Article

Factual Summary: As part of venture capital financing arrangement for the purchase of two plastic bottling machines, Buyer was required to provide a commercial standby in favor of Seller to cover the unfinanced balance of US$ 388,000. The standby required presentation of i) a dated original certificate stating that Seller/Beneficiary had not received payment from Buyer within 60 days of shipment; ii) copies of unpaid invoices for the merchandise; and iii) copies of bill of lading for the merchandise indicating the shipment date.

The goods were shipped on 3 May 2006 and, having not received payment, on 28 July Beneficiary demanded payment. On the day of presentation, which was also the day of expiration, Issuer sent a "Notice of Discrepancies" indicating refusal by telefax. The opinion indicated that the refusal was:

[D] ue to discrepancies between the format of the Draw Request and the format required by the Letter of Credit. Specifically, [Issuer] informed [Buyer] that: (1) the certification of [Buyer's] representative was not dated as required by the Letter of Credit; (2) the serial number shown on one invoice did not match the serial number on the Letter of Credit; and (3) the description of the merchandise on the bills of lading did not match the description of the merchandise on the Letter of Credit.

On the fax cover sheet, the Bank stated, "We are in the process of contacting the customer to see if they are willing to waive the discrepancies." The Bank, however, did not attempt to contact [Applicant] within the 36 minutes remaining before the Letter of Credit expired, nor at any later time.

Although Applicant/Buyer indicated it was prepared to waive the discrepancies, Issuer refused and when Beneficiary re-presented the documents, Issuer refused them due to the standby having expired.

Beneficiary then sued Issuer for a declaration that payment was due under the standby. The trial court entered partial summary judgment in favor of Beneficiary.

Legal Analysis:

1. UCP500: Issuer argued that Beneficiary was required strictly to comply with the LC and Beneficiary argued that substantial compliance should suffice. The Judge noted that neither local state courts nor the 6th Circuit have opined on the proper standard. Based on the arguments of counsel, the Judge concluded that UCP500 was "applicable" in determining compliance.

2. Strict Compliance: Issuer argued that the documents failed to meet the strict compliance standard. While noting that documents that are "nearly the same" do not comply, the Judge stated that "nonmeaningful errors, such as obvious typographical errors, will not justify a bank's refusal to honor a letter of credit. Additionally, under the strict compliance standard, discrepancies between the demand for payment and the terms of the letter of credit will also not justify a bank's refusal to honor the letter of credit when there is no possibility that the bank could have been misled by the discrepancies to its detriment." The Judge noted the inconsistency rule of UCP500 Article 13(a) provides that "documents which appear on their face to be inconsistent . . . will be considered as not appearing on their face to be in compliance with the . . . [letter of] [c]redit," but relying on the trial court decision in Voest-Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940, 944 (S.D. Tex. 2000), stated that "courts interpreting the UCP have held that individual documents presented in a demand for payment must be viewed in light of all documents presented in order to determine whether the documents obviously relate to the same transaction."

3. Compliance, Date: As to the undated certification, Issuer argued that "the absence of a date on the certification could have drawn its validity into question." It noted that "the Letter of Credit only authorized [Beneficiary] to obtain payment from the Bank if [Applicant] failed to make payment to [Beneficiary] within sixty days of shipment of the machines." Disagreeing, the Judge noted that the cover letter accompanying the presentation was dated 28 July, referred to the LC, and "was signed by the same [Beneficiary] representative that signed the Certification. Clearly Issuer] could not have been misled by the absence of a date on the signed certification."

