Article

Factual Summary: To pay for the purchase of 3,800 feet of 30 inch steel pipe, Buyer requested its bank to issue a standby LC in favor of Seller. Issuer's employee discussed the LC terms with Seller's employee. Issuer's employee sent the LC to Seller via telefax with a cover sheet stating "Here is the letter of credit you requested. Please let me know if you need any additional information." When Seller's employee requested a change, the same employee of Issuer sent the amended LC via telefax with a cover sheet stating "Here is the revision to the letter of credit you requested. Please let me know if you need any additional information."

The opinion described the LC that was telefaxed, and noted that it was subject to UCP400 (1983), bore handwritten signatures of the Issuer's employees, and conditioned the bank's obligation on a drawing "when accompanied by this Irrevocable Letter of Credit." It also stated that "the original Irrevocable Letter of Credit must be presented with any drawing so that drawings can be endorsed on the reverse thereof."

Seller claimed that Issuer's employee represented that the LC had been issued in response to Seller's question as to when it could safely ship the pipe in reliance on the LC. Subsequently, Seller shipped the pipe. Buyer failed to pay for the pipe and filed for bankruptcy protection.

The opinion discusses the attempt by Seller/ Beneficiary to locate the original LC, noting conflicting testimony from the Issuer's employee and the Buyer/ Applicant. After various conversations, Seller/ Beneficiary drew on the LC, presenting the original telefax as amended and other documents on Monday 17 February, 2003. The presentation was also accompanied by an affidavit stating that the "original letter of credit" was lost or destroyed and undertaking to indemnify Issuer were it to incur a loss as a result of its presentation.

On the same day, Issuer mailed a letter of refusal which was received on Friday 21 February 2003. The letter failed to recite that Issuer was either holding the presented documents at Seller/Beneficiary's disposal or returning them. In the meantime, a telephone discussion occurred on Thursday 20 February 2003 in which Issuer informed Seller/ Beneficiary that it was dishonoring "because Seller did not include the original letter of credit in its presentation."

Seller/Beneficiary filed an action against Issuer for wrongful dishonor, breach of the letter of credit, detrimental reliance, and breach of its good faith obligation and against its employee for negligent misrepresentation. On cross motions, the trial court granted Issuer's motions for summary judgment and denied Seller/Beneficiary's motion for partial summary judgment, awarding Issuer attorneys' fees. On appeal the intermediate federal appellate court affirmed the award of summary judgment in part and reversed in part.

Legal Analysis:

1. LC Not Contract: The opinion expressly distinguished the commercial standby from a contract stating that it "is an 'undertaking' (as opposed to a contract)" US Rev. UCC § 5-116(d).

2. UCP: The opinion noted that the standby was subject to the UCP, characterizing it as "a compilation of the usage of the trade for letters of credit." Noting that Rev. UCC § 5-116(d) states that the liability of an issuer is "governed by any rule of customer practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit ... is expressly made subject", the opinion concluded that "in deciding this case, this court must follow the terms of the UCP 400."

3. Original LC; UCP400 Article 12(b): Beneficiary argued that the facsimile LC sent to it by Issuer constituted the required original LC and, accordingly, Issuer wrongfully dishonored when it refused on the ground that the original had not been presented. The intermediate appellate court affirmed the ruling of the trial court that rejected this argument.

The appellate opinion noted that a LC could be issued electronically and that the telefax could have been the operative credit instrument under UCP400 article 12(b) since it did not state "full details to follow". However, the opinion concluded that references to the operative credit instrument "do not apply in this case because the letter of credit specifically provides that [Beneficiary] must present the 'original' to successfully draw."

The appellate opinion distinguished between the "operative credit instrument" and the "original", noting that the term was not defined in the credit, Rev. UCC Article 5, nor UCP400. Undeterred, the opinion noted that "the plain meaning of the term is clear. In its definition of 'original', a leading legal dictionary states that "[a]s applied to documents, the original is the first copy or archetype; that from which another instrument is transcribed, copied, or imitated." quoting from Black's Law Dictionary (6th ed. 1990). Accordingly, it ruled that "it is clear that the term 'original' in the instant letter of credit referred to the actual first copy of the document."

While recognizing that "a facsimile copy may in certain circumstances qualify as an 'operative credit instrument' under UCP 400, Article 12, it is not necessarily the 'original' letter of credit. Because the letter of credit expressly required [Beneficiary] to present the 'original' of the credit, [Beneficiary] could not present anything other than the documents from which the facsimile copy was made in order to successfully draw."

The opinion also rejected Beneficiary's arguments that the message on the transmittal letter indicated that the facsimile was the original LC. The intermediate appellate court described this argument as being "without merit": "The language on the cover sheets merely indicates that the facsimile is a copy of the original credit. It does not alter the plain meaning of the term 'original' as it is used in the text of the credit."

