Article

Factual Summary: When US Buyer of swimwear was in arrears US$5,923,172.26, Taiwanese Seller required Buyer to provide letters of credit. Unable to obtain LCs, Buyer contracted on open account with Factor who obtained a series of more than forty LCs from bank (Issuer).

Buyer repaid its past debts from portions of the proceeds from these LCs. In order to accelerate repayment, Seller expedited shipments to Buyer, sometimes shipping before an LC was even issued and often either releasing the goods or using a waybill instead of a document of title. Almost invariably, Issuer refused presentations on these LCs due to various discrepancies. The LCs required presentation within twenty-one days of shipment. Over time, however, the LCs were issued closer to the shipment date and eventually all the LCs were issued after the goods had been shipped, making it difficult or impossible for Beneficiary/Seller to make timely presentation. There were seventeen such LCs accounting for one hundred seventy shipments. For forty-seven times when these presentations were discrepant, Issuer and Factor/Applicant approved waiver of discrepancies.

As Buyer's financial situation deteriorated, Factor declined to waive discrepancies on the three presentations that were the subject of this action amounting to a combined total of US$1,394,971.50. Seller had released the goods on these LCs, giving Buyer control of them when they were shipped. When Buyer's assets were liquidated they included the goods shipped by Beneficiary/Seller and the proceeds were paid to factor.

Beneficiary/Seller claimed that Factor "decided to allow Beneficiary to ship goods . . . to [Buyer] with the intention of subsequently authorizing the issuance of L/Cs for the goods that [Issuer] would not have to pay . . . by not waiving the discrepancies in the documents." "[Factor] decided to allow [Beneficiary] to ship goods . . . to [Buyer] with the intention of subsequently authorizing the issuance of L/Cs for the goods that [Issuer] would not have to pay . . . by not waiving the discrepancies in the documents . . . ." Seller then sued Factor for fraudulent concealment, breach of contract, unjust enrichment, and conversion and sued Issuer for wrongful dishonor. On cross motions for summary judgment, the trial court entered summary judgment in favor of Factor and Issuer and denied it to Beneficiary/Seller. On appeal, affirmed.

Legal Analysis:

1. Applicant; US Rev. UCC § 5-102(a)(2): The appellate court stated that it was undisputed that Factor was an "applicant" within the meaning of US Rev. UCC § 5-108(a)(2) (Definitions) and ruled that the contract between Issuer and Factor could not alter Factor's status as "applicant" on the LC.

2. Obligation of Applicant to Beneficiary: Where the Applicant is a surety for the buyer with no relationship to the Seller/Beneficiary and there is no implied contract in favor of Seller in the contract with the Buyer, there is no action available to Seller against Applicant for breach of contract. Nor was there any fraudulent concealment by Applicant of its decision to stop waiving discrepancies since there is no contractual duty to disclose its decision. In addition, the appellate court ruled that Factor/Applicant was entitled to refuse to waive discrepancies and to exercise its separate rights as a secured creditor against the goods, making the claim of unjust enrichment untenable.

3. Waiver: The appellate court concluded that cases cited by Seller/Beneficiary were inapposite because there was no proof that Factor had waived the discrepancies with respect to the specific presentations at issue.

4. Covenant of Good Faith; US Rev. UCC § 5-108 (Issuer's Rights and Obligations); US Rev. UCC § 5-111 (Remedies): The appellate court ruled that past waivers by Issuer of discrepancies in prior presentations did not obligate it to continue to do so, thereby causing Seller/Beneficiary's claim of violation of a covenant of good faith to fail. Moreover, the court ruled that an action against Issuer for wrongful dishonor was the exclusive remedy available to the beneficiary.

5. Presentation: Seller/Beneficiary argued that each of the sets of documents covered by invoices constituted a separate presentation with the result that only two of the five invoices were discrepant. The appellate court rejected this argument, noting that Seller/Beneficiary had failed to raise an issue of material fact in that uncontested expert opinion by means of affidavit established that "the words 'drafts at . . . at sight' in Field 42C of the letter of credit mean that a sight draft must be presented to obtain payment under the letter of credit. Because a draft is required, the presentation of a single draft and multiple invoices constitutes a single presentment, which must be honored or dishonored as a whole."

Comment

This opinion is significant for several reasons, regarding an action between applicant and beneficiary, claims for breach of a covenant of good faith against the issuer, and with respect to what constitutes a presentation.

The opinion indirectly suggests that there is no basis for an action by a beneficiary against a surety who is the applicant on the basis of the applicant's contractual obligations with respect to the issuer or the beneficiary's counterparty. Under Revised UCC § 5-110(a) (Warranties), indeed, the only right of action is an action by the applicant.

The availability of an action against the issuer predicated on a covenant of good faith would undermine the certainty and predictability of letter of credit law and practice. The court properly rejected this theory.

On the question of presentation, the effect of the decision is to permit the parties to determine what constitutes a presentation by their behavior or the terms of the LC. Here, the beneficiary could have made separate presentations, using separate drafts or one presentation using one draft. It elected to do the latter. While the distinction is formal, so are most distinctions in LC practice. Any other result would have left open the question of whether in such a case the issuer must give separate notices of refusal or be precluded from asserting that there were discrepant documents. A bright line rule predicated on the forms used by beneficiary is the safest way to make this situation clear.

[JEB/naa]

1. Although the decision does not indicate the rules to which the LCs were subject, the Institute has had access to the three LCs.

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