Answer the questions below regarding the case study:
- What basic principle of letter of credit law does this decision uphold?
- Is the court's decision correct given the many problems with the documentation as prepared by the freight forwarder and the additional complication of the Iraqi government asset freeze? Why or why not?
- Is the court's definition of "outright fraudulent practice" too restrictive? What would be the consequences for letter of credit law if the court adopted a more liberal interpretation of fraud?
- What could UBAF have done in the negotiation and drafting process to prevent the ultimate outcome in this case?
The "fraud in the transaction" defense marks the limit of the generally accepted principle that a let- In this regard, it is significant that the Letter of ter of credit is independent of whatever obligation Credit did not specify that shipment in the United States it secures. No bright line separates the rule from must begin at Robert Mueller Airport, or otherwise the exception, to be sure, but . . . "fraud" embraces specify how the equipment was to be moved within the more than mere forgery of documents supporting United States.. . . [The UCP . . . does not assign signif- a call. The logic of the fraud exception necessarily icance to the date of delivery to a designated air carrier entails looking beyond supporting documents . . .. unless the parties expressly incorporate such a term We must look to the circumstances surrounding the into their letter of credit. . .. transaction and the call to determine whether [the] In sum, none of the discrepancies on which UBAF call amounted to an "outright fraudulent practice." focuses would have been material to Plaintiffs' ability to Rockwell Int'l Systems, Inc. v. Citibank, N.A., 719 F.2d 583, 588-89 (2d Cir. 1983). draw on the Letter of Credit if the parties' plans had not been unexpectedly dashed by the invasion of Kuwait UBAF argues that . . . Semetex presented a false air and the subsequent freezing of Iraqi assets. [UBAF's waybill to the confirming bank UBAF purporting to evi- cited authorities] would be analogous to this case only dence shipment and export days earlier than in fact the if Semetex had had foreknowledge of the invasion of shipment was scheduled. The air waybill was dated July Kuwait and the resulting freeze of Iraqi assets, and so 24 and signed by Iraqi Airways at Robert Mueller Air- had conspired with Alison to falsifyin air waybill in order to draw on the letter of credit funds port in Austin, Texas, purporting to evidence consign- ment to that carrier on that date and a flight on July 26. before actually shipping the ion implanter. Of course, no such evidence was presented. ... In reality, by August 1, the ion implanter had not been The parties are thus left with the rights and obli- delivered to the designated air carrier, Lufthansa. .. . gations they bargained for: Semetex bargained for the Although UBAF raises evidence of substantial discrep- right to be paid from UBAF's non-Iraqi assets, and UBAF ancies between the actual facts of the ion implanter's attempted to protect itself against the risk of nonpay- transport and the information on Semetex's transport ment by the Iraqi bank by fully collateralizing its obli- documents, we conclude that UBAF has not presented gation to Semetex. The parties having thus entered into evidence that rises to the level of "outright fraudulent the Letter of Credit arrangement, the material question practice." In particular, evidence of Plaintiffs' fraudulent regarding UBAF's liability is not whether control of the intent is lacking on implanter had passed to Al-Mansour at the time UBAF has presented no evidence that Plaintiffs that Plaintiffs attempted to draw on the Letter of Credit; "first caused the default and then attempted to reap the rather, the question is whether UBAF has demonstrated benefit of the guarantee." Semetex and Eaton, defaulted either that the documents presented by Semetex failed on their obligations on the underlying contract because to satisfy the Letter of Credit's terms, or that they were of an event over which they had absolutely no control- forged or fraudulent or there was fraud in the transac- the Iraqi assets freeze. tion. As set out above, UBAF admits that the documents UBAF likewise has presented no evidence that satisfy the Letter of Credit's terms on their face, and it has Plaintiffs either (1) failed to comply with an explicit term failed to present evidence from which a reasonable fact- of the letter of credit or (2) did so with intent to defraud. finder could conclude that the fraud exception applies. . . . UBAF has presented no evidence that Plaintiffs Conclusion. For the reasons set forth above, we con- alleged "forgery" of dates and a signature on the air clude that Plaintiffs have demonstrated that they are waybill was material to the requirements of the Let- entitled to judgment as a matter of law. ter of Credit or was committed with intent to defraud. There is no dispute that Eaton in fact manufactured an ion implanter to Al-Mansour's specifications, and Case