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Sound of Market Street Inc. v. Continental Bank International

argued: February 11, 1987.


On Appeal From the United States District Court For the Eastern District of Pennsylvania, D.C. Civil No. 84-3922.

Higginbotham and Stapleton, Circuit Judges and Rodriguez, District Judge.*fn*

Author: Stapleton


STAPLETON, Circuit Judge:

In this case, the beneficiary of a letter of credit, Sound of Market Street, Inc. ("Sound of Market"), sued an advising bank, Continental Bank International ("Continental"), alleging that Continental's delay in advising the letter of credit to Sound of Market resulted in Sound of Market's failure to meet the shipping date required by the letter of credit and that the delay breached Continental's duty to Sound of Market under the Uniform Commercial Code ("UCC") and the common law. The district court held that an advising bank owed the beneficiary a tort duty of timely transmission, 623 F. Supp. 93. Finding no contractual, statutory, or tort duty of Continental to advise Sound of Market within a reasonable period of time, we reverse.


In July 1982, Dalco of Cyprus ("Dalco") agreed to pay Sound of Market $125,550 in exchange for the return of 165,000 defective audio cassette tapes Dalco had sold Sound of Market in May 1982. Dalco agreed to have a letter of credit for $125,550 issued in favor of Sound of Market. Sound of Market told Dalco that its bank was Continental Bank in Philadelphia ("Continental Philadelphia").*fn1 Sound of Market asserts that no other terms of the transaction were discussed with Dalco.

Dalco contracted with the Bank of Cyprus for the issuance of the letter of credit. The Bank of Cyprus had a correspondent relationship with Continental. On August 6, 1982, Continental's New York office received a telex from the Bank of Cyprus requesting Continental to notify Sound of Market through Continental Philadelphia that a letter of credit had been opened with Sound of Market named as beneficiary. The telex identified three terms of the letter of credit that are relevant to our discussion. First, shipment had to be made on or before August 31, 1982. Second, the tapes had to be shipped on a vessel "not scheduled to call on her current voyage at Famagusta Kyrenia and Karavostassi Cyprus." App. at 28. Third, both the letter of credit and the request for advice were made subject to the Uniform Customs and Practice for Documentary Credits (International Chamber of Commerce Publication No. 290, 1974 revision) ("UCP").

While preparing the letter of credit for advice to Sound of Market, Continental identified the limitation on the vessel's ports of call as a potential boycott clause. Because letters of credit containing boycott clauses are regulated, see 50 U.S.C.A. App. § 2407 (West Supp. 1986), Continental requested an opinion on the alleged boycott provision from its parent company's legal staff on August 12. On August 18, an attorney stationed in New York counseled that the letter of credit could be advised without further concern about the suspected boycott clause. That same day, Continental mailed the letter of credit to Continental Philadelphia and a copy to Sound of Market. Continental Philadelphia received the letter of credit on August 25, but Sound of Market claims never to have received its copy. Sound of Market received the letter of credit from Continental Philadelphia on August 27.

Sound of Market failed to meet the shipping date and Dalco refused to amend the letter of credit to permit later shipment. Sound of Market then sued Continental for damages, stating in its complaint that "in violation of its requirements under the Uniform Commercial Code, Article 5, and in violation of its duties owed to plaintiff, the beneficiary of the letter of credit, [Continental] negligently and unreasonably failed to advise the plaintiff of the terms and conditions of the letter of credit in sufficient time for plaintiff to fulfill the requirements and conditions stated in the letter of credit to obtain the refund." App. at 7.

Continental moved for summary judgment on the ground that "it did not have a legal obligation to advise [Sound of Market] of the letter of credit in a timely fashion." Sound of Market Street, Inc. v. Continental Bank International, 623 F. Supp. 93, 94 (E.D. Pa. 1985). The district court denied Continental's motion, stating that "if advising banks are liable for inaccurate statements regarding letters of credit, they should be liable for untimely statements as well." Id. at 95. At trial, applying Pennsylvania law, the court charged the jury that Continental owed Sound of Market a duty to act as a reasonably prudent person would have under the circumstances. Affirmatively answering interrogatories submitted to it, the jury found that Continental was negligent in processing the letter of credit during the period from August 6 to August 18, and negligent in deciding to send the letter of credit via first class mail.