In a footnote, the intermediate appellate court also noted that the requirement that the credit be endorsed on multiple drawings "obviously contemplates that there is only one original, and that must be the one and only document actually signed by the two bank officers." [emphasis in original] As to the Issuer's representation that Beneficiary had everything necessary to draw, the intermediate appellate court concluded "these alleged representations only demonstrate that [Issuer] gave faulty information, not that the facsimile copy should be considered the original."

4. Strict Compliance; Rev. UCC § 5-108(a): The appellate opinion recited the rule of strict compliance, stating that failure to present a required original of the LC justifies refusal under the doctrine. It indicated that this rule applied to the examination of documents.

5. Refusal; Timeliness; UCP400 Art.16(d); Rev. UCC 5-116(c); Rev. UCC 5-108(b); "Without Delay": Beneficiary argued that Issuer had failed to give notice without delay as required by UCP400 Article 16(d). The trial court had ruled that that the Issuer had complied with the nonconforming version of La. Rev. UCC § 5-108(b) which provides that an issuer has "at least three days" in which to give notice.

The intermediate appellate court ruled, however, that the trial court erred in concluding that La. Rev. UCC § 5-108(b) "provided the relevant time for giving notice in this case." It rejected the trial court's conclusion that the lack of a definition of "without delay" in UCP400 Article 16(d) entitled the court to look to the UCC for its meaning. "The terms of UCP 400 (requiring notice "without delay" after "issuing bank decides to refuse the documents") are clear and unambiguous, and they conflict with the terms of section 10:5-108(b) to the extent that the latter provides that notice of dishonor and of discrepancies in the presentation is always timely if given within three business days of presentment. Thus, this court should apply only the terms of the UCP 400 to this case", looking to Rev. UCC § 5-116(c).

The intermediate appellate court cited Kuntal, S.A. v. Bank of New York, 703 F. Supp. 312, 313-14 (S.D.N.Y. 1989) (quoting Bank of Cochin Ltd. v. Manufacturers Hanover Trust Co., 808 F.2d 209, 213 (2d Cir. 1986) to the effect that "the phrase ['without delay'] is akin to 'immediate (at once), instant, instantaneous, instantly, prompt.' All of these synonyms connote a sense of urgent action within the shortest interval of time possible." It ruled that "Article 16(d)'s requirement that an issuer give notice 'without delay' commands that it give notice as quickly as reasonably possible after it has decided to dishonor a draw. Because the language of the UCP 400, Article 16(d) is clear, although other sources of law or other articulations of customary practices may provide specific time periods during which an issuer['s] notice of dishonor will always be timely, such sources are not controlling in this case." The opinion noted that "[w]hat constitutes "without delay" depends on the facts of each case." Noting that Issuer had decided to refuse on Monday 17 Fed 2003 and waited until Thursday 20 Feb 2003 to give notice, the opinion stated Issuer "clearly did not notify [Beneficiary] 'without delay by telecommunication' (or otherwise) that it would not honor the presentation."

In passing, the opinion noted that the letter sent on the 17th was "not notice 'by telecommunication'" and, in any event, did not arrive until the 21st. It stated "These communications cannot be considered notice 'without delay' as they were by no means within the shortest reasonably possible interval. [Issuer] could have easily replied to [Beneficiary] virtually immediately, or at least in fewer than three days, by simply picking up the telephone and calling the company or faxing the February 17 letter to it."

6. UCP400 Article 16(d); Disposition of the Documents: Beneficiary also argued that the notice failed to advise "whether [Issuer] is holding the documents at the disposal of, or is returning them to the [Beneficiary]" as required by UCP400 Article16(d). The opinion noted that Issuer did not dispute this contention.

7. Preclusion; Knowledge of Defects: Issuer argued that the preclusion rule of UCP400 Article 16(d) was subject to an exception where the beneficiary presented documents that it knew were defective. Given that Beneficiary did not have the original version of the telefax, the trial court ruled that the preclusion rule should not be enforced because it had knowingly presented a non-complying document. The trial court had relied on the decision in Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir. 1983) for the proposition that where "a beneficiary knowingly presented defective documents, the issuer was not required by the UCP to notify the beneficiary of the precise reasons it would not accept the nonconforming documents when it dishonored the beneficiary's request to draw."

