Article

Factual Summary: To assure that Buyer would fulfill the agreed 90-day payment term in a contract for the sale of scooter components, Issuer issued three commercial standby letters of credit subject to UCP600 in favor of Seller. In the first and third LCs, Beneficiary was described as "PIAGGIO AND C.S.P.A./APRILIA". In the second LC, Beneficiary was described as "PIAGGIO AND C.S.P.A. (APRILIA)". Beneficiary's corporate name is "Piaggio & C.S.p.A." The opinion stated that "Aprilia" is the brand name of a scooter manufactured by Seller. The addresses were the same on all three LCs.

As stated in the opinion, the standby required "drafts at sight, indicating L/C number and date accompanied by: a) a signed statement certifying that the amount drawn under the letter of credit is due and payable by [Buyer/Applicant], that the beneficiary has requested payment of the amount from [Buyer/ Applicant] and has not received payment; and b) the original letter of credit."

Each standby was amended multiple times. Throughout its correspondence (on multiple occasions), including that related to the amendments, Issuer described Beneficiary as "Piaggio and C.S.P.A." When signing the amendments to indicate consent, Beneficiary typically referred to itself as "Piaggio and C.S.p.A" and once as "PIAGGIO AND C.S.P.A. (APRILIA)".

When attempting to draw on the letters of credit, Beneficiary's demand was made on letterhead bearing the name "Piaggio & C.S.p.A.". Issuer decided that the difference between this name and that listed as beneficiary on the LCs was a material difference, and, as a result, refused to honour the drawings under three LCs. Issuer also refused to honour the presentation on the first LC because the original copy of one of the amendments was missing. Although Issuer also found other discrepancies, namely the absence of Issuer's postal code and the word "Canada" or the name of the Issuer being stated as "Nova Scotia Bank" instead of "Bank of Nova Scotia", it concluded that they were not material. The Issuer also took the position that the difference between "&" and "and" was not material. It took the position, however "that the absence of '/Aprilia' or '(Aprilia)' in the presentation documents for these three letters of credit [was] indeed material and prevented it from paying." The opinion noted that Issuer had previously issued and honoured another LC in favor of Beneficiary where the named beneficiary was "Piaggio and C.S.P.A.".

When Issuer asked Applicant to waive the material differences, it refused, citing disagreements with Beneficiary regarding the underlying transaction. Issuer informed Applicant that if Beneficiary made a complying demand, Issuer would honour it notwithstanding disagreements in the underlying transaction.

When Beneficiary sued Issuer for wrongful dishonour, the court dismissed the action, awarding costs to Issuer.

Legal Analysis:

1. Compliance, Standard of; Strict Compliance; UCP600 Article 2 (Complying Presentation); UCP600 Article 14 (Standard for Examination of Documents); Independence; "Minor Discrepancies". Based on UCP600 Article 2's definition of "Complying Presentation", the Judge stated that compliance under UCP600 must be determined in light of the terms of the undertaking, the provisions of UCP600, and "international standard banking practice". She reduced this standard to the notion that LCs are "generally strictly construed according to their terms." In part, the Judge attributed this principle to the autonomy principle that the LC undertaking is separate from the underlying agreements that gave rise to it. The Judge stated that "[b]ecause [Issuer]'s obligation to pay is strict, so is the beneficiary's obligation to comply strictly with the terms and conditions of the credit." The Judge also articulated a corollary to this principle, namely that "the beneficiary has a responsibility to examine the terms of the credit before accepting it." However, the Judge recognized that "what have been described as 'minor discrepancies' between the letter of credit itself and the demand made under it are not fatal to its enforcement." She added:

"Minor variations may relate to the use of words in the singular, rather than plural, superfluous adjectives descriptive of the goods, and numbers in sets rather than in totals. Strict compliance does not relate to obvious typographical errors either in the credit or the documents." (¶45)

The Judge then used this distinction between strict compliance and a minor discrepancy to explain her task, namely to determine how to classify the differences in the names of the beneficiary.

