DCW May 2009 Issue - Institute of International Banking Law & … · 2017. 4. 24. · Apr 2009 DCW...

18 Documentary Credit World ■ May 2009

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Annual Surveyof LC Law & Practice

Charlotte2009

2009 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICEAMERICAS CONFERENCE SUMMARY (PART 1 OF 2)

By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*

Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**

* Lisa CHIN is a banker based in Chicago, IL, and regular participant in the Americas Annual Survey of LC Law &Practice. Specializing in global trade risk, she has over 15 years experience in the industry and is a Certified DocumentaryCredit Specialist.

** Christopher BYRNES is Managing Editor of Documentary Credit World.

For the 18th consecutiveyear, the Institute ofInternational Banking Law andPractice (IIBLP) conducted itsAmericas Annual Survey of LCLaw & Practice. Held inCharlotte, North Carolina forthe first time, the 2009conference took place on 26-27March. The 2009 AmericasAnnual Survey was co-sponsored and hosted by Bankof America. The eventattracted over 65 delegatesfrom Canada, Ireland, and 18US states.

Led by Americas AnnualSurvey Co-Chairs ProfessorJames E. BYRNE (IIBLP) and

James G. BARNES (Baker &McKenzie), the conferencefeatured 15 additional local,regional, and internationalexperts. Panelists includedMichael Evan AVIDON (Moses& Singer LLP); Buddy BAKER;Mel BATOR (Bank ofAmerica); Leo CULLEN(Coastline Solutions); NelsonEVERHARDT (Everhardt &Associates); Bob FOUTTS (JPMorgan); Paul GREAVES (Bankof America); George HISERT(Bingham McCutchen LLP);Carter KLEIN (Jenner & BlockLLP); Don MATTOX(SunTrust); Dennis NOAH(M&T Bank); Donald SMITH(Norman Technologies); DanTAYLOR (IFSA); Charnell C.WILLIAMS (Citi); and JimWILLS (SWIFT).

Additional sponsors of the2009 Americas Annual Surveyincluded Coastline Solutionsand Documentary Credit World.

Martin ABRAHAMSON(Bank of America) deliveredan opening address towelcome delegates.

Prior to the start of theconference discussions,Professor BYRNE recognizedJames G. BARNES for whomthe 2009 ANNUAL REVIEW OF

INTERNATIONAL BANKING LAW &PRACTICE volume is dedicatedfor his years of service to theletter of credit community.

Hot TopicsHot TopicsHot TopicsHot TopicsHot Topics

To begin this firstdiscussion, each panelist chosea “hot topic” for discussion.Paula GREAVES noted that sheis seeing an increase indocuments being returnedunder commercial letters ofcredit rather than eventuallybeing paid after initial refusal.She emphasized that eachparty needs to read the LCcarefully, no matter what itsrole is.

Don SMITH stated he ishearing about a rise in“mythical” discrepancies.There has also been a rise inLC-related scams such asefforts to “sell” letters of

May 2009 ■ Documentary Credit World 19


Delegates of the 2009 Americas Annual Survey of LC Law & Practice conference in Charlotte, North Carolina.

credit and “3039” demandguarantees (“3039” refers to abogus financial guaranteecalled the “ICC 3039 LondonLong Form”). SMITH stressedthat delegates and theircolleagues must preparethemselves to guard againstthese and related scams.

Professor BYRNE said thathe is learning of more frequentinstances of scams on banks.There has been an increase inthe use of LCs to defraudbanks by counter parties.

Bob FOUTTS cited sanctionsclauses as his hot topic. Theseclauses are consuming timeand complicating LCtransactions. Another panelistanticipates the situation willworsen for banks with moreregulations and regulators.

Dan TAYLOR stated that therevision to the Uniform Rulesfor Demand Guarantees(URDG) is taking shape,qualifying it as a hot topic. Healso agrees with FOUTTS’sentiments regarding sanctionsclauses.

Dennis NOAH (M&T Bank)has encountered “push back”from China whereby Chineseentities have been increasinglyreluctant to deal with the US.This appears to beeconomically motivated ratherthan politically driven. Manystate-owned companies arecoping with solvency issuesand some are seekinginjunctions to avoid payment.Professor BYRNE added thatthere was no private law 20years ago in China. In one

generation, they formulated alegal system which is animpressive achievement.Challenges remain. Judges arenot lawyers and there are veryfew lawyers in China thatunderstand LCs. BYRNE notedit is common for one party toeventually back down ifpressure is applied. There is aclear divide regardingexpertise among banks acrossChina. Head offices with moreexperienced personnel want toavoid reputational riskwhereas branches may not seethis as a top priority and haveless respect for the LCproduct.

