Article

Factual Summary:

In the course of a complex series of LC transactions involving more than 40 prior presentations, negotiating bank purchased docu-ments under a letter of credit. Missing was a required certificate of inspection, a discrepancy present in many of the prior presentations under which it had been either cured or waived. The discrepancy was not waived under this presentation, however, and issuer dishonored.

The negotiating bank retained the bills of lading but when it sought to exercise control over the goods, the applicant brought an action against the beneficiary for breach of contract and against the negotiating bank for tortious interference and conversion on the theory that prior goods shipped under the contract were defective and that the goods covered by the bill of lading should be treated as replacements. A default judgment was entered against the seller/beneficiary but the negotiating bank counterclaimed on a theory of unjust enrichment. The trial court dismissed the counterclaims.

Legal Analysis:

1. Unjust Enrichment and Waiver Based on Past Conduct: A negotiating bank which purchases discrepant documents cannot claim that the applicant which obtained the goods based on rights on the underlying contract is unjustly enriched.

Noting the "long-standing rule" of strict compliance, the court concluded that the negotiating bank "ran the risk of not obtaining reimbursement when it made payment to [the beneficiary] knowing that the proper documentation had not been presented."

As to the argument that the purchase was made in reliance on the prior course of conduct by which the request had been waived or cured in more than 40 prior presentations, the court refused to apply the doctrine of estoppel, waiver, or, in effect, to conclude that there was a course of dealing which prevented the issuer from asserting the discrepancy. Noting that the issuer may waive the requirement of strict compliance, the court stated that "courts should be hesitant to allow the doctrine of waiver to disturb the clearly defined rules which govern letter of credit transactions: Claims by a beneficiary of a letter of credit that a bank has waived strict compliance with the terms of the credit should generally be viewed with a somewhat wary eye. ...[I]f equitable waiver claims are treated too hospitably by courts, letters of credit may become less useful payment devices because of the increased risk of forfeiting the right to reimbursement from their customers which banks would soon face."

The court cited the decision of the Eleventh Circuit inBanco General Runinahui v. CitibankInt'l ., 97 F.3d 480, 485-86 (11th Cir. 1996), with approval and noted that, although it only involved one prior waiver, "the principle stated in that case and in other cases... should apply equally where there are multiple prior waivers. The parties to letter of credit transactions are sophisticated commercial entities who are quite aware of the rule of strict compliance. If courts were to permit a sophisticated party who has ignored the rule of strict compliance to nevertheless recover, great damage would be done to the utility of letters of credit. This utility springs from the ability of the parties to such transactions to rely on the clearly defined rules which govern them."

The court indicated that waiver is possible "by engaging in some conduct which evinces an intention not to demand conformity in connection with the transaction which is currently at issue."

2. Unjust Enrichment. After disposing of the negotiating bank's contract claims, as barred by res judicata the court considered its unjust enrichment claim. The court rejected this claim, finding that the bank's loss was a result of its own failure to secure the proper documentation required for reimburse-ment from the issuer. Thus, the balance of the equities did not favor the negotiating bank. As a result, the court concluded that there was no basis for a claim of unjust enrichment because no injustice was perpetrated on the negotiating bank which knew that the documents did not conform.

Comment:

1. The opinion properly rejects the insertion of the contract or equitable doctrine of estoppel or course of dealing into the examination of documents presented under a letter of credit. An issuer has no means of determining what occurred under prior presentations and should not be held to such knowledge. Even under the language of Section 1-205 of the UCC which contains provisions on course of dealing, it is subject to the express terms of the undertaking. The letter of credit is unambiguous with respect to the requirement that the documents comply. The UCP and standard international banking practice require that each separate presentation comply without respect to prior payments notwithstanding discrepancies whether or not notice was given. As a result, there is no basis for resort to estoppel or course of dealing to obtain a different result.

2. The result with respect to control of the goods and the bill of lading may, at first, be surprising. One would have thought that by holding the bill of lading the negotiating bank had control of the goods. This general rule is correct, however, subject to certain limitations. The bill of lading only affects the obligation of the carrier with respect to the goods. It cannot confer better title than that possessed by the consignor. As a result, when the applicant prevailed in the action against the consignor with respect to its rights to the goods, the court concluded that the negotiating bank, which was also a party, was bound by that decision.

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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.