Letters of Credit.

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Date: Fall 2021
From: Business Lawyer(Vol. 76, Issue 4)
Publisher: American Bar Association
Document Type: Article
Length: 6,631 words
Lexile Measure: 1960L

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This survey concentrates on the most significant letter of credit ("LC") (1) issues addressed in cases decided in the United States in the year 2020. (2)

PRE-HONOR CASES--DISHONOR, FRAUD, AND REPUDIATION

Pre-honor cases are those in which a dispute arises before a demand for payment under an LC has been honored. These actions typically involve a beneficiary or other presenter claiming wrongful dishonor by the issuer or the applicant claiming fraud by the beneficiary and they focus on: (i) whether the issuer gave timely and sufficient notice of dishonor, (3) (ii) whether the discrepancies stated in the notice justify dishonor, (4) or (iii) whether there are extraordinary reasons requiring or permitting dishonor, such as forgery or material fraud, (5) injunction, governmental order, or insolvency.

DISCREPANCY DEFENSES, NONDOCUMENTARY CONDITIONS, AND PRECLUSION

Wrongful dishonor disputes based on facial compliance or preclusion issues continue to be resolved mostly outside the courts. This is attributable to the clarity with which U.C.C. Article 5 recognizes standard LC practice, including the role of incorporated international LC rules, and also to the continuing elaboration of standard LC practice in published materials applying the concepts of preclusion and strict compliance to independent undertakings issued subject to UCP600, ISP98, and other ICC rules.

Natixis Funding Corp. v. GenOn Mid-Atlantic, LLC (6) affirmed multiple summary judgment decisions in favor of multiple beneficiaries whose presentations under substantially similar LCs were refused on the sole ground that insufficient funds were available to meet the amounts drawn. Overdrawing a credit is a recognized type of discrepancy justifying dishonor and not requiring the issuer to pay some lesser amount that is available. On appeal, the issuer did not argue that each drawing, including as to the amounts drawn under each LC, did not facially comply with the letters of credit. It argued instead that there was a mistake in drafting a "contemplated" aggregate $130 million draw cap which could be remedied by rescinding or reforming the LC. The appellate court concluded that there was no mutual mistake or fraudulent taking advantage of a unilateral mistake. (7)

MAM Apparel & Textile Ltd. v. NCL Worldwide Logistics USA, Inc. provides a textbook case of the issuing bank's dishonor of drawing documents for their failure to comply with the requirements for them specified in two UCP600 letters of credit. (8) The Bangladesh beneficiary provided an air waybill instead of ocean bill of lading and failed to present a signed telefax and an authenticated SWIFT message stating that the shipment had been inspected and was authorized. The beneficiary also argued that the issuer was precluded from dishonoring its presentation under UCP600 Art. 16 and that notice of dishonor should have been communicated by telecommunication rather than by a SWIFT message. The court examined the issuing bank's notice of dishonor via SWIFT message and found that it named the discrepancies as required by UCP600 Art. 16(c). (9) Counting the business days from the day of presentation to the day of the SWIFT messages notifying of dishonor, the court also...

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Gale Document Number: GALE|A681135812