Fair Pavilions, Inc. v. First Nat. City Bank, 19 N.Y.2d 518 (1967)
An affidavit submitted to a bank to terminate a letter of credit must specify the grounds for termination with sufficient detail to allow the beneficiary to understand and remedy the alleged default.
Summary
Fair Pavilions, Inc. contracted to construct a building for Exhibitions de France, Inc., with payments guaranteed by a letter of credit from First National City Bank, based on an application from Willard International Financial Co. The letter of credit allowed termination if the bank received an affidavit from Willard stating that certain events under the construction contract (clause XV) had occurred. Willard submitted a conclusory affidavit stating that such events occurred, without specifying which ones. The bank then terminated the letter of credit. The New York Court of Appeals held that the affidavit was insufficient because it failed to specify which event under clause XV had occurred, thus preventing Fair Pavilions from remedying the alleged default. The court reversed the lower court’s denial of summary judgment for Fair Pavilions.
Facts
Fair Pavilions, Inc. (plaintiff) contracted with Exhibitions de France, Inc. (“Exhibitions”) to build a structure at the New York World’s Fair.
The contract (clause XV) outlined conditions for termination of plaintiff’s performance.
Exhibitions was obligated to provide an irrevocable letter of credit guaranteeing installment payments.
Exhibitions arranged for Willard International Financial Co., Ltd. (“Willard”) to issue the letter of credit.
Willard applied to First National City Bank (defendant) for the letter of credit in favor of plaintiff for $2,030,000.
Paragraph 6 of the letter of credit allowed termination if the bank received an affidavit from a Willard officer stating that events in clause XV of the construction contract occurred.
The bank received an affidavit from Willard stating, in conclusory form, that “One or more of the events described in clause XV * * * have occurred,” without specifying the event.
The bank notified plaintiff that the $400,000 final payment was terminated.
Procedural History
Plaintiff sued the bank to recover the $400,000 via a motion for summary judgment in lieu of complaint.
Special Term denied the motion, citing factual issues regarding the bank’s duty to verify defaults and the truth of the affidavit.
On reargument, both plaintiff’s and defendant’s motions for summary judgment were denied because of factual issues over whether events described in clause XV had occurred justifying Willard’s affidavit. The court directed that proper pleadings be served.
The Appellate Division held the bank was not obliged to determine the accuracy of Willard’s representation.
The Court of Appeals reviewed the Appellate Division’s decision.
Issue(s)
Whether an affidavit submitted to a bank pursuant to a letter of credit, which states that events allowing termination of the underlying contract have occurred, must specify which event has occurred to be sufficient to terminate the credit.
Holding
Yes, because the affidavit must identify the alleged default with enough specificity to allow the beneficiary of the letter of credit to understand and remedy it.
Court’s Reasoning
The Court of Appeals reasoned that the documents presented to the bank, including the affidavit, must be sufficient on their face to justify the bank’s action in refusing to pay on the letter of credit. The court emphasized that this is especially important given the drastic consequences of canceling the credit for the plaintiff. The court interpreted paragraph 6 of the letter of credit, read in conjunction with clause XV of the building contract, to mean that the affidavit must identify the alleged defect before the credit can be canceled, allowing the plaintiff an opportunity to remedy it. The court stated, “The meaning of paragraph 6 of the letter of credit was not that Willard could terminate the credit at will.” The court found the affidavit’s conclusory statement that “One or more of the events described in clause XV…have occurred” insufficient because it did not specify which event had occurred, making it impossible for Fair Pavilions to remedy the unspecified default. The court contrasted paragraph 6 with paragraph 7 of the letter of credit, which expressly allowed Willard to cancel the credit at will during a specific period, but only on payment of a substantial sum to Fair Pavilions. The court concluded that interpreting paragraph 6 to allow cancellation based on an unspecific affidavit would place one party at the mercy of another, which is against the general policy of the law. The court found that “It is not reasonable to interpret paragraph 6 of the letter of credit in a manner which permits cancellation by means of an affidavit so unspecific that the alleged default is kept secret and the beneficiary rendered powerless to cure it.”