Stating that this decision had been "improperly" applied, the appellate opinion concluded that Philadelphia Gear was "distinguishable from the present case in multiple respects." The appellate opinion listed the distinctions as 1) the LC in Philadelphia Gear was subject to UCP290 which did not require a specification of the discrepancies; 2) the preclusion rule of UCP290 was not clearly linked to the failure to give timely notice; 3) the applicable statute, Prior UCC § 5-111 (Warranties on Transfer and Presentment) contained a beneficiary warranty of compliance, a provision not contained in Rev. UCC § 5-110 (Warranties). The appellate opinion noted two federal appellate courts, the 11th Circuit and the 2nd Circuit, had refused to apply its rule to a UCP400 credit. The court noted the decision in Voest- Alpine Trading USA Corp. v. Bank of China, 288 F.3d 262 (5th Cir. 2002) which gave effect to the preclusion rule of UCP500 Article 14 (Discrepant Documents and Notice) in a situation where the beneficiary has knowingly presented discrepant documents. The appellate opinion also noted the acknowledgment in Voest-Alpine that "beneficiaries often present defective documents to issuers when drawing on letters of credit in part because the applicant may waive the deficiencies in presentation."

8. Preclusion; Incurable Defects: Issuer also argued that the preclusion rule did not apply where the defect was incurable, citing LeaseAmerica Corp. v. Norwest Bank Duluth, 940 F.2d 345 (8th Cir. 1991), a case decided under UCP400. The appellate opinion noted favorable dicta in a ruling in a 5th Circuit decision, Heritage Bank v. Redcom Laboratories, Inc., 250 F.3d 319 (5th Cir. 2001). The appellate opinion noted, however, that this exception had been rejected in other decisions. The appellate opinion noted several technical distinctions between the facts in the cases applying the incurable defect exception and the instant case. It concluded, however, that in any event the exception would not be adopted by Louisiana courts. The appellate opinion stated that Rev. UCC § 5-108, adopting a "strict preclusion" rule analogous to that of the UCP, was said to "plainly [indicate] the legislative intent to apply a rule of strict preclusion, rather than prejudice to the beneficiary, in respect of the issuer's failure to timely give notice of dishonor and defects in the presentation."

9. Preclusion: Accordingly, the appellate court ruled that the failure to give timely and adequate notice precluded issuer from asserting that the documents were discrepant notwithstanding beneficiary's knowledge that the presentation was defective or that the defect was incurable.

10. Damages; Rev. UCC § 5-111: In reversing the trial court, the appellate court ordered that the Beneficiary be awarded the amount drawn, plus interest, less payments that had been made for the purchase of pipes plus attorneys' fees and litigation expenses related to the LC, applying Rev. UCC § 5- 111(e) (Remedies).

11. Reliance; Misrepresentation: Beneficiary had alleged that Issuer was liable with respect to representations made by its employee to the effect that Beneficiary could perform under the contract. The appellate court affirmed the award of summary judgment to Issuer, noting that both claims require justifiable or reasonable reliance. The appellate opinion stated that it was not reasonable for Beneficiary to "rely on the terms of the credit instead of oral representations from [Issuer's] representatives in determining whether to ship the pipe."

Comment:

1. Originals. This decision addresses an issue that has not received careful consideration heretofore in letter of credit practice, namely what is meant by the term "original" with respect to a letter of credit where the "original" must be presented in order for the presentation to be complying. The only context in which originality has been formally considered in standard international letter of credit practice is with respect to a letter of credit sent via telecommunications. In the first half of the 20th Century, it was common for banks to send credits to correspondents via telegraph (afterwards by tested telex) and also a confirmation by mail. In such a situation, the question arose as to what constituted the operative instrument, the telecommunication or the mailed confirmation where the credit referred to the mailed confirmation with terms such as "mail confirmation to follow". UCP82 (1933) Article 9 and its subsequent revisions treated the mailed confirmation as the original where the credit contained this phrase. The rule was revised in UCP290 (1971) Article 4(a) which provided that, unless the credit expressly provided that the mail confirmation was the operative instrument, the electronic version was the operative instrument. This rule is retained in UCP600 Article 11(a) (Teletransmitted and Pre- Advised Credits and Amendments)

2. As noted by the Louisiana intermediate appellate court, these provisions are not controlling since the question raised by the issuer's conduct is a different question than that resolved by the predecessors of UCP600 Article 11(a). In that situation, the credit would make it apparent by its terms that there were two candidates for being the original operative instrument. In the LaBarge case, the only credit received by the beneficiary was the telefax with no indication that there was another candidate for original.

3. It should be noted that where electronic communications were used under the UCP, there would have been no question as to which was the operative instrument where the credit itself did not state that a mail confirmation was to follow. In such a situation, the telecommunication would have been regarded as the operative instrument under either approach. The principle underlying this rule is that the issuer bore the risk of there being more than one candidate for "original" where a mail confirmation was used.

