solution

Maurice O’Meara Co. v. National Park Bank of New York

BACKGROUND AND FACTS

National Park Bank issued a letter of credit addressed to Ronconi & Millar, beneficiary, at the request of its account party, Sun Herald, “covering the shipment of 1,322 tons of newsprint paper in 72½-inch and 36½-inch rolls to test 11-12, 32 lbs. at 8½ cents per pound net weight—delivery to be made in December 1920 and January 1921.” The letter of credit did not require that a testing certificate from an independent laboratory accompany the documents. When Ronconi & Millar’s invoice and draft were presented to the bank, the documents described the paper as was required in the letter of credit. However, the bank refused payment because it had no opportunity to test the tensile strength of the paper. (Interestingly, the market price of newsprint paper had fallen sharply in the time period between the contract of sale and the presentation of documents, amounting to over $20,000 in this case.) Ronconi & Millar transferred their rights to collect payment to Maurice O’Meara, a financial institution, who brought this action to collect the full amount of the drafts. Maurice O’Meara claims that the issuing bank had no right to test or inspect the paper.

MCLAUGHLIN, JUDGE

[The letter of credit]… was in no way involved in or connected with, other than the presentation of the documents, the contract for the purchase and sale of the paper mentioned. That was a contract between buyer and seller, which in no way concerned the bank. The bank’s obligation was to pay sight drafts when presented if accompanied by genuine documents specified in the letter of credit. If the paper when delivered did not correspond to what had been purchased, either in weight, kind or quality, then the purchaser had his remedy against the seller for damages. Whether the paper was what the purchaser contracted to purchase did not concern the bank and in no way affected its liability. It was under no obligation to ascertain, either by a personal examination or otherwise, whether the paper conformed to the contract between the buyer and seller. The bank was concerned only in the drafts and the documents accompanying them. This was the extent of its interest. If the drafts, when presented, were accompanied by the proper documents, then it was absolutely bound to make the payment under the letter of credit, irrespective of whether it knew, or had reason to believe, that the paper was not of the tensile strength contracted for.

This view, I think, is the one generally entertained with reference to a bank’s liability under an irrevocable letter of credit of the character of the one here under consideration.
The defendant had no right to insist that a test of the tensile strength of the paper be made before paying the drafts; nor did it even have a right to inspect the paper before payment, to determine whether it in fact corresponded to the description contained in the documents. The letter of credit did not so provide. All that the letter of credit provided was that documents be presented which described the paper shipped as of a certain size, weight, and tensile strength. To hold otherwise is to read into the letter of credit something which is not there, and this the court ought not to do, since it would impose upon a bank a duty which in many cases would defeat the primary purpose of such letters of credit. This primary purpose is an assurance to the seller of merchandise of prompt payment against documents.

It has never been held, so far as I am able to discover, that a bank has the right or is under an obligation to see that the description of the merchandise contained in the documents presented is correct. A provision giving it such right, or imposing such obligation, might, of course, be provided for in the letter of credit. The letter under consideration contains no such provision. If the bank had the right to determine whether the paper was of the tensile strength stated, then it might be pertinent to inquire how much of the paper must it subject to the test. If it had to make a test as to tensile strength, then it was equally obligated to measure and weigh the paper. No such thing was intended by the parties and there was no such obligation upon the bank. The documents presented were sufficient. The only reason stated by defendant in its letter of December 18, 1920, for refusing to pay the draft, was that—“There has arisen a reasonable doubt regarding the quality of the newsprint paper … Until such time as we can have a test made by an impartial and unprejudiced expert we shall be obliged to defer payment.”

This being the sole objection, the only inference to be drawn there from is that otherwise the documents presented conformed to the requirements of the letter of credit. All other objections were thereby waived.
Judgment should be directed in favor of the plaintiff.

Decision. National Park Bank’s obligation to pay the beneficiary’s drafts submitted under its letter of credit was separate and distinct from the contract of sale between the buyer and seller. Banks deal in documents only. Therefore the defendant, National Park Bank, could not withhold payment of the drafts even if it believed that the paper was not of the weight, kind, or quality ordered by Sun Herald. Defendant also had no right to demand testing of the paper or to inspect it prior to payment.

Case Questions

1. Had the bank been aware that the newsprint shipment did not conform to the requirements of the underlying sales contract, would it have still been required to pay under the letter of credit?

2. If the bank pays for documents that conform to the letter of credit, but the goods themselves turn out to be nonconforming, is the buyer legally justified in refusing to reimburse its bank?

3. Do you think, under current law and banking practice, that bankers should physically inspect the goods when they arrive before honoring their customer’s letter of credit?