Article

Factual Summary: The seller of a 50% interest in a distributing company to a beer distributing company received a promissory note from the buyer in exchange for escrowed shares pending payment of the note. Two years later, the seller accepted a new agreement whereby he would receive a new $800,000 non-recourse note secured by a letter of credit in exchange for releasing the shares from escrow. The L/C which was issued required presentation of the "Original of the promissory note executed May 22nd, 1987". The seller received what he thought was an original of that note but was really a copy.

When the applicant failed to make the final balloon payment on the note eight years later, the beneficiary/seller made a demand under the L/C. Because the presentation did not contain the original note, the issuer dishonored. The beneficiary then approached the applicant, who resigned the copy of the note, and resubmitted the presentation; but the issuer once again dishonored.

The beneficiary filed an action against the issuer for wrongful dishonor and the trial court dismissed the action for failure to state a claim upon which relief could be granted. The trial court reasoned that the beneficiary had not strictly complied with the terms of the standby. On appeal, affirmed.

Legal Analysis:

1. Strict Compliance: Adopting the strict compliance standard, the appellate court noted that, while prior UCC Article 5 did not expressly state a standard, strict compliance was the standard advocated by most commentaries, court decisions, and Revised Article 5 (though not yet in effect). Under this standard, the court concluded that the beneficiary had not strictly complied with the terms of the standby by submitting a copy of the required note and not the original.

2. Original/Copy of Required Document: A copy of an original note resigned eight years later does not satisfy the requirements of a standby which expressly stipulates presentation of the "original" "signed on" a given date.

Comment:

This decision does not involve UCP 500 Article 20 on originals and copies which was the subject of the notorious UK decision inGlencore International AG and Another v. Bank of China,Court of Appeal (Civil Division) (Transcript: John Larking) 8 November 1995. In that decision, the UK court, literally reading the language of the UCP without reading it in the context of letter of credit practice concluded that an originally signed copy was not an original. The instant case, however, requires an original of a note on a given date. A copy resigned eight years later patently does not comply with the L/C term.

In its discussion, however, the court indicated a more reasonable approach than that taken by the UK court:

In theory, although unlikely in practice, it is possible that the promissory note here was duplicated and each copy signed individually at the time of execution, thus creating duplicate "originals." But [the beneficiary] has never asserted that the note tendered here was an original of that kind; its claim of being an original derives from the fact that [the maker] signed it a second time eight years after the original execution. It therefore was unmistakably a copy of the note "executed May 22nd, 1987," and that the LOC did not permit its substitution for the original is confirmed by the next paragraph of the LOC, which states that demand for payment must also be accompanied by "2. Copy of letter in the form of Exhibit B", notifying various persons of the default. The LOC itself thus distinguished between an original and a copy, requiring production of the original promissory note.

The draft ISP would not change this decision in a case such as this one where the standby is specific but it would avoid the unreasonable result represented by the UK decision. Draft ISP 1997 Rule 4.22(b) provides:

A document which appears to have been reproduced from an original will be deemed to be an original if it appears to be resigned or re-authenticated by its originator.

©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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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.