Article

Factual Summary: To pay for over one million mini roll-on bottles and caps that were to be sent to Packaging Company to be filled with perfumes, Buyer caused Panamanian bank to issue a commercial LC for US$170,000 in favor of Seller. The LC was confirmed by a Canadian bank. The LC required presentation of a draft and a "certificate of receipt signed by EG Packaging". Subsequently, the LC was amended to substitute Financier/Transferee as Beneficiary. Transferee could advance funds to Beneficiary but it was agreed between them that Beneficiary remained obligated to perform under the LC.

Approximately a week before the LC was due to expire, Seller delivered the remainder of the merchandise. However, Packaging Company did not sign the certificate of receipt, which was required for a drawing on the LC until two days before the expiry date, claiming defects in prior shipments. In addition another employee of Packaging Company would not sign the drop shipment certificate until one of Applicant's employees who was in charge of this matter returned from a three-week vacation. The scheduled return was after the expiry date.

Although Beneficiary could have prepared and forwarded all documents but the drop shipment certificate to Transferee even under these circumstances, an ice storm necessitated the closing of Confirming Bank's local branch for ten days. Beneficiary did fax the documents to Confirmer that day. Seller had arranged a means of delivering the documents to an alternate branch, but the documents did not arrive until a day after the expiry date. However, Confirmer identified discrepancies in the documents, namely "commercial invoice showing beneficiary as [Seller] instead of [Financier], incomplete applicant's address, incomplete description of goods, not sworn as per letter of credit; straight bill of lading not stating 'Sold to [Buyer].'; drop shipment certificates not presented." and gave notice of refusal to Transferee, asking if documents should be forwarded "as is". Instead, they were corrected and re-presented 16 January, but the Drop Shipment Certificate was not signed until 21 January and not forwarded to Confirming Bank until 26 January. On 27 January, Confirmer issued an Acceptance Advice to Issuer certifying that

REMARKS: WE CERTIFY DOCUMENTS PRESENTED WITHIN THE TIME LIMIT FOR PRESENTATION AND EXPIRY. DUE TO SEVERE WEATHER CONDITIONS IN MONTREAL (QUEBEC), BUSINESS WAS INTERRUPTED FOR TEN DAYS (ARTICLE 17 OF THE UCP 500) WE SHALL REIMBURSE OURSELVES AT MATURITY AS PER L/C INSTRUCTIONS.

The advice was couriered to Issuer with document and received on 2 February.

Not having heard from Issuer, Confirmer issued an Acceptance Advice to Trasnferee on 6 February, stating that "WE HAVE ACCEPTED YOUR DRAFT AND SHALL BE PLEASED TO DISCOUNT THIS ITEM ON YOUR BEHALF IF YOU SO DESIRE." On the basis of this advice, Transferee authorized the release of funds to Beneficiary. On 6 February, Issuer sent a "Certificado" to Applicant indicating that the maturity date of the draft together with the documents which were received on 9 February.

When Applicant, already unhappy with the goods, realized that the Drop Certificate was dated a week after the credit expired, it complained to Beneficiary. However, it did not inform anyone else until 27 February when Transferee received a call to ask about consent to a stop payment (which it refused). Applicant subsequently filed this action for a provisional and interlocutory injunction. The trial court dismissed the case.

Legal Analysis:

1. UCP: The court noted that the parties had agreed "this case must be decided relying exclusively on [UCP500]."

2. Fax; Presentation: It was agreed that the faxed documents did not comply because they "were not in conformity with the letter of credit requirements and were subsequently replaced or provided so that all the documents in proper form were in possession of the [Confirmer] only on January 27". The court stated that "[i]n the Court's opinion, a presentation by fax on the expiry date followed by a delivery of the originals on the following day is not a valid presentation since the bank has to be in possession of the documents stipulated under the letter of credit before the expiry date."

3. Expiration; UCP500 Article 44(a); Force Majeure: The court concluded that complying documents were not presented until 13 days after the LC expired. The court ruled that under UCP500 Article 44(a) the expiry date "could not be extended because of the weather conditions in Montreal". The court stated "an expiry date is not ipso facto extended when a bank is closed for reasons of force majeure...."

