International Contracts and Sales: Chapter 6
Independency/Autonomy Principle, UCP 600 Art. 4 -bank is entitled and obliged to ignore the underlying transaction when considering whether to accept the documents and pay
(a) A credit is by nature a separate transaction from the sale or other contract on which it may be based
Note, Strict Preclusion -If the bank does not comply with the requirements of UCP 600 when rejecting discrepant documents, it is precluded from claiming they do not conform -if bank not notify by the 5th banking day (UCP 600) they are precluded from rejecting the letter -cant hold on to the documents forever
-note, almost never have a truly strictly compliant presentation -you can seeks a waiver, so much more discretionary then the standard story would have -so letter operates as a signaling function -bank holds up signal saying buyer is a good customer and will pay -cant promise this 100%, but at least 50/50 -makes people feel better enough and lowers risk, and so prob that is something closer to the real story -bankers just deal with docs and letter independent of sale contract (the terms of the contract not matter to them) -look to see if the presentation matches
UCP 600 Art. 16 -if think not comply, then may refuse to honor presentation (a) -can reach out for waiver of the discrepancies (b) -strict preclusion in (f)
Discrepant Documents, Waiver and Notice (a) When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate. (b) When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b). (c) When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter. The notice must state: 1. that the bank is refusing to honour or negotiate; and 2. each discrepancy in respect of which the bank refuses to honour or negotiate; and 3. (a) that the bank is holding the documents pending further instructions from the presenter; or (b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or (c) that the bank is returning the documents; or (d) that the bank is acting in accordance with instructions previously received from the presenter. (d) The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation. (e) A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time. (f) If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation. (g) When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made.
Some Documents Might Be Required with L/C -usually require documents to accompany, i.e. like packing list, or invoice, or survey report, insurance certificate, certificate of origin
-commercial invoice required pretty much always -bill of lading ought to always be required (sometimes note remember to require a negotiable bill, but if using a letter then need this, and if trust the other party enough not to have a negotiable bill then really don't need a letter of credit) -packing list, very common -survey report, first ex of this in the rotten chocolate case (going to do lab tests on it), see this with commodities that are graded -If CIF or CIP, there will be an insurance certificate -certificate of origin (for customs purposes) -but some things like cars are certs of title, and so officially issued by customs officials in country of origin, so nice proof that the goods are there and exists, and if have certificate, strong proof supposed to have goods, of ownership -not the same as cert of title or ownership, but function the same -if plants/animals, maybe need certificate of service that they are allowed in -export license -ex: blackberry had an issues a few years back
Holders in Due Course
-takes free of claims and defenses
Payments, Credit, and Performance Guarantees
-wiring money is an option, ex FedWire, Chaps -EFTs, work diff, don't generally mean wiring the money in the normal sense, go through clearinghouse -Whether interest is stated or not it is still there, but if stated then in the price, so if giving credit charging more than if paid up front and this is interest -might get a discount if you pay early -this is another way to tell if they charge interest -if borrowing and paying early and skipping the interest from the seller (bc prob lower from own bank than the seller) -usually see discount for payment within ten days
Sztejn v. J. Henry Schroder Banking Corp.
