Factual Summary:

A U.S. bank issued a commercial standby to Colombian beneficiary to assure payment of a shipment of bananas to Turkey in the event that the buyer failed to do so. It did so on the basis of an undertaking to it from a Turkish Bank issued on behalf of the Turkish buyer. The standby was advised through issuer's "partially owned indirect subsidiary" in Colombia. The standby required presentation of a draft and default statement accompanied by a "related copy of the bills of lading for the vessel M/V Pure" and other commercial documents. Two separate shipments of bananas to two different purchasers at two different locations were combined under the same bill of lading. After delivery of the goods, the applicant failed to pay and the beneficiary drew on the LC and presented documents to the advising bank in Colombia on either 7 or 9 of December and received by the issuer in New York on 14 December, the day before expiry. Notice that the documents were discrepant was sent on 22 December, listing four discrepancies relating to the copy of the bill of lading.

The discrepancies noted were: First, "the consignee name on the bill of lading (Freccero & Scotti S.R.L. in Savona, Italy) was not consistent with the customer name on [the beneficiary's] drawing statement and invoice (Menar in Mersin, Turkey)." Second, "the port of discharge referred to on the bill of lading ('Savona option other European/ Mediterranean ports') differed from the port of discharge referred to on [the beneficiary's] drawing statement and invoice (Mersin, Turkey)." Third, "the shipment weight indicated on the bill of lading (a gross weight of '2,962,558 Kos.') was inconsistent with the shipment weights indicated on the invoice (a gross weight of 1,202,817 and a net weight of 1,064,346)." Fourth, "the bill of lading failed to specify the name of the carrier as required by UCP Article 23(a)(1)."

The notice of discrepancies failed to state whether the documents were being held at the disposal of, or returned to, the beneficiary. The notice did however, state "[u]rgently, please let us have your authorization to either send docs on approval basis to issuing bank or cable I/B for approval to pay despite discrepancies." Beneficiary sent a letter to issuer dated 5 February 1995, authorizing issuer to transmit the drawing to the Turkish bank.

Legal Analysis:

1. Compliance: The beneficiary argued that the bill of lading was "in fact 'related' to and consistent with the other draw documents, because the differing shipment weights and port of discharge on the bill of lading resulted merely from the fact that two shipments of bananas were loaded onto the vessel Pure in Colombia, both of which were covered by the same bill of lading (i.e., the shipment for Menar in Mersin, Turkey, and a second shipment for a different purchaser in Italy."

The court rejected this argument, noting that compliance under letters of credit is determined on the basis of the documents alone and not based on actual performance of the underlying transaction, relying on UCP500 Articles 4 and 14 (b). It stated that "even assuming, arguendo, that [the beneficiary] can provide a reasonable and innocent explanation for the nonconforming documents, that does not alter the fact that the documents were nonconforming, and that [the issuer] was justified in dishonoring the letter of credit on the basis of their nonconformity."

The court noted that under New York law, the beneficiary must establish that it has strictly complied with the terms of the LC, which means that the documents must comply "precisely" with the requirements of the LC. The court recited the adage that documents that are nearly the same will not suffice. It also concluded that the strict compliance requirement applies with equal force where the LC is subject to the UCP under the UCP500 Article 13 (a) inconsistency rule.

The documents that beneficiary presented to issuer justified the refusal of payment, because the documents did not strictly comply with the terms of the LC.

2. Preclusion: Notice of Dishonor not Timely: The beneficiary argued that the issuer's notice was not given within a reasonable time period not to exceed seven banking days mandated by UCP500 Articles 13 and 14 because the time period for giving notice began to run when the documents were presented to the issuer's "partially owned indirect subsidiary" in Colombia and not when they were received by the issuer in New York.

The court rejected this argument, noting that, at most, the Colombian adviser could be characterized as a "branch" of the issuer. Reciting UCP500 Article 2, the court concluded that "the receipt of the documents by [the adviser] may not be attributed to, and deemed a receipt of the documents by, [the issuer] in New York." The court also noted that the beneficiary's behavior evidenced awareness that presentation was to be in New York since the beneficiary "expressly authorized [the adviser] to transmit the draw documents, as soon as possible and at [the beneficiary's] expense, to [the issuer's] New York office."

