Biermann, Dirk T.

English

University of Denver

Denver Journal of International Law & Policy Volume 9 Number 1 Winter Article 13 May 2020 Letters of Credit - American Company Failed to Prove the Elements Necessary to Warrant a Preliminary Order Enjoining an American Bank from Making Payment under a Letter of Credit to an Iranian Bank, Even Though, as a Result of the Islamic Revolution, the Iranian Government Might Default on a Consulting Services Contract with the American Compapny Dirk T. Biermann Follow this and additional works at: https://digitalcommons.du.edu/djilp Recommended Citation Dirk T. Biermann, Letters of Credit - American Company Failed to Prove the Elements Necessary to Warrant a Preliminary Order Enjoining an American Bank from Making Payment under a Letter of Credit to an Iranian Bank, Even Though, as a Result of the Islamic Revolution, the Iranian Government Might Default on a Consulting Services Contract with the American Compapny, 9 Denv. J. Int'l L. & Pol'y 164 (1980). This Comment is brought to you for free and open access by the University of Denver Sturm College of Law at Digital Commons @ DU. It has been accepted for inclusion in Denver Journal of International Law & Policy by an authorized editor of Digital Commons @ DU. For more information, please contact jennifer.cox@du.edu,dig-commons@du.edu. LETTERS OF CREDIT-AMERICAN COMPANY FAILED TO PROVE THEELEMENTS NECESSARY TO WARRANT A PRELIMINARY ORDER ENJOINING ANAMERICAN BANK FROM MAKING PAYMENT UNDER A LETTER OF CREDIT TOAN IRANIAN BANK, EVEN THOUGH, AS A RESULT OF THE ISLAMIC REVOLU-TION, THE IRANIAN GOVERNMENT MIGHT DEFAULT ON A CONSULTING SER-VICES CONTRACT WITH THE AMERICAN COMPANY. American Bell Interna-tional, Inc. v. Islamic Republic of Iran, 474 F. Supp. 420 (S.D.N.Y.1979).On July 23, 1978 the Imperial Government of Iran (ImperialGovernment) entered into an agreement for international communi-cations consulting services and equipment with American Bell Inter-national (Bell), a wholly-owned subsidiary of American Telephoneand Telegraph. This agreement permitted the Imperial Governmentto demand the return of its 38.8 million dollar down payment at anytime (with the exception of twenty per cent of the amounts actuallyinvoiced by Bell and approved by the Imperial Government). In or-der to secure the return of the down payment on demand, Bell wasrequired to establish an irrevocable and unconditional letter of guar-anty in favor of the Imperial Government through the Iranian Bankranshahr. This letter, in turn, was guaranteed by a-letter of creditissued by an American bank, Manufacturers Hanover Trust Com-pany (Manufacturers). Bell agreed to reimburse Manufacturers forall amounts that might be paid pursuant to this letter of credit.Following the Islamic revolution in Iran, Bell filed suit in U.S.District Court in New York seeking to enjoin Manufacturers frommaking payment on the letter of credit. Bell, which had stopped per-formance on the contract in January 1979, claimed that the contracthad been breached by the Imperial Government and repudiated bythe Islamic Republic of Iran in that Bell was owed a substantialamount of money for services rendered under the contract and itstermination provisions.'The court denied Bell's motion for a preliminary injunction. Asset forth in Caulfield v. Board of Education,I four requirements mustbe satisfied before the court may grant injunctive relief. "Theremust be a showing of possible irreparable injury and either (1) prob-able success on the merits or (2) sufficiently serious questions goingto the merits to make them fair ground for litigation and a balance1. 474 F. Supp. at 422.2. 583 F.2d 605 (2d Cir. 1978).RECENT DEVELOPMENTSof hardships tipping decidedly toward the party requesting the pre-liminary relief."3 The court found that Bell failed to establish factssufficient to meet these requirements.Bell fell short of establishing possible irreparable injury becauseit had available adequate remedies at law. First, Bell would have anaction for money damages if Manufacturers paid Bank Iranshahr onthe letter of credit in violation of its terms. Second, while the courtadmitted that Bell no longer had any meaningful access to thecourts of Iran (the agreement provided that Iranian law should gov-ern the settlement of disputes arising under the contract), the com-pany was not precluded