4. Compliance, Serial Numbers of Goods: Issuer had based its refusal in part on the failure of the serial number shown on one invoice to match that on the LC. The Judge stated that "[t]he serial number at issue was listed on the Letter of Credit as 'NO1A010088.' Invoice number 423-X-152 listed the serial number as 'N01A0100088.'" The Judge recognized that "the differing serial numbers could possibly be viewed as having the potential to mislead the Bank." He stated, "[h]owever, invoice number 423-X-152 also contained a description of the merchandise identified by serial number 'N01A0100088.' The description of the merchandise in the invoice was identical to the description of the merchandise in the Letter of Credit. Given that the serial numbers differed by one '0' and that the merchandise description was identical, the court finds that the differing serial numbers were the product of an obvious typographical error. Such a discrepancy does not justify the Bank's refusal to honor Uniloy's Draw Request."

5. Compliance, Description of Goods in the Bill of Lading: Issuer had also based its refusal on the failure of the description of the goods in the bill of lading to "match" that on the LC. The credit had described the goods as "1) Uniloy Model UR8X7- 7PNE CBTR Blow Molding Machine Including Molds and Tooling-Serial Number: N01A010088 and 1) Uniloy Model UR6X9-7PNE CBTR Blow Molding Machine Including Molds and Tooling-Serial Number: N01A0100089." The bills of lading described the merchandise as:

Customer Order No. 12 Customer Order No. 13 (1) Uniloy R2000 B.M.M (1) Uniloy R2000 B.M.M S/N N01A0100089 S/N N01A0100088

The Judge agreed with Issuer that "the description of the merchandise in the bills of lading, 'Uniloy R2000 B.M.M,' is not the same as the description in the Letter of Credit, 'Uniloy Model UR6X9-7PNECBTR Blow Molding Machine' or 'Uniloy Model UR8X7- 7PNECBTR Blow Molding Machine.' However, although the description of the merchandise on the bills of lading differs from the description of the merchandise on the Letter of Credit, the serial numbers on the bills of lading match the serial numbers on the Letter of Credit . . . with the exception of the typographical error discussed above." The Judge also noted that "the serial numbers on the bills of lading also match the serial numbers on the invoices. The bills of lading and the invoices clearly relate to the same transaction. Such invoices contain a merchandise description identical to the merchandise description in the Letter of Credit. Given that the bills of lading, when viewed in light of the invoices, clearly relate to MAB's purchase of one 'Uniloy Model UR8X7-7PNE CBTR Blow Molding Machine' and one 'Uniloy Model UR6X9-7PNE CBTR Blow Molding Machine' this court cannot find that the Bank could have been misled based on the discrepancy between the merchandise description on the bills of lading and the Letter of Credit."

6. Equitable Estoppel: Beneficiary argued that it relied on the representation by Issuer that it would contact Applicant about waiving the discrepancies. Since Issuer never contacted Applicant, Beneficiary claims that Issuer should be estopped from relying on the discrepancies to refuse the presentation. Since Beneficiary's presentation was in strict compliance with the LC, the Judge did not address the equitable estoppel claim and dismissed it as moot.

7. Rehearing: The order of Judge Charles R. Simpson III was dated 22 April 2008. Issuer sought reconsideration due to the fact that "both parties inadvertently misidentified the International Chamber of Commerce ("ICC") publication governing the letter of credit at issue in this case. In their cross motions for summary judgment, both [Issuer] and [Beneficiary] stated that ICC Publication No. 500, Uniform Customs and Practice for Documentary Credits ("UCP") governed the letter of credit. [Issuer] now states that the parties were mistaken and that the actual governing publication is ICC Publication No. 590, International Standby Practices 1998 ("ISP 98). [Issuer] contends that when examined through the lens of ISP 98, [Beneficiary's] demand for payment did not achieve strict compliance with the terms of the letter of credit." The U.S. District Court for the Western District of Kentucky, Simpson, J., denied the motion.

