New York Law Review

Tag: Letters of Credit

  • Nissho Iwai Europe PLC v. Korea First Bank, 99 N.Y.2d 115 (2002): Enforceability of Revolving Letters of Credit

    Nissho Iwai Europe PLC v. Korea First Bank, 99 N.Y.2d 115 (2002)

    A revolving letter of credit must be strictly construed, and if it does not explicitly condition the renewal of credit upon the applicant’s repayment of funds previously disbursed, the issuer must honor subsequent draws regardless of repayment.

    Summary

    Nissho Iwai Europe PLC loaned $150 million to Daewoo Hong Kong Ltd., secured by a guarantee and an irrevocable standby letter of credit from Korea First Bank (KFB). The letter of credit, for up to $11.5 million, was to revolve and be reinstated every three months. When Daewoo defaulted, Nissho drew on the letter of credit. KFB initially paid but then refused subsequent draws, arguing the letter was implicitly contingent on Daewoo’s repayment. Nissho sued for wrongful dishonor. The New York Court of Appeals held that the letter of credit’s plain language required automatic quarterly renewal, irrespective of Daewoo’s repayment, affirming summary judgment for Nissho.

    Facts

    Nissho loaned $150 million to Daewoo, secured by a parent company guarantee and a standby letter of credit from KFB. The letter of credit, drafted by Nissho, was for up to $11.5 million to cover past due principal and interest, revolving every three months until November 9, 2001. Daewoo defaulted on its November 9, 1999 payment. Nissho notified Daewoo of the default and accelerated the loan. Nissho then demanded payment from KFB under the letter of credit, which KFB initially honored, disbursing approximately $10.7 million and later $761,171.87.

    Procedural History

    After KFB signaled its intent to potentially terminate US operations, Nissho, fearing the impact on the letter of credit, received notice that KFB interpreted the letter as requiring Daewoo to make payments before Nissho could draw against it. Nissho demanded another $11.5 million draw, which KFB refused. Nissho sued KFB for wrongful dishonor and anticipatory repudiation. Supreme Court granted summary judgment to Nissho. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the renewal of a revolving standby letter of credit is implicitly contingent on the repayment of funds previously disbursed by the issuing bank, when the letter of credit does not explicitly state such a condition.

    Holding

    No, because letters of credit must be strictly construed, and the language of the letter of credit in this case unequivocally established that the credit line was automatically renewed every three months without any explicit condition requiring repayment by Daewoo.

    Court’s Reasoning

    The Court emphasized that letters of credit must be strictly construed according to their stated terms. To make an issuing bank’s payment obligation conditional, the parties must clearly and explicitly set forth that requirement on the face of the letter of credit. The Court found the language of the letter of credit—that it “shall be revolved and reinstated every three months within the period of validity”—unambiguously established that Daewoo’s credit line was automatically renewed in relation to time. The court rejected KFB’s argument that the term “revolving” inherently implies a condition of repayment. The court stated, “Here, viewing the word ‘revolving’ in the context in which it appears in the letter of credit, it is clear that renewal is based upon the passage of time, specifically three months. There is simply no reference in the instrument to repayment by Daewoo.” Further, the court cited the UCP 500, which states that if a credit contains conditions without stating the required documents, banks will disregard such conditions. The letter of credit specified the documents Nissho needed to present (a signed statement), but did not require proof of Daewoo’s repayment to KFB. The court declined to read an unwritten requirement into the unambiguous terms of the letter of credit, affirming the lower court’s decision.

  • Key International Manufacturing v. Stillman, 66 N.Y.2d 924 (1985): Bank Liability for Honoring Restraining Orders

    Key International Manufacturing, Inc. v. Stillman, 66 N.Y.2d 924 (1985)

    A bank that complies with a judicial restraining order preventing it from honoring letters of credit is not liable for damages exceeding the actual amounts due under the letters of credit plus interest.

    Summary

    Key International Manufacturing sued Irwin Stillman, and Manufacturers Hanover Trust Company was also a party due to letters of credit. Stillman cross-claimed against Manufacturers Hanover Trust, alleging damages from the bank’s refusal to honor cashier’s checks issued as payment for the letters of credit. The bank’s refusal stemmed from a judicial restraining order. The Court of Appeals held that the bank’s liability was limited to the actual amounts due under the letters of credit plus interest. Holding the bank liable for a greater sum for complying with a court order would create an untenable dilemma.

    Facts

    Key International Manufacturing, Inc. initiated a lawsuit against Irwin Stillman. Manufacturers Hanover Trust Company was involved because of letters of credit it had issued. The bank issued cashier’s checks to pay the letters of credit. However, a judicial restraining order was issued, preventing Manufacturers Hanover Trust from honoring these checks.

    Procedural History

    The lower court ruled on the cross-claim filed by Stillman against Manufacturers Hanover Trust. The Court of Appeals reviewed that decision. The appellate division decision is not explicitly mentioned, but the Court of Appeals affirmed the dismissal of part of Stillman’s cross-claim against the Key International Manufacturing, and modified the order related to the cross-claim against the bank.

    Issue(s)

    Whether a bank, complying with a judicial restraining order that prevents it from honoring letters of credit, can be held liable for damages exceeding the actual amounts due under those letters plus interest.

    Holding

    No, because to hold the bank liable for more than the actual amounts due under the letters of credit plus interest as a result of complying with a judicial restraining order would place it in an unacceptable dilemma.

    Court’s Reasoning

    The Court of Appeals reasoned that holding Manufacturers Hanover Trust liable for more than the actual amounts due under the letters of credit, plus interest, would be unfair. The bank was acting under the compulsion of a court order. To penalize the bank for following a judicial mandate would create an untenable situation where banks would be forced to choose between violating a court order and incurring potentially unlimited liability. This would undermine the integrity of the judicial process and create uncertainty in commercial transactions involving letters of credit. The court emphasized the importance of banks being able to rely on court orders without fear of excessive liability. The court found that the proper remedy for Stillman was to challenge the restraining order directly, not to seek damages from the bank for complying with it. As the court stated, “To hold the bank liable for such sum as a result of compliance with a judicial restraining order would be to place it on the horns of an unacceptable dilemma.”