Article

Factual Summary: To pay for the purchase of clothing, Buyer obtained two LCs subject to UCP500, one in the amount of US$123,000, the other for an undisclosed amount.

Beneficiary or its assignee presented documents under the first letter of credit at the offices of Advising Bank where the credit was to expire on Monday 26 November. On Friday 30 November, they were received by Issuer and reviewed and three discrepancies were found. On Monday 3 December, a letter was sent to Applicant seeking waiver and indicating that the "refusal date" was Tuesday 11 December. When Applicant indicated that it would not waive the discrepancies on Tuesday 11 December, Issuer gave notice of discrepancies to Advisor on that date which was seven banking days following the banking day of presentation.

The second LC expired on Friday 14 December. On Tuesday 11 December, Issuer received the presentation, examined it, discovered discrepancies, and sent a letter to Applicant seeking waiver of discrepancies indicating that the "refusal date" was Thursday 20 December. On this latter date, Applicant informed Issuer that it would not waive discrepancies and Issuer gave its notice of refusal which was seven banking days following the banking day of presentation.

Claiming wrongful dishonor and negligence, Beneficiary sued Issuer for breach of contract, wrongful dishonor, and negligence. Both Beneficiary and Issuer moved for summary judgment, and the trial court awarded summary judgment to Issuer and denied it to Beneficiary. On appeal, reversed and remanded for further proceedings.

Legal Analysis:

1. Refusal, Timeliness; Waiver; UCP500 Article 13(a); UCP500 Article 14(c): The trial court concluded that "'[Issuer] had until the close of business on the seventh banking day following its receipt of [Beneficiary's] claim and supporting documents ... to send its Advice of Rejection,' and because [Issuer] complied with this seven day time period its notices of refusal were timely." Beneficiary challenged this conclusion on appeal. Issuer responded that under UCP500 Article 14(c) where the issuer seeks applicant waiver, there is a 'safe harbor', recognized in practice, of "the full seven banking days if the applicant does not respond sooner to a request for a waiver (or responds on the final day)." The appellate court noted that the time within which examination and notice must be given under UCP500 Articles 13 and 14 was a reasonable time. Rejecting the issuer's position, the court stated that the Issuer's "argument cannot be reconciled with the intent of the UCP 500."

It stated that:

Bank does not argue that there is evidence the seven banking day period was reasonable based on the specific circumstances of this case. Nor did it base its summary judgment motion on any of the factors generally relevant in assessing the reasonableness of the time period including: 'the circumstances of presentation, the type and the value of documents,' and the number of documents. (UCP 500 and 400 Compared p. 40.) Bank's claim was that seven banking days is always reasonable where a bank seeks a waiver from an applicant, an incorrect argument.

2. UCP 500 and 400 Compared; Unofficial ICC Publications: In interpreting UCP500, the appellate court quoted extensively from and relied "heavily" on del Busto, UCP 500 and 400 Compared (ICC Publication No. 511). Noting the Issuer's objections, the court stated that: "We are mindful that this analysis is not part of the text and where there is a meaningful difference, we follow the text of the UCP 500."

3. UCP 500 and 400 Compared; Unofficial Publications; Refusal: The appellate court noted that it did not follow the text of UCP 500 and 400 Compared with respect to its correlation of the decision to refuse documents and approaching the applicant for waiver. The publication indicated that the bank was to seek waiver only after it made a decision to refuse the documents. The court stated that: "Because this comment is at odds with the process envisioned in Article 14 itself, we do not rely on it."

4. IFSA Statement of Practice; USCIB Statement of Practice; Reasonable Time, IFSA Statement of Practice; Custom; Letter of Credit Practice: Issuer supported its argument that it had a safe harbor of seven banking days by reference to the Statement of Practice: Reasonable Time for Examination & Notice of Dishonor issued by the International Financial Services Association (formerly the U.S. Council on International Banking), [see LC Rules & Laws: Critical Texts (3rd Edition, Institute of International Banking Law & Practice, 2004) at page 99]. The appellate court noted that: "Bank provides only an excerpt of this document, which appears to be in a 1998 newsletter from the U.S. Council on International Banking."

5. Waiver; Reasonable Time; UCP500 Article 14(c): The appellate court rejected Issuer's interpretation of UCP500 Article 14(c), stating that it was "inconsistent with the UCP 500 because it DBJJJ, Inc. v. National City Bank con't 282 entirely disregards the phrase 'reasonable time.' Article 13(b) provides for a 'reasonable time, not to exceed seven banking days.' It does not as Bank's argument suggests provide for a time period of 'seven banking days.' By giving no meaning to the phrase 'reasonable time,' Bank's argument is inconsistent with the plain language of Article 13(b)."

