Article

Factual Summary: To pay for shipments of electronic goods, Buyer arranged with Applicant to obtain two LCs. Applicant caused LC1 to be issued and subsequently amended to extend the expiration date.

In correspondence with Beneficiary dated prior to the extended expiration date of LC1, Applicant "agreed to waive certain discrepancies in [Beneficiary]'s presentation on [LC1] including presentation after the expiry date."

Shortly thereafter, Applicant caused LC2 to be issued. To obtain payment on LC2, Beneficiary had to present, among other documents,

... (2) an original shipper's copy of air waybill, showing airport of departure as Malaysia and airport of destination as USA; ... and (4) inspection certificate issued by SGS.

During the course of the next month, Beneficiary made five shipments to Buyer totaling US$101,289.96 worth of goods. Shortly after the shipments were completed but a month and a half after its expiration date, Beneficiary presented documents to Issuer for payment on LC1. Five days later, Issuer dishonored the presentation "because, among other reasons, the letter of credit expired ..."

A few days after Issuer dishonored the presentation under LC1 but prior to the expiration date of LC2, Beneficiary presented documents to Issuer for payment on LC2. Issuer responded by sending Beneficiary a notice of dishonor seven days after Beneficiary's presentation citing Beneficiary's "failure to present an inspection certificate and its failure to ship by way of 'air waybill' ..." as a reason for dishonoring the presentation. Beneficiary then made a second presentation under LC2 four days later, still prior to LC2's expiration date. Issuer dishonored Beneficiary's second presentation four days after it was made, citing "'courier receipt presented instead of [air waybill]' and 'inspection certificate not presented' as the discrepancies causing dishonor." Prior to these presentations on LC2, Applicant had agreed in correspondence to waive the discrepancies cited by Issuer as reasons for dishonor.

In fact, Issuer elected not to waive the discrepancies. When Beneficiary asked Issuer why it would not waive the discrepancies, Issuer responded that Applicant had so instructed it. Beneficiary then sued Issuer and Applicant for wrongful dishonor and, on Issuer's motion, the court awarded summary judgment in its favor.

Legal Analysis:

1. Revised UCC §5-116(b); Choice of Law: Since the LC did not contain a choice of law, the court looked to Revised UCC §5-116(b) and applied the law of the issuer which was also the law of the forum.

2. Strict Compliance; Revised UCC §5-108: Beneficiary argued that its presentations complied with the terms and conditions of the LCs and that the purpose of the air waybill and inspection certificate was to represent the manner of shipment and the correct location so that the actual goods would be as purported. Since, in hindsight, the goods turned out to be exactly what Beneficiary represented they would be and they were safely shipped to the correct location, Beneficiary argued that its failure to provide an air waybill and inspection certificate was a trivial error that should not lead to dishonor.

The court turned looked to Illinois' Revised UCC §5-108 for the standard of compliance, which provides "an issuer shall honor a presentation that ... appears on its face strictly to comply with the terms and conditions of the letter of credit." The court stated that "if hypertechnical or unnecessary terms of a letter of credit are not complied with and then are cited by the issuing bank as reasons for dishonor, such an action may amount to wrongful dishonor." The court relied on Integrated Measurement Systems, Inc. v. International Commercial Bank of China, 757 F.Supp 938, 944 (N.D. Ill. 1991), when it stated that "[u]nfairness would result if 'banks could simply dishonor letters of credit based on minor, trivial discrepancies that do not place in doubt the terms of the letter of credit.' ... 'Discrepancies that are minuscule and not misleading' should not lead to dishonor. ..." (quoting Integrated Measurement, 757 F. Supp. at. 944) However, the court also noted that "[c]ourts are hesitant to find that an issuing bank wrongfully dishonored a presentation if the beneficiary failed to comply with substantive terms set forth in the letter of credit that were agreed upon by the signatories." In this case, Beneficiary failed to present an inspection certificate and an air waybill, which were required under the terms of the LC.

The court agreed with Beneficiary's premise, stating that the missing documents "appear to be minor, maybe even unimportant." However, the court concluded that Beneficiary's "argument is inadequate as it deprives [Issuer] of the safety guaranteed by the letter of credit." The court stated that "by entering into an agreement to pay pursuant to a letter of credit, a bank that has no first hand knowledge of the agreement for sale of goods underlying the letter of credit is entitled to be cautious and exacting before paying a beneficiary. Before authorizing the letter of credit, the bank must guarantee, in whatever method the parties agree upon, that the goods are in fact what they are purported to be and were shipped in a safe manner to the correct location."