Questions there is likewise no dispute that, had it not been for the 1. What basic principle of letter of credit law does invasion of Kuwait and the subsequent Iraqi sanctions this decision uphold? orders, the equipment would have reached its destina- 2. Is the court's decision correct given the many tion in Baghdad.. . . UBAF has presented no evidence problems with the documentation as prepared by of . . . fraudulent intent behind the seven-day discrep- the freight forwarder and the additional compli- ancy between the July 26 departure date represented cation of the Iraqi government asset freeze? Why on the air waybill and the actual planned flight date of or why not? August 2, and have presented no evidence that that dis- 3. Is the court's definition of "outright fraudulent crepancy would have been material in any way in the practice" too restrictive? What would be the absence of the unannounced invasion of Kuwait. Sim- consequences for letter of credit law if the court ilarly, they have presented no evidence of fraudulent adopted a more liberal interpretation of fraud? intent behind Plaintiffs' signing the air waybill as agents 4. What could UBAF have done in the negotiation of Iraqi Airways and designating Robert Mueller Airport and drafting process to prevent the ultimate out- as the point of departure. come in this case?Semetex Corp. v. UBAF Arab American Bank 853 F. Supp. 759 (1994) (United States District Court for the Southern District of New York) BACKGROUND AND FACTS In 1988, Semetex entered into an agreement with the Semetex made demand for payment upon UBAF, Al-Mansour Factory in Baghdad, Iraq, an enterprise which demand was rejected. UBAF claimed that the owned and operated by the government of Iraq, in documents evidenceng transport of the ion implanter as prepared by Alison contained inconsistent information which Semetex agreed to provide Al-Mansour with and fraudulent representations regarding the dates of an "ion implanter" used to mark circuitry pathways shipment and the identities of carriers. Semetex applied on microchips. Payment to Semetex was to be made for a license from the U.S. Office of Foreign Assets Con- through an irrevocable documentary letter of credit trol to sue UBAF for payment on the letter of credit, in the amount of $7,462,500. The letter of credit was which application was granted. issued by the Central Bank of Iraq in February 1990 and confirmed by a bank in the United States, specif- SAND, JUDGE ically, UBAF. UBAF invokes the fraud exception to the letter-of-credit The letter of credit conditioned payment solely on independence principle. UBAF admits that the docu- presentation of commercial invoices; a certificate of ments presented to it on August 1, 1990, complied on origin; an air waybill evidenceng air shipment, freight their face with the requirements of the Letter of Credit. prepaid, from the United States to Baghdad via Iraqi It contends, however, that the documents were in com- Airways or carriers authorized by Iraqi Airways; and a pliance only because Plaintiffs misrepresented the cable to Al-Mansour advising Al-Mansour of the flight flight information on the air waybill and forged the sig- number and date of arrival in Baghdad. It did not require nature of an Iraqi Airways representative. Alison noted evidence that control of the ion implanter had passed to flight dates of July 26 and 29 on the air waybill when it a designated carrier before payment could be made. made its second drawing attempt on August 1, UBAF Semetex engaged Eaton Corporation to manufac contends, even though Alison and Plaintiffs knew that ture the ion implanter to Al-Mansour's specifications. the ion implanter had only been picked up by truck in Semetex engaged Alison Transport, Inc., a freight-for- Austin on July 31 and that it was not scheduled to reach warding company, to ship the equipment from Eaton's JFK Airport until August 2. UBAF contends that these discrepancies rise to the level of "outright fraudulent factory in Austin, Texas, to Baghdad. The shipment was practice" that is required under New York law to super- scheduled in several stages by van from Austin to John F. Kennedy International Airport in New York, followed sede the independence principle . ... Fraud provides a well-established exception to the by a Lufthansa flight to Frankfurt and a connecting rule that banks must pay a beneficiary under a letter of Iraqi Airways flight to Baghdad. While the truck carry- credit when documents conforming on their face to the ing the ion implanter was in transit to New York, Iraq terms of the letter of credit are presented. . . The fraud invaded Kuwait, which caused President George H. W. defense, however, is a narrow one. The defense is avail- Bush to issue an executive order blocking Iraqi assets in able only where intentional fraud is shown, not where the United States. The ion implanter was subsequently the party alleges improper performance or breach of diverted to a warehouse in Massachusetts in order to warranty. . . . As the Second Circuit stated in Rockwell: comply with the assets freeze. continues
