Article

Factual Summary: In order to provide assurance of payment for its supplier the applicant obtained a standby letter of credit for the amount of $500,000 in February 1995 to provide for the purchase of electrical goods. The letter of credit required a copy of a notification of intent to draw which "must be given 30 days prior to the drawing" and copies of the bills of lading and invoices without providing detail. In February 1996 the issuer received from the beneficiary a draft for the entire amount of the credit accompanied by numerous documents.

The issuing bank became involved in a series of communications with the applicant in which the applicant urged the issuer not to honor the credit, in particular, claiming that it had not received the necessary 30 day notice and additionally that six allegedly fatal discrepancies existed in the documents presented under the letter of credit.

Eight days after documents were presented, the issuer gave notice of dishonor listing multiple discrepancies chiefly the alleged lack of 30 day notice to the applicant and the undisputed fact that several invoice numbers had been altered by hand. Upon representation by the beneficiary the issuer asserted that the notification letter did not comply because the postal code in the applicant's address read "10001" instead of "10010". The beneficiary did not have another chance to correct the alleged discrepancies as the credit had expired.

The beneficiary brought an action for wrongful dishonor asserting that the second set of documents complied fully with the credit and further that the issuer should be estopped from asserting discrepancies due to its unreasonable delay in processing both of the beneficiary's submissions. The issuer denied both allegations and additionally asserted that the beneficiary had engaged in fraud by altering documents to conform to the letter of credit and by attempting to collect since the supplier did not in fact owe the beneficiary money. The parties cross claimed for summary judgement.

The court denied the issuer's motion and granted the beneficiary's motion for summary judgement, finding no indication that fraudulent activity had taken place and that the beneficiary had complied with the terms and conditions of the credit, concluding that the issuer had wrongfully dishonored.

Legal Analysis:

1. Compliance: Literal Compliance:In determining that an error in the postal code of the applicant did not justify dishonor, the court considered affidavits from a 36 year postal courier in Manhattan (letter would have been delivered) and from an officer of a company with a different name (but the same postal code) that had received applicant's mail on other occasions. The court rejected the beneficiary's argument that delivery was irrelevant but noted that there was no proof of non-delivery. It concluded that if the applicant " desired a particular mode of delivery, or concrete proof that notice had been received ..., it was incumbent upon the [issuer] to specify such requirements when it drafted the letter of credit."

2. Compliance: Notification Letter Deficient: Ambiguity:The court rejected the issuer's argument that the notification letter was deficient because the specific invoice numbers were not listed.

3. Consistency of Documents: The issuer argued that the merchandise description in several copies of the bills of lading was inconsistent and could not properly be matched to the invoice since the bills of lading did not describe the merchandise in sufficient detail. As an example the court noted that an invoice stated "remote color tvs"while the copy of the invoice listed only the item numbers of the goods shipped. The alleged inconsistency was that certain item numbers on certain invoices "did not conform with item numbers on any purchase order". The court noted that "the alleged flaw in all six invoices appears to be the same: the addition of the letters "AS" or "NG" to the item numbers on the invoice. For example, on Invoice 1109-21, the item number listed is "VCR3002-NG"; yet on the purchase order submitted with the invoice the item number is listed as "VCR3002". Evidently, "NG" stands for "No Go" which means that the merchandise is electronically or cosmetically defective at the time of screening, and "AS" stands for "As Is" which means that the merchandise has not been checked." The court also concluded that "[in] other respects such as the price of the merchandise, the invoices and purchase orders match." Rejecting the issuer's argument, the court ruled that it "fails to find that the addition of the letters "NG" or "AS" to the item numbers in the documents in question create an inconsistency under Article 13 (a) of the UCP. The alleged flaws, thus, do not justify [the issuer's] dishonor."

4. Misidentification of the LC:Cover Letter: The issuer alleged that the reference in the cover letter to the letter of credit as "1547424" instead of "1537424" constituted a discrepancy. Noting that "the erroneous numbers did not in fact cause confusion and did not compel an inquiry into the underlying commercial transaction", the court concluded that the beneficiary's mistake "does not justify dishonor". The court distinguished between requirements "that help the bank identify the letter of credit" and "the commercial impact of a discrepancy in the documents", relying on Professor Dolan's explanation in his treatise, "The Law of Letters of Credit" (2nd Ed). The court stated "Requirements that help the bank identify the letter of credit , such as legends and designating cover letter numbers, are for the issuer's benefit; errors pertaining to these requirements do not call upon the reviewing bank officer to exercise discretion on a commercial matter, only to exercise discretion as a banker. The incorrect cover letter number simply required a determination of which letter of credit the beneficiary wished to draw upon."