3. Waiver (Discrepancies); Revised UCC §5- 104: Beneficiary argued that there was evidence that Issuer knew that Applicant had agreed in writing to waive the discrepancies that were the basis for dishonor.

The court reviewed the Revised UCC §5-108, in stating

An issuing bank is obligated to honor a beneficiary's presentation on a letter of credit if the presentation strictly complies with the terms and conditions of the letter of credit. [Applying Revised UCC §5-108]. However, an issuing bank can waive certain terms or conditions contained in the letter of credit. Id. The Illinois Code provides, "unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply." [Revised UCC §5-108]. Thus, if the issuing bank agrees with the applicant to waive certain discrepancies in the beneficiary's presentation, then the issuing bank is bound by that agreement. Id. Waivers made by the applicant directly to a beneficiary are not binding and do not serve to amend the original terms of the letter of credit. [Revised UCC §5-108], Comment 7. Only if the issuing bank agrees to the applicant's waivers will those waivers be binding. [Revised UCC §5-108].

Because Beneficiary could not prove that Issuer had agreed to the waivers in either of the LCs (or even knew of them), the court found that Issuer was not bound by the waivers.

4. Formality; Waiver: The court looked to Revised UCC §5-104 (Formal Requirements) and 5-102 (Definitions) (a)(14) ("Record") for the proposition that "any waiver that amends the letter of credit must be in writing."

5. Revised UCC §5-108; Preclusion; Notice of Dishonor; Reasonable Time: Beneficiary also argued that Issuer's "delay in dishonoring [Beneficiary]'s final two presentations precluded [Beneficiary] from curing the presentations' deficiencies and that [Issuer] should be estopped from claiming non-conformity as a basis for dishonor."

The court found that Issuer notified Beneficiary in a manner that was timely under Illinois' Revised UCC §5-108(b). The court noted that "the final two presentations made by [Beneficiary] were dishonored in six and five business days respectively, counting the day the bank received the documentary presentations as a business day."

The court also to found that "[b]y waiting to present until the final week of the letter's existence, [Beneficiary] placed itself in a precarious position. [Beneficiary] was left without payment or a chance to present again due to slight discrepancies in its presentations. [Issuer] complied with the statutory requirement of providing notice of dishonor in seven business days and its delay does not estop it from asserting non-conformity as a valid reason for dishonor."

Moreover, the court stated that since the discrepancy consisted of actual missing documents and not a minor technical omission contained in a document, Beneficiary would have been unable to correct the discrepancy even if it was notified of it sooner. The court thus rejected Beneficiary's argument.

Comments:

1. Waiver in Writing: In dicta, the court stated that a waiver must be in writing under Revised UCC §5- 104 because it amends the terms and conditions of a letter of credit. The statute provides that an "amendment" to a letter of credit must be in writing. Although a waiver is not technically different from an amendment under standard international LC practice, requiring either a writing or behavior manifesting waiver not only avoids "swearing" contests, but is aligned with practice. Rarely, if ever, does a bank "waive" discrepancies orally with no further action - i.e. payment.

2. Examination, Reasonable Time; Examination, Pending Expiration: The court states that it finds the timing of the refusal "troubling". What seems to trouble it, however, is the insufficient time available for the beneficiary to cure the discrepancies prior to the expiration of the credit. As the court recognizes, the beneficiary chooses the time for presentation and should not be heard to complain if it abuts the expiration of the credit. What is puzzling, however, is that the opinion did not even consider the question of whether the examination of the documents under the presentations in five and six days was a reasonable time. While it recites the text of Revised UCC §5- 108(b), it seems to assume that these time periods were reasonable.

3. Estoppel v. Preclusion: Beneficiary apparently confused the terms "preclusion" and "estoppel" and the court echoed its terminology. The LC rule reflected in Revised UCC §5-108 is a rule of preclusion in that, unlike estoppel, it operates whether or not there is reasonable reliance.

4. Minor Discrepancies: While the court properly discounts refusal for trivial reasons, its suggestion that that failure to present a required air waybill or certificate of inspection may be unimportant is surprising and incorrect because the actual delivery of good goods does not justify overturning the independence principle. [JEB/az]

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