Article

Factual Summary: To assure payment of monthly rental for the lease of a fuel storage tank, Lessee arranged for the issuance of a letter of credit in the amount of US$200,000 issued by bank (Issuer) in favor of Lessor. The LC stated "We hereby engage with you that documents drawn in compliance with the terms and conditions of this letter of credit will be duly honored by us upon presentation at Chemical Bank, 823 Riverview Drive, Benton Harbor, MI 49022 before the close of business on September 13, 2008." (Emphasis in opinion.)

When Lessee missed numerous rental payments, Lessor accelerated the lease and drew on the LC in the full amount. On 7 July 2008, Lessor/Beneficiary sent documents by "facsimile" (which means by telefax), email, and Federal Express to Issuer's employee, Tim Walling, who had signed the LC and who worked in Issuer's office in Marshall Michigan. On 28 July 2008 at 4:17 PM, Lessor/Beneficiary sent a second drawing to Mr. Walling in Mashall, Michigan. [Counsel for Beneficiary has advised the Editors that all drawings were trifold, that is by telefax, email, and courier.] At 4:54 PM on the same day, Lessor/ Beneficiary sent what was described by the court as a "revised draw" to Issuer's counsel who, according to the court, "apparently also was not located in [Issuer]'s Benton Harbor, Michigan office." At 5:03 PM on the same day, a "correct demand notice" was sent to the counsel which was addressed to the Marshall, Michigan office. On 12 September 2008, a day before expiry of the credit, Lessor/Beneficiary sent another draw request to Mr. Walling in the Marshall, Michigan office.

Issuer did not honor but did not notify Lessor/ Beneficiary of any discrepancy. Lessor/Beneficiary sued Issuer for wrongful dishonor and other grounds. On cross motions, the trial court denied the claims of Issuer and granted Lessor/Beneficiary's motion for summary judgment on its breach of contract count.

Legal Analysis

1. UCP500; Relevance of UCP600.

In its opinion, the court refers to Michigan's revised UCC Article 5 (Letters of Credit) and to the UCP in parallel. The opinion indicates that the LC was subject to UCP500 (1993). However, the opinion refers to the relevant corresponding texts of UCP600. A footnote in the opinion sheds light on this circumstance. Footnote 4 notes that while the LC was subject to UCP500, "That publication was superseded by UCP Publication Number 600, which Lessor/Beneficiary cites in its briefs." The court noted that "Lessor/ Beneficiary states that '[a]ny changes between UCP publications do not materially impact [Lessor/ Beneficiary]'s claims.' Issuer has not contradicted this statement, and the court's review of Publications 500 and 600 confirms that the pertinent provisions (Articles 14(b) and 16(b), (d) and (f)) are identical from one version to the next."

2. Compliance; Rev. UCC Section 5- 108(a); 5-108(e).

Issuer argued that Beneficiary's failure to present documents to the location stated in the credit constituted a discrepancy. In assessing the standard of compliance, the court recited the strict compliance standard of Revised UCC Section 5- 108(a), noting the reference in it to Section 5-108(e) regarding standard practice. The court ruled that the Beneficiary had failed to comply with the LC's "location of presentation term", justifying dishonor.

3. Oral Variation of LC Term; Course of Dealing; Covenant of Good Faith and Fair Dealing.

Beneficiary argued that it did not comply with the LC requirement because an Issuer "employee named 'Mrs. Velvet' directed [Beneficiary] employee Mark Engdall to send draw requests to Tim Walling in the Marshall office." Beneficiary argued that such redirected presentations were part of the course of its dealing with Issuer, and that dishonor for this reason violated Issuer's covenant of good faith and fair dealing. The court concluded that "[t]his argument lacks merit." The court stated that "[Beneficiary] cannot use the duty of good faith and fair dealing as an end run around the unambiguous language of the contract." It observed that if Beneficiary had wanted the right to make the presentation to the Marshall office, it should have caused the LC to so state. The court also noted that the LC stated that "[t]his Agreement may not be changed or modified without the written consent of the party sought to be bound by such change or modification", observing that "Michigan courts routinely enforce such contractual provisions."