-"where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller" -It is true that even though the documents are forged or fraudulent, if the issuing bank ha already paid the draft before receiving notice of the seller's fraud, it will be protected if it exercised reasonable diligence before making such payment" -once the first bank honors in good faith then freezes up the ability to stop
Voest-Alpine Trading v. Bank of China
-5th circuit case -had to honor the LC -Bank of China did not notify rejection within the 5 days -just said they were going to reach out regarding waiver, and then 7 days later said not accepting, but then this was too ate and the court held that the first notice was not a notice of rejection -if look to the underlying reasoning, here the client didn't want to pay the original price bc the price had substantially decreased, and they wanted to look for a way not to pay or maybe force renegotiation -they are still bound by the contract, so shouldn't be able to get away with this
Underlying Transaction
-Material fraud in underlying transaction justifies an injunction under UCC art. 5 1) § 5-109 allows the injunction where honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or the applicant a. The applicant is the one getting frauded. If only said on the issuer, then would make it seem that to count under 509 it would need to be a fraudulent presentation, but because it says issuer or applicant then can extend to the transaction 2) When deciding as matter of policy, want to disfavor fraud 3) Suicide letters: a clean letter of credit (known as a suicide letter of credit/suicide letter) a. Under this, the only thing required for presentation is a draft (not need bill of lading, survery report, invoice, packing list, etc, nothing other than draft which is to say I seller order you bank to pay me in the amount of the letter.) Pretty much impossible for this to be fraudulent. Just saying pay me. Since the comments make it clear we can use the fraud exception for suicide letters where only thing being presented is a draft which cant be fraudulent, that also suggests that if have fraud in the underlying transaction, that is good enough
UCP 600 UCP is all important (current is UCP 600, in 2007, so probably will have a new one soon) -virtually all letters incorporate this -to some extent this is the rule book -the bankers use this and so it is basically equivalent to a trade usage in my opinion
-Rules that apply to L/Cs when the text of the credit expressly indicates that it is subject to these rules -They are binding on all parties unless expressly modified or excluded by the credit
Confirmed Letter of Credit
-Seller still might feel uneasy, esp if know nothing about the issuing bank -So the issuing bank asks the nominated bank to add its confirmation to the issuing bank's own undertaking to pay and so becomes the confirming bank -and unconfirmed letter simply means the undertaking to pay is only through one bank
Other Jurisdictions to Note
-Subject of Split -US says fraud in underlying transaction good enough -Canada (Bank of Nova Scotia v. Angelica-Whitewear) and China (Zuigao Renmin Fayuan Guanyu Shenli... Provisions Concerning Certain Issues in Hearing Letter of Credit Cases) agree -But UK says this is not good enough, under United City merchants v. Royal Bank of Canada -Australia follows the UK on this in Inflatable Toy
-So two fraud issues: underlying document and underlying transaction
-basically everyone agrees there is a fraud exception, but then the q is whether it is an issue of fraud in the letter of credit, or in the actual transaction (which is supposed to be independent) -if the presentation is not fraudulent, then get to the second issue
Case Example
-beneficiary was buyer under warranty obligation -buy machine and thing not work or as long as supposed to -other says works fine and you messed it up -present beneficiary letter to the bank and say pay me and they pay -might want to restrain honor, and injunction against honor -so sue against fraud and first response is to prove that lying, otherwise sounds like contract dispute and bank should pay and then should sue
Mid-American Tire v. PTZ Trading, Ltd Court finds these key pieces met here -seller dangled promise of summer tires to unload the winter tires -analogize to famous cases, so Sztejn involved bristles (comes from an animal) but they shipped cow hair and trash, so no colorable right -or Cambridge Sporting Goods, involved shipping old, ripped, and mildewed boxing gloves, so no right to be paid
-channel islands, an offshore territory -contract for mix of winter and summer tires, really only wanted the summer tires -seller not have enough of the summer tires, no way it could have performed, never seemed to have planned to perform, etc -good as gonna get for case for fraud -had opened letter of credit, but they file for an injunction -letter is not confirmed, Barclays in Guernsey is the nominated bank -PTZ makes compliant presentation, they didn't just honor it, they went to First Bank, and Mid-American had gotten temp restraining order and tells Barclays, so tells PTZ not perform bc of this order -UCC Art 5 does apply to a fraud claim (including fraud provision of UCC Art. 5) and this is the overwhelming authority in the states -The scope of the UCC and UCP are different -UCP more a recording of practice rather than a statement of legal rules -The UCC, if the letter incorporates the UCP, is only displaced in the few scenarios where there are overlapping and inconsistent rules -The UCP is not trying to govern fraud, not that there is no fraud exception -here, governed by UCC Art.5 -main jurisdictions are US and London (UK law a bit diff) (note all countries deal with fraud diff) -So fraud exception does apply -before the revision to Art 5, there were a few states that had rule (AL and NY were mentioned) that said if Letter incorporated the UCP then Art 5 not apply -lower court in this case had relied on this confused and and the SC set it straight, as these were only the case in those specific jurisdictions -and even when NY had that provision, they held the fraud provisions of Art 5 still applied bc need to be a fraud exception -AL and NY no longer have these provisions
