Article

Factual Summary: To assure payment of a line of credit provided by the seller to the buyer, a standby LC was issued for US$100,000. The standby required presentation of a demand including a detailed statement contained in the standby signed by an authorized official of the beneficiary, and also required a recitation of a formula that identified the standby by number.

Following the original expiry date, Applicant obtained an extension of the LC, which operated on a month-to-month basis. Occasionally, Beneficiary telephoned Issuer or Applicant a few days before the expiry date to verify that Applicant had obtained an extension of the LC.

After more than a year under this arrangement, Applicant opted not to request an extension of the LC.

After unsuccessful attempts to contact Applicant for several days and not having received a notice of renewal, Beneficiary's financial services manager contacted Issuer at 3:30 PM (1530 hours) on the Friday afternoon preceding the expiry on Sunday the 12th, and was informed that the credit had not been extended.

When the bank officer was informed that Beneficiary would make a drawing, he responded that "the Bank would refuse to honor [Beneficiary's] demand because it did not meet the Bank's deadline. The Bank considered everything received after 3:00 on Fridays to be the following Monday's business."

Beneficiary's Manager of Customer Financial Services sent documents by telefax on Friday after 3:30 PM and also by overnight courier for Saturday delivery. According to the court:

The letter sent via facsimile transmission was not signed by [the Manager of Customer Financial Services] on behalf of [Beneficiary], it did not contain the certification required by the letter of credit, and it did not contain the required draft language. Similarly, the overnight package materials did not contain the certification required by the letter of credit and did not contain the required draft language. Furthermore, the documents did not specifically state how much [the buyer] owed [Beneficiary]. The documents sent via facsimile transmission and overnight mail included a stack of invoices, but when [the bank officer] received the invoices, he could not make any sense out of them. The invoices contained incorrect payment terms and it appeared to [the bank officer] that the amounts were not due and owing on August 10, 2001.

On the following Monday, the 13th, after speaking to counsel, Issuer's Vice President stated "that he was instructed to escrow money belonging to [Applicant]." On the 21st, seven banking days after the telefax had been sent and six banking days after the delivery of the couriered document, a letter dishonoring the presentation was sent by Issuer's counsel. The opinion does not indicate what was stated in the notice of refusal.

Beneficiary then brought this action for wrongful dishonor. The trial court granted Issuer's motion for summary judgment.

Legal Analysis:

1. Timeliness of Presentation: Issuer informed Beneficiary orally that its close of business was 3:00 PM (1500 hours). Beneficiary sent its presentation by telefax on Friday the 10th at 4:30 PM (1630 hours) and by courier for delivery on Saturday the 11th although it was not delivered until Monday the 13th because the bank was not open on Saturday. Beneficiary argued that there was no evidence in the record regarding the 3:00 cut off. Without deciding whether or not the presentation was timely, the court assumed timeliness for purposes of its analysis.

2. Strict Compliance: The court favorably cited a series of Iowa cases that adopted the doctrine of strict compliance, indicating that the documents must comply strictly with the terms and conditions of the LC.

3. Compliance of Presentation: The court ruled that the presentation failed to comply with the terms and conditions of the credit because it failed to contain the required statement, was not properly signed, and did not contain the required reference to the letter of credit number.

4. Timeliness of Notice of Refusal: In a footnote, the court ruled "that the Bank provided written notice of dishonor within seven business days of presentment, whether calculated from Friday, August 10, 2001 or Monday, August 13, 2001."

5. Expiry Date, Pendency: The court noted that "Avery could not have cured the defects because any subsequent presentment would have come after the letter of credit had expired. The Court thus finds that by presenting its demand so close to the expiry date, Avery assumed the risk that it would not have time to cure any defects in the presentment before the expiry date."

6. Expiry Date, Effect: Apparently the suggestion was made that there was a right to cure documents after the occurrence of the expiry date. To this suggestion, the court noted that "permitting a beneficiary to enjoy an unrestricted right to cure deficiencies after the presentation deadline would render the expiry date virtually meaningless and would effectively subvert the strict compliance standard."

7. Waiver of Strict Compliance: Beneficiary argued that Issuer had waived the right to insist on strict compliance. The court rejected this argument, stating that there was no intentional relinquishment of the right to insist that the documents comply and that "the record is clear that the Bank insisted upon strict compliance with each term of the letter of credit."

Comments:

1. The court is correct in its determination that the pendency of a deadline should not affect the actions of the bank.

2. It is also correct in its refusal to allow a question of waiver to be raised where there is no factual evidence to support it.

3. As to the ability to cure, the court's observation that timely cure would have been impossible is not entirely accurate. Whether that is correct depends on two determinations that it did not make.

4. The first determination is the last date on which timely presentation of the documents could occur. The court appears to assume that that date was the stated expiration date. However, that date fell on a Sunday, a day on which the bank to which presentation was to be made was normally closed for business. Under both UCP500 Article 44 and ISP98 Rule 3.13, the occurrence of such a deadline on such a day results in it being moved to the next banking day. As a result, under either rule, the expiration would have been on Monday. The opinion does not indicate whether or not the credit was subject to either rule. Assuming that it was not, the question would be whether Revised UCC Article 5 would have recognized this practice since it does not address this question. Under Section 1-303 and Revised Section 5-108(e) ("An issuer shall observe standard practice of financial institutions that regularly issue letters of credit."), it could have done so, and, in the opinion of the editors, it should have. The second determination is whether or not the beneficiary could have acted on that Monday to re-present. This question is moot because it did not receive the notice of refusal until after the extended expiration date.

5. The real question raised by this case was whether or not there was timely notice of refusal. Because the opinion does not recite the text of the notice, it is not possible to determine whether or not it was proper. The court disposes of this issue in a footnote, stating that it was given within seven business days. Under Revised UCC Section 5-108(b), such a determination is insufficient. The question to be determined is whether or not seven days was a reasonable time. Unless there is something extraordinary about this standby, seven days is probably an unreasonable time within which to give a notice of refusal, especially since the bank officer apparently made his decision to dishonor before the presentation was even made. There is, also, a factual question as to when the decision was made, and whether, having been made, notice was given without undue delay.

6. One issue that the opinion does not address at all is whether or not there was anticipatory repudiation. On Friday 10 August, the banker is alleged to have stated that it would not honor Beneficiary's presentation because "it did not meet the Banker's deadline" of 3:00 PM. Because the expiration date fell on Sunday, the last date for presentation was actually Monday. Did this refusal constitute anticipatory repudiation? The court did not address the issue, in all likelihood because the Beneficiary did not raise it.

7. Another issue not addressed is whether or not the telefax sent on a Friday afternoon constituted a proper presentation. Under standard practice, it would not unless the credit permitted it, but it is likely that this point was not made in the notice of refusal, which would have precluded it from being raised.

8. The case also illustrates the issue of hours of operation and the effect of physical presentation after those hours. There is debate about the meaning of UCP500 Article 45 on this issue, while ISP98 would entitle the bank to refuse presentation.

9. A final issue with respect to the compliance of the documents. There appears to be little doubt that the documents did not begin to comply. On the issue of the recital of the LC number, however, it should be noted that there is a considerable body of opinion that would not regard such a matter as a discrepancy where the bank was able to determine to which credit the presentation related.

[JEB/bso]

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.