Article

Factual Summary: Applicant obtained a standby letter of credit from Issuer in favor of Beneficiary/ Insurer as one of several means of securing Applicant's obligations under claim-service agreements under which it administered worker's compensation insurance policies issued by Beneficiary.

The letter of credit listed Beneficiary as "Continental Casualty Company, c/o Risk Management Group, CNA Plaza, 333 S. Wabash, Chicago, IL 60685, Attn: Contract Administration" and required presentation of "your sight draft(s) drawn on us, indicating our Credit No. 00.OD.02804". When Issuer indicated that it would not renew the LC, Beneficiary drew, sending the following document:

"Pay to the order of CONTINENTAL CASUALTY COMPANY

"US Dollars Eight Hundred Ten Thousand and 00/100

"To: SouthTrust Bank, N.A.

"'Drawn under the SouthTrust Bank, N.A. Letter of Credit No.

00.OD.02804 dated December 14, 2000.'

"Continental Casualty Company

"By: /s/ W.V. Romashko

"W.V. Romashko

"Vice President-Property Casualty Billing & Collections"

(Capitalization in original.)

The logo of Continental's parent company - 'CAN' - and Romashko's telephone and facsimile numbers were also included on the sight draft.

An accompanying letter bore the address "CNA Plaza 29 South, Chicago, Illinois 60685-0001." The letterhead also repeated Romashko's title, telephone number, and facsimile number and listed his e-mail address. The heading to the letter contained the following reference:

"Applicant: Skilstaf, Inc.

Letter of Credit No.: 00.OD.02804

Draw Amount: USD $ 810,000.00"

Issuer received the presentation at 10:58AM on Friday. On the following Monday, Issuer informed Beneficiary that it was refusing to pay "because Continental had not included its address on the sight draft" and requesting a revised draft. Although Beneficiary re-presented the draft on the next day, Issuer refused to honor on the ground that the LC had expired. Issuer dishonored "because [Beneficiary] had not included its address on the sight draft." Although Beneficiary re-presented another sight draft that did include the address, the letter of credit had expired and Issuer dishonored again.

Beneficiary sued Issuer. On cross motions for summary judgment, the trial court awarded summary judgment to Issuer. On appeal, reversed and remanded.

Legal Analysis:

1. Strict Compliance: The appellate court stated that "[i]t is well established that 'Alabama, with the majority of the states, follows the 'strict compliance' rule governing the acceptance of letters of credit.'" quoting from N & C Props. v. AmSouth Bank, N.A., 558 So. 2d 906, 909 (Ala. 1990).

2. UCP500; Strict Compliance; Revised UCC Section 5-103(c); Revised UCC Section 5-108; UCP500 Article 13(a): The appellate court stated that the strict compliance standard of Revised UCC Section 5-108 was "consistent with the rules set forth in [UCP500]."

3. Compliance, Address of Beneficiary; Draft; Beneficiary's name; Address: Issuer argued that Beneficiary "failed to state in the sight draft the full name and address of the beneficiary and, thus, failed to comply strictly with the terms and conditions of the LC. [Beneficiary] stated in its sight draft that payment should be made to "Continental Casualty Company." [Issuer] insists that [Beneficiary] should have stated that payment be made to "Continental Casualty Company, c/o Risk Management Group, CNA Plaza, 333 S. Wabash, Chicago, IL 60685, Attn: Contract Administration," because that information is the information listed under "Beneficiary" in the LC. [Issuer] alleges that [Beneficiary's] failure to state this full name and address in the sight draft caused a discrepancy between the sight draft and the terms of the LC, and that this discrepancy constituted a failure to comply with Alabama's requirement of "strict compliance" with the terms of the LC."

The appellate court stated that "we need determine only whether the 'terms and conditions of the letter of credit' required that any sight draft presented, in order to appear 'on its face strictly to comply' with those terms and conditions, include the address of the presenting beneficiary." The court stated that the issue before it was "whether the term and condition of the LC that the beneficiary present 'your sight draft' required something more than that the sight draft be from Continental. Stated differently, did the inclusion of Continental's address in its listing in the LC as 'beneficiary,' establish as a term and condition that any sight draft submitted by Continental include its address and specifically that same address listed on the LC."

The appellate court ruled that "[t]he beneficiary of the sight draft was Continental Casualty Company,

at whatever address it might be using at the time it might seek to submit a sight draft drawn on the LC. Taking [Issuer's] argument to its logical extreme, if [Beneficiary] had changed its physical or mailing address in any way subsequent to its listing its address as beneficiary on the LC and before the issuance of a sight draft, in order to comply strictly with the LC in submitting a sight draft drawing against it, [Beneficiary] would have to state its original, but now incorrect, address. The notice of discrepancy given [Beneficiary] by [Issuer] did not state that there was any doubt or uncertainty about whether the drawer of the sight draft, 'Continental Casualty Company,' was the same entity as 'Continental Casualty Company,' the beneficiary of the LC."

The appellate court noted that, quite the contrary, Issuer indicated that it was prepared to accept a corrected draft from the entity that had presented it with the address in the LC. The court stated "[b]ecause the LC nowhere required that a sight draft drawn on it by Continental Casualty Company list that entity's address, we cannot hold, as a matter of law, that inclusion of an address on the sight draft was a term or condition of the LC."

4. Covert Letter; Transmittal Letter: The appellate court noted that the cover letter bore a different address than that stated in the LC but in the same city, although it referred to the LC by number and amount. The court did not consider whether this different address was relevant.

5. Course of Dealing: "[Beneficiary] submitted evidence to the trial court indicating that both before and after the presentment of the first sight draft on December 10, 2003, [Issuer] honored nearly identical sight drafts presented by [Beneficiary] or one of its related entities, i.e., sight drafts bearing the name, but not the address, of the beneficiary." The appellate court, given its decision that the LC only required that the draft be drawn by the beneficiary, did not discuss this point.

Comment:

So-called strict compliance or not, this refusal was not warranted. Bankers have a weird notion that their unstated expectations will translate into requirements that justify refusals. This decision is an object lesson that they do not. Could the issuer have seriously doubted that the entity that was making the presentation under this LC was the true beneficiary of the LC? There is no indication. Indeed, as the court aptly indicates, the bank's willingness to take a representation from the same entity signals that there was no suspicion that a fraudster or disgruntled employee was making the demand. Even had it so suspected, a check payable to the named beneficiary would have afforded it ample protection.

This case provides an object lesson that not all "practices" are reasonable and that banks cannot expect courts to rubber stamp their peculiar notions about implied LC terms.

The lesson is particularly apt given the controversy about addresses for the applicant and beneficiary surrounding the commercial invoice in ISBP(2003) and UCP600. At its current stage, the compromise is that a draft from an address in the same country is not discrepant. Silly though this rule is, it is better than the position advocated by the conservatives, namely that the address must be identical to that in the LC. It is rules such as these that will sound the death knell of the commercial credit as bankers know it.

For standbys, the good news is that such nonsense is not acceptable even under the UCP. There is no room whatsoever for such an argument under ISP98 although a future revision may do well to codify this result.

[JEB/cbw]

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