2. Beneficiary, Name; Draft; ISBP (2007) ¶¶ 52 & 53; Typographical Error. Citing ISBP ¶¶ 52 & 53 (2007), the Judge stated that "the draft must be drawn by the party stated in the credit, and must be drawn by the beneficiary." Beneficiary argued that "in light of all the documents passing between itself and [Issuer] there can be no question it is the only entity that could possibly be the proper beneficiary under the letters of credit." (¶39). Beneficiary referred to a series of communications to Beneficiary and SWIFT messages in which Issuer referred to the beneficiary as "Piaggio and C.S.P.A." and the identity between the name and address in each of the letters of credit and all of the documents. Moreover, Beneficiary noted that "there is no legal entity called either Piaggio & C.S.p.A./Aprilia or Piaggio & C.S.p.A. 'Aprilia'". (¶44)

The Judge stated that "the correct name of the beneficiary is fundamental" (¶46), noting that Issuer would have to look beyond the face of the documents to make this determination and that addition of the term "Aprilia" is not a typographical error. The Judge rejected the Beneficiary's reference to GAN General Insurance Co. v. National Bank of Canada, 1998 Ont. C.A. LEXIS 890 (Ont. C.A. 1999) [Canada] (abstracted at 2000 ANNUAL SURVEY 319), stating that unlike GAN, Beneficiary "offered neither an indemnity, nor has it provided an affidavit to [Issuer] confirming that [Beneficiary] is one and the same as the beneficiaries described in the letters of credit." (¶51) The Judge stated that "[i]t seems to [her] if the customer mis-names the beneficiary it is up to the customer or the beneficiary to correct the mistake. It is not up to the bank to determine the true name of the beneficiary. In order to determine if there is only one Piaggio entity, [Issuer] would have had to examine many extraneous documents, and look significantly outside the letter of credit itself. That takes this situation outside of one where there is an obvious typographical error." (¶49) The Judge concluded that "[t]he discrepancy in the name of the beneficiary is not one that on its face can be said to lead indisputably to [Issuer] concluding the beneficiary is the same even though the name in the letter of credit and presentation documents are different" (¶48), noting that in GAN an undisputed true copy was presented and the original document was prepared by the bank.

3. Original Operative Instrument, Amendment. Although each standby was amended multiple times, Issuer only required Beneficiary's acceptance on some of these amendments. The Judge stated that "[w]here [Beneficiary]'s consent was necessary, [Issuer] sent [Beneficiary] the original amendment with a stamp on it" with lines for Beneficiary to fill in. "[Beneficiary] was to fill in the blanks, return a copy to [Issuer] and retain the original amendment itself since each amendment formed part of the letter of credit and would be required if [Beneficiary] were to call on the letter of credit."

Issuer refused the presentation under the first standby in part because Beneficiary failed to present the operative original of the second of six amendments. In place of this amendment, Beneficiary presented a copy.

Beneficiary argued that presenting a copy of the second amendment in lieu of the original, when combined with the rest of the presentation, should have been sufficient, relying again on GAN. The Judge disagreed, stating that "[Beneficiary] has not given an indemnity. It has not provided an affidavit. The case is clearly distinguishable. Here the failure to produce the original amendment precludes [Issuer] paying."

Comments:

1. Rejected Candidates for Refusal. It is apparent that the issuer made a good faith effort to examine the documents, distinguishing between matters that did not justify refusal and those which did. It is correct in its conclusion that the difference between "&" and "and" in the name of the beneficiary would not warrant refusal nor would a reformulation of the name of the issuer from "Bank of Nova Scotia" to "Nova Scotia Bank". The reasons are worth mentioning: It is commonly understood that "&" is an abbreviation for "and" and the substitution of one for the other even in a formal name should not cause any confusion to an issuer. Nor should a restatement of the issuer's own name. Presumably the issuer knows whether or not the credit being drawn on was issued by it, particularly when the original operative credit is also presented. For that reason and because it had received the presentation, the failure to insert "Canada" or the issuer's postal code would not justify refusal under any circumstances.

2. Micro Scrutiny of the Documents. It is also apparent that the issuer scrutinized the documents very carefully, as it was entitled to do. Having listed all the potential discrepancies, its task was to determine which ones warranted refusal.

3. The Issue and Result. The trial court also correctly stated the chief issue before it, namely whether the differences in the name of the named beneficiary warranted refusal. Unfortunately, both bank and court erred in their resolution of this question. One difference between the names as they appear in the standbys and the documents presented related to capitalization, namely "C.S.P.A." following the name "Piaggio &" or "PIAGGIO AND". The opinion does not suggest that either the judge or the bank thought that these differences would warrant dishonour. They do not any more than does the use of "&" in lieu of "and".

4. "Aprilia". The dismissal of this basis for refusal leaves one major difference in the beneficiary's name, namely the failure to include the term "Aprilia" in the letterhead on which the demand was contained. This document only indicated that the demand was being made by "Piaggio & C.S.p.A.".

5. Its Meaning. The term "Aprilia" apparently is the brand of scooter being ordered, a fact that the court correctly informs us need not be investigated by the bank.

