Factual Summary:

A transferable standby was opened up pursuant to a contract for the sale of ostrich skins. The transferee was to be the beneficiary's supplier of the skins. The LC stated that it could only be transferred by the issuer and only upon presentment of the original LC. The original, however, was mailed by the advisor and apparently lost in the mail. The issuer agreed to send the amended LC to the transferee's bank in Germany if the beneficiary provided the issuer with a letter stating that the original had been lost in the mail. Though no documentary evidence existed, the beneficiary contended that she notified the issuer of the deadline in which the LC had to be received in Germany. The employee of the issuer testified that she was told that it would do its best in meeting the deadline, but no promise was made to do so. Ultimately, the transferred LC was received five hours after the alleged deadline.

The underlying transaction was not consummated, and the beneficiary sued the issuer and the advisor for breach of contract and negligence in missing the deadline, and misrepresentation under Texas' Deceptive Trade Practices Act (DTPA). Judgment was awarded to the beneficiary by a jury on the negligence and misinterpretation claims. On appeal, reversed.

Legal Analysis:

1. Adviser-duty to Beneficiary:The beneficiary contended that the advisor owed a common-law duty to refrain from its alleged negligent act where, as in this case, there had been a pre-existing relationship and the advisor had voluntary undertaken action beyond its role as advisor. The court noted first that there was no contract or relationship between the beneficiary and the advisor pertaining to the LC. The court stated that, under the UCC, the advising bank assumes a duty accurately to inform the beneficiary of the contents of the LC. Additionally, because the UCC is silent concerning any other statutory duties of an advisor, the court found that the advisor's only duties were to inform the beneficiary that the LC had been issued and accurately to relate the terms of the credit, which the advisor did. The court noted that the UCP, to which this LC was subject, and case law from several jurisdictions did not support such a duty as the beneficiary urged. It stated further that UCP400 Art. 48, which expressly limits a bank's duty in relation to the transmission of an LC, arguably limited the advisor's liability concerning the mailing of the LC. Thus, it concluded that "imposition of a duty in this case could work to undermine the UCC and the ordinary customs and practices of banks in letter of credit transactions."

2. Issuer: Duty to Transmit: The beneficiary claimed that the issuer had a duty of reasonable care to transmit the LC by the alleged deadline based on payment of a transfer fee by the beneficiary to the issuer. The court disagreed, ruling that payment of fee did not, by itself, create a tort duty to ensure the timeliness of the transfer. Nevertheless, the beneficiary claimed that the duty existed because the evidence showed that the issuer knew about the deadline and could have transferred the LC before the deadline. The court again disagreed, finding that UCP400 Art. 54(c) dictated that the issuer did not have a duty to act in a certain way regarding a transfer unless it expressly contracted or otherwise agreed to undertake such an action, and it was undisputed by the parties that no such agreement was made.

3. UCP:The court described the UCP as "a set of international customs and usages that have the force of law when incorporated into a letter of credit." The beneficiary claimed that the UCP was not controlling because it claimed there was no evidence that it agreed to use, or even knew about the UCP. However, since the beneficiary signed the LC (for reasons not stated), the court ruled that the beneficiary had constructive or inquiry notice of the terms of the LC.

4. Misrepresentation:The court additionally reversed the jury's DTPA findings because it decided that the claim was only an attempt by the beneficiary to recast its tort and contract claims as a DTPA action by arguing it purchased a service that was performed in a manner different than was promised. The court ruled that an allegation of breach of contract by way of nonfeasance, without more, did not constitute a false, misleading, or deceptive act in violation of the DTPA. The court found that the beneficiary cited no evidence that the issuer made any assurances and the uncontroverted evidence was that the LC was properly sent and received in Germany.



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.