5. Good Faith:In any event, the beneficiary urged the court to rule that the issuer was estopped by its conduct in consulting with the applicant from asserting discrepancies. Reciting the independence principle formulated in UCP Articles 4 and 14, the court noted that "[t]hese tenets assure that the bank's obligation under the letter of credit remain independent of the underlying commercial transaction." The opinion thus stated "[the] record shows a number of communications between the issuer and the applicant that appear to violate the principles of the UCP and the principle of good faith. The issuer is correct in its assertion that, under the UCP, it is allowed to approach the applicant of the letter of credit for a waiver of any discrepancies with or without the beneficiary's approval." Concluding that the issuer had breached the independence principle and the principle of good faith, the court ruled that the issuer was estopped from claiming non-compliance with the terms and conditions of the letter of credit.

6. Fraud - Back Dating; Altered Documents:The issuer alleged that the documents presented were "tainted with fraud" because the notification letter was back dated as was evidenced by a telephone call inquiring about the proper method of delivery which occurred after the date of the letter and because the hand written invoice numbers on the invoice were "whited out" and replaced by type written numbers. The court stated that fraud, including falsified documents is a well established exception to the rule that an issuing bank must pay when a beneficiary submits documents that conform on their face to the terms and conditions of the letter of credit. However, it noted that an issuer alleging fraud must present evidence that the misrepresentations in documents "are material to the requirements of the letter of credit" and mere speculation, conjecture or evidence of bad business management did not satisfy the narrow requirement of intentional fraud. Concluding that the allegations regarding the date were unsupported speculation, that the invoice numbers were immaterial to the terms and conditions of the letter of credit which did not specify which invoices were to be presented, and that there was no evidence that the white-outs constituted an alteration, the court rejected this contention.

7. Fraud - Underlying Transaction:The issuer claimed that the drawing was fraudulent since discovery revealed that no debt was owed the beneficiary. Because none of the discovery indicated payment on the invoices presented under the letter of credit, the court rejected this argument.

Comments:

1. This opinion is to be applauded for its sane treatment of the error in the letter of credit numbers. The distinction between discrepancies with a commercial significance and those with a banking significance is valid. The question is whether the letter of credit was able to be identified. It was and no harm resulted. In spirit this approach is similar to that taken in ISP98 Rule 3 which merely suspends presentation until identification can occur.

2. Interestingly the alleged discrepancy in the letter of credit number occurred not in a required document but in the cover letter, not a document required by the letter of credit. The court ignored this point in its opinion and the distinction should not impact the principle stated by the case. Nonetheless, it is curious to find a bank alleging that an error in a cover document constitutes a discrepancy. Under UCP500 Article 13(a), such a document technically is to be "Diregard[ed]" as an extraneous document. Of course bankers do not ignore cover on transmitted letters. ISP98 Rule 5 (Notice, Preclusion, and Disposition of Documents) provides guidance on how they may be properly used.

3. The consistency argument by the issuer raises serious questions. The court properly notes that the letter of credit itself contained neither a description of the goods nor invoice numbers, as is typical of commercial standbys. The abuse of the consistency rule in commercial letters of credits is a topic for a different setting. It has no role whatsoever in standby practice as is recognised in ISP98 Rule 3 (Presentation). While the court properly refused to treat as a discrepancy the absence of detailed descriptions of the merchandise on the bills of lading permitting them to be matched to the invoice, its reasoning (one could "tell" that the addition of two letters did not make the numbers dissimilar), while correct does not go far enough for a standby presentation. If the inconsistency rule is retained for commercial letters in UCP600, this opinion offers guidance as to how it should be applied. Since this letter of credit is a standby, however, a more appropriate conclusion would be that the UCP500 Article 13(a) inconsistency rule is not "appropriate" for standbys under UCP500 Article 1.

4. One disappointment in the opinion, was the court's treatment of the error in the applicant's address postal code. The court, no doubt spurred on by counsel, had regard to the question of whether the notification was in fact received and concluded that it probably was received. The court despite its obvious respect for the independence doctrine, does not fully appreciate its scope. For the purpose of examining documents, receipt is irrelevant. If for example, the letter of credit had required a delivery receipt or courier air bill, an error in the address would have constituted a discrepancy. This standby merely required a copy of the notification. There is no reference to the address in this opinion and no indication in the text of the opinion as reproduced that the applicant's address appeared in the letter of credit. Whether or not it did, however, there is no necessary relationship between the address on the notification letter and where the letter was in fact addressed. The envelope or courier air bill could well have contained the correct postal code. As the court properly notes, were the applicant concerned about the delivery, it could have required a copy of the delivery receipt and specified its contents.

5. The nature of the alleged discrepancies coupled with the evidence of the issuer - applicant contact suggests that the issuer was actually collaborating with the applicant in the examination of the documents. The court's response should be carefully noted. Because of what it deemed to be the improper conduct violating the independence principle and the issuer's duty of good faith, the court ruled that the issuer was prevented from asserting discrepancies.

(c) 1999 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.