4. The Louisiana intermediate appellate court, however, distinguished between the notion of an operative instrument and the original that must be presented under the credit. While noting that there was no definition of "original" with respect to the credit, it concluded that the "plain meaning" of the term was that it was the document that was the basis for the telefax, drawing comfort from the definition of "original" in Black's Law Dictionary. This approach, however, overlooks the role of originality in standard international letter of credit practice to which the court's attention is directed by Revised UCC Sections 5-108(e) (Issuer's Rights and Obligations) and 5-116 (Choice of Law and Forum). While not defined, the meaning of originality is discoverable by analysis based on standard international letter of credit practice and sound principles of interpretation.

5. With respect to the document that must be presented as the original letter of credit, an original is the document that gives rise to the issuer's obligation, namely the instrument that was issued. It is certainly the case that the issuer could send a sample or draft of the credit that it proposed to issue to the beneficiary to determine whether it was satisfactory. When banks do so, they carefully note that it is a "sample" or "draft" and otherwise qualify its communication so that there can be no confusion as to whether or not what is transmitted is the letter of credit. Where the bank fails to do so, it should bear the risk of any confusion or loss since the credit should be interpreted against the issuer with respect to ambiguity.

6. The real question, one that is overlooked by the trial and appellate courts, is whether and when the credit was issued. Issuance occurs when the credit leaves the control of the issuer. Under the court's approach, it is unclear whether or when the credit was ever issued. The reason for this confusion is that the bank either delivered to the applicant the form that was telefaxed or kept it. In either event, it was lost and never delivered to the beneficiary.

7. If the court is correct about which is the "original", it must insist on a determination of whether or not the credit was ever issued. Unless it was, the bank can have no obligation. That it is unclear from the opinion whether there was a finding about issuance signals that the court does not appreciate what is an original for purposes of the letter of credit, namely the instrument whose delivery gives rise to and represents the obligation of the issuer. Had the bank held on to the form it used for the telefax and not delivered it to the applicant, it would have no obligation because there was no issuance of "the credit".

8. From the perspective of the beneficiary, the delivery of the letter of credit occurred when it received the telefax. What happened to the source of the telefax is irrelevant. If held by the issuer, there could be no problem of a duplicate credit. If given to the applicant, there could be no harm. With or without the credit, the drawing can only be made by the beneficiary. The credit was not transferable and, in any event, any transfer would have had to have been effected by the issuer since the credit is straight and there are no nominated banks.

9. The fact that there is a source of the telefax (i.e. the paper or computerized version) may from a technological perspective suggest that the source was the "original". It is the "original" of the telefax but from the perspective of letter of credit practice, the "original" credit is the communication delivered to the beneficiary unless the issuer has qualified this communication in some apparent manner.

10. It should be noted that a letter of credit is not a negotiable instrument in which a photocopy is clearly not the "instrument". It should also be noted that the cases cited by the Louisiana intermediate appellate court regarding the presentation of copies are inapt. In those cases, there is no doubt that there was an original and in such a case a photocopy is not the same thing.

11. Equally specious is the comment in the footnote to the effect that the form from which the telefax was sent had to be "the original" since the credit provided for multiple presentations and required that they be noted. Such a requirement is applicable where presentation can be made to a nominated bank in addition to the issuer. In the first place, the only place to which a presentation could be made was the issuer. The requirement is one that has no practical effect since the issuer would determine from its records whether there was any balance owing on the credit. In the second place, the telefaxed version could serve this purpose as well as the form used to send the telefax.

12. Given the deviation of the issuer from standard international letter of credit practice in regard to the issuance of this letter of credit, the issuer should bear the risk of any ambiguity as to originality.

13. It is useful to have a decision from the US Court of Appeals for the Fifth Circuit disapproving further reference to its widely discredited Philadephia Gear decision regarding preclusion. It was wrong when issued, confusing estoppel with preclusion and misinterpreting UCP290. With even greater specificity under subsequent versions of the UCP, it remains wrong.

14. With respect to the court's ruling on reasonable reliance, one wonders whether it was reasonable as a matter of law to think that the beneficiary would rely on the issuer's interpretation of the meaning of "original". As pointed out, there is more than one reasonable meaning of what constituted an "original". The court seems to think that the definition of the term answers the question of what is an original whereas it only defines the term. The problem is not in the definition but in its application to the facts which is not a matter of looking at dictionaries but of practice and the realistic impression given the beneficiary by the words and conduct of the issuer. It would be quite a different matter if the issuer had stated that it was supplying the text for reference and that the "original" would be forthcoming. But it did not do so. Instead, its employee represented that the beneficiary could act as if the telefax were the original and took no measures to cause what it later claimed to be the "original" to be issued to the beneficiary.

[JEB/krp]

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