Article

Factual Summary: To pay for an order of fabric, Buyer arranged for issuance of an undertaking, entitled "Guaranty", issued by non-bank Financier in favor of Seller. As described by the appellate court, "[t]he 'Guaranty' set forth [Financier]'s commitment to pay [Seller] the purchase price for the fabric upon [Seller]'s presentation to [Financier] of specified documents evidencing [Seller]'s performance (the invoice, bill of lading, and packing list) and, in addition, a 'written demand ... for payment under this guaranty ... prior to [a stated date].'"

Prior to the stated date and after shipping the fabric, Seller sent all of the "specified documents" together under a "cover of correspondence" that stated "[i]f you should require any additional documentation or information, please do not hesitate to contact us", but that did not "contain any language 306 demanding or requesting that payment be made at that time."

Not having heard from the Financier for almost 10 weeks or received payment, Seller contacted Financier, making an express demand for payment. Financier rejected this demand as untimely and Seller brought an action against it for wrongful dishonor. The trial court awarded summary judgment to the Seller. On appeal, reversed and summary judgment entered for the Financier.

Legal Analysis:

1. Letter of Credit; "Guaranty"; Guarantee; Standby, Guarantee: The appellate court concluded that the undertaking involved in this transaction was a standby letter of credit, notwithstanding its label, "Guaranty", and that it was subject to Revised UCC Article 5, referencing UCC § 5-102 Official Comment 6. In this legal analysis, therefore, the Seller will be referred to as "Beneficiary", the Financier as "Issuer", and the Buyer as "Applicant".

2. Applicable Law: In Footnote 1, the appellate court noted that: Although it appears that this case is governed by the law of New Jersey (the state from which [Issuer] issued the subject letter of credit), it has not been suggested that there is any divergence between New York law and New Jersey law on any of the issues raised by this appeal. Accordingly, in its opinion it cited both the New York and New Jersey Statutes.

3. Demand; "Written Demand": Interpreting the text of the separate provision in the letter of credit that stated that it would expire "unless written demand upon [Issuer] for payment under this guaranty is made ...", the appellate court concluded that a separate document was required apart from those specifically required elsewhere in the terms of the credit.

4. Interpretation: In interpreting the LC, the Majority applied the rule of contract interpretation that "a letter of credit, like any writing, should be construed as to 'give full effect to all parts of the writing and every word of it, if possible'" citing AXA Assurance, Inc. v Chase Manhattan Bank, 770 A.2d 1211, 1215 (2001) [U.S.A.].

5. Requirement Not Satisfied by Presentation of Other Documents: The appellate court rejected the suggestion that the requirement of a "written demand" was satisfied by the presentation of the specified documents listed in the credit. It reasoned that such an approach would "render nugatory" the term regarding a "written demand", thus violating the rule of construction that all parts of a writing must be given effect.

6. Cover Letter Inadequate; Strict Compliance; Standby: The appellate court also rejected the suggestion that the written demand requirement was satisfied by the statement in the cover letter (described by the appellate court as a "transmittal correspondence"), which stated that "[I]f you should require any additional documentation or information, please do not hesitate to contact us". Relying on its interpretation of the "strict compliance" rule, the appellate court concluded that "the requirement of a 'written demand' ... means just that - a writing literally requesting payment be made." It stated that "[a]t best for [Beneficiary], these statements could be interpreted - arguably - as implicitly reflecting a desire by [Beneficiary] that [Issuer] make payment upon receipt of the documents." The appellate court indicated that the statement was susceptible "to an alternative interpretation, namely, that [Beneficiary] wished to confirm that the submitted documents were sufficient so that [Beneficiary] would be able to draw on the letter of credit by submitting a demand for payment at a later time, perhaps in the event of a default by [Applicant]."