4. Preclusion; Rev. UCC Section 5-108(b); UCP600 Article 14(b) & 16(f).

Beneficiary argued that Issuer was required to give notice within seven days and that it had failed to provide any notice whatsoever. Issuer responded that the duty to give notice never arose because the documents were sent to the wrong location. The court concluded that the argument was "untenable" because it was not supported by Michigan case law and "because it would lead to an extreme and illogical result. Namely, if the issuer of an LOC were allowed to dishonor a draw without complying with its notice-ofdiscrepancy obligations-on the ground that there was a discrepancy in the first place (in this case, [Beneficiary]'s failure to present the draws to the address specified in the LOC)-the notice-ofdiscrepancy requirements in UCP[600] Article 16 and [Revised UCC § 5-108] would be rendered nugatory." The court observed that the interpretation argued by Issuer would "contravene the venerable principle that courts must not construe statutory or contractual provisions so as to deprive such a provision of force and effect."

5. Independence; Rev. UCC Section 5- 103(4); UCP600 Article 4(a).

Issuer raised several arguments linking the obligation and rights of the beneficiary to the underlying transaction, namely that it had terminated the underlying transaction and that the invoice was not due and owing because the acceleration was improper. The court rejected these arguments, pointing to the independence principle embodied in the UCC and UCP. The court stated "Even if [Beneficiary] breached its contract with [Applicant/Lessee] or acted beyond its authority under that contract, that would be of no avail to [Issuer] with regard to its duties and rights under the [letter of credit]."

6. Application, effect on Beneficiary; Independence.

Issuer argued that there was another basis for refusal, namely that the Beneficiary had failed to present the original LC. The court rejected this argument, noting that there was no such requirement in the LC but rather in the application for the credit which, it pointed out, was not signed by the beneficiary and which "has no bearing on [Beneficiary]'s right to payment under the Letter of Credit".

7. LC Fraud, procedural considerations.

The notion of fraud lurks throughout the case. Issuer tried to raise it as a defense but was prevented on procedural grounds. The argument that the beneficiary acted beyond its authority and in breach of the lease may well have been the substance of the fraud argument. If so, the court was not impressed with the argument and denied requests by both parties for further briefing on the point as unnecessary.

In a previous motion, Issuer had argued that it needed to file a sur-reply brief to raise the issue of fraud. Specifically, Issuer noted that the LC states "that if [Applicant/Lessee] does not have a bond issued to serve as collateral for the aforementioned contract, [the fuel storage tank lease contract, then] Applicant agrees to have a Letter of Credit available for the life of the said contract." Beneficiary terminated its contract with Applicant on 7 July 2008, the same day that it first attempted to draw upon the LC.

Issuer sought to argue that the LC was no longer available to Beneficiary as of that day. In an order dated 4 August 2009 at 2009 U.S. Dist. LEXIS 67915, the court denied Issuer's motion to make the new argument in the summary judgment motion, stating "A sur-reply brief is inappropriate for this purpose, because [Issuer] could and should have fully developed and supported the terminated-contract defense in its opening summary-judgment brief or at least in its reply brief."

Comment

1. Which UCP Version? The opinion mistakenly refers to UCP600 as if it controlled the LC obligation. The fact that UCP500 has been superseded by UCP600 does not alter the fact that the LC was issued subject to UCP500 and it is the provisions of UCP500 that govern the credit. Both rules provide for preclusion where the issuing bank fails to give any notice of refusal but it is an overstatement by the court that the provisions regarding notice are "identical from one version to the next". There are a number of significant differences, the most important being the change from a reasonable time not to exceed seven banking days to a maximum of five days. In this case, there is no problem since no notice was given, but a problem could arise were the notice given on the sixth day following presentation.

2. Compliance. The court appears to give equal weight to the provisions of U.S. Revised UCC Article 5 and the UCP. While they are similar in some respects, there is a hierarchy. In an LC that is subject to UCP500 and is also subject to Revised UCC Article 5, terms that appear in the UCP displace the variable provisions of UCC Article 5. This rule applies to the formulation of the standard of compliance. The UCP does not use the term "strict". The interpretation of "strict" in Revised UCC Article 5 is softened, however, by its reference to standard practice. Since "strict compliance" in LC terminology signifies not absolute or literal replication but compliance as it would be understood under standard international letter of credit practice. A similar parallelism appears in the court's reference to the preclusion rule.

