Article

Factual Summary: Factual summary: To purchase CD-ROM drives, applicant procured an LC to be issued in favor of the seller/beneficiary. Issuer made four amendments to the LC to satisfy applicant's additional orders by increasing the amount of the credit to US $14,233,100 and extended the last date of shipment to March 31, 1994. negotiating bank/assignor made four presentations of documents based on four shipments occurring in March, 1994. The issuer dishonored the four presentations and timely notified the negotiating bank/assignor that "APPLICANT HAS REJECTED DOCUMENTS DUE TO LATE SHIPMENT" or "DOCUMENTS REJECTED BY APPLICANT DUE TO LATE SHIPMENT." The negotiating bank/assignor telexed the issuer a request for clarification of its notice of dishonor. Issuer telexed the response: "PLEASE REFER TO OUR AMENDMENT NO. 3 DD 21 JAN 94 WHICH STATES 'AIRWAY BILLS . . . DATED NOT LATER THAN 07 FEB 94'. THEREFORE, DOCUMENTS RETURNED TO YOU ON 14FEB94." Negotiating bank assigned its rights to seller/beneficiary and seller/beneficiary filed its complaint against issuer for wrongful dishonor and insufficient notice of documentary discrepancies providing the basis for dishonor.

Legal Analysis:

1. Strict Compliance: Michigan has adopted the majority view of the strict compliance standard requiring presentation documents to precisely conform to the LC's presentment requirements. The LC required presentment of "AIR WAYBILLS CONSIGNED TO MEDIA VISION INC. DATED NOT LATER THAN 94/02/07" whereas Amendment No. 03 to the LC listed additional acceptable presentment documents to include "FORWARDERS BILL OF LADING OR OCEAN BILL OF LADING CONSIGNED TO MEDIA VISION INC., MARKED 'FREIGHT PREPAID' ARE ACCEPTABLE." The seller/beneficiary argued that the transportation documents dated after 94/02/07 where forwarders bill of lading, while the issuer contended that the documents were untimely air waybills. Since the parties presented conflicting definitions of the two terms at issue and conflicting versions of the intent behind Amendment No. 03 to the LC, the court held that the issue cannot be resolved on cross-motions for summary judgment.

2. Strict Preclusion Notice Requirement: Seller/ beneficiary urged the court to adopt a strict preclusion notice requirement under UCP 400 Art. 16(d). The seller/beneficiary argued that an issuer, who dishonors a presentment of documents, must give notice of refusal to the beneficiary which accurately states the discrepancies found in the documents as the basis for the issuer's refusal. Seller/beneficiary argued that the issuer failed to give proper notice of discrepancies and thus, under Art. 16(e), is "precluded from claiming that the documents are not in accordance with the terms and conditions of the credit." The issuer argued that the preclusion notice requirement should be less harsh and apply only in cases where the beneficiary relied on the "issuer's notice to its detriment, or could have cured any defects" in the presentation.

The court embraced the strict preclusion standard relying on relevant case law of the majority of courts rejecting the view that a beneficiary show detrimental reliance on the issuer's failure to properly describe all discrepancies in its notice of dishonor. The court noted that strict preclusion applicable against the issuer complements the strict compliance standard applicable against the beneficiary when making a presentation. Thus, the issuer is estopped from relying on any valid reasons for dishonoring the beneficiary's presentations for which it did not properly provide notice of pursuant to UCP Art. 16(d).

3. Sufficiency of Issuer's Notice of Dishonor:Issuer's notices of dishonor stated either that "APPLICANT HAS REJECTED DOCUMENTS DUE TO LATE SHIPMENT" or "DOCUMENTS REJECTED BY APPLICANT DUE TO LATE SHIPMENT." Issuer argued that this meant that the air waybills presented by negotiating bank/assignor were dated after February 7, 1994 in violation of the LC. The court held that the plain language of the notices did not support the issuer's belated interpretation and that late shipment is not a valid reason for dishonoring the draws for the four March shipments since Amendment No. 2 to the LC provided March 31, 1994 as the latest date of shipment. The court held that the plain language of the notice should clearly communicate the reasons for the withdrawals. The notice should make a specific reference to the document in question and identify the non-conforming aspect of the document. Thus, the issuer's notices were held insufficient communications of the discrepancies upon which it relied in rejecting the documents.

4. Post-Notice Discrepancy Clarification:In response to issuer's notices of dishonor, negotiating bank/assignor responded to issuer that all shipments were timely and requested a clarification of the basis for rejection. Issuer responded on the same day stating "PLEASE REFER TO OUR AMENDMENT NO.3 DD 21JAN94 WHICH STATES 'AIRWAY BILLS . . . DATED NOT LATER THAN 07FEB94." The court rejected a line of cases which held that "any grounds for dishonor not stated in the original notice are waived." The court held that all timely notices provided to the beneficiary should be considered in deciding the sufficiency of the notice of dishonor.

The court noted that UCP 400 provides an issuing bank with a "reasonable time" to examine documents and give notice "without delay." UCP 500 resolved these ambiguities by requiring the issuing bank to provide notice "without delay but no later than the close of the seventh banking day following the day of receipt of the documents."

Therefore, the court considered issuer's clarification as timely. However, the court found the clarification still failed to sufficiently "identify the deficient document or explain the cause for its deficiency." Failing to expressly identify the "non-conforming document and make some reference to the cause of its deficiency," the issuer "is estopped from relying on the fact that plaintiff presented air way-bills dated later than February 7, 1994 to support its dishonor of plaintiff's draws on the March, 1994 shipments."

Comment:

The strict preclusion notice requirement is becoming the prevailing norm in courts across the US. As the court concluded, there is "stronger authority and superior logic" supporting adoption of strict preclusion notice requirement, which adds certainty and efficiency to LC law. Just as beneficiaries must strictly comply with the LC document presentation requirements, issuers must be wary of the sufficiency of their notices of rejection of presentation documents identifying with particularity the manner in which presentation documents do not strictly comply with the LC. Strict compliance by the beneficiary concomitant with strict preclusion against an issuer "comports with fundamental principles of fairness." These dual standards of LC law simplifies the presentation and honor or rejection of documents and enhances mercantile efficiency.

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