Article

Factual Summary: To pay for the sale of clothing, Buyer/Applicant caused Issuer to issue two LCs subject to UCP500 in favor of Seller/Beneficiary.

LC expired on Monday 26, November at Advising bank. On that day, Seller/Beneficiary or its assignees presented documents to Advising Bank on the day of expiry, Monday 26 November. Issuer received the documents on Friday 30 November, reviewed them, and noted three discrepancies. On Monday 3 December, Issuer sent Buyer/Applicant a letter to request waiver of the discrepancies which stated a "refusal date" of Tuesday 11 December which was the seventh banking day following receipt of the documents. On the "refusal date", Buyer/Applicant refused to waive the discrepancies, and Issuer sent a notice of refusal to Seller/Beneficiary.

Documents were presented to Issuer under the LC 2 on Tuesday 11 December, prior to the LC's expiry date of Friday 14 December and after it received Applicant's refusal to wave discrepancies on LC 1. After examining these documents and finding discrepancies, Issuer sought Buyer/ Applicant's waiver via letter that again contained a "refusal date" which was Thursday 20 December, the seventh banking day following the banking day of receipt of the documents. On the "refusal date," Buyer/Applicant informed Issuer that it refused to waive discrepancies and Issuer sent a notice of refusal on the same date.

For each LC, the "refusal date" was the maximum amount of time available under UCP500 Article 13(b) and 14(d)(i). Claiming wrongful dishonor, Seller/Beneficiary sued Issuer. The trial court granted summary judgment in favor of Issuer which, on appeal, was reversed and remanded. On remand, cross motions for summary judgment were denied. After a trial, the court entered judgment on LC1 in favor of the Issuer and in favor of the Beneficiary on LC 2.

Legal Analysis:

1. Reasonable Time; UCP500 Article 13(b); UCP500 Article 14(d); Safe harbor; Seven Banking Days: The court stated that the issue in the case was whether Issuer acted within a reasonable time in refusing the presentation. The court noted that "[i]t is established that the seven-day period of Article 13(b) of the UCP is not a safe harbor. The time within which Bank must have acted was the lesser of a "reasonable time" or seven business days...."

2. Refusal, Pendency of Expiration; Expiration, factor in refusal; Pendency of Expiration as factor in reasonable time; Reasonable Time, Pendency of Expiration: The court remarked on the conduct of Beneficiary in waiting until the day of expiry to present documents on LC1. It stated that "there simply was no time left for Seller or [its Assignee] to cure discrepancies. The chicken had flown the coop. Buyer's waiver of the discrepancies represented the only avenue left for Seller to secure payment under the credit."

Issuer's Expert testified that "it is not standard banking practice to consider the expiry date of the letter of credit as relevant to the issue of the date that banks set for the refusal notice." Moreover, the court noted that counsel for both sides agreed with this opinion, referring to US Circuit Court decisions in support.

The court, however, stated that these cases were distinguishable and neither stood for the proposition "that the expiry date is never a circumstance the Court can consider." The court also noted that a California state court was not bound by federal court decisions on matters of state commercial law. Although the court did not articulate a ruling on this question, its decision with respect to LC2 clearly took the pendency of the expiration into account.

3. Waiver; UCP500 Article 14(c); Pre Refusal Waiver: Noting that Beneficiary had no time within which to cure discrepancies under LC1 due to presentation on the expiry date, the court stated that waiver of the discrepancies by Applicant was the only means by which it could obtain payment. Noting that Issuer had allowed Applicant up until the day of refusal to inform it as to whether or not it would waive the discrepancies, the court stated that "[i]t was eminently reasonable, therefore, for Bank to seek that waiver, and to set the refusal date as far out as possible". Accordingly, the court found that allowing the full seven day period was timely.

As to LC2, the court noted that two days remained after Issuer determined that the documents were discrepant. The court gave credence to Beneficiary's expert who testified that the discrepancies "were minor ('no brainers' was his description)" and easily correctible by [Beneficiary]...and under the circumstances, [Issuer's examiner] should have set the refusal date referred on the waiver request at one banking day, not seven." In reaching this opinion, Beneficiary's expert noted "[Applicant's] record of waiving discrepancies, relatively low by banking industry standards ("mediocre" was the word he used to describe that record), and that in industry circles Buyer would be considered a "headache customer" from whom banks generally try to stay away."

While recognizing that there was no requirement that banks follow up on requests for waiver, the Expert testified that "by setting the refusal date at seven banking days, Bank failed to act in the spirit of the UCP, failed in its duty to protect the interests of Seller, and failed in its role as a neutral and trusted paymaster."

Beneficiary's other Expert testified that "it was unreasonable for Bank to set the refusal date at seven days, and to wait all seven days for Buyer's response to the waiver request without a single follow-up attempt." He also "referenced the common law to the effect that issuing banks must exercise good faith as to credit beneficiaries, and opined that Bank's conduct with respect to the subject letters of credit appeared to be 'kind of rote,' that is mechanical and routine." The Experts also gave weight to the fact that Applicant would have already received delivery of the garments which they indicated "should have served as a warning flag to Bank."

Issuer's Expert testified as to LC practice, noting that that there are serious operational issues with respect to following up requests for waiver, and that a one day refusal date would be unreasonable and not "expeditious" within the meaning of UCP500.

As to LC2, the court ruled that Issuer was precluded from asserting that the documents did not comply with the terms and conditions of the credit under UCP500 Article 14(e). It stated that

a reasonable time for the refusal notice in this instance was one day, that is, the close of business on December 13, and furthermore, that Bank, acting as a neutral and trusted paymaster, should have been in urgent and direct communication with both Buyer and Seller throughout that day, preferably by telephone. If that had happened, and if by the close of business on December 13 Buyer refused to waive the document discrepancies or did not respond at all to Bank's waiver request, Seller, receiving Bank's prompt notice of refusal, would have had a full business day, December 14, to cure the defects.

4. Practice; Custom; Standard International Letter of Credit Practice: Issuer had introduced evidence that its practice of allowing up to the seventh day for waiver by the applicant was standard in every situation. With this in mind, Beneficiary's other expert noted the remark of "Judge Learned Hand: 'a whole calling may not set its own standard of usage.'" The court noted the testimony of Issuer's expert that the conduct of the bank was consistent with UCP500 and standard banking industry practice, stating that he "apparently [believed] that standard banking practice is, by definition, reasonable."

[JEB/cbw]

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