Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2010 LC CASE SUMMARIES 69 UCC Rep.Serv.2d 180, 2009 WL 1393569 (C.D. Ill. May 18, 2009) [USA]
Topics: Evergreen Clause; Wrongful Dishonor; Irrevocable Letter of Credit; Automatic Extension; Notification of Non-Extension; US Rev. UCC § 5-108(d)
Type of Lawsuit: Beneficiary sued Issuer for Wrongful Dishonor.
Parties: Plaintiff/Counter Defendant/Beneficiary- Old Republic Surety Co. (Counsel: Harold E. McKee and Stephanie M. Keddy of Riordan, McKee & Piper, LLC, Chicago, IL.)
Defendant/Counter Claimant/Issuer- Quad City Bank & Trust Co. (Counsel: Christopher P. Jannes of Davis, Brown, Koehn, Roberts & Shors, PC, Des Moines, IA.)
Underlying Transaction: Unknown.
LC: Clean Irrevocable Letter of Credit for unknown amount. Silent as to governing rules.
Decision: The United States District Court for the Central District of Illinois, Mihm, J., applying Illinois Revised UCC Article 5, granted Beneficiary's motion for judgment on the pleadings in the amount of US$119,192.03, together with interest from the date of the wrongful dishonor, reasonable attorney's fees, other expenses of litigation, and denied Issuer's motion for summary judgment.
Rationale: Where a credit contains an automatic extension clause providing for non-extension on notice, Issuer must clearly and unequivocally communicate its intent not to renew.
Article
Factual Summary: Bank (Issuer) issued an LC in favor of Beneficiary, stating:
"We warrant to you that all your drafts under this CLEAN IRREVOCABLE LETTER OF CREDIT will be duly honored upon presentation of your draft drawn on us at 3551 7th Street, Suite 100 Moline IL 61265 on or before the expiration date or on or before any automatically extended date as set forth.
This CLEAN IRREVOCABLE LETTER OF CREDIT expires on 02/06/08, but will be automatically extended for one year terms if [Beneficiary] ha[s] not received by certified mail notification of our intention not to renew 30 days prior to the original expiry date and each subsequent expiry date."
On 7 January 2008, Issuer sent a telefax to Beneficiary stating:
This CLEAN IRREVOCABLE LETTER OF CREDIT expires on [6 June 2008], and is not automatically renewable without notification from Quad City Bank and Trust Company."
The cover sheet stated that "[a]n original hard copy was sent certified mail today."
On 12 August 2008, Beneficiary sent a sight draft to Issuer in the amount of US$119,192.03. On 27 August 2008, Issuer refused to honor Beneficiary's sight draft. Beneficiary then sued Issuer, claiming that Issuer wrongfully dishonored. The trial court granted judgment on the pleadings to Beneficiary.
Legal Analysis:
1. Notice of Non-Extension, Mode of Notice: Beneficiary argued that the notice of nonextension was not adequate because it was not sent by certified mail or provided in the LC. The District Court ruled that the telefax constituted a sufficient form of notice, even though it was not by certified mail. It stated "what while many notice-giving rules were drafted in terms relevant to paper-based systems, the rationale and purpose of the rule can be met by an electronic notice, which is often more effective and timely." The District Court also stated "even though it finds the fax transmission to be a sufficient form of notice, it would encourage the drafter (or any party) to strictly comply with the terms of a letter of credit or any type of contract."
2. Notice of Non-Extension, Sufficient Notice: The District Court stated that the facsimile did not sufficiently notify Beneficiary of Issuer's intent not to renew the LC. According to the Judge, the language of the nonrenewal notice needed to be "clear and unequivocal," and the clearest notice of the nonrenewal would have tracked the language of the evergreen clause and stated "This CLEAN IRREVOCABLE LETTER OF CREDIT expires on 06/06/08, and Quad City will not renew beyond that date."
Comment:
1. Preclusion? While the opinion mentions that the notice of refusal was sent on 27 August following a demand on 12 August, it does not mention preclusion. Had the notice of non extension been effective, the question would have arisen as to whether or not a notice of refusal was required for an expired credit. The question is resolved under US Revised UCC Section 5-108(d) which provides that "[f]ailure to give the notice specified in subsection (b) [notice of refusal] or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery as described in Section 5-109(a) or expiration of the letter of credit before presentation." ISP98 Rule 5.04 (Notice of Expiry) contains a similar rule. No such rule is present in UCP600 or URDG 758.
2. Two LCs? While the opinion concludes that the communication to the beneficiary was not an effective notice of non-extension, it does not consider what the communication is. A serious argument can be made that the communication is a second LC. While there can be no doubt that the bank did not intend to issue another LC, what it wrote controls and not what it intended.
[JEB/sal]
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.