6. Statement of Practice; Reasonable Time: With respect to the Statement of Practice on Reasonable Time, the appellate court noted that "it is unpersuasive for the same reason Bank's argument is unpersuasive; it is inconsistent with the plain language of the UCP 500, the intent of the UCP 500, and the 1995 Official Comments on Uniform Commercial Code. Whereas Article 13(b) indicates that a reasonable time cannot exceed seven banking days, the excerpt indicates, without supporting authority, that the bank 'has up to the full seven day period within which to give notice of refusal.'"

7. Practice; Custom: With respect to Issuer's reliance on the IFSA Statement of Practice, the appellate court noted that: "To the extent Bank is arguing that the practice of banks may elucidate the meaning of the UCP 500, that argument may have merit where the practice is consistent with the UCP and further explains the UCP. ... However, to the extent Bank's argument is that the industry norm trumps the UCP 500, that argument lacks merit. Countenancing that argument would result in a 'fragmented patchwork of local customs and practices, the very problem letters of credit and the UCP were designed to avoid.' (Brenntag International v. Norddeutsche Landesbank (S.D.N.Y. 1999) 70 F. Supp. 2d 399, 409 [rejecting argument that court should rely on specific banking practices instead of plain meaning of UCP].) Additionally, relying on what Bank characterizes as standard practice instead of the provisions UCP 500 would alter the terms of the letters of credit, which adopt the UCP 500, not the practice described in an excerpt by the U.S. Council on International Banking."

8. Expert Testimony: The appellate court noted that because "[t]he UCP does not rise to the status of a law", the restriction on the inadmissibility of expert testimony on issues of law is "relaxed" with respect to banking practice. Moreover, the court noted that: "To the extent the trial court excluded similar evidence of the standard practice presented by Seller in the form of an expert declaration, it erred."

9. Rev. UCC Section 5-108; Reasonable Time: The appellate court noted that Issuer's argument failed to take into account the Official Comment that indicated that the reasonable time period "is not extended to accommodate an issuer's procuring a waiver from the applicant" and that the seven day period "is not a safe harbor". The court noted that this Official Comment "is consistent with the plain language of Article 13(b)".

10. Preclusion: Beneficiary argued it was entitled to summary judgment since Issuer was precluded from claiming that the documents were not in compliance with the terms and conditions of the credit under UCP500 Article 14(e) because it failed to provide timely notice of refusal as a matter of law. The appellate court rejected this argument, noting that Beneficiary had failed to prove "that the time period Bank used to examine documents, seek a waiver, and notify [Beneficiary] (or [Advising Bank]) was unreasonable" as a matter of law.

11. Reasonable Time; Preclusion; UCP500 Article 13(a); UCP500 Article 14(e): Issuer argued that the preclusion rule of UCP500 Article 14(e) did not encompass the provisions in UCP500 Article 13(a) regarding examination of documents within a reasonable time. The appellate court stated that: "The preclusion rule clearly applies to a failure to act in accordance with the provisions of Article 14. However, whether the same rule applies to a violation of Article 13(b) is ambiguous." It noted that this ambiguity contrasted sharply with UCP400 Article 16 in which it was clear that the preclusion rule was applicable to the failure to examine documents within a reasonable time. The appellate court stated that: "The intent of the International Chamber of Commerce demonstrates the same penalty applies under the current UCP 500."

12. UCP500 Article 14(c); Waiver; Notice of Refusal: Beneficiary argued that Issuer "was required to notify it of the discrepancies at the same time it notified [Applicant]." To support this argument, it relied on a statement in UCP 500 and 400 Compared to the effect that the issuer is not precluded from contacting the beneficiary to permit it to cure discrepancies. The appellate court noted that this reference was not dispositive of the question of whether the issuer was required to contact the beneficiary at the same time that it contacts the applicant and stated that Beneficiary had failed to show any obligation.