Then define what material fraud is, See
-form legal tests and holds that there is material fraud "where the legitimate purposes of the independence principle are not served" -So when does this occur -court explains that will be true when the letter is being used for a vehicle for fraud -where the beneficiary has no colorable (meaning even arguable right) right to expect honor and there is no basis of fact to support such honor (just doing this to get paid even though they know they are not entitled to be paid) -so no basis in fact or honor
Fraud Exception
-fraud is an intentional tort, which could allow for punitive damages -if make a promise/contract, and at that time have no intention of fulfilling it, then fraud -letters of credit are a big way to commit fraud -if sales contract totally fraudulent, then it would be independent and not matter bc if docs compliant then the bank would need to pay, and this cannot stand -if not want the letter then claim its fraud when really just a breach of contract case, so get some iffy cases brought -this comes up a lot
Boston Hides & Furs -SO not every mismatch justifies dishonor
-holds inconsistency bw bill of lading and an invoice on the number of the trailer used to ship the cow hides was not a discrepancy justifying dishonor, but there was a prob with the bill of lading which did justify dishonor -so see that not every single discrepancy means that the presentation should be dishonored -discrepancies bw presentment docs themselves as opposed to presentment docs and the letter of credit are subject to the strict compliance principle -inconsistent trailer numbers were an inconsistency on an issue not related to the letter of credit
In Practice
-if the letter of credit requires say the bill of lading, and this is wrong then this seems more of a prob then if there is a doc that is not required -or suppose that the case more likely to get, take the bill of lading and suppose LC requires the bill and the notify party be XYZ company and also requires an invoice, but not say invoice needs to have notify party on there, but sometimes will, and say it say notify SYZ, less likely to be a prob bc whil invoice is required, it did not specify that it needed to have a notify party, so the closer we get to the LC matters for decisions -then what if docs among themselves not match up -still strict compliance, but if couldn't possibly be misled then not a prob, and the invoice is not what will use to notify, the carrier uses the bill of lading so the invoice saying SYZ prob not an issue, but if the bill of lading said SYZ then might dishonor bc suppose to be XYZ and this could be a prob -So see rules, but also see attention to function -Snyder thinks it should really be any inconvenience, the bank shouldn't have to check if it is a typo or not
Standby Letters of Credit as a Means to Securing Performance
-just standing by, bank not have to pay unless there is non-performance, so functions like a guarantee -beneficiary certificate -the idea is the get paid by the bank if they present this, sometimes need independent verification that haven't been paid, but Snyder hasn't seen that much
Strict compliance, Beyene Case -with the name mess up Soran/Sofan
-need strong independence principle: independent from sales contract, so know can trust the letter even if cant trust he buyer -so the good news is that the leading banks take letter of credit operations seriously bc although day to day business with the customers, letters wont be respected if not honored as supposed to -basically concluded the misspelling was a material discrepancy bc could have resulted in non-receipt of the goods and so entitled to reject the document
Strict Compliance -note, strict compliance is not always perfect compliance -if the nominating bank pays the beneficiary after wrongly accepting discrepant documents it is not entitled to reimbursement if accept non-conforming letter bc this is a discrepant presentation (assuming there has been no waiver)
-scrutinize means scrutinize, and if they don't want to pay, they really scrutinize -maybe not want to pay bc customer has gone bankrupt, or customer itself not want to pay (and seems to be the issue in the Bank of China case) -bank shouldn't be listening to customer on that (bc the bank will be liable if wrongly refused) (and letter will not work if not act independently of customers wishes, tho in real world the bank wants to keep customer happy)
SRS Products v. LG Engineering is a good example of above
-ties nicely back to Mid-America -look to if independence principle being served -and answer was yes -they are still typically for sellers, tho can have a buyer
Letters of Credit, Generally -usually done through SWIFT system -the buyer is known as the applicant -bank as issuing bank -seller is the beneficiary -the issuing bank sends letter to the bank in seller's country asking them to advise the seller of the credit -might also involve a nominated bank (or collecting bank) -this bank scrutinizes the docs on behalf of the issuing bank to make sure they conform and if so this bank pays the seller, and then the issuing bank pays this bank and then the buyer pays the issuing bank (so issuing bank takes risk of non-payment by the buyer) -undertaking to pay for the stipulated documents, then the bank essentially has control of the goods until the buyer pays -and so the bill of lading also provides issuing bank with additional security in return for its undertaking to pay
