Article

Factual Summary:

To assure reimbursement by the applicant to an insurer, the bank issued an LC which, among other things, required that documents "must be accompanied by the original of this credit." Following the applicant's default, the beneficiary drew on the LC and presented all the required documents except the original LC, which could not be found. In its place, the beneficiary presented a true copy of the LC, an indemnity in the issuer's favor, and an affidavit from its corporate counsel confirming that the original LC was lost, and had not been sold, transferred, or otherwise assigned. When the issuer dishonored because of the absence of the original LC, the beneficiary brought this action. The trial court ruled that the dishonor was wrongful. On appeal, affirmed.

Legal Analysis:

1. Compliance; Required Original LC Lost: The issuer argued that it was entitled to strict compliance with "every term of the Letter of Credit, and that a true copy of the Letter of Credit does not strictly comply with the requirement that it be presented with the original." In rejecting this argument, the appellate court noted that the bank did not dispute the accuracy or legitimacy of the copy, nor claim that the credit was ineffective. In concluding that presentation of a true copy rather than the required original was sufficient, the court noted that the bank did not face any risk that the LC was inauthentic or that the demand for payment was inconsistent with the terms and conditions of the letter of credit.

The court stated that "strict compliance applies to those documentary terms and conditions that go to the essence of the [LC undertaking], those which are 'sufficiently material to justify a refusal of payment.'" Here, the essence of the LC undertaking was that when the beneficiary presented a sight draft drawn on the issuer accompanied by a signed written demand certifying that the amount due related to the applicant's obligation under the insurance policy, the issuer would pay. The court concluded that the requirement was insufficiently material to justify dishonor and that "[t]here is therefore no requirement of strict compliance with this term. The Bank is only entitled to substantive compliance with respect to this document." The judge stated,

[i]n my view, the production of an undisputed true copy of the Letter of Credit generously meets that threshold. . . To find otherwise permits the Bank to avoid its liabilities based on a 'technicality', a recipe for commercial unreliability and uncertainty. On the other hand, sanctioning the use of an authentic copy, and insulating the Bank's vulnerability with an indemnity agreement, permits the fulfillment of the commercial agreement reached by the parties when they negotiated the Letter of Credit.

The court also stated that, "[t]he Bank's refusal to honour the Letter of Credit was, in the circumstances, officious and entirely unwarranted." In addition, the court noted that there was virtually no risk to the issuer since an indemnity was offered and that it was very unlikely that the original LC would be found and successfully presented since it could only be presented at one specific branch and only by the beneficiary, accompanied by the other required documents.

Comment:

1. This opinion is clearly contrary to standard international banking practice. While abstractly logical, it fails to take into account an issuer's expectation that regardless of materiality, every required document will be presented in the form indicated. It should be noted that the failure of UCP 400 (or UCP 500, for that matter), to which this standby was subject, to address the requirement of presentation of originals, a common requirement in standby letters of credit, opens the door to this type of judicial speculation. ISP98 Rule 3.12 (Original Standby Lost, Stolen, Mutilated or Destroyed) would confront the court with standard banking practice and make it much more difficult for a court to ignore such a requirement in a letter of credit.

2. Nonetheless, banks must recognize that, increasingly, serious beneficiaries are concerned about the presence of such a requirement in a letter of credit, and such beneficiaries would be well advised, where it does exist, to also require some statement regarding the terms on which a replacement copy could be issued and under which it would be acceptable for presentation under the LC, lest their ability to draw on the LC be defeated by the loss of the original.

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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.