13. Collusion: Beneficiary also argued that Applicant improperly colluded with Issuer. The appellate court noted that while UCP500 allowed an issuing bank to seek waiver from an applicant, the bank must remain independent and that the decision to refuse or accept presentation must still lie solely with the issuing bank. The court quoted from UCP 500 and 400 Compared, "[T]he contact with the Applicant is not justifiable if it is designed to allow the Issuing Bank and the Applicant to make a joint decision on the discrepant documents." The court observed that: "This mandated independence safeguards the nature of the letter of credit as a distinct transaction from the underlying contract" and stated that: "Where an issuer, under the guise of seeking a waiver, permits an applicant to participate in the decision of whether to honor or dishonor the documents, it runs afoul of the independence rule." The court noted, however, that in this case "there is no evidence that [Applicant] identified discrepancies in the documents or that [Issuer] and [Applicant] made a joint decision on the documents."

14. Without Delay; UCP500 Article 14(d)(i); UCP500 Article 14(c); Applicant Waiver; Waiver, Applicant: Beneficiary argued that since a bank is required to give notice of refusal "without delay" of its decision to refuse documents under UCP500 Article 14(d)(i), it would be precluded from asserting that the documents are discrepant if it waited to give notice until it consulted the applicant. The appellate court rejected this interpretation, noting that under it "a bank is punished for following a procedure expressly authorized by the UCP 500." The court noted that:

"A close reading of Article 14(b) reveals an ambiguity regarding the point in time when a bank refuses to take up the documents - either immediately upon identifying discrepancies or after receiving a response to a request for a waiver. The distinction is significant because the refusal to take up documents triggers the necessity to provide notice."

...

"[I]dentifying discrepancies and refusing the documents are two separate acts. ... It is difficult to imagine a circumstance where a bank unilaterally would choose to honor a nonconforming documentary presentation. Nevertheless, a bank may identify discrepancies and agree to take up the documents if it obtains a waiver from the applicant. Therefore, the identification of the discrepancies is separate from the refusal to take up the documents."

Comments:

1. Issuer Seeking Applicant Waiver and UCP500 Article 14(c). UCP500 Article 14(c) addressed the considerable inefficiencies and expenses tied up with refusing discrepant presentations where the applicant wished to pay as well as the banks' concerns about holding the documents after deciding they were discrepant and about maintaining independence while approaching the applicant.

2. UCP500 Article 14(c). Article 14(c) was drafted to address these problems. It makes it clear that it is only applicable after the bank has examined the documents on their face and made a determination that they are discrepant and, absent applicant waiver, will-be refused by the issuer.

3. There was a concern that this provision might be DBJJJ, Inc. v. National City Bank con't 284 misinterpreted to expand the time limit set in UCP500 Article 13 or, worse, encourage delays by banks merely claiming to be seeking waivers or to be going through the motions for undcreditworthy applicants Accordingly, UCP500 Article 14(c) provided that it "does not, however, extend the period mentioned in sub-Article 13(b)".

4. What is "a reasonable time not to exceed seven banking days"? What factors count in applying the "reasonable" other than the seven day limit? What factors count in the situation in which the issuer exercises its discretion to approach the applicant for waiver as provided in Article 14(c)? One can approach this like a lawyer interpreting and applying a specific contract or like a banker who interprets and applies this requirement every day as issuer and presenter. The bankers ask what is the practice under the UCP, for which there is an answer in a detailed Statement of Practice issued by the IFSA. Revised UCC Article 5 defers to practice rules (like the UCP) in section 5-116 and to standard practice in 5-108(e). For those who insist on logic in practice, the IFSA Statement of Practice is sufficiently detailed and organized in such a way as to indicate the policy, as well as practical, considerations underlying the practices described in it. It deals specifically and separately with "reasonable time not to exceed seven banking days" as applied to presentations deemed discrepant by an issuer that is willing to honor if the applicant agrees. It recognizes, that unlike the timing factors which affect the examination of documents and listing of discrepancies, the time it may take the applicant to respond is not based on factors that are known to the bank, so the only non-arbitrary limitation the bank may impose on the applicant is to respond within the seven day ceiling set (arbitrarily) in the UCP. The test remains "reasonable time not to exceed seven banking days" but the factors bearing on reasonableness are not based on what the bank can do but on what is a reasonable amount of time for the bank to allow the applicant to take in deciding whether to waive discrepancies.

Accordingly, the International Financial Services Association (IFSA) stated standard international letter of credit practice regarding this issue in its Statement of Practice 1(d), after describing the various factors that affect the time it takes banks to examine documents, etc, sates, with respect to the subset of presentations that include approaching the applicant:

"If an issuing bank decides to approach the applicant for a waiver of the discrepancies identified by the bank, then the time for giving notice to the presenter runs to the close of the seventh banking day after presentation, unless the applicant sooner communicates its decision not to waive or the bank sooner decides to dishonor notwithstanding the applicant's waiver."

