Article

Factual Summary:

As security for a loan, lender required a transferable standby letter of credit in favor of a broker and advised by the lender. The L/C was issued for one year's payments but in force for seven years. It was confirmed for one year. Unhappy with the terms of the credit, the lender communicated with the broker/beneficiary which engaged in correspondence with the issuer. In a series of letters, the issuer indicated that the credit would be "reavailable to you upon your receipt of our tested telex or amendment." A subsequent letter, resulting from a further request, inserted the term "automatically" before "reavailable" so that it read "automatically reavailable to you upon your receipt of our tested telex."

Contending that this correspondence constituted amendments to the letter of credit, the lender to whom the credit was subsequently transferred, took the position that it became automatically transferable by virtue of the second letter or, in the alternative, that the issuer had deliberately misrepresented the automatic reavailability. When the borrower defaulted on its obligation, the second beneficiary drew on the credit and, when payment in excess of the original amount was refused, brought this action against the issuer. The issuer moved for summary judgment which was granted.

Legal Analysis:

1. Amendments: The appellate court held that a summary judgment ruling as to whether the letters constituted amendments or side agreements was inappropriate because expert testimony revealed both genuine issues of material fact and that the terms of the letter of credit were ambiguous at best. Much of the dispute about the letters centered around the meaning of the phrase "automatically reavailable" to describe the issuer's sending of the tested telex which would renew the letter of credit annually. The issuer contended the phrase meant the letter of credit "automatically" preserved its original term that the applicant must replenish its collateral in the issuer's bank before the letter of credit is renewed.

2. Transferability of amendment, UCP Article 10(d): The appellate court also interpreted UCP 400 Article 10(d), on which the district court partly based its summary judgment. The district court had determined that Article 10(d) excused the issuer from any liability of an amendment communicated by it directly to the beneficiary because it was required to obtain the confirmer's consent to any amendments. The appellate court ruled that, although 10(d) does require the consent of the confirmer before amending a letter of credit, the confirmer in this case was not affected by the amendment because the confirmer had only confirmed the letter of credit for one year. Therefore, the confirmer's lack of consent to the amendments to the letter of credit did not prevent them amendments from taking effect.

3. Transferability of amendments, UCP 400 Article 54: The district court had reasoned that even if the letters were amendments, and even if the confirmer, acting as transferring bank, had the authority to transfer all of the beneficiary's rights to the second beneficiary, the confirmer's terms of advice still limited the letter of credit to the original amount, which the second beneficiary's presentation would have exceeded. The appellate court noted that the letter of credit expressly stated it was transferable, and also that UCP 400 Article 54(a) gives the beneficiary the right to have the letter of credit transferred. The appellate court ruled that the beneficiary intended to transfer all of its rights associated with the letter of credit, including any amendments made either before or after the transfer. The court also noted that the confirmer used the issuer's standard form for the transfer, which stated it was a transfer of the letter of credit and all of its amendments, and that when the confirmer sent this form to the second beneficiary, the confirmer effectively advised the second beneficiary of the transfer's scope, including the amendments, assuming that they were amendments.

4. Fraud: The district court granted a summary judgment to the issuer on the issue of whether the second beneficiary may have been affected by fraudulent acts of the issuer which misled the second beneficiary into believing the letter of credit had been amended to cause it to be automatically renewed annually. It based its ruling on the fact that the issuer dealt in its correspondence with the beneficiary and not the second beneficiary. The appellate court ruled that Maryland law did not require the issuer to communicate directly with the second beneficiary in order for it to be held liable for fraud committed against it. The appellate court reasoned that because the issuer and beneficiary had agreed to the letter of credit being transferable in its entirety, the issuer was aware that the credit could be transferred to the second beneficiary. The appellate court summarized that "one who embodies a fraudulent misrepresentation in an article of commerce" is liable for a loss "caused to another who deals with him or with a third person regarding the article or document in justifiable reliance upon the truth of the representation." As a consequence, the court held that summary judgment in the issuer's favor here would be inappropriate.

Note: Update's Editor provided an Affidavit in support of the second beneficiary in opposing the Motion. In this appeal to the 4th Circuit, the USCIB filed an Amicus Curiae Brief on behalf of the second beneficiary which was published at LETTER OF CREDIT UPDATE, Vol. 11, No. 4, April 1995.

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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 ICC or the other partners in DC-PRO.