Article

Factual Summary: Bank issued a standby LC in the amount of $1,500,000 payable to "All American Seminconductor," at a specific address in Miami, Florida. The standby required presentation of sight drafts accompanied by a required statement and unpaid invoices. The statement in the presentation said that "we are drawing against" the LC, the LC number, and referenced Applicant's "purchase order number 764."

Two days before expiration, Issuer received documents including a letter from Beneficiary's credit manager on a letterhead that named "All American" at the Miami address in the LC. This letter stated that the outstanding balance due was $1,715,111.14 and included invoices issued by "All American Semiconductor" from a Chicago address marked unpaid. The invoices referred to KB Gear and to purchase order number 764.

Issuer refused payment because Beneficiary's name differed from that in the LC, because there was no draft, and because the LC was overdrawn by $215,111.14.

Beneficiary brought this action against Issuer for wrongful dishonor. In a series of orders, the trial court ruled in favor of Beneficiary, entering summary judgment. On appeal, affirmed in a per curiam opinion relying on the trial court's "well-reasoned analysis."

Legal Analysis:

1. Name of Beneficiary; Discrepancy; Strict Compliance: Issuer argued that Beneficiary's incomplete name in the letter accompanying the presentation "did not unambiguously identify [Beneficiary] under the [LC]." It also introduced evidence to show that at least two companies with the name "All American" resided at the Miami address. Observing that the letter accompanying the presentation taken alone may have justified dishonor, the trial court ruled that the accompanying invoices "contain obvious links to the transaction to which the [LC] refers and to the beneficiary named in the [LC]."

The trial court stated:

"Those invoices name 'All American Semiconductor' as the invoicing party, list [Applicant] as the customer, and reference the purchase order number identified in the [LC] and in [Beneficiary's] letter. The information in the documentary presentation, taken as a whole and in context, establishes that the 'All American' making the presentation is the same entity as the 'All American Semiconductor' named as the beneficiary in the LOC under the strict compliance standard."

The appellate court agreed that the presentation strictly complied "when reviewed as a whole."

2. Draft; Discrepancy; Strict Compliance: Issuer argued that no draft was presented. The trial court disagreed, ruling that the statement, "that 'we are drawing against' the [LC], when contained in a documentary presentation [Beneficiary] submitted to [Issuer], ... is an effective demand for [Issuer] to pay [Beneficiary] and thus constitutes the 'draft' the [LC] required."

The appellate court agreed that the presentation strictly complied "when reviewed as a whole."

3. Amount; Overdrawing; Overdraft; Draft in Excess of LC Amount: Issuer argued that the amount of the invoices exceeded the amount available under the credit and, accordingly, was discrepant. The trial court disagreed, stating that "the mere statement of [Applicant's] outstanding balance in [the statement] does not constitute a demand for payment of that balance, which at the time of the documentary presentation exceeded the limit of the [LC]. The submission of invoices in excess of the maximum available under the [LC] instead constitutes a demand for payment of the full amount remaining available under the credit at the time of the documentary presentation. See Fiat Motors of N. Am., Inc. v. Mellon Bank, N.A., 649 F.Supp. 245, 252-53 (W.D. Pa. 1986) (holding that an issuer of a letter of credit was obliged to pay a beneficiary who demanded payment in an amount exceeding the maximum available under the credit), aff'd, 827 F.2d 924 (3rd Cir. 1987)."

4. Strict Compliance; Standard of Care; Revised UCC §5-108(a): The appellate court agreed with the trial court that the presentation "met [the local applicable law's] 'strict compliance standard for letter of credit transactions.'" It adopted "the UCC 248 concept of strict compliance not as absolute perfectionism, but as complying with standard practice for issuers. See Minn. Stat. Ann. § 336.5-108, cmt. 1 (2003) (incorporating the U.C.C. comment); Voest- Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940, 947 (S.D. Tex. 2000) (interpreting language virtually identical to that of Minnesota law and using a common sense, case-by-case approach to strict compliance to hold that minor deviations that do not bring into question the obvious link between the documents presented as a whole do not justify dishonor by the issuer), aff'd on other grounds, 288 F.3d 262 (5th Cir. 2002). [Beneficiary's] draw presentation met that standard because its documentary presentation, when viewed as a whole, complied with the requirements in the letter of credit, and the minor discrepancies claimed by [Issuer] did not justify rejection of the draw."

