrap steel was later sold to another buyer for slightly over a half million dollars, nearly a million dollars less than the original contract price.

On February 13, two days before the expiration date of the credits, Voest presented three drafts with the required documentation to Chase. The documents contained what the district court termed "irreconcilable" inconsistencies. The bills of lading indicating receipt on board of the scrap metal were signed and dated January 31 by the captain of the ATRA. The weight and inspection certificates accompanying the drafts revealed, however, that the cargo was loaded aboard the ATRA sometime between February 2 and February 6.

Despite this glaring discrepancy Chase advised the Bank of Baroda on February 25 that the drafts and documents presented to it by Voest conformed to the terms and conditions set forth in the letters of credit. At Voest's request (Chase having provided Voest with an advance copy of the advice it planned to forward to the Bank of Baroda), Chase added the following language: "PAYMENT OF ABOVE-MENTIONED DRAFT ... WILL BE MADE AT MATURITY ON JULY 30, 1981, TO VOEST...." The Bank of Baroda apparently looked at the documents with more care than Chase. It promptly advised Chase that the documents did not comply with the requirements of the letters of credit, that it would therefore not honor the drafts, and that it would hold the documents at Chase's disposal. When Voest presented the drafts for payment on July 30 Chase refused to honor them.

Voest thereupon instituted the present suit. It asserted that Chase waived the right to demand strict compliance with the terms of the credits and therefore wrongfully dishonored the drafts. Voest further alleged that regardless of whether the documents conformed to the letters of credit Chase was liable on the drafts because it accepted them. Chase, in turn, served a third-party complaint on the Bank of Baroda, alleging that were Chase to be held liable for wrongfully dishonoring the drafts, the Bank of Baroda should be liable to Chase in the same amount. In granting summary judgment against Voest the United States District Court for the Southern District of New York (Duffy, J.), 545 F.Supp. 301, found that Chase had not waived compliance with the terms and conditions of the letters of credit and that the drafts had not been wrongfully dishonored. The district court also rejected Chase's...