Letter of Credit Forum

The North Carolina Business Court ruled yesterday onteh  issue when a North Carolina Court should apply the law of a foreign country and concluded that it would apply North Carolina law to a forum selection clause requiring the parties to litigate their dispute in the Commercial Court of Paris, under French law.

 Buyer and Plaintiff (SAG) sued its Bank Paribas (defendant) after SAG's deal with buyer KPC had gone bad. SAG claimed that Paribas had forced it to use a certain supplier (Bronwen) whose breach of contract destroyed the deal. Bronwen and SAG had concluded a Third party Letter of Credit Agreement which contained the forum clause designating French law and Parisian courts. 

Even though the decision comes to the correct result it is disappointing in its wording and its failure to address the issues. 

a) unclear wording

The court states:"{18} Paribas agreed to provide Letters of Credit on behalf of SAG to satisfy KPC’s financing requirements."

SAG purchased Petroleum from KPC and Paribas helped SAG (!) and not KPC to obtain financing. 

That the court further refers to the agreements between SAG and the seller KPC as "petroleum agreements" does not make things better. What is a "car contract": is it a lease, a purchase, an agreement to insure, transport, obtain a lien on, certify ? The court mentions that SAG wanted to purchase and transport the petroleum, hence it would be proper to refer to the agreement as purchase agreements or options to purchase (with ancillary logistics related duties). 

Secondly, in letter of credit transactions a clear nomenclature exists: applicant, issuing bank, beneficiary. The fact that the court did not use these terms to clarify the functions of the various parties in the transaction shows that the lawyers involved were unfamiliar with LC transactions. 

b) failure to address the issue

The bank was sued related to the issuance of a letter of credit. The court fails to mention this contractual relationship of issuing bank and applicant in the reasoning at all. Rather, it twistedly interprets an agreement between plaintiff and plaintiff's supplier ("Agreement"). Plaintiff SAG and its supplier Bronwen concluded the Agreement to outline their obligations in regards to the financing SAG obtained from defendant bank Paribas. Paribas never signed the Agreeent, however, the Agreement authorizes Paribas to act on behalf of SAG and Bronwen and provided for joint and several liability for the financing to the benefit of Paribas. The Agreement contained a forum clause designating Paris, France. 

When I say the court twistedly interprets the Agreement I mean the following: If the forum clause had designated North Carolina as the forum, Paribas would have fought to have that clause, which it did not negotiate, voided by the court. In my opinion the question not addressed is: Under what circumstances can a third party beneficiary reject individual clauses of the underlying agreement. On the one hand, the third party beneficiary gains an advantage from the agreement, on the other hands certain strings might be attached. Can the beneficiary simply cut the strings ?

The court agreed with Paribas that SAG should pursue its claims in the French courts. 

This decision is certainly correct and a relief for all banks. I particularly liked that the court rejected the idea that since France does not have discovery US style, the case had to be litigated in the United States. US companies and their lawyers have to get used to foreign jurisdiction, particularly if they agree on a foreign forum.  

On the other hand, the contractual relation between SAG and its bank based on the issuance of an LC should be strong enough to have the case transferred to France. Tort claims follow contractual claims in regards to forum clauses as the court confirmed. The use of the Agreement, to which the defendant bank Paribas was only a third party beneficiary, to justify dismissing the claim of teh  Applicant against the issuing bank seems weak.

Conclusion: Banks will make sure that their standard form regarding issuance of letters of credit contain forum clauses. It might further be a good idea to check all agreements related to reimbursements, and use of secondary banks as well. 

Litigation in the US is expensive for two reasons: costs of lawyers (who are worse trained than in other countries but still demand a premium) and the cost of discovery. It might be a good business approach to avoid US forums. 

The full text of the decision can be found here.