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Ashriza Noor Hikmah 10/304788/HK/18556

ISSUE Plantiff: Defendant: HANIL BANK BANK NEGARA INDONESIA

PT. Kodeco Electronics Indonesia asked defendant BNI (Indonesia, with a branch in New York) to issue a letter of credit for the benefit of "Sung Jun Electronics Co., Ltd.". BNI did so, but misspelled the name as "Sung Jin Electronics Co. Ltd." Sung Jun did not object. Sung Jun negotiated the letter of credit to plaintiff Hanil Bank (Korea, with a branch in New York), who paid for it and submitted the appropriate documents to BNI, but the documents correctly identified Sung Jun as "Sung Jun." BNI refused the documents because they did not match the letter of credit, after Kodeco refused to waive the discrepancy. As a result of BNI's failure to pay, Hanil filed a breach of contract action against BNI on April 19, 1996 in New York State Supreme Court. REGULATION Foreign Sovereign Immunities Act, 28 U.S.C. 1602 ANALYSIS A letter of credit is a written undertaking of a bank, which gives rise to an obligation, such as payment of a sum of money, when the bank is presented with certain required documents. 1 These documents, which are the key to the letter of credit transaction, must conform to the conditions stipulated in the letter of credit. 2 As a general rule, if documents presented to the issuing bank are not in compliance with the terms and conditions of the letter of credit, a bank may refuse to honor its obligation under the letter of credit. 3 Because it is estimated that ninety percent of all documents initially tendered contain discrepancies, a court's ability to discern which discrepancies constitute grounds for dishonoring the transaction is an issue of the utmost importance in letter of credit law. Letters of credit (individually, "LC," or collectively, "LCs"), 6 frequently have been characterized as one of the more secure methods of payment available in sales transactions. 7 However, the use of LCs to facilitate growing international sales transactions in reliance on this characterization 8 is somewhat ironic: although LCs can effectuate a secure payment, in most instances the documentary compliance standard does not require the issuing bank to make a payment to the beneficiary. 9 Under current compliance standards, even the slightest documentary discrepancy can enable an issuing bank to avoid its payment obligation under the LC. CONCLUSION May an issuing bank reject documents that contain a single incorrect letter in the name of the beneficiary? Held Yes. The bank deals with the documents, not the underlying commercial transaction, and here the plaintiff does not claim that "Sung Jin" is an obvious misspelling in Korea of "Sung Jun." Did BNI breach a duty of good faith by acting on the advice of Kodeco to reject the documents? Held No, the UCP allows the issuing bank to ask for a waiver from the payer of credit (here Kodeco), but is under

Ashriza Noor Hikmah 10/304788/HK/18556


no obligation to get approval of the beneficiary, as the deal turns on the documents, not the underlying transaction. The judgment of the district court denying defendant BNI, an Indonesian corporation, sovereign immunity under the FSIA.