Article

Factual Summary:

Pursuant to a distribution agreement between the manufacturer, the Brazilian distributor, and the distributor's U.S. purchasing agent, a standby for US$ 250,000 was opened by the issuer in favor of the beneficiary/manufacturer.

By the terms of the LC, the standby contained a fixed expiration date which was to be "automatically extended, without written amendment, in each successive calendar year unless" the issuer gave "written notice that we [the issuer] have elected not to renew the letter of credit beyond such date," (a "notice of termination). It also required presentation of a default statement that "the amount of the draft which this statement accompanies will be applied by us to indebtedness due and owing by [the applicant] for invoices which [the applicant] defaulted on the payment terms to [the beneficiary]."

On three occasions, the issuer requested the advising bank to "please obtain authorization to cancel" the standby. The beneficiary, however, refused to agree to its cancellation. Immediately prior to the next expiration date, the issuer sent another communication containing the statement: "Please cancel ... [standby LC] and release us from liabilities...." A subsequent telex instructed the advisor to "[p]lease consider [the prior telex] as a notice of termination and release us from liabilities". Within the next cycle of renewal, the beneficiary drew on the standby for obligations owed by the applicant and, pursuant to the standby's terms, presented the required default statement.

Claiming that the LC had expired because the "Please cancel ... and release" communication constituted a notice of non-renewal and that no invoices had been issued by the beneficiary to the Brazilian distributor, the issuer dishonored the first drawing. It also dishonored a second drawing solely on the ground that the LC had been canceled.

The beneficiary filed an action against the issuer for wrongful dishonor and the parties cross-moved for summary judgment. The trial court granted the beneficiary's motion for summary judgment and denied the issuer's cross-motion. On appeal, affirmed.

Legal Analysis:

1. Choice of Law: Forum's Law: Even though the LC was issued in Brazil and the beneficiary performed in California, choice of New York as the forum for litigation and reliance on New York law in the parties' briefs was determinative as to the application of the forum's law.

2. Standard for Notice of Non-Renewal: Clear and Unequivocal: The issuer argued that the standard by which the adequacy of its claimed notice of non-renewal should be measured was to be found in general commercial law, namely Uniform Commercial Code Section 1-206(26), which provides a general definition of "notice". This definition provides that notice takes place when the person required to give notice "takes such steps as may be reasonably required to inform the other in the ordinary course whether or not such other actually comes to know of it ... ." The appellate court rejected this approach. Stating that "[s]implicity and certainty are hallmarks of the letter of credit transaction and explain the letter of credit's great utility"' the court looked to what it described as the corollary of the independence principle, namely that in order to strictly comply with the terms of the credit, the beneficiary "must know precisely and unequivocally what those requirements are". Quoting from Marino Indus. Corp. v. Chase Manhattan Bank, 686 F.2d 112, 115 (2d Cir. 1982) and Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 466 (2d Cir. 1970). The court noted that the UCP promoted simplicity and certainty in specific articles such as UCP500 Article 5(a) requiring that instructions for a credit be "complete and precise", and UCP500 Article 42 requiring an expiry date and discouraging the use of "marginally unclear terms". It therefore agreed with the trial court's conclusion that under the UCP notice of non-renewal would have to be "clear and unequivocal" even though the UCP did not explicitly mention notice of non-renewal on the basis of "its treatment of closely analogous issues, along with the principles and policies underlying the UCP generally".

The appellate court also noted that New York's non-conforming version of prior UCC Article 5 (Letters of Credit) does not apply to credits subject to the UCP in situations such as those presented by this case. The court also questioned whether the UCC definition of notice "speaks directly to the issue before us."

3. Notice of Non-Renewal: The issuer argued that the telex in question could not be reasonably construed to be just another request for beneficiary consent to terminate the LC since it differed in material respects from the prior requests for consent to cancellation. The appellate court compared the communications and concluded that the similarities to prior communications were at least as strong as any differences. It also noted that the issuer itself felt compelled to clarify its meaning in subsequent communications. The appellate court, therefore, upheld the trial court's ruling that the notice was not clear and unequivocal.

4. Fact or Law: The issuer contended that there was sufficient ambiguity to require a full trial as to the meaning of the telex. The appellate court ruled, however, that summary judgment was appropriate since there could be no reasonable argument that the telex was clear and unequivocal.

5. Fraud in the Transaction: The issuer claimed that the drawing was fraudulent in that the statement of default (that the drawing was for "indebtedness due and owing by [the applicant] to [the beneficiary] for invoices which [the applicant] defaulted on the payment's terms to [the beneficiary]") was false because the beneficiary knew that the default was that of the purchasing agent and not the applicant. The trial court concluded as a matter of law that the applicant was responsible for the debt and there was no material fact demonstrating the existence of fraudulent intent on the part of the beneficiary. The court of appeals agreed, finding that a legitimate dispute exists concerning the meaning of the required statement. As a result of this ambiguity, the beneficiary's statement could not constitute an "outright fraudulent practice," which would have been necessary for a finding of "fraud in the transaction."

Comment:

This decision reveals a commendable sensitivity in its interpretation of the UCP. Faced with a narrow constructionist argument, the court looks to the policy behind the UCP and formulates a rule consistent with that policy. The policy is that the independence of the undertaking requires certainty and that certainty is supported by a clear and unambiguous notice. The court remarks on the connection between the strict compliance rule and the need to understand what are the terms of the undertaking. That the court overlooked another policy, the nature of an irrevocable undertaking, and the obvious corollary that no termination may take place unless it is apparent, is not significant in view of the result. The important feature of the decision is that the court is looking to letter of credit policy and the reasons underlying it to interpret and apply the UCP.

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