Article

Type of Lawsuit: Issuer sought declaratory judgment in state court that LC had expired; beneficiary removed to federal court and counter claimed against issuer for wrongful dishonor.

Parties: Plaintiff/Issuer- Heritage Bank (Counsel: D. Miller & D. MacDonald) Defendant/Beneficiary- Redcom Laboratories, Inc. (Counsel: D. Lettelleir & W. Baggett) Applicant- Fiber-Wave

Underlying Transaction: Purchase of electronics.

LC: Irrevocable Commercial LC for $215, 729. Subject to UCP500.

Decision: U.S. Court of Appeals for the Fifth Circuit, Reavely, J., Smith, J. and DeMoss, J. (Opinion by Smith, J.) affirmed summary judgment for beneficiary entered by the U.S. District Court for the Northern District of Texas, Buchmeyer, J.. Rationale: An issuer cannot rely on an injunction to excuse its obligation to give a timely notice of refusal under UCP500 Article 14(e).

Factual Summary: When beneficiary drew on LC to pay for delivery of electronics, applicant successfully petitioned a Texas state court to enjoin improper presentation on the basis that the beneficiary's electronics was defective. When the beneficiary subsequently made another demand during the pendency of the injunction, the bank dishonored on the ground that it was prohibited from paying by the injunction and moved unsuccessfully to dissolve the injunction. After the LC expired, the beneficiary again made a demand, alleging that the injunction had been dissolved, and the bank sought declaratory judgment in state court against the applicant and the beneficiary. The beneficiary then removed this action to federal court, seeking recovery for wrongful dishonor and sought dismissal of the applicant on the grounds that it was improperly joined to destroy diversity. The trial court dismissed the applicant as a party and granted the beneficiary's motion for summary judgment. On appeal, affirmed.

Legal Analysis:

1.Proper Parties; U.S. Federal Diversity Jurisdiction: The issuer asserted that the trial court had improperly dismissed the applicant as a party to the declaratory action. Arguing that the applicant was a proper party, it contended that the controversy should be returned to the Texas state court due to lack of U.S. federal diversity jurisdiction since joinder of the applicant was proper as a person who would be affected. The court rejected this argument, stating that the applicant would not be "affected" by a declaratory judgment because a declaratory judgment only answers questions of the rights of parties, rather than actually ordering an issuer to honor an LC. It pointed out a distinction between an interest in the outcome and having an interest in the current controversy. The court also noted an applicable Texas statute, Tex. Civ. Practice & Rem. Code Section 37.003(a) (Vernon 1997), prohibits an order to honor an LC in a declaratory action.

2. Independence of LC: The court noted that the "rationale underlying letters of credit" supported the conclusion that the applicant was not a proper party to an action for wrongful dishonor. "The entire arrangement exists to allow the credit issuer's obligation to the beneficiary to operate independently of the underlying agreement with the applicant."

3. The Virgule; "/"; UCP500 Article 21: The LC required "one copy of the invoice/bill of lading upon receipt of each shipment as well as notification from applicant stating that such equipment has been sent or is in the process of being delivered." The issuer asserted that the beneficiary was required to present a bill of lading under these terms. The beneficiary had presented an invoice, sworn statements as to the delivery of the goods, and Federal Express receipts signed by the applicant. Relying on UCP500 Article 21 (Unspecified Issuers or Contents of Documents), the court noted that "if the letter of credit does not have specific requirements, the bank should accept anything not inconsistent with other documents presented." The court rejected the issuer's argument, stating that the "plain terms" of the LC indicated that the beneficiary need not present a B/L. "The virgule separating the two terms signifies that the beneficiary may provide either an invoice or a bill of lading". In reaching this conclusion, the court cited the American Heritage Dictionary of the English Language (4th Ed. 2000) for the definition that a "virgule" is a "diagonal mark (/) used especially to separate alternatives.

4. UCP Article 43(a); Latest Date for Presentation of Transport Documents: The issuer argued that the beneficiary did not present documents within twenty-one days after the date of shipment as required by UCP500 Article 43(a) Limitation on the Expiry Date. The court noted that an allegedly complying presentation was not made until 200 days after the date of shipment. It concluded, however, that the parties "specifically contracted around" the UCP500 Article 43(a) default rule by.47 2001 LC CASE SUMMARIES insertion of the term in the LC that provided that the presentation would be honored "on delivery of documents as specified if presented at our counters on or before the expiration date", rejecting the issuer's suggestion that "this language may be interpreted merely to affirm the period for which the credit was good." It found that the actions of the issuer in giving notice of refusal based on the injunctions to two presentations that occurred before the expiry of the credit. "Even though the bank need not have notified the beneficiary of the deficiency of untimeliness, it seems surprising that, if the UCP 21 day default rule were intended to apply, it chose to make use of the injunction rather than the UCP as the basis for dishonor. Based on its own actions, the issuer apparently believed that the LC [terms] overrode the UCP's requirements." The court thus ruled that the beneficiary "made a timely presentment.".

5. Notice of Refusal: In passing, the court noted that the failure to make presentation within the UCP500 Article 43(a) 21 day rule rendered the presentation untimely and further noted that "an untimely presentment is an incurable defect, and the bank had no duty to notify the beneficiary of it."

