Factual Summary: To allay the supplier's concerns about receiving future payments for the purchase of bicycles and bicycle parts, the manufacturer applied for and received a standby letter of credit from the issuer for the supplier's benefit. The standby was amended twice to increase the funds available.

Knowing that its documents were non-compliant, the beneficiary requested that the applicant apply to the issuer for an amendment to those terms deleting the submission of certain documents. The applicant submitted this request and the issuer agreed to an amendment to the standby changing some of the documentation requirements.

Notwithstanding the amendment, the documents were non-compliant. The beneficiary presented them, requesting that the issuer ask the applicant to waive the discrepancies and authorize payment. The issuer thereupon contacted the applicant to seek waiver. The applicant denied this request, saying instead, that it would try to reach an agreement with the beneficiary. Later, the applicant faxed the issuer stating: "F.Y.I. we have agreed, if this letter gets signed, we will waive all discrepancies please be on the look out [sic] for this document." That fax was accompanied by a blank copy of a letter that the applicant desired the beneficiary to sign. A copy of this letter signed by the beneficiary was subsequently sent to the issuer by the beneficiary who again contacted the applicant to ask if it waived the discrepancies in the previously submitted documents. However, the applicant refused to waive the discrepancies and instructed the issuer not to honor the presentation under any terms other than those contained in the letter of credit. On the basis of this instruction, the issuer refused payment to the beneficiary. Before complying documents could be submitted by the beneficiary, the letter of credit expired.

The beneficiary then filed suit against the issuer for wrongful dishonor, claiming the applicant had waived the discrepancies in the required documents and that the issuer was obligated to pay the beneficiary once it had received the signed letter from the beneficiary. Following a bench trial, the court ruled that the letter from the applicant to the issuer constituted conditional irrevocable waiver of the discrepancies which would be operative upon the beneficiary's signed letter. On appeal, the intermediary appellate court affirmed the ruling.

Legal Analysis:

1. Waiver: By Applicant Sufficient:The decision of the appellate court was predicated upon its understanding of the nature of waiver. It recognized the issuer's right to waive a discrepant presentation when the documents were presented. The court notes that "[h]owever, [the issuer], as allowed under UCP500 Art. 14(c), contacted [the applicant] to see if [it] would be willing to waive such discrepancies." According to the court, when this waiver is forthcoming, "the bank has no further obligations to examine or investigate the transactions between the customer and the beneficiary. To require or allow a bank to take further action before it issues payment would undermine the policy underlying letters of credit that the bank issuing payment is entitled to rely strictly on the documents before it." It characterizes the bank's role upon waiver as "ministerial."

Accordingly, the only issues were whether the issuer sought waiver (a fact which was undisputed) and whether the applicant had waived the discrepancies. Construing the applicant's telefax as evidencing a present intention to waive, when the signed letter was received by the beneficiary, "the waiver was no longer revocable." Although the court does not use the language, it constituted a conditional irrevocable waiver.

At this point, the court concluded that "the waiver became effective and the request for pay ment having been made, [the issuer's] only obligation under the UCP was to pay the amount requested."

2. Applicant Waiver:The applicant's letter to the issuer "instructed that a signed letter from [the beneficiary], conforming to the blank form letter included with [the applicant's] letter, triggered [the applicant's] waiver." The court rejected the issuer's argument that this language implied "only that [the applicant] 'would consider' a waiver..."

Analyzing the context in which the letter was sent, the court concluded that the issuer knew of the discrepancies and their extent and had agreed that they would be waived. The court concluded that "[t]he language of the letter to [the issuer] reflects this agreement and evidences [the applicant's] unequivocal intent to waive the discrepancies in the documentation."

3. Waiver Distinguished from Amendment:Noting that the application contained detailed steps for the approval of an amendment, the issuer advanced the alternative theory that the request was for an amendment, requiring it to take additional steps. Looking to the course of dealing in obtaining the amendment, the court concluded that the conduct related to a waiver.


1. The court is fundamentally wrong in its assumption that its conclusion is supported by UCP500 Art. 14. While the UCP expressly permits the issuer to seek the applicant's waiver, it nowhere indicates that such a step would constitute waiver by the issuer. Indeed, such a notion would have never occurred to the drafters.

If the beneficiary fails to comply with the LC's terms and conditions, the issuer has no obligation to pay regardless of whether the applicant waives the discrepancies. If the issuer agrees to waive them, it will do so only after assuring itself of reimbursement. Typically, this will involve a new credit assessment which will occur only after it hears from the applicant and immediately prior to its decision.

This practice is reflected in ISP98 5.06(c)(iii) which provides that "the issuer is not obligated to waive the discrepancy even if the applicant waives it ... ," a provision which states current LC practice.

2. As a result, it is irrelevant what the court thought that the applicant intended. The applicant had no power to "instruct" the issuer to do anything and it was free to consult with the applicant again if it so decided. At most, the applicant would have been estopped to deny its waiver.



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.