Article

Factual Summary: Issuer issued a standby letter of credit that provided that Issuer "would honor a sight draft 'for all or any part of [the following] credit' if timely presented at the proper location:

Effective - Amount - Total Available
June 15, 2001 - $500,000.00 - $500,000.00
July 15, 2001 - $500,000.00 - $1,000,000.00
August 1, 2001 - $500,000.00 - $1,500,000.00"

The standby also contained a provision that "'each successive increase will be available upon receipt by' [Issuer] of 'an equal amount' of funds 'prior to the applicable date.' The letter of credit further provided that if the bank 'is not in receipt of the second or third installment of such funds by such dates, this Letter of Credit will be limited to the amount on deposit in said account.'"

The standby also provided that Issuer's obligation "is in no way contingent upon reimbursement with respect thereto." The court stated that Applicant never made either deposit but notes that "[t]he account did, however, contain a standby letter of credit for $500,000.00 with another bank, which was also due to expire on June 15, 2002."

On the day before expiration, Beneficiaries presented a sight draft in the amount of US$1,500,000. Three banking days after the date of presentation, notice of refusal was given due to "a discrepancy between the amount of the sight draft and the amount available under the letter of credit: the demand exceeded the amount available."

Claiming wrongful dishonor, Beneficiaries brought an action against Issuer. On cross motions for summary judgment, the trial court entered summary judgment for Issuer and against Beneficiaries.

Legal Analysis:

1. Strict Compliance; Drafts; Amount in Excess of That Available; Interpretation: Beneficiaries argued that because the LC stated that the total available amount after August 1, 2001 would be $1,500,000, the submission of a draft for $1,500,000 was in strict compliance with the terms of the LC. The court rejected this argument, stating that "it views portions of the letter of credit in isolation. [Beneficiaries'] argument overlooks other statements in the letter of credit." Noting the provision limiting the obligation of the bank in the event that the deposits were not made, the court stated that "[t]his sentence clearly articulates a condition that would limit the letter of credit to the amount on deposit. The language is specific and is located in the paragraph immediately following the listing of the amounts available under the letter of credit." The court noted that Beneficiaries' witnesses admitted "that the plain language of this sentence limits the amount available to [Beneficiaries]." The court stated that since it was undisputed that the second and third installments were never made, "the draft requested more money than was available under the letter of credit."

The court then proceeded to the conclusion that "[t]he discrepancy between the amount requested in the draft and the amount available in the account makes the draft non-conforming", citing New York decisions to the effect that "drafts that exceed the face value of the letter of credit do not strictly comply with the letter of credit. ... Although the face value of the letter of credit was limited by this condition, [Beneficiaries] submitted a draft for the amount that would have been available if the second and third payments had been made. Since those payments were not made, the draft exceeded the amount available under the letter of credit. Accordingly, [Beneficiaries]' draft did not conform to the amount available under the letter of credit."

2. Draft; Amount in Excess; Interpretation: Beneficiaries also argued that Issuer "was obliged to pay $500,000.00 on this $1,500,000.00 draft because the letter of credit promised to honor drafts 'for all or any part of this credit.'" The court interpreted this argument as stating that: "[Issuer] should honor a draft for the full amount for any lesser sum available. The plain language suggests a different interpretation: that [Beneficiaries] could submit a draft for 'all or any part of this credit,' and such a draft would be honored in accordance with [Issuer's] obligations. [Beneficiaries] were not required to request the full amount of the letter of credit, but could request 'any part' of the credit available under the letter. The Court considers this sentence to refer to [Beneficiaries'] rights to request a part of the total amount available, not to [Issuer's] obligation to pay part of a draft that requests more money than is available in the account."

3. Amount Available; Interpretation: Although the court stated that neither the second nor third installments were made, it noted that: "The amount on deposit was either zero or $500,000.00, depending on whether a standby letter of credit with another bank is considered to be 'on deposit' in the relevant account. Regardless, the request for $1,500,000.00 did not conform to an amount available under the terms of the letter of credit."

