Factual Summary: Pursuant to a purchase agreement for industrial conveyor belts, an irrevocable LC was opened for the benefit of the seller. A short time later, due to problems with a shipment, a shareholder of the beneficiary verbally agreed with the applicant to the deposit of the proceeds of the LC into an account controlled by a shareholder who agreed to hold the funds in trust pending the correction of deficiencies in the shipment.

The applicant apparently notified the issuer of this change, and the issuer in turn notified the advising bank via SWIFT. The message purported to amend the LC by directing that proceeds drawn thereon be deposited into the designated account. None of the beneficiary's officers, directors, or other shareholders, however, had consented to the amendment.

The first drawing contained shipping documentation from the beneficiary's shipping agent that referred to the beneficiary's account number, not the shareholder's account number as called for in the amendment. The advising bank treated this communication as a rejection of the amendment by the beneficiary and deposited the proceeds into the beneficiary's account, not into the shareholder's account. The shareholder, however, demanded that the funds be deposited into its account in accordance with the amendment. Believing that the shareholder's account belonged to the beneficiary and that the share-holder was authorized to act on the beneficiary's behalf, the advising bank acceded to the request and transferred the funds to the account.

The beneficiary then notified the advising bank that it had never accepted the amendment and demanded that the funds be re-transferred. The advising bank examined the pertinent documentation, whereupon it re-transferred the funds to the beneficiary's account.

The shareholder and the applicant brought suit against the advising bank when it refused to re-credit the account. The advising bank later joined the beneficiary as a third party defendant. At trial, the court refused to admit certain documents into evidence, including the original letter of credit and the terms of the proposed amendment. When judgment was entered in favor of the advising bank, the applicant and shareholder appealed, contending that the trial court erred in refusing to admit the documents into evidence and that they were entitled to judgment notwithstanding the verdict. On appeal, affirmed.

Legal Analysis:

1. Amendment:The court found that, under Prior UCC Section 5-106(b), "unless otherwise agreed once an irrevocable letter of credit is established ... as regards a beneficiary it can be modified or revoked only with his consent." The court found no evidence of a contrary agreement by the parties and there was no evidence to suggest that the beneficiary consented to the amendment. The shareholder testified that he contacted the issuer when he received notice of the amendment and verbally accepted it. The issuer denied in testimony ever receiving such a confirmation. In any case, the court found that the shareholder was not authorized to act on the beneficiary's behalf. Additionally, the court found that the beneficiary had produced evidence which explicitly rejected the amendment, and the shipping documents sent to the advising bank reflected that it still considered itself the beneficiary of the LC.

2. Evidence: Furthermore, the court found that the exclusion of evidence did not prejudice the plaintiffs. The evidence, among other things, contained the terms of the original LC, which were not in dispute, and the terms of the proposed amendment, which were found to be irrelevant because the amendment was never accepted. Therefore, the documents would not have affected the trial court's decision even if they had been admitted.

3. Obligation of Advising Bank:The court looked to the provisions of the UCC regulating the duty of an advisor and found no guidance to the question of its obligation regarding payment. According to the court, the advisor "was only required to accurately transmit the terms of the letters of ... credit, any other documents and payments drawn upon the letter of credit to the beneficiary and issuer. [The Advisor] was likewise obligated to follow the terms of the letter of credit as originally issued ...." Since the beneficiary had rejected the proposed amendment, the advising bank was obligated to follow the terms of the original LC and had no obligation to credit the funds to the assignee's account.

4. Charge Back of Payment: Mistake: Although the funds had been wired to the advisor, the court relied on UCC Sector 4-214(c) (Commercial Paper) and concluded that a bank could charge back a mistaken payment made pursuant to an LC. The court found that since the shareholder had induced the advising bank to mistakenly transfer funds into the account, the advising bank was justified in returning the funds to the beneficiary's account.



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.