3. Preclusion: Sufficiency of Notice: The beneficiary argued the issuer's notice was insufficient in that it failed to recite that the documents were held at the disposal of or being returned to the beneficiary as required by UCP500 Article 14 (d) and (e).

Although recognizing the notice "did not expressly state that [the issuer] was holding the dishonored documents at [the beneficiary's] disposal", the court rejected this argument on the ground that the notice "clearly indicated as much with the words: '[u]rgently, please let us have your authorization to either send docs on approval basis to issuing bank or cable I/B for approval to pay despite discrepancies.'" The court stated that the beneficiary "clearly understood that the draw documents were being held at its disposal, as evidenced by the fact (alleged by [the issuer] and not disputed by [the beneficiary]) that beneficiary, in a letter dated 1 February 1995, authorized [the issuer] to send the draw documents to the Turkish bank 'requesting issuance of the [LC].'" The court also noted that it would not be "appropriate" to invoke the doctrine of preclusion "since, among other things: (1) the dishonored documents had no inherent value, i.e. because they consisted primarily of mere copies, and did not include, e.g., an original negotiable bill of lading which controlled the disposition of merchandise; (2) the merchandise had, according to [the beneficiary], already been delivered at the time in question; and (3) [the beneficiary] has not alleged that it suffered any damages or prejudice as a consequence of [the issuer's] failure to include language in the notification of dishonor which explicitly stated that [the issuer] was holding the documents at [the beneficiary's disposal. ..."


1. Compliance and Strict Compliance: The court equated the UCP standard of compliance with the judicial standard of "strict compliance", failing to recognize that the UCP nowhere mentions "strict" in relation to compliance and at several points tolerates a rather loose relationship between the documents and the LC. It is, indeed, ironic, that the court chose to illustrate its analysis of this "equality" by reciting UCP500 Article 13 (a) sentence 3, the inconsistency rule, which merely requires that documents not be inconsistent with one another and hardly can be called a rule of "strict compliance" in any normal sense.

2. Commercial Standbys and the UCP: This case is a wonderful illustration of the need for the ISP in standby credits. As the court itself points out in reference to a different point, the documents submitted under the credit had no value, were copies, and were delivered after delivery of the goods. There was no intention or possible commercial reason that the documents be subjected to the same degree of scrutiny as would be required of a "live" transport document under a commercial LC. Under the UCP, however, such a level of scrutiny is probably appropriate and would justify dishonor. This is particularly onerous for the beneficiary who never prepared the documents with the intention that they fall within the scrutiny of the LC requirements for "live" documents since payment was expected directly from the applicant and only secondarily under the standby.

Had the standby been issued under ISP98, Rule 4.21 (b) would have prevented such an unwarranted level of scrutiny and would not have required inter-documentary consistency under Rule 4.03 unless the parties so stipulated in the standby.

3. Preclusion: The court's cavalier treatment of UCP500 Article 14 (d) gives pause. It concludes that the recitations required under this rule can be met by a recitation of a request for approval to forward the documents or otherwise seek waiver from the applicant and a subsequent authorization several months later. The formulae of UCP500 Article 14 (d) (ii) are crafted to emphasize the ownership of the documents by the beneficiary once there has been dishonor by the issuer. Any decision which weakens this express principle by resort to judicial interpretations based on subsequent attempts to discern the subjective understanding of the beneficiary and the implicit meaning of very different phrases is highly undesirable. Particularly troubling is the court's focus on the subjective understanding of the beneficiary, which is hardly relevant to system rules such as the UCP.

The only salve is that because the documents were presented under a standby, their possession was meaningless, a point noted by the court here but ignored in its analysis of the strict compliance issue. Here again, the ISP would have made a difference. Rule 5.07 does not require a recitation of this formula in a standby for the reasons indicated by the court.



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.