Referencing a recentconversation he had with asenior Chinese banker, NOAHsaid Chinese banks are



considering whether they needto confirm US credits in lightof the financial difficultiesmany US banks haveexperienced recently. Chineseinstitutions are essentiallysaying: “We’re moreconcerned about your banksthan you are with ours.”

BYRNE then referred totwo cases in the 2009 ANNUAL

REVIEW volume involving asimilar pattern. In Jaffe v. Bankof America, N.A. (abstracted atApr 2009 DCW 13), anapplicant sued the issuer toenjoin honor of a standby. Thecredit was to cover paymentfor the construction of a luxuryyacht. The beneficiary was notthe builder, but instead was aChinese bank that was to lendfunds to the builder. The yachtwas never built nor were thefunds repaid, so thebeneficiary drew on the LC.The applicant accused thebeneficiary of fraud andmaintained that the Chinesebank was also a party to thefraud. This was a seriousallegation to say that a Chinesebank was in collusion with theChinese boat builder. Theinjunction was granted.

The same shipyard wasinvolved in 2002 IrrevocableTrust v. Huntington NationalBank (noted in 2009 ANNUAL

REVIEW 388). A buyer enteredinto two contracts with aseller/ joint builder and a

Chinese builder to constructtwo 127-foot luxury motoryachts in China. Two standbyLCs were issued in favor ofthe Chinese builder’s bank toguarantee re-payment of fundsthat were advanced to buildthe yachts. The buyerterminated both contracts lessthan six months after signing,alleging that no work hadbeen started on the yachts.The buyer tried to have thecredits cancelled, but thebeneficiary refused, as it hadnot been repaid the advancefunds. The buyer sought toenjoin the issuer from payingany demands. Similar to theJaffe case, there wereallegations that the Chinesebank was a party to the fraud,but it was not joined as a partyin the action.

It was noted that in bothcases the credits did not runlogically to the beneficiary butrather to the beneficiary’slender.

One panelist noted a rise inLCs where the beneficiary isnot the applicant’s counterparty, but somebody else. Itmight be a lender or anentirely different entity. Atypical LC is between counterparties and the lender is theassignee of proceeds. There ismuch confusion regarding howcredits should be wordedwhen the two sides are notcounter parties. If not properly

structured, one might have akind of surety. The panelistused the example of a lessee’sobligation running not to thelessor, but to the lessor’slender. It appears the two havea direct relationship with eachother, but they do not. This isnot so much a concern forbanks, but causes manyproblems for applicants andbeneficiaries as it serves as atransferable letter of credit.

As a beneficiary, onecorporate participant indicatedshe sees this situation a lot,particularly from Korea. Thepurchase order says the buyeris one party, but the letter ofcredit is coming from anotherparty. She has to ask herKorean office to determine theobligor party, because she andher company would nototherwise know who it is(probably the ultimate buyer).Sometimes the LC comes fromthe finance company or alessee.

One panelist cautioned thatwarranties arising under USUniform Commercial CodeArticle 5 (UCC Art. 5),specifically section 5-110, are tothe named applicant.1 Anotherpanelist added that if there isno contractual relationshipbetween the beneficiary andanother party who isunknown, the law implies aseparate promise.

A third panelist warned that

1. UCC Art. 5-110(a)(2) states: “If its presentation is honored, the beneficiary warrants to the applicant that thedrawing does not violate any agreement between the applicant and beneficiary or any other agreement intended bythem to be augmented by the letter of credit.”



from a compliance perspective,any beneficiary/seller shouldbe “very afraid” of thisscenario, because the USgovernment will carefullyscrutinize such matters. Sellersneed to know their buyers.

Another problem expressedby the corporate user is that anLC may not cover 100% of themerchandise value. A portion(perhaps 50%) is payableagainst delivery or when theproduct is working andrequires a document signed bysomeone unknown to thebeneficiary/seller. Othersagreed this trend of partialpayments is growing becauseof the dismal economy. Thebuyer is attempting to getfinancing on the back end. Aspayment is at the buyer’sdiscretion, it may not occurmost of the time. Within alarge global company acting asbeneficiary/seller, salesrepresentatives may say this iscommon and have no problemwith such an arrangement, butLC specialists will stronglyobject and may prohibit it.

