Article

Factual Summary:

To pay for the purchase of stainless steel barbed tape, a Peruvian corporation caused the issuance of a commercial credit in favor of the seller. The beneficiary contracted with a non-bank presenting agent to ensure that the required documents complied with the terms of the credit. After the goods were shipped, the presenting agent made presentation notwithstanding the fact that both the beneficiary and the presenting agent knew that the prepaid freight amount set forth in the bill of lading was inconsistent with prepaid freight amount set forth in the invoice. The presenting agent assured the beneficiary, however, that this inconsistency did not amount to a discrepancy, and that the documents conformed to the terms of the credit.

Upon presentation, the confirmer refused honor on the basis of this inconsistency and the failure of the bill of lading to contain the master's name. The presenting agent, however, did not notify the beneficiary that the confirmer rejected the documents. Unsure of the status of the credit, the beneficiary met with the confirmer and it was unclear from the opinion whether the beneficiary claimed that subsequently the confirmer advised that there were no problems with the documents. In any event, the beneficiary admitted that it was notified directly that the presentation did not comply with the terms of the credit a few days later, but alleged that the confirmer indicated that if conforming documents were supplied on an expedited basis, the credit would be honored. The beneficiary made a second presentation more than a week later which the confirmer again rejected as being untimely.

The beneficiary then brought this action against the confirmer for wrongful dishonor, and against the presenting agent for breach of contract and negligence. The confirmer moved to dismiss the action against it for failure to state a cause of action. For purposes of this notion, the court assumed that all allegations in the pleading were true. In response, the beneficiary requested leave to amend its complaint. The court granted the confirmer's motion.

Legal Analysis:

In opposition to the confirmer's Motion to Dismiss, the beneficiary advanced several arguments. First, that it had made a conforming presentation prior to the original expiration date of the letter of credit. Alternatively, that any discrepancies contained in the documents were non-substantive and therefore in compliance with the terms of the credit. In any event, it argued that the confirmer waived the expiration date of the credit by its actions. And, finally, that it had presented conforming documents prior to the expiration of the "extended original expiration date."

1. Conforming Presentation: The beneficiary contended that its initial presentation complied with the terms of the credit. The court did not agree and found, with minimal discussion, that the beneficiary's initial presentation did contain discrepancies (1) inconsistency between bill of lading and invoice as to prepaid freight amount; (2) state transport documents), and, therefore, did not conform to the terms of the credit.

2. Substantial Compliance: The beneficiary argued that any discrepancies contained in its initial presentation were non-substantive and therefore in compliance with the terms of the credit. Relying on application of the strict compliance rule by New York courts, the court reasoned that any discrepancy contained in the documents, whether substantive or non-substantive, rendered the beneficiary's presentation non-conforming, and rejected this argument.

3. Waiver of Expiration Date: As to beneficiary's argument that the confirmer waived the expiration date of the credit if conforming documents were supplied on an expedited basis, the court noted that, under UCP 500 Article 9d, the confirmer had no authority to waive the expiration date, and that, under New York law, any waiver must be made intentionally and knowingly. The court found that the beneficiary neither alleged any conduct by the confirmer that would amount to a waiver nor provided any support for its allegation that it relied on the representations made to it by the confirmer. Therefore, the court concluded that the confirmer's representations regarding expedited documents did not constitute a waiver of the expiration date. The court did find, however, that the alleged statements, if made to the beneficiary constituted a conditional waiver as to which reliance was not alleged and, since the condition was not met because conforming documents were not supplied on an expeditious basis, was not met.

4. Beneficiary's Request for Leave to Amend Its Complaint: The beneficiary requested leave to amend its complaint to clarify the representations made by the confirmer regarding expedited documents to the effect that the beneficiary was told that there was "no problem" with the documents. In its discussion, the court noted that the statement the beneficiary proposed to include in its amended complaint would not constitute a waiver of the right to receive conforming documents. The court characterized the beneficiary's alleged reliance on the representations made by the confirmer as unreasonable because the beneficiary knew that the documents contained discrepancies. The court also admonished the beneficiary, stating that it should have known that a confirmer does not have the authority to waive the terms of a letter of credit. Nonetheless, the court was reluctant to dismiss the action without granting the beneficiary an opportunity to amend its complaint. The court did, however, caution that making only superficial changes to its compliant could subject the beneficiary to sanctions.

Comment:

1. The discussion of conditional waiver is enlightening. The thrust of the court's analysis is that the allegations give rise to a cause of action. This means that a jury will consider whether the confirmer's staff made an oral representation that it would accept an expedited re-presentation even though the expiration date had passed. To be sure, what took place in the conversation may be subject to different interpretations. The legal significance is that where such an allegation is made (even if disputed), summary disposition is not appropriate.

2. Even more interesting will be the action against the presenting agent, an aspect of the case not at issue in the motion considered here. As beneficiary's rely increasingly upon such agents, it is inevitable that errors will occur (or be alleged, as here) and the question of liability raised. The results will be interesting to follow.

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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.