Article

Factual Summary: To facilitate issuance of insurance, Bank issued a "clean" standby payable to insurer, "The Travelers Indemnity Co.", for US$2,500,000. The standby, contained "an evergreen clause" which provided that the LC was automatically extended unless:

90 days prior to any such date we shall notify you in writing by registered mail or courier service at the above listed address that we elect not to consider this Letter of credit renewed for any such additional period. In that event, you may draw hereunder on or prior to the then relevant expiration date, up to the full amount then available hereunder, against your sight draft(s) on us, bearing the number of this Letter of credit (Emphasis added).

As issued, the LC indicated that the beneficiary was:

The Travelers Indemnity Company
One Tower Square
Hartford,Connecticut 06183
Attn: Cindy Aissis-9GS

The designation, 9GS, following the name of the person to whose attention it was sent indicated the ninth floor of one of "nine separate multi-story buildings in the Travelers office complex in Hartford, Connecticut."

Six amendments to the LC were effected, each having been sent to the appropriate person at the address indicated above or in an amendment and all received. The sixth amendment sought to change the name of Beneficiary to that of a successor to Beneficiary, "Gulf Insurance Co.", change the amount and identify a different person as the "attention party" together with a new address in the same complex.

Subsequently, Issuer sent a notice of non renewal which, unlike all of the previous amendments, was not couriered to either pre 6th amendment notifying party or the one stated in the 6th amendment. It was sent to:

The Travelers Indemnity Company
Financial Analysis Unit
9 Grove Street
One Tower Square
Hartford, Connecticut 06183

Instead of using the number on the standby, which was number S52430A dated 24 April 2002, the notice referred to it as "LC No. SLCC122395 date July 29, 1998". The couriered package was received by the Beneficiarys mail center and forwarded to the person managing Beneficiary's credit risk at an office in the same complex, but was lost internally before being received.

Subsequently, a seventh amendment was sent by mail to Beneficiary and address referenced in the fifth amendment, which, among other things, changed the LC number. When Successor Beneficiary later contacted Issuer regarding drawing on the LC, it was informed that the LC had been purged from Issuer's system. "No copy of the Notice was found following a subsequent search of relevant files." Sometime later, Beneficiary drew on the standby and Issuer refused, stating "[t]he Letter of credit is expired." Beneficiary then sued Issuer for wrongful dishonor. On joint motion, the trial court granted summary judgment to Beneficiary.


Legal Analysis:

1. Procedure; Summary Judgment: In considering the cross motions, the court stated that "[l]etters of credit suites are appropriate for determination by summary judgment."

2. Notice of Non-Renewal; Expiration; Address of Beneficiary; Attention Party; Strict Compliance: The court agreed with Beneficiary's argument that the notice of non-renewal was invalid and of no legal effect as it was not addressed to the proper beneficiary. It quoted Revised UCC § 5- 108(a), noting that the notice required strict compliance. Thus, the court concluded that Issuer's dishonor of the sight draft was improper.

3. Standard: The court decided that the standard practice to be used in determining whether there had been strict compliance with the terms of the LC was the Issuer's own practice in sending to Beneficiary the first six amendments.

Applying this standard, the court concluded that Issuer did not meet the strict compliance rule when it sent the notice of non-renewal to an address different that the one established in the sixth amendment of the LC since Issuer had addressed each of the amendments to the proper beneficiary and to the attention of the correct party. According to the court:

Each of those amendments was addressed to the proper beneficiary and to the attention of the correct "attention party" located on a specific floor in a specific building within Traveler's office complex; each of those amendments was received by the insurer and then Beneficiary. Bass Aff., P29. Speculating with regard to what "must have" happened or "would have" happened under usual circumstances once the mail center sorter directed the April 24, 2002, package to [Manager of Credit Risk] at 10-CR does not constitute the evidentiary foundation required to defeat plaintiff's motion. It is no more than conjecture despite the taking of many depositions over a prolonged period of discovery. There is no "evidence" to support the unwarranted offering that the Notice must have been received by [Attention- Ports in LC amendment] but she was less than diligent and somehow lost it. That suggestion ignores that the defendant failed strictly to comply with the terms of the LC and ignores too that, had the Notice been received, there would have been little reason not ot make a draw if Gulf (or Travelers) were unable to reach an accommodation with the defendant regarding the non-renewal.

The court concluded that Issuer's "[n]otice was invalid and of no legal effect."

4. Discrepancy; Notice of Refusal; Dishonor; Discrepancies, Additional: Issuer argued that there was no dishonor of a proper draw request because the new Beneficiary of the LC never presented a draw request seeking payment. In this sense, Issuer claimed when the sight draft was presented, it did not expressly state it was presenting the draw on behalf of the new Beneficiary. The court disagreed because when Issuer rejected the drawing, it alleged only one ground for its rejection -that the LC had expired. In this regard, the court ruled that Issuer was precluded from asserting as a basis for dishonor any discrepancy if not stated in the notice of dishonor.

In addition, the court noted that nothing in the express language of the LC prevented a party other than the Beneficiary from presenting the draw and that Issuer did not provide any authority for the proposition only a beneficiary can present a draw.

Comments:

1. Strict Compliance Standard for Notices of Refusal: Unfortunately, the analysis of whether or not the notice was satisfactory has been cast into the framework of the strict compliance standard which traditionally has been said to apply to the documents presented under a letter of credit. The suggestion sometimes made that strict compliance should apply to the notice of refusal is mistaken. What matters is that the information about refusal should be conveyed in a manner that would be understood in the letter of credit community. In effect, the standard is one of unambiguous and effective communication of the necessary information. While the question of whether the recipient so understood it is not determinative, it is relevant. To apply this notion to the addressing and sending of a notice of non renewal is unfortunate since it shifts the debate from the particulars to abstract categories. These types of questions are rarely ones that can be sorted out by general categories.

2. Circumstances Matter: In Travelers Indemnity, the overriding reality is the absence of evidence. The issuer had purged its files and the beneficiary had no notice in its files. The only evidence before the court was, in all likelihood, the courier air waybill with the data indicated on it. The court is heavily influenced by the bank's own behavior. It sent all prior communications to the address and person indicated on the LC and amendments. Only the notice of non renewal was sent to a different location at the same address. The bank was unable to meet its burden of proof as to receipt of the notice.

3. Notice to the Beneficiary: While it might be argued that the receipt by the beneficiary was sufficient, the court did not so conclude. To an extent, the definitions of UCC Article 1 fuel this notion. Had the LC itself not given the particular mail stop and attention party in the address, that argument might have had more weight. Had the LC number and date of issuance been correct, it might also have had weight. All these factors taken together, however, do not enable the bank to meet its burden of proving that it gave notice of refusal which it was required to do by the terms of its own irrevocable letter of credit undertaking. The lesson of this case is that banks that send a notice of non renewal should take steps to preserve evidence, should take care to send it to the location and person indicated in the undertaking if there is one, and should follow up to ensure that it has been received.

[JEB/mp]

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