Comments:

1. Standard of Compliance: The appellate court's use of a more flexible approach to the application of the so-called "strict compliance" standard is welcome. Viewing the documentary presentation (and the document) as a whole avoids the absurd results that follow when one item of data in one document is viewed in isolation. What is missing from the court's formulation of the Voest-Alpine standard, however, is the focus on the standard practice. Without such a focus, this standard merely invites courts to substitute their judgment for that of the international LC community.

2. Naming of Beneficiary: The question is whether it is possible to determine from the use of an incomplete name on a letter demanding payment that a person other than Beneficiary had drawn down the LC. The trial court properly looked to the drawing as a whole, considering the address and other "obvious links" in the document to the transaction reflected in the LC, and the full name on the accompanying invoices. Even though the name of Beneficiary is data that must correspond with the name in the credit, the use of an incomplete name under circumstances that make it apparent that the drawing is by the same entity involved in the transaction reflected in the credit is not a basis for refusal.

3. Draft; Demand: The credit requires a presentation of a draft and the letter that was presented by Beneficiary was a demand but not a negotiable draft. Prior to the formulation of the ISBP, it could have been argued that banking practice did not require a negotiable instrument at least where the credit was a standby. That argument has been weakened by the provision in the ISBP which indicates that it is applicable to documentary credits. To be sure, no draft would be required had the credit been subject to ISP98 where Rule 4.16 (Demand for Payment) would have permitted Beneficiary to present a simple demand. But this standby was subject to UCP500. It is, however, understandable that courts have little patience with such meaningless technical requirements.

4. Drawing Amount Exceeds Amount Available under Credit: Issuer refused a drawing in excess of the amount available under the credit. UCP500 Article 37(b) empowers banks to refuse invoices issued for amounts in excess of the amount permitted by the credit. The trial court properly pointed out that the submission of invoices under a standby does not necessarily indicate that the excessive amount is demanded. The UCP provision does not, however, make such an allowance. Here again, Beneficiary would have been better served had the credit been subject to the ISP. ISP98 Rule 3.08(e) provides that any document other than the demand stating an amount in excess of the credit amount is not a discrepancy. One factor not taken into account was that the invoices would have had to have been totaled to conclude that the amount was in excess of the amount available. ISBP Paragraph 27 (Mathematical Calculations) might be read to support the conclusion that the bank should not have made this complex calculation.

It appears from the trial court opinion that the demand also stated an amount in excess of the amount available under the credit. The trial court indicates that the reason given by Issuer was that Beneficiary overdrew the LC. If this basis for refusal refers to the amount demanded, there is no provision in UCP500 about a demand or drawing in excess of the amount available under the credit and the ISBP provisions on drafts do not speak to this point.

However, it is addressed in ISP98. Under ISP98 Rule 3.08(e) (Partial Drawing and Multiple Presentations; Amount of Drawings), such a demand would be a discrepancy.

Regardless of how the rules are worded, the rule that the court adopts, deeming such an excessive demand to be a demand for the amount available, is not LC practice.

Where the credit is issued subject to express rules, courts should not impose contrary rules. In this case, it is difficult to determine whether the problem was one with the invoices which are addressed in the UCP or with the drawing amount which is not addressed. The notice of refusal was not specific on this point. In any event, this opinion should serve as a warning to bankers of the short patience of courts with ambiguously worded practices that appear to operate arbitrarily.

[JEB/jcs]

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