4. Strict Compliance: The court noted that one of the "central tenets" of New York letter of credit law is the "principle of strict compliance" for which it cites case law and UCP500 Article 13 and 14(b). It applied this principle in concluding that a draft in excess of the amount available under the credit was non compliant.

5. Interpretation: With respect to the interpretation of a credit, the court noted that "if there is any ambiguity or error in the letter of credit, there is 'a long-established standard of construction against the issuer (bank).'" citing Ocean Rig ASA v. Safra Bank of N.Y., 72 F. Supp. 2d 193, 198-99 (S.D.N.Y. 1999).

Comments:

1. Non-conforming Documents. This case clearly demonstrates the narrow interpretation of "strict compliance" taken by the courts and the UCP500. Also, the court makes the point that the slightest discrepancy can make a document nonconforming and subject to dishonor.

2. It is standard practice for banks to reject drawings in excess of the amount available under the credit. However, it is doubtful that this practice or the UCP justifies the rejection in this case. UCP500, to which the credit in this case is subject, provides in Article 37 that banks may refuse commercial invoices for amounts in excess of the amount permitted in the credit. Based on the opinion, the document at issue was the draft and not the commercial invoice. In any event, it is the draft that was mentioned in the notice of refusal. Indeed, it is doubtful that this standby required presentation of a commercial invoice.

The ISBP does not refer to this issue, either. ISBP Paragraph 53 provides that the amount of the draft must agree with that of the commercial invoice, but says nothing about drafts in excess of the amount of the credit. Interestingly, ISP98 Rule 3.08(e), a rule to which the standby is not subject, is the only expression of this practice. Therefore, if this draft is to be refused, the refusal must be based on UCP500 Articles 13(a) or 21 or an unarticulated practice. It does not appear that the draft was inconsistent with any other document presented. Therefore, if there is any basis for refusal, it must be that the draft did not comply with the terms and conditions of the credit under Article 13(a).

This position would be fairly straightforward if the credit was for $1,500,000 and the draft was drawn for $2,000,000. The credit in this case, however, is far more complicated. The credit provides a sliding scale of availability linked to a time period. There is then a separate provision that further conditions the obligation of the issuer by limiting its liability if no deposits have been made. There is no indication that there is any mechanism by which the beneficiary could know whether or not these deposits have been made. Technically, the credit is available for $1,500,000 after the third time period, but the issuer is not obligated to pay that amount. Therefore, a draft in the amount of $1,500,000 is not in excess of the amount for which the credit is available by its own terms. It is merely in excess of the amount for which the issuer is liable. To force the beneficiary to guess as to how much the applicant has deposited improperly forces it to determine a condition that is beyond its control and solely within the control of the issuer.

3. At the very least, this issue should have been decided on the interpretation principle which the court acknowledged but ignored, namely to construe the credit against the issuer. If the issuer had provided a mechanism, such as an amendment, by which the beneficiary would have been informed as to the amount for which the issuer was liable, it would have fairly been able to assert that the credit was overdrawn. But where it provides a time schedule, and the draft is for an amount aligned to that schedule, it cannot be said to be overdrawn. It can only be said that the full amount is not available.

4. This approach raises an interesting question that the court ignored, namely whether the existence in the "account" of a standby running to the issuer for $500,000 constitutes the "receipt" of funds within the meaning of the credit. If the issuer retained the counter standby and linked it to the account of the applicant, it should be so treated, and the issuer should have been required to pay $1,000,000.

5. The decision raises another interesting question, namely whether or not the examination and notice of refusal was given within a reasonable time and without delay. That notice was sent three banking days after the banking day on which the documents were received. It does not appear that this issue was raised.

6. One wonders if the beneficiaries were not prejudiced by arguing that the terms of the credit should be read to indicate that the entire amount was due. The court concluded that the beneficiaries' argument was contrary to the plain meaning of the credit, which it is, and, having started in that vein, was not prepared to listen to the more subtle arguments that should have occurred to it and been raised about whether the drawing was in excess of the amount available under the credit.

[JEB/lhd]

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