of the problem it believed the freeze created nor did it give Engel an opportunity to modify the contract as parties are required to do under UCC section 2-616 in cases of commercial impracticability. See Mo. Rev. Stat. § 400.2-616. Instead, Medcon unilaterally determined that it could not perform and repudiated the contract. Medcon anticipatorily breached its contract with Engel and must pay the damages Engel incurred.
C. ANTICIPATORY BREACH OF THE LETTER OF CREDIT
The letter of credit says on its face that it is governed by the Uniform Customs and Practice for Documentary Credits (rev. ed. 1983). The UCP does not address the problem which arose in this case: anticipatory breach. Contrary to what First American contends, Article 19 of the UCP does not excuse performance under a letter of credit where circumstances have created a supervening illegality. The plain language of Article 19 indicates that it is meant to cover those times when uncontrollable acts stop the bank from doing business altogether, e.g. hurricanes, wars and computer failures.
Even where the parties have chosen to subject themselves to the UCP, Courts still look to other applicable law to govern the transaction. See D.C. Code § 28:5-102(1)(a); Banco di Roma v. Fidelity Union Trust Company, 464 F. Supp. 817, 820 (D.N.J. 1979). Only in a few states that have modified the UCC must the Court defer entirely to the UCP when there is a conflict. See Consolidated Aluminum Corp. v. Bank of Virginia, 544 F. Supp. 386, 400 (D.Md. 1982).
The Uniform Commercial Code directly addresses anticipatory breach of letters of credit in section 5-115 and can therefore provide a relevant standard in this case. See D.C. Code § 28:5-115.
When First American wrote to both Engel and Mercantile, the advising bank, and stated its intention not to pay on the letter of credit, its actions constituted an anticipatory breach. See Phillips Puerto Rico Core Inc. v. Tradax Petroleum, Ltd., 782 F.2d 314 (2d Cir. 1985). First American claims that it was only giving Engel notice of a supervening illegality, but the facts belie that contention.
First American not only wrote to Engel, it wrote the advising bank and said that it would not pay under any circumstances, thereby indicating to its agent, see Sound of Market, Inc. v. Continental Bank International, 819 F.2d 384, 388 (3d. Cir. 1987) (advising bank is agent of issuing bank), that documents could not be accepted. Mercantile then carried out First American's wishes and advised Engel that it could not "assist . . . in the handling of the documentation." Engel notified First American that Mercantile had prevented presentation on September 11, 1990, before the letter of credit expired. See Exhibit I, Engel Industries' Motion for Summary Judgment. If First American wished to correct any errors on Mercantile's part, they had the opportunity. Engel was never notified that documents would be accepted. First American's letters did not simply give notice, they blocked Engel's further performance by impeding the presentation of documents.
By its own submissions, First American has shown that it questioned whether the freeze prevented it from paying on the letter of credit only after it had already repudiated the letter of credit. On September 24, 1990 First American first wrote the Office of Foreign Assets Control seeking guidance on whether it was permitted to make payment under the letter of credit.
See Marcuss Affidavit, Exhibit C, Defendant's Cross Motion for Summary Judgment. First American was acting without any guidance from OFAC when it wrote Engel on August 14 declaring that payment under the letter of credit was illegal. First American acted in haste and without sufficient legal justification when it wrote Engel. First American's letter to Engel was not a simple notice of the freeze or of what First American tentatively believed to be its impact on the letter of credit. It was a repudiation.
There was no act that excused First American from completely discharging its obligation under the letter of credit. Simply put, the freeze never created an absolute bar to First American's performance. Whatever legal force the freeze had, it was only temporary in nature. Moreover, First American always had available to it the right to seek an exception to the freeze by applying to OFAC for a licanse. What is more, once the regulations were in place, it became clear that First American could pay under the letter of credit as long as the terms had been satisfied. Unlike the case of Chuidian v. Philippine National Bank, 734 F. Supp. 415 (C.D.Cal. 1990), First American never received any specific orders instructing it to freeze its letter of credit.
In August of 1990, the freeze was issued in broad terms with the understanding, as OFAC noted in its January 30, 1992 letter, that specific cases would be addressed through licenses and regulations. It was obvious from the record that First American wanted an excuse not to perform its solemn undertaking to pay under its letter of credit. Instead of doing everything it could to meet its obligation under the letter, First American took the opposite tack, namely to find or manufacture every excuse possible to avoid compliance with its responsibilities. That is not the way a financial institution should respond in this very important area because in doing so, it does considerable damage to the acceptability of letters of credit for effecting complex transactions in the business world.