from bringing an action in U.S. courts underthe Sovereign Immunities Act.'Bell failed to prove probable success on the merits in that itcould not prove by a preponderance of the evidence that either (1)demand under Manufacturers' letter of credit did not conform to theterms of that letter, or (2) that the demand, having been properlymade, should not be honored because of "fraud in the transaction."The court first considered the nonconformity issue. The demand forpayment by Bank Iranshahr was identical to the terms of the letterof credit in every respect but one. The letter of credit named aspayee the "Imperial Government of Iran Ministry of War," whereasthe demand for payment named as payee the "Government of IranMinistry of Defense, Successor to the Imperial Government of IranMinistry of War."' The court found that, although a demand forpayment must strictly comply with the letter of credit in order tojustify payment,' a court, upon a full trial, would probably not findnonconformity in this case. As legal successor to the Imperial Gov-ernment, recognized as such by the United States,7 the Governmentof Iran could properly demand payment under the terms of the letterof guaranty which provided for payment to the Government Of Iran's3. Id. at 610.4. 28 U.S.C. § 1605(a)(2) (1976) provides, inter alia, that a foreign state shallnot be immune from jurisdiction of U.S. courts in any case in which the action isbased upon a commercial activity of a foreign state conducted outside the territory ofthe United States which causes a direct effect in the United States. 28 U.S.C. §1610(b)(2) (1976) allows attachment of property in the United States belonging to theforeign state in aid of execution upon a judgment obtained under § 1605(a)(2).5. 474 F. Supp. at 423.6. See, e.g., Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 465 (2d Cir.1979); North American Foreign Trading Corp. v. General Electronics, Ltd., 67 A.D.2d 890, 413 N.Y.S.2d 700 (1979); Key Appliance, Inc. v. First National City Bank, 46A.D.2d 622, 359 N.Y.S.2d 866 (1974), aff'd, 37 N.Y.2d 826, 339 N.E.2d 888, 377N.Y.S.2d 482 (1975).7. 474 F. Supp. at 423-24.1980166 JOURNAL OF INTERNATIONAL LAW AND POLICYpredecessor.8Bell's primary contention, and the issue given the most consid-eration by the court, was that payment on the letter of credit shouldhave been enjoined because the Islamic Republic was guilty of"fraud in the transaction." The argument between the parties fo-cused on the scope to be given the term "transaction." Manufactur-ers contended that the term referred only to the letter of credittransaction and not to the underlying commercial transaction. Bellargued that the term referred to the totality of circumstances.Fraud in the transaction was first allowed as a theory of relief inSztejn v. Henry Schroder Banking Corp.' The case involved a letterof credit secured to guarantee payment for bristles purchased by aNew York merchant from a supplier in India. The plaintiff success-fully argued that the shipping of cowhair and other useless materialconstituted fraud justifying enjoining payment under the letter ofcredit. Since the materials shipped were not the materials ordered,the shipping documents which were required to be presented for pay-ment under the letter of credit were fraudulent and therefore pay-ment was not due under the terms of the letter. While the court inSztejn reaffirmed the independence of the letter of credit from theunderlying contract, it also introduced the notion that the underly-ing transaction could be considered in determining whether docu-ments essential for payment under the letter of credit were in factfraudulent even though conforming on their face to the requirementsof the instrument.The Uniform Commericial Code of New York, which the partiesagreed was controlling in this case, attempted to codify the "fraud inthe transaction" terminology in section 5-114."' The Code allows anissuer of a letter of credit the option to deny payment to the benefici-ary when there is fraud in the transaction and the beneficiary is nota holder in due course. The Code implies that a court of appropriatejurisdiction can enjoin an issuer from honoring demand on a letter ofcredit on a finding of "fraud in the transaction." However, the Codedoes not clarify whether fraud in the transaction pertains only to theletter of credit transaction or to the underlying contract between theissuer's customer and the beneficiary of the letter of credit," andcases since Sztejn, both before and after the section 5-114 addition8. See Pastor v. National Republic Bank, 56 111. App.3d 421, 371 N.E.2d 1127(1977), a/f'd, 76 Ill.2d 139, 390 N.E.2d 894 (1979).9. 