Article

Factual Summary:Beneficiary sold and shipped styrene monomer to applicant and presented documents to nominated bank, which declined to give value but which forwarded the documents to Issuer at Beneficiary's request.

Issuer received the documents on 9 August 1995, a banking day. On 11 August 1995, Issuer sent the following telex to the presenting bank: "UPON CHECKING A/M DOCUMENTS, WE NOTE THE FOLLOWING DISCREPANCY: [listing seven alleged discrepancies]. . . WE ARE CONTACTING THE APPLICANT FOR ACCEPTANCE OF THE RELATIVE DISCREPANCY. HOLDING DOCUMENTS AT YOUR RISK AND DISPOSAL."

12 and 13 August were Chinese banking holidays. On 15 August, the presenter responded that the alleged discrepancies were not adequate grounds for dishonor, and demanded payment. On 19 August, Issuer telexed to the effect that "now the discrepant documents may have us refuse to take up the documents according to article 14(B) of UCP 500." Issuer returned the documents on 18 September.

Beneficiary sued Issuer for wrongful dishonor. Issuer sought dismissal for lack of jurisdiction and improper venue, which the trial court denied. The trial court ruled in favor of Beneficiary, finding that Issuer's 11 August telex failed to provide sufficient notice of refusal and that the discrepancies noted in that telex were insufficient to justify rejection of the LC. On appeal, affirmed on the ground that the notice of refusal was insufficient and declined to consider the issue of whether the noted discrepancies justified dishonor.

Legal Analysis:

1. Venue: Issuer contended that venue did not lie in the Southern District of Texas. The appellate court stated that venue in the Southern District of Texas was proper since a substantial number of the events giving rise to the suit occurred in Texas even though the LC was issued in China. The court noted that the LC was sent to Beneficiary's headquarters in Houston through a nominated bank in Houston to whom the documents were presented.

2. Standard of Review; UCP500 & Law: Issuer argued that the trial court's interpretation of UCP500 should be reviewed de novo "because the UCP 500 has acquired the function and status of law with respect to letters of credit which incorporate its terms." The appellate court rejected this argument, noting that under its decisional law "usage of trade is a question of fact." As a result, it ruled that "[a]ccordingly, the district court's finding that the Bank of China's letter did not comply with the usages of trade set forth in the UCP 500 is a factual conclusion subject to review for clear error."

3. Notice of Refusal; Preclusion; UCP500 Article 14(d): The appellate court noted that the latest date for refusal under UCP500 Article 14(e) was 18 August and that the only communication prior to that date was the telex of 11 August. Therefore, its analysis focused on the sufficiency of that communication.

4. Notice of Refusal: The appellate court observed that the trial court had rested its decision on the following grounds: 1) Issuer did not explicitly state that it was rejecting the documents; 2) the statements that Issuer would contact Applicant for acceptance despite discrepancies, had the effect of holding "'open the possibility of acceptance upon waiver' and 'indicates that the [Issuer] has not refused the documents.'"; and 3) Issuer did not mention "refusal" until its 19 August 1995 telex when it wrote, "[n]ow the discrepant documents may have us refuse to take up the documents according to article 14(b) of UCP 500." Voest-Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940 (S.D. Tex. 2000) The trial court had concluded that Issuer's offer to solicit waiver "suggests that the documents had not in fact been refused but might be accepted after consultation with [Applicant]." The trial court had stated that this clause in the telex "deviated from the norm and introduced an ambiguity that converted what might otherwise have been a notice of refusal into nothing more than a status report."

5. Refusal; Waiver: The appellate court reviewed the evidence on which the trial court relied, , essentially the August 11 telex, UCP500 Article 14, and expert testimony which indicated that Issuer's statement that it "was contacting the applicant for a waiver" deviated from the norm of UCP500 Article 14 and introduced an ambiguity into the communication. The appellate court concluded "viewed in the context of standard international banking practices, the [issuer]'s notice of refusal was clearly deficient. The bank failed to use the standard language for refusal, failed to comply with generally accepted trade usages, and created ambiguity by offering to contact [the applicant] about waiver, thus leaving open the possibility that the allegedly discrepant documents might have been accepted at a future date."

6. The UCP500 Process of Refusal: The appellate court noted that: "[t]he UCP 500 contemplates a three-step procedure for dishonoring letters of credit. First, the issuing bank reviews the documents presented for discrepancies. Second, if the bank finds problems, it contacts the purchaser for a waiver. Finally, after conferring with the purchaser, the bank may issue its notice of refusal. This sequence ensures the issuing bank's independence in making its decision while also giving the purchaser an opportunity to waive discrepancies, thus promoting efficiency in a field "where as many as half of the demands for payment under letters of credit are discrepant, yet, in the vast majority of cases, the account party waives the discrepancies and authorizes payment. Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 824 (2d Cir. 1992)."

7. Expert Testimony: Issuer argued that it was improper for the court to accept the proffered expert testimony because employees of the presenting bank "both testified that they understood the bank's August 11 telex to be a notice of refusal." The appellate court responded, "[h]owever, in contrast to [the expert's] reasoned explanation of why the waiver clause deviates from standard banking practice, [the employees], who were both fact witnesses, offer nothing more than their subjective beliefs."

8. Purpose of Notice of Refusal and to Whom it is Directed: Issuer argued that a communication is adequate as a notice of refusal if the presenting bank through whom it is routed understands it to refuse the documents. The appellate court rejected this argument, stating that "Moreover, the determinative question is not whether the [issuer]'s provided adequate notice of refusal to [the presenting bank], but whether it gave notice to [Beneficiary]; and the bank presented no evidence of [Beneficiary]'s interpretation of the telex."

9. Damages: Issuer argued that Beneficiary's damages should be reduced by the amount received for the resale of the goods. The appellate court indicated that there was no authority for such a rule and no evidence to indicate that any money had been recovered by the resale. The appellate court also noted that the trial court's order allowed for a reduction of the award by any amount that Beneficiary may receive in China in an action against the applicant.

10. Attorney's Fees: Issuer objected to the award of US$ 266,453.46 in attorney's fees and an additional US$ 25,000 for the appeal to Beneficiary. The court noted that under US law attorney's fees can only be awarded where the contract or statute so provides. Beneficiary relied on Texas Statute Section 38.001 under which attorney's fees had been allowed in a prior Texas case, Temple-Eastex, Inc. v. Addison Bank, 672 S.W.2d 793, 798 (Tex. 1984). Moreover, the appellate court ruled that Beneficiary had sufficiently put Issuer on notice that it was seeking attorney's fees.

Comment:

1. The Court of Appeals for the Fifth Circuit correctly focused on UCP 500 Article 14 and the August 11 telex and international standard banking practice in the application of that Article to that telex. Whether viewed as a factual or legal issue, the issue is for the court to decide, a point now made clear in revised UCC 5-108(e). The issue does not depend on the understanding of the particular issuer, nominated bank or beneficiary. It depends on the understanding of letter of credit bankers generally, i.e., on international standard banking practice in the interpretation and application of the UCP.

2. The August 11 telex failed to say "refused", "rejected". or the like, and it arguably reserved a right to accept the documents at a later date. The appellate court decision, like the trial court decision and the expert testimony given in the case, focused on this combination and therefore does not address notices of discrepancy that merely lack refusal language or merely recite that the issuer is approaching the applicant for a waiver. See Credit Industriel et Commercial v. China Merchants Bank at page 75 and comments thereon.

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