Article

Factual Summary: To ensure payment of rent under its sublease, Subtenant obtained a standby LC from Issuer in favor of Beneficiary. The standby which was amended six times required presentation of “the original of this standby letter of credit, and all amendments, if any, and the operative notice.” The application for the LC also gave Issuer the option to accept documents that were in substantial compliance with the LC. When Subtenant defaulted on rent, Beneficiary presented the original LC and amendments 1, 4, 5, and 6 as part of its demand for a partial drawdown on the LC. Beneficiary was unable to find amendments 2 and 3. Issuer dishonored Beneficiary’s demand citing failure to present amendments 2 and 3. After the dishonor, Beneficiary requested true copies of the amendments and received them from Issuer’s counsel.

Beneficiary sued Issuer for a declaration requiring honor of the drawdown request without presenting amendments 2 and 3 and for breach of contract based on Issuer’s failure to honor the initial drawdown request. Issuer moved to dismiss and for summary judgment.

The trial court adjourned the case to provide Beneficiary an opportunity to cure its demand, instructing Beneficiary “to present a copy of amendment 2, supported by an affidavit of the appropriate person certifying the source of the copy and that the copy had not been altered in any way.” Beneficiary subsequently, on Tuesday, November 12, 2013, presented the same documents as before, as well as a copy of Amendment 2 supported by an affidavit from Issuer’s counsel certifying its source, demanding USD 406,058.80. On Monday, November 25, 2013, Issuer again dishonored the LC. The trial Judge ruled that Beneficiary had substantially complied with the terms of the LC and granted judgment in its favor. On appeal, affirmed.

The trial Judge ruled that Issuer’s dishonor on the basis of not having provided the original Amendment 2 was arbitrary. The trial Judge noted that the LC allowed for substantial compliance, which he believed that Beneficiary had achieved. Issuer appealed, arguing that it was proper to deny the demand under strict compliance as it appears in U.C.C. § 5-108 and that the LC gave Issuer the option to use either strict or substantial compliance.

Legal Analysis:

  1. Strict Compliance; Original LC. The appellate court noted that NY UCC Section 5-108(e) required that documents presented “strictly comply” with the terms and conditions of the LC. The trial judge relied on the waiver provision in the application to conclude that Issuer had waived the discrepancy. The appellate court noted, however, that the provision did not require waiver and that “it was error … to hold plaintiff to the lesser standard of substantial compliance.”

The appellate court ruled, however, that the documents presented met the standard of strict compliance. Relying on Official Comment 1 to UCC Section 5-108, the appellate court noted that, the strict compliance standard does not require that the documents presented by the beneficiary be exact in every detail”, quoting with approval from BasicNet S.P.A v CFP Servs., Ltd., 2015 NY Slip Op 02080, [1st Dept 2015]). The appellate opinion cited with approval a series of federal court decisions for the proposition that “certain types of minor discrepancies may not be used to establish a failure of strict compliance.” The appellate court stated that

In the matter before us, there is no possibility that the presentation of a true copy of amendment 2, instead of the original, could mislead [Issuer] to its detriment. Indeed, this copy had been prepared by [Issuer] itself, and was provided to [Beneficiary] by [Issuer]'s own attorney. Its accuracy was not in dispute, and there is no dispute regarding the content of the document, which merely extended the expiration date of amendment 2 and which had since been superseded by subsequent amendments. Since the submission of a true copy of amendment 2 would not compel any inquiry by the bank into the underlying transaction, the rationale for the strict compliance rule, ‘to protect the issuer from having to know the commercial impact of a discrepancy in the documents’ (E & H Partners, 39 F Supp 2d at 284 [internal quotation marks omitted]), has no applicability here.

The appellate opinion also noted that “the substitution of a true copy of a long-expired amendment constitutes an inconsequential defect that does not violate the strict compliance standard.”

  1. Ambiguity of LC Terms. In construing the clause in the LC requiring presentation of originals, the appellate court noted that

there is some ambiguity in the plain language of the letter in that regard. The terms of the letter of credit expressly require presentation of “the original of this standby letter of credit, and all amendments, if any, and the operative notice." As a matter of contract interpretation, because the first clause requiring [Beneficiary] to present the original letter of credit is set off by a comma from "and all amendments," the word "original" does not necessarily modify the words "and all amendments."

Comment: This decision soundly rejects a distortion of the rule of strict compliance. Requiring an original of the LC is seriously problematic for a straight LC. Requiring original amendments is not justifiable except as a trick to defeat an otherwise complying presentation. If the beneficiary presented documents appearing to be “originals”, the issuer would in any event check its records to ensure that it was aware of all amendments so that it knew of the text of the LC. It is also problematic where the beneficiary has not consented to them. In such a case, they are not “amendments” but merely proposed amendments. Issuers and applicants should be heard to complain at a highly technical response that makes commercial sense to an even more technical defense that makes no commercial sense.

Excerpt from TEXT OF LC APPLICATION

6. Acceptable Documents Under the [Letter of] Credit.

a) Substantial Compliance. Except as expressly provided otherwise on the Application, we authorize you and the issuer to accept as complying with the Credit any Drafts and/or Documents which are in substantial but not strict compliance with the Credit without affecting or relieving us of any of our Liabilities under this Agreement. Nevertheless, the Issuer may in its discretion refuse to accept any or all such Drafts and/or Documents unless they are in strict compliance with the Credit (emphasis added).

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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 the ICC or Coastline Solutions.