Article

Factual Summary:

To assure performance of broker's undertaking to obtain drilling contracts for ocean rigs, broker obtained issuance of a standby for US$ 15 million through the application of a Virgin Island affiliate, naming the rig owner's subsidiary as beneficiary. As issued, the standby stated that it was issued "For account of Maritima Petroleo e Engenharia Ltda, Rio de Janeiro, Brazil" which was the broker. It required presentation of a demand statement which recited that the beneficiary confirmed that "the conditions agreed between ourselves and Maritima Petroleo e Engenharia Ltda... now have been met." The standby also nominated a NY bank to which presentment could be made and provided for a three day window for presentation: no earlier than 9:00 a.m. New York time on February 8, 1999 and no later than 4:00 p.m. New York time on February 11. 1999. It also set forth the number of signatures required, the acceptable signatories, and the requirements for validation of the signatures.

Since the standby as issued contained the name of the broker rather than that of its subsidiary which was the correct applicant, the applicant and issuer sought and obtained the beneficiary's agreement to amend the credit in the following manner:

1. WHERE IT [the standby] READS MARITIMA PERETEOE ENGENHARIA LTDA, RIO DE JANEIRO, BRASIL. AMENDED TO READ MARITIMA OVERSEAS, INC. TOTTOLA, BRITISH VIRGIN ISLANDS.

ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.

Since the rental contracts were not obtained, the beneficiary drew on the standby on 8 February 1999, presenting documents to the nominated bank which forwarded them to the issuer the same day.On 10 February, the issuer notified the nominated bank that payment would be made on 12 February. Later that same day, however, the issuer notified the nominated bank that the documents were discrepant and at 4:35 p.m. sent a notice of dishonor via S.W.I.F.T. and telephoned the beneficiary as well.

The alleged discrepancies were that the demand letters did not comply with the amendment and that the signature validation clause on the letter did not comply. Although disputing this conclusion, the beneficiary represented documents on Thursday 11 February. On Tuesday 16 February, the issuer again dishonored, stating that the same defects were present. The beneficiary brought this action against the issuer for wrongful dishonor. The court denied the issuer's motion to dismiss the action or to grant summary judgment. It granted summary judgment to the beneficiary on its claim of wrongful dishonor but denied its claim for punitive damages and attorneys' fees.

Legal Analysis:

1. Interpreting the Amendment: The court noted that the name of the applicant appeared in two places in the credit as issued. It appeared in the recital at the beginning in the full form as " Maritima Petroleo e Engenharia Ltda, Rio de Janeiro, Brazil". It also appeared in abbreviated form in the required text of the demand letter as "Maritima Petroleo e Engenharia Ltda". The question addressed by the court was whether the amendment operated on both of these phrases or only on the first one.

The first demand letter recited the name of the broker as indicated in the unamended standby. The issuer argued that the amendment must be read to mean that both the longer phrase in the recital of the applicant's name and the shorter phrase (withoutthe geographical designation) must have been altered by the amendment. The beneficiary argued that the amendment must be read strictly and that only the exact phrase stated in the amendment (the name plus geographical designation) was affected by the amendment and that the text of the demand letter was not altered by the amendment since the name as stated in the text of the demand letter was different than as it appeared in the amendment.

Drawing on the principle of strict compliance, the court ruled that the amendment did not affect the demand letter. Noting that the amendment began with the arabic numeral "1" which corresponded to the clause in the standby reciting the name of the applicant, the court concluded that "style rules indicate that the "1" serves not to number the item but to designate the part of the document to which the Amendment refers." The court also noted that "the Amendment states that it modifies only the Standby Letter of Credit; it does not purport to modify the Demand Letter."

The court also noted that the substantive reasons for the amendment suggested that it should not be applied to the demand letter which recited the names of the parties to the underlying agreement rather than the applicant which was a subsidiary of the broker and not a party to the underlying transaction. Documents submitted to the court made it clear that the issuer was aware of the substantive reason for the amendment and its limited scope. In light of these facts, the court concluded that because [the issuer's] "knowledge of the switch in account holders was one reason for the Amendment, it cannot argue that it would now be required to inquire into the relationship between the parties to the underlying transaction, thereby violating the independence principle."

2. Required Signature Verification: As to the signature verification, the relevant clause in the standby read:

Such signatures to be notarized by a Public Notary in Norway, and legalized by way of Apostille*, or by the relevant Norwegian authorities and by the Embassy or Consulate of the United States of American in Oslo, Norway.

The demand letter was legalized by Apostille only. The issuer dishonored on the ground that the verification must also contain legalization by the U.S. consulate. The issuer argued that this clause imposed dual requirements that the signature be legalized 1) by either Apostille or the Norwegian consulate and 2) by the U.S. consulate.

Noting the punctuation and substantive meaning of the requirements, the court concluded that only an Apostille was necessary. Its justified its decision on the ground of strict construction and "correctness". The court stated:

In the case of a single-letter misspelling of a name, courts have found that the beneficiary did not comply strictly and that the issuer was within its right to dishonor the letter of credit. [citation omitted.] By the same token, where the beneficiary complies precisely with the terms on the face of the letter of credit, an issuer may not dishonor the demand by suggesting that a single letter or typographical character was erroneously added or subtracted from the original with which the beneficiary complied. The only differences that are not accorded strict compliance are those that are meaningless (as cited above, the meaningless typographical error of "Smith" to "Smithh"). Here, the punctuation difference clearly is not meaningless, nor is there any support for the claim that the punctuation should have differed.

