Factual Summary:: To finance a US$ 1.2 million contract for the purchase of styrene monomer the bank issued an LC. After the shipment of the goods, beneficiary presented the documents specified in the LC to the paying bank, which declined to act, made a courtesy examination, and "found discrepancies between the presentation documents and the letter of credit ... ." Nonetheless, it forwarded the documents to the issuer without any comment. On receipt, the issuer telexed the presenting bank stating that there were "seven alleged discrepancies between the letter of credit and the documents [beneficiary] presented" and stating that it was contacting the applicant for a waiver of the discrepancies. There was no indication that the presentation was dishonored. The issuer sent a second telex eight days after receipt of the presentation documents stating that it "may ... refuse to take up the documents."

Later, the issuer "refuse[d] to take up the documents" and the beneficiary brought an action for wrongful dishonor. After a full trial, the courentered judgment for the beneficiary, concluding that the telexes did not constitute a Notice of Refusal and that the documents complied with the terms and conditions of the LC.t

Legal Analysis:

1. Notice of Refusal: Actual Conveyance of Refusal; UCP500 Article 14 (d): The beneficiary argued that the issuer's initial telex did not give actual refusal, as the telex gave no clear statement of refusal and discussed the possibility of the issuer contacting the applicant for a waiver of the allegedly discrepant terms. The court agreed, stating "[h]ere the [issuer's] notice is deficient because nowhere does it state that it is actually rejecting the documents or refusing to honor the LC or words to that effect. A notice of refusal, by its own terms must actually convey refusal as specified in Article 14(d)(i)." The court ruled that the issuer's first telex "holds open the possibility of acceptance upon waiver of the discrepancies by [the applicant] and indicates that [the issuer] has not refused the documents."

The beneficiary next argued that the issuer's second telex did not constitute notice of refusal. The issuer's second telex stated "Now the discrepant documents may have us refuse to take up the documents according to article 14(B) of UCP 500." The court agreed, stating, "This is [the issuer's] first mention of refusal and it is tentative at best. The use of 'now' further indicates that the documents were not previously refused in the [first] telex. Even if this second telex was sent as a notice of refusal, it came too late." The court found that, "Seven banking days, the refusal period allotted by the UCP 500 Article 14(d) would have expired [one day prior to the issuer's second telex.] The [Issuer's] failure to formally refuse the documents before the deadline precludes the [issuer] from claiming that the documents are not in compliance with the terms and conditions of the credit." The court stated that although it "could properly end its analysis here [and rule for the beneficiary], [we] will analyze the discrepancies listed by the [issuer]."

2. Compliance Standard: Issuer contended that the documents did not satisfy the strict compliance standard. The court disagreed, stating, "the UCP 500 does not mandate that the documents be a mirror image of the requirements or use the term 'strict compliance.'" However, the court noted that there is a "wide range of interpretations on what standard banks should employ in examining letter of credit document presentations for compliance."

The first approach noted by the court required "that the presentation documents be a mirror image of the requirements. In Banco General Runinahui, S.A. v. Citibank Int'l, 97 F.3d 480, 483 (11th Cir. 1996), the court "[R]ecognized and applied the 'strict compliance' standard to request for payment under commercial letters of credit...[t]he fact that a defect is a mere 'technicality' does not matter."(quoting Kerr-McGee Chem. Corp. v.FDIC, 872 F.2d 971, 973 (11th Cir. 1989)). The court considered the mirror image approach as problematic "because it absolves the bank reviewing the documents of any responsibility to use common sense to determine if the documents, on their face, are related to the transaction or even to review an entire document in the context of the others presented to the bank."

In another approach, the court considered cases "follow[ing] the strict compliance standard but support[ing] rejection only where the discrepancies ... create risks for the issuer if the bank were to accept the presentation documents." Under this less stringent standard, the question is not whether the documents correspond exactly to the LC, but rather if the discrepancies within the documents of presentation would become problematic for the issuing bank.

