Factual Summary: The beneficiary entered into a Purchase/Supply Agreement with the applicant to provide all of the latter's cigarette, candy, and tobacco needs. As part of the agreement, the applicant opened two LCs payable to the beneficiary. Among other documents, the LC required a "purchase order evidencing quantities and prices of merchandise in above invoices". The applicant became delinquent with respect to its obligations under the agreement, and, as a result, the beneficiary attempted to draw on the first LC. The course of dealing between these parties did not utilize purchase orders and, so, none could be submitted. The issuer dishonored this drawing as non-compliant because the beneficiary failed to present a required purchase order evidencing quantities and prices of merchandise in the invoices.

A second attempt to draw on the LC was made by a law firm that had a lien on the proceeds of the LCs. To satisfy the purchase order requirement, the firm presented an open purchase order agreement with the applicant and an affidavit from an officer of the beneficiary that set forth the procedures used to fill the open purchase order. The firm alleged that, taken together, these documents evidenced the quantities and prices of merchandise delivered pursuant to the agreement. The issuer dishonored these documents, as relying, in part, on an affidavit from the beneficiary's vice-president stating that no such purchase orders existed.

The law firm attempted a third draw, this time submitting a letter from the applicant to the beneficiary detailing how all cigarette orders electronically transmitted to the beneficiary served as authorized purchase orders and that all candy orders received by the beneficiary from the applicant were authorized orders provided that the order did not exceed a certain amount. This letter, along with other documents, was submitted in an attempt to comply with the purchase order requirement, or, in the alternative, to constitute a waiver of the requirement. The issuer rejected the document because it was not titled a "purchase order" and did not set forth quantities or prices.

A fourth attempt to draw on the LC was made, this time including what was referred to as "the original signed purchase order" and an amendment to it which allegedly specified quantities and prices for the invoices. The issuer rejected this presentation because the document was titled a "service agreement," was not a purchase order, and did not evidence prices or quantities.

One attempt to draw on the second LC was made by the firm, but the draw was rejected because the presentation did not contain a required copy of the applicant's signed statement certifying that there was no current dispute between the applicant and the beneficiary. No further draws on the second LC were attempted. Subsequently, suit was brought against the issuer for wrongful dishonor of both LCs. The issuer moved for summary judgement, which was granted.

Legal Analysis:

1. Strict Compliance:Purchase Orders: Invoking the doctrine of strict compliance, the court found that the documents presented were not on their face the required purchase orders. The plaintiff acknowledged that the beneficiary and applicant did not use individual purchase orders, and the affidavit of the beneficiary's vice-president stated that such purchase orders did not exist. The court rejected the contention that the submitted documents collectively met the purchase order requirement, stating that issuers should only be concerned with deciding quickly whether the documents complied with the conditions of the LC without the need to judge their insignificance. While purchase orders may take various forms, it ruled that issuers are not expected to be familiar with trade customs and practices in this business which, allegedly, did not utilize purchase orders.

The assignee contended that the issuer's independent knowledge, together with the beneficiary's failure to obtain the required statement due to impossibility, demonstrated the existence of material disputed facts sufficient to deny the issuer's motion. Since there was no dispute that the documentary requirements of the second LC were not met, the court ruled that the issuer was entitled to summary judgment.

2. Waiver: The beneficiary's assignee alleged that a letter from the applicant waived the requirement of a purchase order, setting out authorization procedures for placing purchase orders. Defining waiver as "the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it," the court rejected this contention because the issuer was not aware of the letter until the beneficiary attempted to draw. The letter did not refer to the first LC and did not purport to be an amendment to it, therefore it could not be an "intentional relinquishment of a known right" by the parties. Additionally, the court noted that there was no consent by the issuer to any amendment.

3. Obligation: Issuer Motivation: The assignee pointed to the issuer's internal memos in asserting that the issuer's dishonor of the two LCs was motivated by concerns over reimbursement since it was aware of the applicant's ominous financial condition. The court revealed that the issuer's motivation was "not relevant" since the beneficiary did not comply with the conditions of the LC.

4. Impossibility of Performance:The court expressed bewilderment as to why the parties would amend the LC to require purchase orders when none were ever used or existed. It indicated that the issuer was not privy to this information and that it was "neither material or relevant" to the case: "There is nothing in law or in fact that gives rise to an inference that [the issuer] knew or should have known of the parties' practice or that [the issuer] should have ignored the plain words of the fourth Documentary Condition and accepted the substitute documents."

5. Construction of LC Terms:Rejecting the beneficiary's suggestions that all the documents should be considered collectively, the court noted that banks should not be required to enter into complex analysis. It noted that there was no ambiguity in the requirement and added, parenthetically, that any such ambiguity would not be considered against the issuer since the applicant drafted the controversial term.

6. Examination: Issuer's Independent Knowledge:Pointing out that the issuer had independent knowledge that no dispute existed between the parties, the assignee argued that a question of material fact existed, precluding summary judgement. The court rejected this contention, ruling that the failure to submit a required document was decisive regardless of whether or not the issuer had knowledge of the truth of any statement it was to contain.



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.