Engel performed its obligations, and it was entitled to get the benefit of its performance. First American's key argument is that it was excused from performance under the letter of credit because Engel did not make presentment as required by the letter of credit. Under the circumstances of this case, First American is estopped from demanding that Engel present documents in order to receive payment. Cf. Crocker Commercial Services v. Countryside Bank, 538 F. Supp. 1360, 1363 (N.D. Ill. 1981) (bank estopped from raising objections to documents when objections not made before letter of credit expired). First American repudiated the letter of credit before it expired, indicating to Engel that any presentation would be futile. Moreover, when Engel sought to preserve its rights and tried to perform its obligations under the letter of credit, First American prevented Engel from making presentation until the letter of credit expired. There is undisputed evidence that Engel was prepared to make presentation, that it had delivered the goods FOB its warehouse, and that presentation was not made only because First American's agent, the advising bank, would not accept presentment.
This case is analogous to Kelley v. First Westroads Bank, 840 F.2d 554 (8th Cir. 1988). In Kelley, a court had issued a temporary restraining order preventing the issuing bank from paying on the letter of credit. By the time the temporary restraining order was lifted, the letter of credit had expired. The appeals court upheld the order requiring the bank to honor the letter of credit despite the fact that it had expired. The temporary restraining order was viewed as holding payment in suspension. The freeze should be viewed in the same way. It held First American's duty to pay in suspension until a decision could be made on the legality of payment. First American's duty to pay was fixed on August 24, 1990 when Engel had the documents ready and they were denied any opportunity for presentment.
It is obvious that beneficiaries of letters of credit cannot be allowed to collect without first meeting all of their obligations. Without a rule of strict compliance, letters of credit would not serve their purpose as a financing mechanism, but to honor First American's defense would be to carry the concept of strict compliance to an extreme. In this case, Engel has complied with its obligations including the preparation of necessary documents as shown by the undisputed evidence it has presented. First American cannot now prevail by claiming that Engel failed to do something First American specifically blocked Engel from doing.
Even if First American had been correct about the impact of the freeze, at the most it was only temporarily prohibited from making payment under the letter of credit. First American could have taken the documents and withheld payment until such time as it was licensed or otherwise authorized to make payment. Since OFAC has now indicated that the freeze does not prevent First American from accepting presentation of the documents, Engel must prevail on its claim. See Exhibit A, Defendant First American Bank's Cross-Motion for Summary Judgment Against Plaintiff Engel Industries, Inc. (OFAC letter dated January 30, 1992).
Letters of credit serve an extremely important purpose in the commerce of this nation and indeed the world. They facilitate complex commercial transactions by assuring parties like Engel that they will be paid if they complete their performance under contracts that they make. As one expert in the field of commercial transactions has written:
Support for credit in commercial transactions has been the lifeblood supplied by financial institutions such as banks. . . . Without the involvement of a financial institution on the side of the purchaser, the seller assumes a serious risk that the purchaser of goods or services might not be able to meet the obligation on the underlying transaction. That risk also creates an uncertainty of repayment itself with the burden of disposing of its collateral in a market with which it is unfamiliar and in which it has no expertise.
Egon Guttman, Bank Guarantees and Standby Letters of Credit: Moving Toward a Uniform Approach, 56 Brooklyn L. Rev. 167-8 (1990). In many instances, letters of credit simplify and facilitate transactions by making them feasible and economical. By assuring entrepreneurs the benefits of their bargains, business speculators who are otherwise unknown to each other are able to enter into contracts with the confidence they will be executed to the satisfaction of the parties. To permit a letter of credit to be repudiated as was done here would strongly inhibit the use of this very important instrument and could force businesses to engage in exhaustive credit investigations and otherwise devise needlessly complex and prohibitively expensive financing arrangements. If reputable financial institutions are able to weasel out of their obligation under their letters of credit, they will do a great disservice to business in this country and will also reduce their own profits. Letters of credit are too important a form of financing to permit them to be so easily repudiated with such finality as summarily happened in this case. Engel certainly would not have entered into this international transaction without the benefit of a letter of credit or its equivalent.
The Court trusts that this opinion will provide guidance to the parties on the resolution of the remaining claims. They should notify the Court immediately of any agreement they reach. If the parties are unable to resolve the remaining claims within twenty days, they are to notify the Court of how they want to proceed.
An appropriate order accompanies this opinion.
United States District Court
ORDER - June 2, 1992, Filed
For the reasons given in the foregoing opinion, it is this day of June hereby
ORDERED that plaintiff Engel Industries' motion for summary judgment is granted. Judgment shall be entered in favor of the plaintiff in the amount of $ 148,000 with appropriate set-offs, if any; and it is
FURTHER ORDERED that the cross-motion for summary judgment of defendant Medcon Enterprises is denied; and it is
FURTHER ORDERED that the cross-motion for summary judgment of defendant First American Bank is denied; and it is
FURTHER ORDERED that within twenty days of the date this order is entered the parties are either to inform the Court of how they have resolved the claims remaining in the case or to file with the Court a statement of how they want to proceed with the remaining claims.
United States District Court