North Carolina Court Of Appeals: Bright Stars and Letters of Credit

The Court of Appeals on Tuesday of last week, in Speedway Motorsports Int'l Ltd. v. Bronwen Energy Trading, Ltd., unwound a year old decision by the Business Court. In that decision, Judge Diaz had ruled that a Defendant bank which had issued a letter of credit was bound to litigate in Switzerland a crossclaim involving the letter of credit. The judge dismissed the claims against the Bank, relying on a choice of forum clause specifying that litigation would take place in Geneva.  The forum selection clause was contained in a secondary guarantee of amounts drawn on the letter of credit, a guarantee to which the Bank was not a party.

The Business Court had found the third party claims to be closely related to the letter of credit transactions that were at issue and therefore subject to the Swiss forum selection clause.  Judge Diaz based his decision partly on cases where a non-signatory to an arbitration agreement was held to be obligated to arbitrate.

The Court of Appeals went off in an entirely different direction, referencing its 1981 decision in Sunset Invs.,  Ltd. v. Sargent, 52 N.C. App. 284, 278 S.E.2d 558, disc rev. denied, 303 N.C. 550, 281 S.E.2d 401 (1981).  In Sunset, the Court said that the "one bright star" in letter of credit transactions was that "every letter of credit involves separate and distinct contracts."

This "basic principle" is known as the "independence principle" or the "autonomy principle."

The Court of Appeals said that it was "unwilling to risk undermining letter of credit transactions."  It said that given the need for certainty and speed of payment under letters of credit, "it is important that the law not carry into letter of credit transactions rules that properly apply only to secondary guarantees or to other forms of engagement."

The same principle led to another opinion in the same case issued the same day in which the Court of Appeals ruled that there was no personal jurisdiction over the letter of credit issuer in spite of its "incorporation by reference" of the document containing the forum selection clause.  So the Bank still prevailed on its jurisdiction-based motion to dismiss.  It didn't have to defend the claim against it in North Carolina.

So, it seems clear that to draft a forum selection clause binding the issuer of a letter of credit, the drafter must make the clause part of the letter of credit itself.

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