4. Place of Presentation, Presentation; UCP Article 42(b): The court also noted that pursuant to the LC terms, the documents were required to be presented in Toronto and not in Montreal on or before the expiry date. While it noted that it was "ready to accept that the tender of the required documents to a regional office of an issuing or confirming bank and their scanning to the designated place for presentation on or before the expiry date amounts to a valid presentation as per UCP 500", it stated that "this was not the case here."

5. Compliance, Strict; Strict Compliance; Expiry Date: The court noted that the doctrine of strict compliance "is even more important with regard to the expiry date" and that the failure to make a timely presentation before the expiry date excuses banks from their LC obligation.

6. Expiry Date; Extension of Expiry Date; Force Majeure; UCP 600 Article 17: The court stated that, given the facts, the question was whether "presentation after the expiry date of a credit is or is not possible under UCP 500." In answering this question, the court looked to Sentence 2 of UCP500 Article 17 which provides "[u]nless specifically authorised, banks will not, upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business." The court interpreted this provision to "[acknowledge] that an extension of credit which expired is possible if specifically authorized. The Court sees no valid commercial reason to limit the possibility of such an extension to events of force majeure. It follows that a confirming bank may always accept a draft under a credit which expired with the consent of the affected parties i.e. an agreed extension." In this context, the court quoted the Sarna treatise, Letters of Credit (3rd ed. 1996) at 7-3 to the effect that "Notwithstanding the stipulation of an expiry date, the date may be deemed to have been amended, abandoned and prolonged by the conduct of the parties."

7. Expiry Date; Waiver: The court stated that "the confirming bank may unilaterally waive its rights to insist on presentation by the beneficiary on or before the expiry at its own risk." It noted that the issuer could also waive expiration. The court concluded that the Acceptance Advice sent by Confirmer to Issuer "was in fact a request for such an authorization, at least in the mind of its staff. In his examination out of court, the head of the department at the [Confirmer], Mr. Li, said that further to the issuance of the Acceptance Advise 'the issuing bank has the option to come back to us and authorise us to pay - to accept - and not to pay ... not to honour, or to refuse the documents'. Consistent with that understanding, the [Confirmer] sent no copy of the Acceptance Advice to CCC before February 6, 1998. In other words, it did not commit itself towards CCC on January 27, 1998 by accepting the draft, but instead approached [Issuer] for an authorization."

The court recognized that this Advice "was to some extent misleading" due to the statement "[w]e certify documents presented within the time limit for presentations and expiry. Due to severe weather conditions in Montreal (Quebec) business was interrupted for ten days. (Art. 17 of UCP 500) We shall reimburse ourselves at maturity as per L/ C instructions." Nonetheless, it considered the actions of Confirmer. It noted that Confirmer did not hide the fact that its acceptance was date 27 January, that the maturity date was pegged to that date and not the expiration date, and the drop shipment document clearly revealed a date of 21 January. Based on these facts, the court stated that Issuer was "therefore in a position to challenge the statement of the confirming bank to the effect that the documents were presented within the time limit and to refuse to take them up...." Because Issuer forwarded a promissory note to the applicant and the documents, the court concluded that "[b]y its conduct, the issuing bank was agreeing to an extension or, at least, to a late presentation of the specified documents."

8. Notice of Refusal, Preclusion; UCP500 Article 14(e); Expiration Date: The court stated that if Issuer intended to reject the presentation on the grounds that documents were after the expiry date "it was under the obligation to take prompt steps to dissociate itself from the actions of the [Confirmer]....The time frame for [Issuer] vis-à-vis the [Confirmer] was limited to a reasonable time which could not exceed seven banking days following the day of receipt of its stipulated documents...." The court concluded that after this outer time limit Issuer "was precluded from claiming that the documents were not in compliance with the terms and conditions of the credit".

9. Injunction: The court concluded that there was no basis to enjoin Beneficiary from presenting the draft in view of the Acceptance Advice which the court treated as an authorization to accept after expiration or to enjoin Confirmer from being reimbursed by Issuer.

10. Estoppel: The court also noted Confirmer was "estopped from asserting non compliance since its conduct has induced [Financier] to pay [Buyer]."

