Legal Case Summaries

Article

Factual Summary:

A letter of credit was issued to fulfil the applicant's obligations under a contract with the beneficiary for the purchase of clothing. On 21 December 1994, the beneficiary made a presentation. The issuer found the documents to be discrepant (New York rather than New Jersey was identified on the bill of lading at the point of origin and the fax number of a contact was omitted) and so notified the beneficiary in a telephone conversation on 23 December. In that same conversation the issuer informed the beneficiary that it had contacted the account party for a waiver and was awaiting a response. In a subsequent conversation on 30 December, the issuer informed the beneficiary that the account party had waived the discrepancies, but that its own account executive had not yet authorized payment. Approval was not given and the issuer dishonored.

On 19 January 1995, the beneficiary attempted to cure the documents and made a representation. The issuer dishonored that presentation because it was untimely because the transport documents were stale.

The beneficiary brought suit and the trial court awarded summary judgment to the beneficiary based on the notion that, once the applicant had waived the discrepancies, the bank could not refuse payment. That decision was reversed on appeal.(*1) The appellate court found that the issuer had a separate right to demand conforming documents, but remanded the case for a factual determination regarding the timeliness of the notice of dishonor. On remand, judgment was entered for the beneficiary after a bench trial.

Legal Analysis:

The issuer argued that the beneficiary's knowledge of the specific discrepancies, as explained in a phone call two days after presentation, constituted a notice of dishonor. Alternatively, the issuer argued that any deficiency in the notice of dishonor had not proximately caused the beneficiary's losses.

1. Notice of Dishonor: The court rejected both of the issuer's arguments. First the court ruled that a notice of discrepancies does not constitute a notice of dishonor as a matter of law. As such, the court found that the issuer had failed to provide the beneficiary with a specific notice that it would dishonor within seven days of presentation after quoting in detail from the transcript of the telephone conversation between the document examiner and the beneficiary. Accordingly, it ruled that the issuer had waived its right to assert any discrepancies as a defense against wrongful dishonor.