7. Standby: The appellate court supported its conclusion that the LC was a standby with the suggestion in Footnote 3 that the credit may function as a secondary guarantee of payment rather than as the primary expected method of payment. It based this supposition on the observation that standby LCs commonly operate in the event of Applicant default. Although noting that no certification of default is required by the terms of the credit, the court speculated that "the parties may well have intended it to fulfill the function of a guarantee," and correctly observed that "[t]he parties' use of the label 'Guaranty' obviously would have been consistent with such intent."

8. Preclusion: Beneficiary argued and the trial court accepted that Issuer "is precluded from raising the absence of a timely written demand by reason of [Issuer's] failure, upon receipt of the [cover letter] to notify [Beneficiary] of the need for such a written demand." The appellate court rejected this position since "[n]o preclusion can be deemed to arise from [Issuer's] inaction, since, in the absence of any demand for payment, the [cover letter] cannot be deemed to have constituted a presentation triggering an obligation on [Issuer]'s part to notify [Beneficiary] of discrepancies within a reasonable time." In Footnote 4, the appellate court distinguished the situation where a presentation was discrepant. Also, the opinion stated that:

[a]n Issuer is not a mind-reader, and, where the letter of credit requires an express demand for payment, the Issuer should not be required to assume that the submission of other required documents without such a demand is a faulty attempt to draw on the instrument. To impose such an obligation on the Issuer would essentially read out of existence any written demand requirement that may be set forth in a letter of credit.

9. Estoppel: The appellate court also noted that, since there could not have been any justifiable reliance on the Issuer's ten-week silence by Beneficiary, the doctrine of estoppel would not apply.

10. Delay by Beneficiary: The appellate court stated that its decision was influenced by the failure of Beneficiary to inquire "why no payment or other response to the [cover letter] had yet been received."

11. Preclusion. Dissent: The dissent disagreed with the conclusion of the appellate court, stating that "In light of [Issuer's] failure for more than three months to notify [Beneficiary] of its rejection of the documentation proffered by [Issuer] in support of its request for payment, [Issuer] may not avoid liability under the agreement by claiming that [Beneficiary] failed to make timely written demand for payment or that the demand was otherwise not in accordance with the agreement."

Comments:

The Text of the Credit and Cover Letter: At the request of the Institute of International Banking Law & Practice, David P. Lennon, counsel for the Beneficiary, has provided the text of the letter of credit and the cover letter. They are referred to in these Comments and set forth in full at 2005 Annual Survey 397.

1. Letter of Credit or Guaranty: Both the Dissent and the appellate court characterized the undertaking as a letter of credit and not as an accessory guarantee or suretyship undertaking. The majority's citation to Revised UCC § 5-102 Official Comment 6 is apt, and the Dissent's remark that no external evidence is necessary and that the undertaking is documentary is insightful. The use of the term "letter of credit" or "guaranty" is not decisive. The issue is what undertaking is made. Here, the undertaking is to pay against the presentation of documents.

Examination of the text of the undertaking does raise some doubt about this characterization. The undertaking contains some unusual conditions, namely requiring that the invoice, B/L, and packing list be either mailed or telefaxed directly to the issuer and not presented with the demand for pay. These conditions, however, are not non-documentary since they required presentation of "documents" to the issuer, albeit separately from the drawing. The undertaking speaks of a certificate of inspection and presentation of duplicate invoices including the guarantee number being presented to the offices of the issuer.

The undertaking also contains a statement reserving the right to redirect delivery of the goods, but it does not condition payment on the redirection of the delivery, although it appears that payment could be refused if the documents did not reflect the redirected delivery. This provision constitutes a limited unilateral right of amendment, but such a provision does not render the undertaking a suretyship obligation.

The final paragraph, however, raises deeper questions. It states:

Payment: We hereby guaranty payment of invoices covering the aforesaid merchandise once delivered; providing all the terms and conditions hereof and the above-mentioned purchase order are strictly complied with, each of them being of the essence; the merchandise and documents are properly labeled; [Beneficiary] has complied with all applicable rules, regulations, and statutes; and duplicate invoices including guaranty number (original invoices to be sent to our client) are presented to our office, [address], upon shipment of merchandise.