5. This principle represents the considered interpretation of UCP500 Article 14(c) by the US LC banking community.

6. It also deserves respect because it makes good sense. If a bank is to seek applicant waiver, which is an activity that the UCP and UCC permit and that is generally encouraged by LC policy wonks, it must be allowed to do so without routinely exposing itself to preclusion.

7. Role of UCP 500 and 400 Compared. In light of the failure of the appellate court to accord deference to a formal pronouncement of a major international banking organization, it is ironic that it gave considerable respect and deference to an unofficial study by one person which does not represent the opinion of the ICC Banking Commission nor even of the entire group the revised UCP400. While this publication contains some useful explanations of changes, it is not systematic or definitive, and, more importantly, is not an official publication of the Banking Commission.

8. Preclusion and Reasonable Time. The appellate court has struck on one of the hidden interpretation issues under UCP500, whether or not the preclusion rule includes the failure to examine the documents within a reasonable time. The court's treatment of this issue is sound. One would have expected such a change to cause considerable discussion. It did not.

Moreover, the letter of credit community has operated as if there had been no change from the rule in UCP400 Article 16. Indeed, as the court notes, there are sound technical reasons for interpreting UCP500 Article 14 as including the provisions regarding reasonable time. One is the reference in UCP500 Article 14(c) and the other is the reference to seven banking days in UCP500 Article 14(d)(i) which is the seven day period. The drafting could have been more elegant, but any other interpretation would cause endless confusion. Moreover, the alternative is unsatisfactory. In that case, preclusion could be said to operate if notice of refusal is not given "without delay", with banks and, ultimately courts, scrambling to figure out what goes into a calculation of "without delay" which would include a reasonable time for examination and any additional time taken to give notice. This latter inquiry would focus attention on the bank's process of decision (i.e. when the examination was complete and a decision to refuse had been made) and the communication of that notice.

Comments by James G. Barnes, Baker & McKenzie:

My objection to the California appellate court opinion is that it misstates the relative significance of UCP 500 and 400 Compared, ICC Publication No. 511 (which is an unofficial ICC publication written by one person that describes drafting history and doesn't really answer the question at hand) and the IFSA Board-approved Statement of Practice (which authoritatively describes bank practice and squarely addresses the question at hand about waiting until day 7 for the applicant to act on a waiver inquiry. (Unfortunately, the court was given an excerpt, the first two pages rather than all four, of the Statement. That may account somewhat for the failure to give it the weight it deserves on its own and in comparison to ICC Publication No. 511.).

The Practice Statement does not quite say that taking the full 7 days is "always reasonable", being expressly qualified by the possibility that the bank earlier decides to ignore the applicant's waiver or the applicant earlier waives. Since the bank will not know how much time the applicant may reasonably take in the circumstances applicable to it (the applicant is not simply examining documents on their face) and is not in control of the timing factors (like who at the applicant's business needs to decide to pay when payment is not required), the bank has no basis for limiting its approach to the applicant to, say, three business days.

The only timing factor other than the 7 day limit that a bank could non-arbitrarily introduce would be based on the expiry date, i.e., limiting the applicant's time so as to protect the beneficiary's opportunity to cure. (A zero factor clearly on one of the LCs at issue and pretty clearly so on the other LC.) The Practice Statement did not include expiry date imminence as a factor, just the earlier waiver or decision not to accept a waiver. That does not make it wrong in its statement of bank practice or per se unreasonable under a "reasonable time" standard.

I do not quarrel with the conclusion that the Article 13 reasonable time requirement is within the Article 14 preclusion rule, but it requires an agressively nonliteral reading of Article 14. I subscribe to the notion that the UCP should be interpreted as statements of custom and practice and applied in light of "the standard of practice of financial institutions that regularly issue letters of credit [UCC 5-108(e)]." The DBJJJ court, however, rejected that approach in holding that the "plain meaning" of Article 14 could not accommodate the IFSA's Statement of Practice describing what banks actually do under Article 14 when applying the "reasonable time" requirement where the issuer has approached the applicant for a waiver of discrepancies. Deciding that it is OK to interpret the words "this Article" in Article 14(e) to include Article 13 requires a rejection of the "plain meaning" approach and a willingness to find and accommodate practice that is consistent with that interpretation and application of Article 14(e). I can't respect a decision to reject the IFSA Statement of Practice on "plain meaning" grounds when accompanied by a decision that the reference in Article 14 (e) to "this Article" really means "this Article and also Article 13.

[JEB/sal]

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