3. Construed against the Issuer: The court also based its decision on the "principle" that "ambiguities will be construed strongly against the issuer." The court noted that while the beneficiary had originally drafted the clause, the issuer "crafted the final clause on the basis of a draft submitted by [the beneficiary]. Because [the issuer] altered the clause in a way that introduced the ambiguity of which it complains, the construction of the putative ambiguity against the issuer is consistent with the general standard of construction requiring that ambiguities be construed against the issuer."

4. Impossibility of Performance: In addition, the court noted that since 1966, the U.S. has prohibited its embassies or consulates from legalizing letters of credit where the party belongs to a country where legalization by Apostille is available. Noting that both Norway and the U.S. are signatories to the UN Convention, the court concluded that the issuer's interpretation would make performance by the beneficiary impossible and that such an interpretation "cannot be tolerated'.

5. Knowledge of Law: The court also rejected the issuer's argument that it was not required to have familiarity with the special meanings related to the legalization of documents. It noted that these matters 'are not, however, customs of the trade. "The legalization of signatures on a letter of credit does not touch on any custom or peculiarity of dealings in offshore oil drilling rigs, the business of [the beneficiary or applicant], but on the issuance of letters of credit, the business of [the issuer]."

Comment:

1. The interpretation of provisions in standbys is always a challenge. Interpretations by courts and especially by courts that believe, as does this court, that "[w]here the principles of strict construction and independence are not wholly sufficient, they are complemented with traditional principles of contract interpretation." Admittedly, the court qualified this statement by noting that "These rules apply 'only to the extent that contract principles do not interfere with the unique nature of credits.'" While there may be some rare situations where principles of traditional contract interpretation shed some light on what is meant, those occasions are rare indeed. The true principle is that where the meaning of the terms of the credit cannot be determined from its text in light of the applicable rules of practice and law, that the construction of a term must be determined in the light of how that term would be understood in standard international practice

2. Given the court's theoretical prediliction, the outcome is refreshingly sound. The amendment and the requirement of legalization were strictly and sensibly interpreted. The difficulty with the opinion is not the outcome but the reasoning incidental to it.

3. A case in point is the reliance that the court placed on the amendment being preceded by the numeral "1". The court linked this reference to the first clause of the credit on the basis of its impressions of "style". In the absence of proof that the numeration of clauses in amendments to LCs are linked to the clause, any linkage must be regarded as fortuitous and any conclusion based on such linkage as specious.

4. Also troubling is the court's conclusion that the issuer would be prevented from asserting that it cannot inquire into the relationships between the parties to the underlying transaction because its "knowledge of the switch in account holders was one reason for the Amendment". Although the court did not use the term "estoppel", it would have been appropriate. While there may be some room for estoppel in peripheral situations, one wonders about its application here. Had the text of the amendment called for a change in both names, any such knowledge would be irrelevant. For the same reason, it is also irrelevant in this case.

5. Interestingly, in adhering to what it describes the "strong" rule of construction that requires that the text of a credit be construed against the issuer, the court subtly applies a different methodology by inquiring into the process by which the text of the credit was created. It finds its opinion reinforced by the fact that the issuer revised the original version drafted by the beneficiary. Would it have taken the same position if the issuer had not done so? The only useful point of this rule is that one simply treats the text as issued without inquiring into how it came to be. However that may be, it is the issuer's undertaking as issued and the measure against which its obligation must be measured. As indicated, the true measure of ambiguous terms is how they would be understood in context under standard letter of credit practice.

6. One of the more insightful aspects of the opinion is the court's refusal to interpret the credit in a manner that would make performance impossible. While this approach has limits_the parties may insist on just such terminology as with a condition under the control of the applicant or the issuer may not know that performance is impossible_the opinion registers strong judicial disapproval of such terms in credits or such interpretations. In this respect, the opinion adds its voice to that of the international letter of credit community that such terms "cannot be tolerated".

7. The obvious question that this case raises is whether the standby would have fared any better had it been subject to ISP98. Since the outcome of the case was sensible, it is to be hoped that it would not differ. The ISP, however, might have positively affected the analysis. This result might have come from the general admonitions throughout the rules regarding the principles by which standbys anf the rules are to be interpreted. As to the required text, ISP98 Rule 4.15(b) [assuming that it applied] would not have changed the outcome since there was no apparent error and would have reinforced it. As to the legalization, ISP98 Rule 4.12(d) would have been useful if the correctness of the Apostille had been challenged but it would not have shed any light on the interpretation of the clause.

*As noted by the court in footnote 2 of the opinion:

An "Apostille" is a certificate of legalization specified by The Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, Fed. R. Civ. P., appended to Rule 44. This Convention requires signatory countries to legalize documents by Apostille only; the Apostillization is similar to notarization. "Consularization," the method of legalization replaced by the Convention and performed for transactions involving countries not signatory to the treaty, requires approval of the document by the embassy or consulate officials of the countries of the parties involved.

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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.