6. UCP Article 14; Preclusion: The issuer contended that beneficiary made a discrepant presentment. The court rejected this argument, stating that the issuer had "waived its right to raise the discrepancies" because it based its dishonor on the injunction and not the alleged discrepancies, quoting Siderius, Inc. v. Wallace Co., 583 S.W.2d 852, 862 (Tex. Civ. App. 1979). for the principle that "where an issuer formally places dishonor on a specific ground, the issuer is held to have waived all others".

7. Preclusion; Incurability: The court suggested that "to retain its ability to raise discrepancies notwithstanding preclusion, the bank must prove the existence of an incurable deficiency or that the failure to notify resulted in no prejudice, citing Wing On Bank, Ltd. v. American National Bank, 457 F.2d 328, 328-29 (5th Cir. 1972). The bank argued that the presentation was untimely and, thus, incurable. The court, however, concluded that there was no untimeliness since the "letter of credit contracted around the UCP default rules" and that, therefore, any defects could have been cured and the beneficiary could have suffered prejudice if the issuer did not give notice of refusal.

8. Injunction: The issuer argued that injunction granted in the state trial court excused its honor. The court noted that the bank may be excused if it was permanently enjoined from honoring any presentation under the LC. Although by its terms the injunction order appeared to enjoin honor, the appellate court noted that the injunction order recited that it was "granted as requested". It looked to the state court transcripts. In the hearing for injunctive relief, the issuer's counsel had stated Your Honor, we're not here asking that beneficiary be enjoined from doing anything. If they can gather the appropriate documentation and present it to the bank, then the letter of credit should be paid. What we're asking for an injunction and what we got a TRO Temporary Restraining Order against was only the bank paying on improper presentment. The appellate court then concluded that the trial court had "correctly interpreted the injunction as applying only to improper presentments."

9. Expiration: The issuer argued that the credit had expired. The court stated that an injunction "in and of itself, does not excuse performance indefinitely. The injunction 'merely suspended the issuer's obligation to honor or dishonor the drafts during the pendency of the legal restraint'", quoting Kelley v. First Westroads Bank, 840 F.2d 554, 558 (8th Cir. 1988). The court concluded that dishonor of one of the presentations prior to expiry was improper.

Comment:

1. LC drafting reflects an undue fondness among bankers for virgules. They crop up everywhere, including the UCP, but it is not always apparent that. the parties understand what they mean or even understand the same thing by their use. This decision is helpful in reinforcing the proposition that such a term means "either/or", that is, one or the other but not necessarily both of the items listed.

2. It is puzzling, however, that the issuer argued that there was no bill of lading presented when the beneficiary presented a courier waybill. The term "bill of lading" has no meaning in UCP500 separate from transport documents, which would include UCP500 Article 29 courier receipts. It would seem that such a document was presented. Puzzlement deepens if there is no bill of lading presented, because UCP500 Article 43(a) (Limitation on the Expiry Date) only operates on the date of shipment indicated in a transport document. If there was no transport document, UCP500 Article 43 would not have been applicable.

3. Nor does UCP500 Article 43(a) apply to copies of transport documents.

4. This decision reveals a serious misunderstanding of the preclusion rule of UCP500 Article 14(e). Reflecting standard international letter of credit practice, the preclusion rule operates without regard to the curability of discrepancies. It is not a rule of equitable estoppel or of waiver, but an absolute rule reflecting mercantile principles of finality. The failure to state a discrepancy precludes a bank from asserting that the documents are not in compliance with the terms and conditions of the credit. Therefore, the failure of the issuer to recite a discrepancy in its notice of refusal precluded it from future recitation of it when the injunction lifted.

5. Expiry, however, needs to be distinguished from discrepancies arising as a result of untimely presentation. There is no need to give notice of refusal where the LC has expired because expiration is not a discrepancy. It signals that the LC is no longer an obligation of the issuer. There is, therefore, nothing on which the preclusion rule can operate. Although it is difficult to understand how the court arrived at this point, its conclusion was that the issuer was precluded from asserting a discrepancy not noticed in a presentation made prior to the expiration of the LC. Unless there is special provision, the expiration of an LC is not stayed by the award of an injunction. Presumably, the beneficiary that is met with a request for injunction has requested that a bond be issued by the applicant in order to cover such a contingency should it be determined that the injunction was improper.

6. Perhaps the most bizarre aspect of this decision is the court's conclusion that the injunction applies to improper presentations in the sense of non complying presentations. An injunction does not lie to prevent such a presentation. The applicant can look to its rights to resist reimbursement but not interfere with the LC presentation on that ground.

7. The facts of this case suggest an agenda item for UCP600: the scope of the 21 day default latest date for presentation after shipment rule. It makes little if any sense to apply this rule to a situation where, by its terms, the transport document indicates that the applicant has possession of the goods or that it is irrelevant to obtaining possession of them. The purpose behind the rule is to hasten delivery of the document of title permitting the applicant to obtain possession of the goods, so as to avoid any demurrage or other charges incurred by delay in obtaining the goods. Where this reason does not exist, the purpose for the rule ceases and, where the purpose ceases, the rule should cease to operate, as well.

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