Article

Factual Summary: At the request of Applicant, Bank issued "Irrevocable Letter of Credit No. 9200101343" in favor of Beneficiary. Subsequently, as part of a computer system upgrade, Issuer assigned a new number, S501279, to the LC but, while it cross referenced the number change in its own system, failed to notify Beneficiary of the change.

The Institute has been informed that the LC was subject to UCP500 "and to the extent not inconsistent therewith, the laws of the State of Illinois, including without limitation, Article 5 of the Illinois Uniform Commercial Code" although the opinion does not so state.

The LC was, by its terms, available for five years from issuance, but provided for automatic extension or non-renewal at the end of the five year period. The LC stated that it "shall be deemed automatically extended without amendment for a one year period from the Original Expiration Date, and any one-year extension thereof ***, unless at least sixty (60) days prior to the Expiration Date Issuer notifies Beneficiary in writing . . . that Issuer does not intend to renew this Letter of Credit."

Shortly before the LC would have been automatically renewed for the first time, Issuer sent Beneficiary a written notice titled "NOTICE OF NON-RENEWAL" which read:

RE: OUR STANDBY LETTER OF CREDIT NUMBER S501279 DATED [Date of LC Issuance]

ACCOUNT PARTY: [name of applicant]

THE ABOVE REFERENCED LETTER OF CREDIT WAS ISSUED WITH THE CONDITION THAT IT MAY BE AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FROM THE PRESENT OR ANY FUTURE EXPIRATION DATE UNLESS WE NOTIFY YOU IN ACCORDANCE WITH THE LETTER OF CREDIT TERMS.

WE HEREBY NOTIFY YOU THAT WE ELECT NOT TO EXTEND THIS CREDIT FOR ANY ADDITIONAL PERIOD AND THEREFORE, THIS CREDIT WILL EXPIRE IN FULL WITH OUR CLOSE OF BUSINESS ON [expiration date].

[Issuer]

[AUTHORIZED SIGNATURE]

CC:[Applicant] * * *

CUSTOMER REFERENCE: 9200101343 [Note: This is the original number of the LC.]

Neither Issuer nor Beneficiary ever contacted the other about the notice. Several months later, Beneficiary attempted to draw US$415,269 against "Letter of Credit No. 9200101343", and Issuer dishonored the draft, claiming that the LC had expired.

Beneficiary sued Issuer for wrongful dishonor. The trial court granted Beneficiary's motion for summary judgment. On appeal, affirmed.

Legal Analysis:

1. "Clear and Unambiguous" Standard; Notice of Non-renewal; Non-renewal, Notice of: Issuer argued that its notice of non-renewal "followed the clear and unambiguous terms of the letter of credit" in that it fulfilled every requirement in the LC in having "notified [Beneficiary] in writing that it did not intend to renew 'this letter of credit' 60 days before the expiration date and by overnight courier." The appellate court agreed that "clear and unambiguous" was the correct standard to be applied to the revocation of a letter of credit, and that, absent "clear and unambiguous" revocation, the notice of nonrenewal failed. The appellate court concluded that the notice was not clear and unambiguous since "[t]he body of the letter, when read as a whole, leads to the conclusion that it is a notice regarding only [an LC with a different number than the one issued to Beneficiary]." Turning to Official Comment 1 to Revised UCC Section 5-108, the appellate court noted that "the standard of strict compliance governs the issuer's obligation to the beneficiary and the applicant." Strictly construing the terms of the letter, the court decided that Issuer failed to notify Beneficiary of the non-renewal of the LC and, as a result, the LC was automatically renewed for an additional year. It also noted that Issuer's "change of its numbering system, without notice, could not create new duties on the part of [Beneficiary]."

2. Standard LC Practice; Change of LC Number: The appellate court noted that Beneficiary's expert had opined that Issuer failed to follow standard international LC practice in changing the LC number without advising Beneficiary and, accordingly, that the LC was automatically extended despite the notice of non-renewal.

3. Notice of Non-Renewal, Duty to Inquire: Issuer argued that there was sufficient connectivity with the LC taken as a whole to place Beneficiary on notice that the notice of non-renewal might relate to its LC and require that it make inquiry. Issuer argued that the notice of non-renewal, which contained the original number of the LC under the heading "Customer Reference" at the end of the notice, two references to Applicant by name, the correct expiration date of the LC, and the correct issuance date of the LC, gave sufficient facts to "put a prudent man upon inquiry" such that Beneficiary had a duty to inquire. The court ruled that Issuer's "change of its numbering system, without notice, could not create new duties on the part of [Beneficiary]".

Comments:

1. The trial and appellate courts properly determined that this attempted notice could not affect Beneficiary's rights under the LC. There was no relationship between the first and second LC numbers. Anyone receiving the notice would assume that it was sent in error and had nothing to do with the first LC. The reference to the applicant or the obscure listing of the first LC number and other linkage could not clarify this obscurity.

2. A beneficiary to a LC with an evergreen clause is entitled to notice of non-renewal in accordance with the terms of the LC, and notice that informs it that the LC is not being renewed. Where the notice is ambiguous or obscure, as was this notice, the notice fails its purpose since the beneficiary could not understand from reading it that it had to draw on the LC before the expiration date in order to preserve its rights.

3. One wonders, however, what the effect of the change might be regardless of the notice of nonrenewal. One of the characteristics of irrevocability is that an LC, once issued, cannot be amended without the consent of the beneficiary. Even had Issuer sent a notice to Beneficiary informing it that the LC number had been changed and requiring a reference to the new number in connection with any drawing, Beneficiary would have been able to make a complying drawing by referring to the original LC number. The notice would, in effect, only be a proposal to amend the LC and could not have been effective without the consent of Beneficiary.

4. Both the appellate court and the trial court noted the applicability of the standard of strict compliance to this question. Interestingly, the appellate court quoted a sentence from the Official Comment to Revised UCC Section 5-108 that seems to reinforce this notion. On closer inspection, however, the reference appears to apply only to the presentation of documents and not the issuer's actions. The proper standard for these actions is that of standard LC practice. As the courts correctly concluded, the notice of non-renewal did not give notice that the beneficiary's letter of credit was not being renewed and, accordingly, did not result in its expiration.

[JEB/lhd]

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