-typically banks charge a percentage on this -but if good credit or long credit with the bank maybe get a better price on them -so for est customers letters can be much much cheaper So EFT, easy and much cheaper then if doing a letter of credit -if won't honor for reason other than strict compliance issues, note, some countries have requirement for notice and protest (will go in with a notary and possibly other witnesses, you present, they dishonor, the notary watches it all and writes up a statement of what happened, and now have evidence: dishonor, notice, and protest)
UCC § 5-109
Allows the issuing bank to refuse to pay, or the applicant to obtain an injunction restraining the issuing bank from paying when "a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary or on the issuer or applicant"
Deferred Payment -In The UK, UK Bills od Exchange Act § 38: The rights and powers of the holder of a bill are as follows: (1) he may sue on the bill in his own name (2) Where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to parties among themselves, and may enforce payment against all parties liable on the bill -Same is not true of deferred payments: Banco Santander S.A. case: -issuing bank issued a deferred payment L/C undertaking to pay 180 days after presentation of conforming documents -turned out fraudulent documents -Paribas refused to pay Banco and court held with Paribas saying the bank's right to collect was subject to the same defects as the fraudster (diff outcome if bill of exchange was used)
Draft: is an order to pay Note: a promise to pay Sight draft: and order to pay on sight Time draft: an order to pay sometime after sight (how much time stated in the draft, typically 30 or multiple of 30 days after sight) (sometimes called a bill of exchange) -how do you know when sight happens -this is upon acceptance -so take the time draft/bill of exchange which has an order to pay X 30 days from sight, signed by person making the order (that is the drawer) -note most common is check -note, when you endorse you guarantee the amount -so in the check hypo where collin sells the check from Snyder to matt for 95, he is still liable for the 100 -but if you endorse without recourse, then cant come back if it turns out to be no good, so then matt is screwed -so the way drafts typically work is they are endorsed without recourse, but if endorsed without this, then worth more because have the guarantee of the seller -who it is drawn on will make a difference -this cant be done with letters of credit
UCP 600 Art. 14 (a-d, f) -have a maximum of 5 banking days following the presentation to determine if complying (c), must present a "single notice" -standard of tolerance for discrepancies in (d) (need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.)
Standard for Examination of Documents (a) A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. (b) A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation. (c) A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit. (d) Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. (f) If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfil the function of the required document and otherwise complies with sub-article 14 (d).
UCC Art. 5
UCC Art 5 bows to the UCP, with the exception of small list of mandatory rules -just used to supplement the UCP -UCP not deal with everything, for example, fraud, and so have the UCC for that
Letters of Credit, Advising Bank
When an advising bank, they do not have an obligation to honor the letter of credit, only confirming banks do -advising banks do often pay on the letter, it is just that they don't have to -so even if just an advising bank, it is the bank the seller knows and gives all the docs and asks will they pay the seller, if a nominated bank, they will do so acting on nomination, not required to but typically they will and then forward docs on to the issuer -if advising bank won't take it, would need to present a straight letter to the issuing bank, but cant do this yourself bc other side of the world, so then maybe the bank will then act as agent and will send it corresponding bank through customary banking channels, and then can got to the issuer -so get another bank to present it to the issuer -this all has costs, but since only acting as agent don't charge that much
Note, UCC § 5-108(a) also states a strict compliance standard modified by "standard practice," but recall that by virtue of § 5-116(c) the provisions of the UCC prevail over those in § 5-108(a) to the extent of any inconsistency
§ 5-108(a)(a) Except as otherwise provided in Section 5-109, an issuer shall honor a presentation that, as determined by the standard practice referred to in subsection (e), appears on its face strictly to comply with the terms and conditions of the letter of credit. Except as otherwise provided in Section 5-113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply. § 5-116(c) Except as otherwise provided in this subsection, the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject. If (i) this article would govern the liability of an issuer, nominated person, or adviser under subsection (a) or (b), (ii) the relevant undertaking incorporates rules of custom or practice, and (iii) there is conflict between this article and those rules as applied to that undertaking, those rules govern except to the extent of any conflict with the nonvariable provisions specified in Section 5-103(c).