Issuer argued that "because [Beneficiary's] cover letter was not required by the letter of credit to be included in the demand for payment, the court should not have considered the date on the cover letter," relying on ISP98 Rule 4.02 (Non-Examination of Extraneous Documents). The Judge rejected this argument, stating that apart from the cover letter "there is no possibility that [Issuer] could have been misled by the absence of the date to its detriment . . . . As required by the letter of credit, [Beneficiary] submitted bills of lading evidencing the shipment date of the machines. The bills of lading indicate a shipment date of May 3, 2006. [Issuer] did not receive [Beneficiary's] demand for payment until July 31, 2006. After examining the bills of lading and comparing the shipment date with the date on which it received the demand for payment, [Issuer] would have clearly been aware that [Beneficiary's] demand for payment was made more than sixty days after the shipment date."

Comments:

1. Given the rather remarkable failure of counsel to note that the standby was subject to ISP98, the decision invites analysis under both UCP500 and ISP98 and a comparison of the differences.

2. As to the LC requirement that the certification be dated, most banks would regard the absence of a date, per se, as a discrepancy. The reality is that this requirement is often clerical and mindless. It is interesting that Issuer felt required to advance a rationale as to the significance of the date, namely that the Issuer was entitled to documentary assurance that the 60 days from the shipment date had passed. Once it is conceded that the date requirement must be rational, the court's conclusion that it can be determined from the documents follows.

3. The principle on which the decision is fixed is that a discrepancy must be considered in light of the presentation as a whole. This principle was set forth in the trial court decision in Voest-Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940, 944 (S.D. Tex. 2000), aff'd on other grounds, Voest- Alpine Trading USA Corp. v. Bank of China, 288 F.3d 262 (5th Cir., Apr 23, 2002). This decision has attracted a remarkable following, in large part because it satisfies a compelling need in commercial law for a principled reason for the doctrine of strict compliance. Such principles are notably absent from the specious so-called "substantial compliance" approach, linked to being "close to the mark" [whatever that means] and subject to the rudderless ad hoc treatment of each set of facts. It is similarly lacking from the wooden school of mindless exactitude, as well. Neither approach reflects strict compliance which requires a bank to examine the date on a document as a whole and in the context that the document plays in the LC transaction.

4. As to the serial number, the Judge's decision, based on a finding of a typographical error, is consistent with several recent interpretations of the ICC Banking Commission regarding UCP600. The fact that the typographical error occurred in the description of the goods in the invoice may give pause but an apparent typographical error is just that. Moreover, the judge and probably the parties overlooked the fact that the LC required a "copy" of the invoice in a commercial standby, bringing into question whether UCP500 Article 37 is even applicable.

5. As to the description on the bill of lading, it is difficult to conclude that it is in a general term not inconsistent with that in the credit. On the other hand, the Judge did find linkage through dates in the document to other documents.

6. Having recognized that the standby was subject to ISP98, the Judge determined that the alleged discrepancies were still unfounded. The only argument addressed relates to the date of the certificate and whether the court can properly look to the cover letter. Interestingly, ISP98 Rule 5.08 (Cover Instructions / Transmittal Letter) recognizes the cover letter for certain purposes regarding presentation whereas UCP500 (and UCP600) ignore its existence. The fact that the ISP recognizes the relevance of the cover letter regarding payment instructions does not justify a conclusion that it would be irrelevant in determining the date (or latest date) of the documentation.

7. As to the other alleged discrepancies, ISP98 Rule 4.20 (Other Documents) provides that documents such as copies of invoices and transport documents are not to be examined under commercial LC rules for such documents. Therefore, these documents are to be examined in light of the standby requirements and as to whether the document is appropriately titled or serves the same function. Moreover, ISP98 Rule 4.03 (Examination for Inconsistency) prohibits refusal based on inconsistency between documents (not with the LC) except as specified in the standby. Under these rules, the test would be whether the invoice and bill of lading relate to the same transaction as does the standby.

8. Interestingly, the Judge does not refer to Rev. UCC § 5-108 and its reference to strict compliance although his decision is consistent with Revised UCC Article 5's approach to strict compliance.

The text of the first page of the standby in Uniloy follows. The second page contained only a signature.

Note: There was one amendment that extended the expiry date to 31 July 2006.

View first page of standby

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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.