Factual Summary: Buyer/applicant obtained a commercial LC issued by a Russian bank in favor of seller/beneficiary as payment for a shipment of oils. The LC was confirmed by a New York bank and advised through another bank in Singapore. Beneficiary presented documents to the advisor which forwarded them the confirmer. The evidence did not reveal whether delivery was on a Friday or a Monday, so that the documents were received either six or three days before expiration. After reviewing the documents, the confirmer sent a notice of refusal to the advisor on the day the LC expired, indicating that it would not honor the LC because of three discrepancies in the documents presented, namely: (1) the B/L "misspelled the port of destination in the Ukraine as Ilychevsk, instead of Iliychevsk as required" by the LC; (2) "the beneficiary on the insurance policy was named as [beneficiary] and/or applicant, while the letter of credit required that the applicant ... be the beneficiary" of the insurance policy; and (3) "the cargo handling instructions indicated that 1488.295 metric tons of palm stearin were delivered, while the letter of credit required 2401.866 metric tons ... to be delivered". The day after giving notice of its dishonor, the confirmer circulated an internal memorandum that stated " 'we should do our best to get out of' the letter of credit because issuer has stopped paying on its other letters of credit". The confirmer notified the issuer of the dishonor, which requested that the confirmer forward the documents on an "approval basis for checking and taking decision about acceptance". The confirmer asked the advisor if it "should comply with [issuer's] request to send the documents on approval basis". The advisor responded that the beneficiary would like the documents forwarded to the issuer for its "approval and payment". The confirmer forwarded. the documents to the issuer and inquired "whether it 'may' pay the beneficiary 'notwithstanding' the discrepancies". The issuer subsequently waived the discrepancies, and authorized the confirmer to debit its account on the maturity dates of the LC. However, the confirmer notified the advisor "that it would not waive the discrepancies, that the letter of credit and confirmer's confirmation expired ... and that confirmer would not accept the discrepant documents even if issuer did so". Thereafter, the confirmer offered to serve in the capacity of advising bank to the advisor and beneficiary, with the intention of honoring the LC at its date of maturity "only on an unconfirmed basis", if issuer had sufficient funds on account. When the issuer refused a request to honor the LC on its maturity date "claiming that issuer had lost its banking license and that there were restraining orders on its account", beneficiary sued the confirmer for wrongful dishonor. The confirmer moved for summary judgment, which was granted.

Legal Analysis:

1. 'Mere Misspelling' vs. Material Error: The beneficiary argued that the misspelling of the port of destination on the bills of lading should not have justified dishonor by the confirmer, noting that the LC contained inconsistent spellings itself, identifying the port as both "Ilyichevsk" and "Iliychevsk". While "discrepancies between the documents and the letter of credit will generally lead to the latter being dishonored, although non-meaningful errors, such as obvious typographical errors, will not justify dishonor", the court noted that there were "two sites in the Ukraine, and one each in Azerbaijan, Kazakhstan and Uzbekistan" bearing the port name "Ilichevsk", as spelled in the beneficiary's B/L. Citing the confirmer's argument that "to have approved the documents would have been to risk the chance that the cargo had been delivered to a port not mentioned in the letter of credit", the court ruled that the dishonor was justified because "[the confirmer] could not be expected to determine from the face of the documents and the letter of credit that the different versions of the port's name referred to the same port."

2. Insurance Policy Beneficiaries: The beneficiary argued that the insurance policy, which named both the beneficiary and applicant as the policy's beneficiary, complied with the LC, which required an insurance policy in the name of the applicant. The court noted, however, that "the meaning of 'and/or' is that either [beneficiary] or applicant or both could claim the proceeds of the policy, a right that [beneficiary] was not granted by the letter of credit." The court regarded this error as substantial, justifying dishonor.

3. Handling Instructions: Multiple Documents and Error: The beneficiary argued that it had in fact submitted handling instructions for 2,400 metric tons of palm stearin to the confirmer as required by the LC. It contended that two handling instructions were presented to the confirmer, constituting two separate shipments, one on July 18, 1998 and the other on July 27, 1998. The confirmer "argue[d] that, even if [beneficiary] could raise a factual issue with respect to whether it sent the second handling instruction, that document was nonconforming because it was incorrectly dated as 1997, and would have presented another reason to dishonor the letter of credit." The court noted that the confirmer could not have known if the shipping instructions were from the current or prior year, and this ambiguity justified dishonor.

4. Wrongful Delay: Beneficiary claimed that the confirmer "took too long to review the documents and issue the notice of dishonor because it was determined to dishonor the letter of credit for improper reasons", particularly because the confirmer was aware that issuer was reneging on outstanding LCs. The court found that the confirmer's actions were consistent with guidelines set forth by the UCP500 Article 13(b) (Standard for Examination of Documents), which provides a confirming bank a reasonable time, not to exceed seven days, to review documents and determine whether to accept or deny them. The confirmer issued its notice of dishonor within either three or six.81 2001 LC CASE SUMMARIES days. Article 14(d)(i) (Discrepant Documents and Notice) "requires a conforming bank that has refused documents to provide notice of the discrepancies without delay but no later than the close of the seventh banking day following the day of receipt of the documents". The confirmer finished examining the documents at 4:10 P.M. (its business hours were 9 A.M. to 5 P.M.) and issued notice of dishonor the next morning at 11 a.m. The court determined that even though it issued its dishonor on the very day the LC expired, "[the confirmer] acted within the seven-day period."

5. Reservation of Right Not to Pay: Citing expert opinion and a ruling by the ICC Banking Commission, beneficiary argued that "a confirming bank that sends allegedly discrepant documents to the issuing bank for approval is deemed bound to pay under the letter of credit, unless the confirming bank expressly reserves the right not to pay." Since the confirmer had failed to expressly reserve its right not to pay in its communication with the issuer, in which it asked if the issuer would waive the discrepancies, the beneficiary contended that the confirmer should not be allowed to object to any discrepancies. The court distinguished the beneficiary's argument from other cases in which the confirming bank was bound to such an obligation, noting that here the beneficiary's LC had expired prior to the confirmer's correspondences with the issuer. In subsequent correspondences with the advisor, "[the confirmer's] repeated assertion of its intention to honor the letter of credit only on an unconfirmed basis, together with [the advisor's] acceptance of [the confirmer's] position, demonstrates that there was no intention by [the confirmer] to relinquish any right. Rather, the communications that took place after the letter of credit was dishonored reveal that [the confirmer] stated that it might pay [beneficiary], only if issuer made funds available."

Comment: 1. The court's judicial notice of five other locations with similar spellings that could be confused with the one used by the beneficiary seems convincing until it is remembered that there were two spellings of this geographical designator in the LC itself. In light of the fact that the issuer itself did not know how it wanted the named port spelled, a third variation comes much closer to an apparent misspelling than a discrepancy. 2. The court's conviction that the virgule ("/") in naming the insured renders the insurance policy discrepant is unsupported by any rule of practice or opinion. It would hardly be surprising that both parties maintained insurance interests in the goods. Such is almost always the case. In such a situation, for the court to insist that the insurance policy say "Buyer only" where the LC says only "Buyer" is not defensible. 3. In light of other New York cases, it is surprising to find a court granting summary judgment in a situation where: a) it is unclear at this stage in the litigation how many banking days the bank took to examine the documents; and b) at a minimum, it took 3 days. The court's rationale, that the beneficiary could have sought an amendment and itself delayed in presenting the documents is irrelevant. While 3 days should be a safe harbor (but the NY courts have not thought so), more than 3 is a question of fact and should not enter into the calculation unless, as was also arguable here, the issuer deliberately delayed its examination.


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.