6. It's More Than Just the LC. However, the court's reasoning for concluding that the refusal was justified reveals that much more was involved. In the first place, we are told that numerous communications and proposed amendments were addressed by the bank to the beneficiary under all of the standbys under the simple name "Piaggio and C.S.P.A.". The bank acted on these communications and responses as if they came from the named beneficiary. One of the communications also referred to the recipient as "PIAGGIO AND C.S.P.A. (APRILIA)".

7. Sworn Statement. The Judge indicated her conclusion that the bank could legitimately be concerned that the presentation emanated from an entity other than the named beneficiary of the LCs. However, the opinion seems to suggest that a sworn statement explaining the terminology and perhaps stating that there was no similar entity at the address to which the standbys were issued coupled with an undertaking to indemnify and hold the bank harmless would have sufficed.

8. Consequences of Permitting One Fix. If the question is assurance that the entity claiming is the same entity as the named beneficiary, such an approach is one practical means of resolving the question. However, it is not the only one. Given the actions of the bank regarding the amendments and its apparent reliance on the responses from the entity named in them without the addition of "Aprilia", it should not be able to insist that the beneficiary strictly observe naming protocols that it has ignored. The bank could as easily have protected itself by making payment by a check payable to the named beneficiary or insisting that it would only wire it to an account in that name.

9. Why Amend the Credit? While it is correct, as the Judge observes, that the beneficiary is well advised to scrutinize the terms of any LC running to it, this practical observation does not answer the question of what constitutes compliance. It is as likely that any rational business person knowing its name, knowing that "Aprilia" referred to the product it was producing and seeing that the bank apparently understood these matters as was apparent from the various communications, would think it unnecessary to insist on a further amendment to all the standbys which apparently had been amended many times already with accompanying expense and delays. It is equally apparent that any rational business person in these post-9/11 days would not draw in a name under which it did not operate and which was not its name and would use its correct name.

10. Hyper Technical Result. The net result of this opinion is the triumph of a highly technical basis for refusal that will appear irrational to any business person. While there is an important place for technicalities in letter of credit practice and law and the issuer is entitled to assurance that a demand is being made by the named beneficiary, there can be little doubt that the bank understood that it was dealing with the counterparty of its customer, the applicant, in a transaction related to the letter of credit issued by it. While the detailed terms of the documents presented under these three standbys are not set forth in the opinion, it is difficult to believe that there are not numerous links to the transactions, the standbys, the proposed amendments, and other communications from the bank.

11. Presenting the Amendment. While reasonable persons could debate the correctness of the above opinion regarding the name of the beneficiary, there is no room regarding the refusal for failure to present the operative original of one proposed amendment. The court and bank are even more wrong in refusing for failure of the beneficiary to present the operative original of one of many amendments. This aspect of the opinion is outrageous from the perspective of LC law and practice.

12. What Did the Credit Require? The opinion does not provide the text of the LC but in a sworn statement by an employee of the Issuer, the basis for this requirement is indicated in a two step analysis: 1. The relevant LC required presentation of drafts and a statement that the amount was owed "'accompanied by' the original letter of credit"; 2. The amendment contained this statement: "this amendment is to be considered as part of the above letter of standby letter of credit and must be attached thereto." Apparently, the Issuer and the Judge interpreted this obscure statement in the amendment as amending the requirement that the original letter of credit be issued to include the unstated requirement that originals of the amendments must also be presented.

13. Does It Make Sense? Apart from the principle of interpreting the text of documents against the drafter, any interpretation should be based on the commercial purpose of the proposed interpretation. It is apparent from the sworn statement that the Issuer had the amendment in its files since it had been returned with an indication that the beneficiary accepted it. The amendment was a reduction in amount. The bank apparently was prepared to rely on its records for the conclusion that the amendment was accepted and the amount was reduced but, nonetheless required presentation of the original. There can be no reason not to accept a copy of a proposed amendment. The only rational basis for refusal related to the presentation of the operative instrument would be to prevent the beneficiary from making another presentation to another bank. Unless the standby nominated a bank to confirm, pay, or negotiate (which is unlikely and, in any event, did not occur), this reason is irrelevant. A less rational reason for requiring the presentation of the original operative instrument is to assist the issuer in finding its letter of credit undertaking. Presentation of the original operative LC should more than suffice for this task. Requiring presentation of originals of the proposed amendments (as opposed to a copy) is simply irrational. The LC is not negotiable like a negotiable instrument. There is no magic in possession of the instrument. Having the original operative standby, much less also having a copy of the proposed amendment, more than suffices to enable the bank to locate the standby in its own records. The court's suggestion that an undertaking to indemnify would have sufficed makes this situation even more absurd. Indemnify the issuer for what? It had more than enough information to locate the standby in its records and determine whether the documents presented complied.

[JEB/mlm]

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