Documentary Credit World

Topics: Amendment; Auto-Extension; Mass. Rev. UCC Section 5-101; Original Documents; UCC Section 5-108; Strict Compliance; UCP600 Article 17(a) (Original Documents and Copies)

Note: To support its purchase of goods, Marblehead Weather Garments, LLC (Applicant) applied for and caused Northmark Bank (Issuer) to issue a standby letter of credit in favor of ProQuip Ltd. (Beneficiary), a Scottish maker of golf apparel. The LC was issued subject to UCP600 and was “available with [Issuer] by payment against presentation of … the original of and all amendments, if any, to this Letter of Credit for our endorsement.” (emphasis added).₁ Originally, the LC would expire after one year. Shortly before the original expiry date, Issuer amended the LC by extending it for another year and including an auto- extension clause. The extension clause provided for successive one-year extensions unless Issuer notified Beneficiary in writing 45 days before the current expiry date of its non-renewal decision (Amendment 1). All other terms and conditions were unchanged.

The LC was extended for several years. In 2020, Issuer timely notified Beneficiary that it would not renew the credit. Accordingly, six days before expiration, Beneficiary demanded payment by presenting the original LC and a copy of Amendment 1. Beneficiary also tendered an affidavit and indemnity which “(1) averred that a diligent search had failed to locate the original Amendment 1, and (2) undertook to hold the bank harmless from an enumerated list of potential liabilities relevant to Amendment 1.” Issuer dishonored. Beneficiary then sued Issuer in the proper Massachusetts Superior Court alleging breach of contract and seeking a declaratory judgment. Both parties moved for summary judgment. The trial court granted summary judgment in favor of Beneficiary. Issuer appealed. The Appeals Court of Massachusetts, Massing, Hershfang and D’Angelo, JJ., reversed and remanded with an order to enter summary judgment for Issuer.

At trial, the Judge applied principles of contract interpretation and, although acknowledging that strict compliance was the appropriate standard under Massachusetts law, concluded that, given the circumstances, “there was ‘no risk that [Issuer] w[ould] be harmed’ and that equity supported judgment in favor of [Beneficiary].” On appeal, the court first noted the UCC definition of a letter of credit found in Mass. Rev. UCC Section 5-101(a)(10) as well as the standard for examination of documents in UCC Section 5-108(a).₂ The appellate court then drew attention to UCP600, to which the LC was expressly subject. UCP600 Article 17(a) provides: “At least one original of each document stipulated in the credit must be presented.” The case turned on whether Issuer properly dishonored the presented copy of Amendment 1 as the LC required the original credit “and all amendments, if any”. As the appellate court expressed:

The language is not a paragon of clarity, and, were we to apply contract principles, it would not be unreasonable to construe it as requiring presentment of the original of the letter of credit, along with all amendments (without specifying originals or copies).

In reviewing case law and Professor John F. Dolan’s legal treatise on LCs, the appellate court noted that letters of credit are “unique commercial instruments.” Under Massachusetts law, Issuer was required to observe standard practice for financial institutions that regularly issue LCs, citing Mass. Rev. UCC Section 5-108(e). Read in combination with UCP600 Article 17(a), the appellate court proceeded to “analyze the propriety of the [Issuer]’s dishonor through the lens of those cases in which the letter of credit called for an original, but none was presented.” Citing several cases where dishonor was upheld where an LC required presentation of original documents, the appellate court concluded that “the LoC required presentment of the original Amendment 1 and that [Beneficiary]’s presentment of a copy of Amendment 1 did not strictly comply with the LoC’s terms.” Elaborating further, the appellate court considered the perspective of a document examiner (again citing Prof. Dolan):

While the version offered by the bank included three handwritten signatures at the bottom of each page of the document [i.e. Amendment 1], the photocopy presented by [Beneficiary] included just one. Thus, the two versions differed from one another, further emphasizing why the original was required. It was beyond the scope of the bank’s ministerial role to determine that the variance between the copy presented and the original was ‘unimportant’ such that the presentment strictly complied with the requirement for originals.

Beneficiary cited Ladenburg Thalmann & Co. v. Signature Bank₃ for the proposition that some “variances” from the strict LC terms and conditions may be allowed. The appellate court, however, distinguished the current case; in Ladenburg, dishonor was not justified as the beneficiary had presented originals of all superseding amendments despite failing to present an original of an earlier amendment. In the instant action, Amendment 1 was part of the “embodied” terms of the LC. As the conditions and incorporated standard practice of the credit required presentation of all original documents, Issuer permissibly dishonored. Accordingly, the appellate court reversed and remanded the case.

Comment: The procedural history and outcome of this case resembles that of Windsor Township v. Tompkins Financial Corp., No. 592 C.D. 2021 (Pa. Commw. Ct. Oct. 18, 2022), summarized in Feb. 2023 DCW at 16.

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