Comments:

1. Waiver: It is possible for a bank that is obligated on a letter of credit to waive the expiration date. Waiver, however, requires an affirmative indication on the part of the "waivee" that it is doing so with full understanding of its actions. In this regard, it may be wondered if the court's analysis is not overly strained. While it is correct that there were data in the presentation which on examination would have reflected that documents were presented after the expiration date, it is a "stretch" to conclude that this information constituted a request that the issue were waive to failure to make timely presentation on or before the expiration date.

2. Delay in giving notice by applicant; ISP98 Rule 5.09 (Applicant Notice of Objection): A more fruitful basis for this decision is the court's recognition that the applicant unduly delayed in giving notice of its objection to the expiration after it was aware that documents were presented early. Indeed, the court's recitation of the facts suggests that the applicant consciously manipulated the various parties to its own advantage. ISP98 Rule 5.09 articulates a rule which reflects standard international letter of credit practice, namely that the applicant must give notice within a reasonable time of its objection to a discrepancy. The basis for such a rule is that of all the parties the applicant is in the best position to understand what matters are significant to it and what are not.

3. Inadequate Notice: The court had before it but did not use another avenue to reach the same result. Although it noted that the notice of refusal sent by the confirming bank was directed to the wrong entity, it did not consider the implications of this fact. Having ignored the transfer of the letter of credit, which apparently was a transfer in whole, the court failed to appreciate that the confirmer was required to give notice to the beneficiary or the presenter. While it appears that some documents were presented by the original beneficiary, it also appears that the documents were presented by the transferee beneficiary. Under these circumstances, the court could have concluded that confirmer had failed to give adequate notice of refusal to the named beneficiary.

4. Expiration/Preclusion: The difficulty with each of the proceeding bases for the decision is that they assume that the failure to note that the credit has expired is a discrepancy and that the failure to give timely and adequate notice of it results in preclusion. Although the court considered that expiration was another discrepancy which was subject to preclusion, this opinion is contrary to standard international letter of credit practice. Unlike discrepancies, the validity of the credit is not a matter for notice and refusal. See ICC Banking Commission Opinion Document 470/TA.286 (July 1999). This practice is reflected in ISP98 Rule 5.04 (Notice of Expiry) which provides "[f]ailure to give notice that a presentation was made after the expiration date does not preclude dishonour for that reason." It is also stated in US statutory law at Revised UCC §5-108(d). Once the undertaking expires without documents having been presented, it ceases to be available. There is, therefore, no undertaking on which a claim can be made.

5. Injunction: A better rationale would be to note the requested relief, namely injunctive relief. An injunction is not appropriate absent LC Fraud.

6. Estoppel; Reasonable Reliance: The question of the ability of the confirmer to retain the reimbursement or the Transferee to retain the proceeds of the LC arises, however. Having accepted the draft, it might be contended that the Confirmer is obligated to honor it at maturity without regard to defenses of which it was aware. Moreover, the Transferee acted in reasonable reliance on the advice of acceptance before disbursing funds to Beneficiary.

7. Force majeure, UCP approach: There is a valuable lesson in this decision. While the court may be incorrect in the tactical manner in which it treated the expiration, its approach reflects a deep sensitivity to the fundamental equities involved. These equities have been deliberately ignored by the international letter of credit banks for decades. One of the few remaining provisions in the UCP which challenges notions of fairness is that provision which penalizes the beneficiary for presentation at a time when the bank is closed due to force majeure events. Although UCP600 suggested alternatives in its drafting process, neither the drafters nor the Banking Commission had the moral courage to insist on a rational approach to this problem. In part, the reason for this failure of nerve was the absence of compelling examples. This decision provides one in point. It should be clear that courts will invent ways of evading the unfair application of this rule.

8. Inoperative Conditions: Another lesson to learn from this case is the disturbing phenomenon of applicant controlled conditions. It is apparent from the recitation of the facts of this case that the applicant had no intention of permitting the beneficiary to obtain complying documents except on its own terms. Such conduct is contrary to the fundamental principles underlying letters of credit and it is past due that the letter of credit community should begin to react to these provisions in a way that defeats them. The measures taken up to this point, namely to require conspicuous disclosure of these provisions, apparently have failed as they have grown more numerous and onerous. It may well be time for the letter of credit community to deny them enforceability.

[JEB/az]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.