Semetex Corp. v. UBAF Arab American Bank
853 F. Supp. 759 | District Court, S.D. New York | 1994
What This Case Means for Subcontractors
Semetex and Eaton sued to enforce payment on a letter of credit issued by Iraq's central bank and confirmed by UBAF Arab American Bank. When Iraq invaded Kuwait, the U.S. froze Iraqi assets, and UBAF refused to pay despite valid shipping documents. The court ruled that a confirming bank must honor its letter of credit obligations even during sanctions, as long as the creditor obtains proper government authorization. This matters to subcontractors because it protects your right to payment on letters of credit regardless of external political or economic disruptions.
Key Takeaways
- •Letters of credit create independent payment obligations that exist separately from the underlying construction or supply contract—the bank cannot refuse payment based on contract disputes or external events.
- •If a bank wrongfully refuses to honor a valid letter of credit, you can pursue legal action by obtaining necessary government licenses or authorizations; don't assume sanctions or freezes automatically cancel your rights.
- •Document everything carefully: shipping documents, delivery evidence, and compliance with letter of credit terms are critical to enforcing payment in court.
Letters of credit impose obligations independent of underlying contracts.
Frequently Asked Question
Can a bank refuse to pay my letter of credit because of government sanctions or political events?
No. A bank's obligation to pay a letter of credit is independent of external events like sanctions or freezes. However, you may need to obtain government authorization (like an OFAC license) to pursue legal action. The key is that the letter of credit terms were met and your documents are valid—the bank cannot hide behind external circumstances to avoid payment.
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