Here, the undertaking could be read as broader than one to pay against presentation of documents. However, the condition related to the delivery of the merchandise modifies the requirement of invoices which the final sentence requires to be presented to the issuer. Some terms including the reference to compliance with the terms and conditions of the delivery order, statutes and regulations also suggest that the issuer may have thought and perhaps intended that its undertaking was a suretyship guarantee. It is not unusual, however, for standbys to contain odd provisions that ultimately must be disregarded. Government mandated standbys are replete with such terms. Taken as a whole, the undertaking is more documentary than not, and it is understandable that the court treated it as an undertaking to pay against the presentation of documents. It appears on its face to condition the obligation to pay on the presentation of an invoice and certificate of inspection and remission of the other documents by telefax and mail.

Taken as a whole, it does not appear to condition the obligation to pay on the actual performance of the transaction but on its representational performance.

2. Which Law?: The New York appellate court cited Revised UCC Article 5 provisions as being equal to New Jersey law, assuming that it reflected New York law. At the time of issuance, 22 June, 2000, however, Revised UCC Article 5 was not in effect in New York, but was in effect in New Jersey. Consequently, although the appellate court was mistaken regarding what constituted New York law applicable at the time of issuance, there was no harm since it applied the Revision of UCC Article 5 that was in effect in New Jersey.

3. Standby: The Majority also speculates that the credit may have been a standby. The name "Guaranty" reinforces that conclusion. Whether or not it was a standby turns not on whether a statement of default was required but on the documents that were required. The opinion indicates that the documents included a bill of lading and the requirement that they be presented within four days of issuance reinforces the conclusion that these documents were necessary in order to obtain the goods. If so, this undertaking is not a standby but a commercial credit. Although the opinion did not note it, the undertaking states that the required documents were "copies of invoice and bill of lading". Consequently, the credit would be regarded as a standby.

4. Did the Credit Require a Demand?: Despite the conclusion of the Majority that a separate document demanding payment was required, there is serious doubt that the credit required such a document. The Majority suggests that there are two distinct portions and that the reference to demand does not state a separate document.

This impression is confirmed by examination of the text of the credit below. The layout of the credit is revealing and vital to the interpretation of whether a document is required. The LC begins by describing the applicable terms. Next, under the heading "Special Instructions", it sets forth required documents, including in the second paragraph requiring a certificate of inspection. Both paragraphs could only be read as requiring the presentation of the documents there stated. The three paragraphs following relate to the general undertaking of the issuer.

The first of these paragraphs states "[o]ur liability under this guaranty is limited to [amount stated] and expires on [stated date] unless written demand upon us for payment under this guaranty is made prior to [stated date]. [Issuer] will make payment to you for any invoices under this guaranty by our check payable to your order."

It is this paragraph that the court reads to require presentation of a separate document named a "demand". The reference in the credit to "demand" (not "a demand") differs considerably from the references to specific documents at the same location in the credit. Interestingly, the Majority had to insert the article "a" in order to state its conclusion. The relevant sentence indicates a limit to the amount payable under the credit and states that it expires on a certain date unless documents are presented prior to that date. The phrase "written demand" is more readily and naturally read to mean "presentation of documents" and not a separate document containing a demand. The focus of this part of the sentence is on the expiration and of the paragraph on the limits to the liability of Issuer, and not on the statement of an additional specified required document. There are standard formulations used for drafts which would be understood to require a separate document. To use the term "demand" without a specific article, however, would not be so understood. There is no such practice. Accordingly, under standard international letter of credit practice, this phrase would not be understood to state an additional documentary requirement. The most that can be said is that the sentence is ambiguous on this point, and should be interpreted against the issuer and in favor of the beneficiary.