A third standard "is to analyze the documents for risk to the applicant." Under this standard, discrepancies between the presentation papers and the LC would warrant dishonor only if the possibility of defective performance or fraud were increased. The court noted that this standard was without significant support in case law.

The court concluded that the latter two standards "employ a determination-of-harm standard that is too unwieldy [because it] would improperly require the bank to evaluate risks that it might suffer or that might be suffered by the applicant and could undermine the independence of the three contracts that underlie the letter of credit payment scheme by forcing the bank to look beyond the face of the presentation documents."

Because of problems with the other approaches, the court concluded that the best standard was to follow that suggested in UCP500 Article 13(a). Under the court's interpretation of the Article 13(a) standard, the issuer inspects the presentation documents for consistency with the LC and determines if the documents relate to the same transaction. In imposing such a standard, the court employed "a common sense, case-by-case approach" where minor typographical discrepancies would not be the basis for dishonor. The court noted that this approach differs from the "relaxed strict compliance standard" because "the actual calculus used by the bank is not the risk it or the applicant faces but rather, whether the documents bear a rational link to one another." Under the method the court applied, the issuer is required to determine whether the LC and presentation documents bear a "rational link" to one another but is not required to consider possible risks for the beneficiaries or other contracts in relation to the LC.

3. Discrepancy; Name of Beneficiary: The issuer claimed that six of the seven discrepancies listed in its letter to the presenting bank warranted its refusal to honor the letter of credit. First, the issuer claimed that the proper name of the beneficiary differed from the name on the LC as the LC stated, "USA Trading" rather than "Trading USA". In response, the court ruled that "the inverted name bore obvious links to the documents presented by [beneficiary]", and both names were recognizable as the same corporate entity. The court further stated "while it is true that the LC inverted [beneficiary's] geographic locater, all the documents [beneficiary] presented that related to this transaction placed the geographic locate behind 'Trading', not in front of it. Furthermore, the addresses corresponded to that listed in the LC and [the presenting bank's] cover letter to the [issuer] identified [beneficiary] as the beneficiary in the transaction with [the applicant]. The LC bore obvious links to the documents presented by [the beneficiary]".

4. Discrepancy; Original Documents: Second and third, the issuer claimed that the beneficiary failed to send the "original" documents for drawing. In rejecting this argument, the court stated that the documents were the originals as evidenced by the signatures. The court also stated that failure to stamp a document as an original does not mean that the document is not an original.

5. Discrepancy; Dates: Fourth, the issuer claimed "that the date of the survey report is after the bill of lading and is therefore discrepant". The court found that, even though the report was issued after the bill of lading, it was not discrepant because "the survey itself was conducted before the ship departed" without addressing the question of the proper dating under the terms and conditions.

6. Surplusage: Fifth, the issuer argued that the LC number listed in the beneficiary's certified copy of the fax was wrong. The court declined to accept this argument, stating that the number was only wrong by one digit and that the document checker could have verified the number in seven other places to confirm the correct number or "looked to the balance of information within the document and found that the document as a whole bears an obvious relationship to the transaction". The court further stated that "adding the LC number to this document was gratuitous and in the numerous other places in the documents that the LC was referenced by number, it was incorrect only in one place".

7. Discrepancy; Typographical Error: Sixth, the issuer claimed that the destination for delivery was listed incorrectly in the certificated of origin and the beneficiary's certificate. The court stated, "The misspelling of the destination is not a basis for dishonor of the letter of credit where the rest of the document has demonstrated linkage to the transaction on its face." The court ruled that because the alleged discrepancies failed to warrant dishonor, the beneficiary was entitled to payment of the LC.

8: Inconsistencies: Noting that inconsistencies between the document were alleged, the court stated that, "The UCP 500 does not provide guidance on what inconsistencies would justify a conclusion on the part of a bank that the documents are not in compliance with the terms and conditions of the letter of credit or what discrepancies are not a reasonable basis for such a conclusion."



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.