On appeal, Continental asserts that the district court erred in imposing a duty of timely transmission on an advising bank. Continental further argues that the UCP should govern the scope of such duty, if any. Finally, Continental argues that New York law should govern the resolution of this dispute.


Continental asserts that New York law should determine the legal consequences of a New York advising bank's conduct in New York, particularly given New York's interest in international letter of credit transactions. See J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd., 37 N.Y.2d 220, 333 N.E.2d 168, 172-73, 371 N.Y.S.2d 892 (1975), cert. denied, 423 U.S. 866, 96 S. Ct. 126, 46 L. Ed. 2d 95 (1975). Sound of Market, on the other hand, urges that Pennsylvania law applies to this dispute because injury occurred to a Pennsylvania corporation.

We need not resolve this issue if the laws of New York and Pennsylvania would not conflict on the resolution of this dispute. Coons v. Lawlor, 804 F.2d 28, 30 (3d Cir. 1986). Because we find that neither New York nor Pennsylvania would impose a duty of timely transmission upon an advising bank, we find it unnecessary to make a choice of law.


Continental argues that the district court should have considered the UCP in determining the extent of an advising bank's duties to a beneficiary. Under New York law, "Article 5 does not apply to a letter of credit or a credit if by its terms or by agreement, course of dealing or usage of trade such letter of credit or credit is subject in whole or in part to the [UCP]." N.Y. U.C.C. Law § 5-102(4) (McKinney 1964); accord, e.g., United Bank Ltd. v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 360 N.E.2d 943, 947 & n.2, 392 N.Y.S.2d 265 (1976); Banco Nacional de Desarrollo v. Mellon Bank, N.A., 726 F.2d 87, 90 n.5 (3d Cir. 1984); KMW International v. Chase Manhattan Bank, N.A., 606 F.2d 10, 15 & n.3 (2d Cir. 1979). Under the circumstances enumerated in the statute, the UCP replaces Article 5 as the governing substantive law, thus controlling legal relations between all parties to a letter of credit transaction, including the beneficiary and an advising bank. H. Harfield, Practice Commentary, N.Y. U.C.C. Law § 5-102; Almatrood v. Sallee International, No. 83-1800, slip op. (S.D.N.Y. May 13, 1985). Because the letter of credit in this case was subject to the UCP, the UCP replaced Article 5 under New York law.

Nonetheless, the New York Court of Appeals has stated that, even where the UCP is applicable, "it would not, in the absence of a conflict, abrogate the precode case law . . . and that authority continues to govern even where article 5 is not controlling." United Bank Ltd., 360 N.E.2d at 948 n.2. Thus, the UCP "does not bar the relief provided for in section 5-114 of the code," which codifies precode caselaw. Id. Similarly, although the UCP does not impose a duty of accurate transmission on advising banks, New York law imposes such a duty even where the UCP is applicable. E.g., First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 475 N.E.2d 1255, 1259-60 & n.4, 486 N.Y.S.2d 715 (1985); Bril v. Suomen Pankki Finlands Bank, 199 Misc. 11, 97 N.Y.S.2d 22, 33-34 (Sup. Ct. 1950); Merchants Bank of New York v. Credit Suisse Bank, 585 F. Supp. 304, 308 & n.7 (S.D.N.Y. 1984).

We recognize, however, that "Pennsylvania regards the UCP as a recording of common practice, and not the substantive law of a state which contracting parties may choose." Banco Nacional, 726 F.2d at 90 n.5. Thus, assuming that Pennsylvania's choice of law rules dictate application of Pennsylvania law, a Pennsylvania court would apply Pennsylvania's version of the UCC as the governing law even if a letter of credit has been made "subject" to the UCP.*fn2 Intraworld Industries v. Girard Trust Bank, 461 Pa. 343, 336 A.2d 316, 322-23 (1975). Accordingly, we must hereafter ...

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