3. Presentation. The question not asked by the parties nor considered by the court was whether sending the documents to another address than that required in the LC constituted a presentation. If there were no presentation, there would be no obligation to examine and give a notice of refusal. Had the documents been sent to another address occupied by a stranger, there would be no question of examination and it would be assumed that there had been no presentation. In this case, however, the documents were sent to another office of the issuing bank. The opinion does not expressly so state, but the Editors have been informed by Beneficiary's Counsel that the documents were received by the bank. Such a situation gives rise to several considerations. If they were sent to a unit in the bank that was unsure how to process them or to what they related, there might be delay in forwarding them to the proper unit. The documents would not have been regarded as having been presented until they reached the location indicated in the credit which is when the time for examination would begin to run and which is the date on which the timeliness of the presentation would be determined. Thus, if the documents were sent to a different address of the organization on the day of expiry and were not received by the proper unit (without there being a deliberate delay) until the next day, the presentation would not be timely because the credit would have expired. However, the issuer could not simply ignore the presentation and there is some question as to whether it could simply return it to the sender. There are provisions in U.S. UCC Article 1 regarding the receipt of notices by an organization which might have some applicability to this question. The standard by which the conduct of the business should be measured is that of the commercial reasonableness of its actions. Businesses do not throw away a presentation of documents even if they do not belong in the unit to which they are sent. It is also of some significance that they were addressed to the bank officer who signed the LC.

In this case, there is no indication in the opinion whether the LC department ever received the documents from its own organization or what happened to the documents. The assumption of the court is simply that there was a presentation, giving rise to the obligation to give timely notice of refusal. Counsel for the Beneficiary has informed the Editors that Issuer sent a communication to Beneficiary stating that the bank was "processing" the documents. Such a communication is decisive in that it suggests that a "presentation" has been made and even taken up.

The court treats the misdirected routing of the documents as a discrepancy. One wonders, however, if it is simply not yet a presentation. There is nothing to prohibit the beneficiary from routing the documents through another branch of the issuer (although it need not take them up). Such a routing would not constitute a discrepancy. It might be argued that addressing the required documents to another location would be a discrepancy but it is unclear here whether required documents were so addressed. It might be observed that a bank cannot give notice of discrepancies unless it has received the documents. From this notion, it may well be inferred that the documents eventually found there way to the proper bank official.

4. Course of Dealing; Waiver; Estoppel. While neither the parties nor the court use the term "course of dealing", beneficiary's argument is essentially based on that notice. Since it was disputed that there were such dealings, it was inappropriate for summary determination. One wonders what the result would be were there such a course of dealing. The court is correct in its conclusion that course of dealing cannot vary the terms of the LC. However, one wonders why the LC terms cannot be waived or the issuer estopped from asserting them. Had it been proven that a bank employee had instructed the beneficiary to direct the documents to another location, then there might well be estoppel. In addition, it is possible that certain conduct of the issuer might constitute waiver.

5. Preclusion/Presentation. The focus of the case turned on the application of the preclusion rule. Issuer had argued that it was not applicable because the documents were sent to the wrong location. The court dismisses this argument without really coming to grips with it. The lack of precedential case law is not surprising. There is no decision reported on this question anywhere to the Editor's knowledge. As to the rule of interpretation, the provisions cited do have meaning where there has been a presentation. The question is whether there was one (as indicated above in Comment 3). It is under that rubric that the case should have been analyzed. If there was no presentation, then there is no duty to give a notice of refusal. As indicated, to make that determination, it is necessary to have more facts than the opinion discloses.

6. Failure to Present Original. One of the more surprising arguments in this unique case is Issuer's argument that the beneficiary was required to present the original LC because the application for the credit so provided. Apart from the fact that the preclusion rule would have disposed of this argument, a point that the court did not bother to make, it is incredible that the bank or its counsel would have urged such a position which runs completely in the face of the independence principle.

7. LC Fraud. The court quite properly shut down the possibility of a fraud argument. The facts alleged amounted to a contract dispute and not LC fraud.

The opinion contains several excerpts from the text of the LC. The editors, however, have obtained the entire text which is reprinted here.

[JEB/gdb]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.