5. Demands and Demands: A central issue of the case is whether or not the credit requires a separate demand and whether or not a demand was made. The Majority of the appellate court concluded that the cover letter and documents accompanying it were neither a demand in the sense of a document demanding payment nor a demand in the sense of a presentation. The former proposition is doubtful, and, as perceived by the Dissent, the latter is fundamentally incorrect.

6. Even if a Demand is Required, was the Cover Letter a Demand?: Even if the credit required presentation of a separate demand, did the separate document presented constitute a demand? The Majority concluded that it did not. Its reasoning was based on two points, that there was no express language of demand and that it could have as readily have been understood as an inquiry as to whether not the documents attached were those required by the credit. That there was no express term of demand in the cover letter should not have been decisive. The credit did not require presentation of a draft. If it required any additional document, it was a "written demand". What commercial function does a demand have? None, because there is no commercial document known as a demand. The only function of a "demand" is to indicate to the Issuer that a presentation has been made. Mere submission of the documents already indicates that payment is being demanded. By the addition of the term "writing", one might conclude that a writing must accompany the presentation. If so, the cover letter sufficed as an examination of it reveals. That it did not use the term "demand" is not decisive. Under standard letter of credit practice, it would have been implied absent express language required by the credit.

The Majority, however, stated that such a conclusion could not have been reached because the transmittal could have been a trial run checking out what was required. This supposition is not founded in letter of credit practice. When an LC bank receives a required document under a letter of credit, it is deemed to be a presentation and treated accordingly unless there is an express indication otherwise. There is nothing in the opinion that would suggest that a trial run was underway and would be no basis for the issuer to so assume. This presumption that the presentation was a presentation is reinforced by the fact that what were presented included at least one original document, namely the certificate of inspection. Experience reveals that beneficiaries do not part with required originals on test runs.

7. Presentation; Preclusion: The most shocking aspect of this altogether unsatisfactory opinion is its conclusion that the preclusion rule is inapplicable because the document (and others accompanying it) that does not measure up to being a demand is also not a presentation. The basis for this conclusion is the specious reasoning that the submission of the documents could be construed as a "test-run" and not a presentation for payment. As indicated, whether the cover letter was the "written demand" required by the credit or not, there can be no doubt that the transmission of the documents referencing the guaranty number and including a copy was a presentation requiring timely and adequate notice of refusal. Absent an express indication otherwise, the presentation of most of the documents required under a credit would be analyzed as a presentation by the LC community. Consequently, the preclusion rule of Revised UCC Section 5-108 operates. On such a presentation, the Issuer is required to state the basis for the refusal. By placing the burden of failure to respond for two months on the Beneficiary, the Majority turns letter of credit practice and law on its head.

8. Non-Bank LC Issuance: The credit was issued by a non-bank. There is no basis in law or practice to create special rules favoring non-bank issuers. U.S. Revised UCC Art. 5 is applicable to non-bank Issuers, and rejected the provision in the Prior Article 5 that they should be subject to special rules under the principle that all LC issuers should operate on a level playing field, in part to protect the reputation of the product.

9. Estoppel: It is interesting to note that the Majority thought an argument based on estoppel to be available (but not satisfied under the facts of the case) even where (albeit incorrectly) preclusion was not available.

10. ISP98: Here is another situation where the Beneficiary would have been well served to require that the undertaking be issued subject to ISP98. Under ISP98 Rule 4.16 (a), a demand need not be separate. Moreover, ISP98 Rule 3.02 is quite specific about what constitutes a presentation, namely "[t]he receipt of a document required by and presented under a standby constitutes a presentation requiring examination for compliance with the terms and conditions of the standby even if not all the required documents have been presented." While, generally speaking, it would be incorrect and improper to read ISP98 into undertakings to which it is not subject, some of its general rules state propositions that are fundamental to all letter of credit type undertakings. This latter provision would be applicable to all LC undertakings whether subject to the UCP, ISP, or local law.

[JEB/lhd]

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