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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2000 CASE SUMMARIES 28 S.W.3d 79 (Tex. App. 2000) [U.S.A.]
Topics:
Interpretation; Construction; Automatic Reduction Clause; Attorney's Fees
Type of Lawsuit:
Beneficiary sued issuer for wrongful dishonor.
Parties:
Plaintiff/Appellant/Beneficiary - Eastman Software, Inc. (Counsel: Craig W. Weinlein and Marvin S. Shoman of Carrington, Coleman, et al., Dallas)
Defendant/Appellee/Issuer - Texas Commerce Bank, N.A. (now known as Chase Bank of Texas, N.A.) (Counsel: Bill Jones, Eleanor H. Hodges, and Denise Smith of Cash, Jones, LLP, Houston)
Underlying Transaction:
Not stated.
LC:
Standby LC for US$ 750,000. Subject to UCP500.
Decision:
The Court of Appeals of Texas (6th District), Ross, J., reversed the award of Summary Judgment granted by the trial court in favor of the issuer and entered summary judgment in favor of the beneficiary.
Rationale:
An ambiguous automatic reduction clause will be construed against the interest of the issuer.
Factual Summary:
Article
Factual Summary: Issuer issued standby LC in the amount of US$ 750,000, providing that the credit would expire on 25 March 1998. The credit further provided "It is a condition that if this letter of credit is not drawn against on the following dates, the letter of credit amount shall be automatically decreased in accordance with the following schedule: on (date)- September 5, 1997 ...amount of decrease-$250,000.00 on (date)- December 24, 1997...amount of decrease- $250,000.00
The beneficiary made two drawings each of $250,000 on 3 July 1997 and 15 September 1997. At each point, the issuer noted on the back of the standby that the balance was respectively $500,000 and $250,000. When the beneficiary made a final drawing prior to the expiration date, the issuer dishonored for the stated reason: "received after scheduled date". The beneficiary sued for wrongful dishonor and the parties moved for summary judgment. The trial court entered summary judgment for the issuer. On appeal, reversed and summary judgment entered for the beneficiary.
Legal Analysis:
1. Interpretation of LC: The issuer argued that the automatic decrease clause should be construed to read that the automatic reduction took place regardless of a drawing on the letter of credit.
The beneficiary argued that the clause should be read so that the reduction would occur only if there was no drawing on the L.C. Looking at the letter of Credit, the court concluded that in the event of ambiguity, an interpretation should be made against the interest of the drafter of the document. From this principle, it concluded that a bank's LC "if construed most strictly against a bank because that who drafted it" without any indication that it had inquired into who actually drafted the credit.
The court also noted that LCs are to be interpreted and construed under the ordinary rules of contract construction and that interpretation of the terms of a letter of credit is a matter of law to be decided by the court.
Reciting various axioms of contract construction, namely that all terms must be harmonized if possible to reflect the intention of the parties and the entire writing should be considered, the court concluded that to give effect to the interpretation in favour of the beneficiary should be and that the trial court had erred in entering summary judgment in favour of the issuer.
2. Attorney's Fees: The trial court had awarded attorney's fees to the issuer under the erroneous impression that the issuer was entitled to fees under Revised UCC Section 5-000(e). Prior to appellate argument, however, the issuer conceded that the revision was not in effect and that it was not entitled to attorney's fees.
Comments:
1. This case emphasizes the importance of care in drafting automatic reduction clauses and the possibilities for misinterpretation.
2. The Opinion also illustrates the danger of allowing courts to wander through the world of interpretation of standby letter of credit language. The principles elaborated by the court do, in fact, represent the general principles of contract interpretation (for what they are worth). However, when courts venture into this realm, it is inevitable that they do so without guidance, without principle founded in sound letter of credit practice, and with only a possibility of a sound result. The decision here should have been based on the ordinary effect in standby LC practice to the language used by the parties. The operative term that should have impressed itself on the court is the phrase "if letter of credit is not drawn against in the following dates". The implication to be drawn from this phrase is that the balance then in effect remains and this impression is reinforced by the notations in the reverse of the credit as to what the balance is. Under these circumstances, should the bank have intended that the balance would be reduced to zero in the event that there had been any drawings (all drawings being in the amount of $250,000 under the terms of the credit) prior to the second reduction the credit should have expressly so stated.
© 2000 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.