177 Misc. 719, 31 N.Y.S.2d 631 (1941).10. N.Y.U.C.C. § 5-114(2)(McKinney)(1964).11. See 63 MINN. L. RaV. 487, 508 (1979).VOL. 9:141RECENT DEVELOPMENTSto the Code, are not consistent as to the proper interpretation of thephrase.The court did not determine which interpretation should begiven effect because it felt that, on either theory, Bell had notdemonstrated probable success on the merits. The court consideredBell's allegations that the Islamic Republic had taken actions to re-pudiate all its contracts with American companies, but dismissedthese allegations as unproved. The court also held that Bell failed todemonstrate "the kind of evil intent necessary to support a claim offraud" or that the actions of the Islamic Republic in its purportedrepudiation were made with "fraudulent intent to mulct Bell."' 2Although the court did find that these issues involved suffi-ciently serious questions going to the merits to make them fairground for litigation, it failed to find that the balance of hardshipstipped decidedly toward the plaintiff Bell. Even though Bell stood tolose a substantial sum of money, Manufacturers stood to lose asmuch or more if the letter of credit it had issued was not honored.Manufacturers held many assets in Iran that could be subject to na-tionalization by the Iranian Government or to attachment by Iraniancourts in proceedings initiated by Bank Iranshahr, and Manufactur-ers could lose credibility in the international banking community ifit failed to make good on its letter of credit. Moreover, Bell know-ingly and voluntarily entered into the contract which allowed theIranian Government to recoup its down payment on demand in orderto bring to Bell "both monetary profit and prestige and good will inthe global communications industry."'" Bell sought the benefits ofthis commercial arrangement and the court felt that it must alsobear the burdens.While the result of the Bell case seems to support the indepen-dent nature of the letter of credit, the dicta in the decision indicatesa willingness on the part of the court to entertain arguments relatingto fraud occurring in the underlying transaction which does not di-rectly affect the letter of credit transaction. The court suggests thatif the demand for payment was made with the intent to defraud orpenalize Bell in its attempt to settle disputes through enforcement ofthe underlying contract and its termination provisions, a court couldproperly enjoin payment on the letter of credit which was estab-lished to guarantee that payment on demand.The utility of the letter of credit in international trade is depen-12. 474 F. Supp. at 425.13. d. at 426.1980'168 JOURNAL OF INTERNATIONAL LAW AND POLICY VOL. 9:141dent on its continued independence from the underlying agreement.By allowing greater recognition of the underlying transaction in ac-tions to enjoin payments under letters of credit the courts threatenthis utility. The end result is a greater burden on international tradeas parties to agreements are less able to rely on the guarantee ofpayment the letter of credit is designed to secure.If the trend to consider the underlying transaction as an integralpart of the letter of credit transaction continues, especially in casessuch as this one, where an American company has agreed to bebound by the laws of a foreign jurisdiction, the willingness of foreigncorporations and governments to enter into agreements with U.S.parties will be impaired. Such a move, not unlike the freeze on Ira-nian assets in the United States, would do little to raise the confi-dence of foreign businesses and governments in the American busi-ness system.Dirk T. Biermann

Letters of Credit - American Company Failed to Prove the Elements Necessary to Warrant a Preliminary Order Enjoining an American Bank from Making Payment under a Letter of Credit to an Iranian Bank, Even Though, as a Result of the Islamic Revolution, the Iranian Government Might Default on a Consulting Services Contract with the American Compapny

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