One participant mentionedhe knew of an instance wherethe LC had an 80%/20% split.The government-controlledapplicant had no intention ofpaying the last 20% as itconsidered this 20% to be itsdiscount.

How does this compare tothe Jaffe case? One panelistresponded that it depends onwhere the fraud wasconsidered to have taken

place. Another panelist saidthat he would consider this aUCC Art. 5-110 warranty, butwondered how well thatwould stand up with a non-USbeneficiary.

Would the same result haveoccurred if this has been atransfer? Panelists commentedthat there would probablyhave been a clause in the LCstating not to transfer beforechecking back with the issuingbank to see if such transferwas acceptable to the newparty. Some participantsthought the result would havebeen the same since the firstbeneficiary’s documents aresubstituted.

Asked one former banker:Are today’s bankersexperiencing pressure to doriskier or strange deals? Herecalls from his past some“really creative people” on thesales side of the bank thatwould try some really unusualdeals. From their perspective,they had little concern if thedeal went bad down the roadbecause they had already beenpaid. Another former bankeras head of the salesdepartment had the policy thatsales reps only got paid theircommission when the bank gotpaid. That philosophy changedthe entire dynamic of sales’thinking.

One active banker said thathe is starting to see sales thatare much riskier in order tocapture business. Interestingly,another active banker said the

opposite. At his bank, therehas been an increase in theirsales reps having moreknowledge and unwilling todo certain creative deals. Theyare seeing greater interest instandbys and carefullyreviewing them.

Panelists told participantsthey must recognize that thereis an increased regulatoryburden. Banks must lookcarefully at their deploymentof assets. Every transaction isgoing to a risk group forevaluation. One participant hasobserved an increase increative deals because liquidityhas dried up. Those withinbanks that are responsible forrisk have had to get up tospeed. Banks really have tolook at deals and ask if theymake sense. It is no longer“business as usual” anymore,another experienced bankersaid. He added his bank isalmost reinventing thebusiness. A lot of oversight isbeing put into place for creditrisk and operational risk.

BYRNE informed delegatesthat Sue Auerbach retired oneyear ago from the US Office ofthe Comptroller of theCurrency. Since 1995, she hadbeen the OCC attorneyprimarily responsible for letterof credit and guarantee issues.The Office has just namedSue’s replacement, ChrisManthey.

A participant who is anexporter stated that he isseeing that credits are no



longer available in the US. Thebuyer wants them availablewith the issuing bank andpayment delayed considerably.There have been ongoingproblems with sales andoperations to be able to copewith significant paymentdelays.

Returning to the topic ofmythical discrepancies, onepanelist asked whatbeneficiaries can do when suchdiscrepancies are cited by aninland Chinese branch asopposed to a branch in a large“money center” city. Hesuggested trying to get a USbank involved in refuting suchdiscrepancies since a US bankmay have “more weight”.Another question then arises:How does one get the matterelevated to the higherdepartment within the Chinesebank? An experienced bankerresponded that one must startat the bank’s head office withthe highest person with whomone has contact and then bereferred to others. The conceptof “losing face” is still veryimportant in China. Starting atthe bottom is much moreinefficient. One needs toprepare in advance what to doif they do not get paid.

One panelist stated that heis seeing bad discrepancies andChinese banks “are notbudging”. In one instance,there were several unpaid LCsinvolved. His strategy was toutilize correspondentrelationships in the country for

assistance. The LCs eventuallywere paid, But the situationdemonstrated to him that localbranches do not have as muchfamiliarity with LCs.

A participant who is anexporter mentioned a pastexperience contesting adiscrepancy in which herequested his bank to go “tothe top” in Pakistan, but it didnot help. He asked AnnualSurvey delegates: What is theresponsibility of a negotiatingbank to assist an exporter?One panelist replied that itdepends on which bank theexporter is using because eachbank has different contacts.Another added that if thebank has a stake in thetransaction (an obligation),then the bank would fight thediscrepancy. If the bank doesnot have an obligation, then itmight not take a position,although may elect to fight thediscrepancy if it wants tosupport its customer. A thirdpanelist suggested that LCspecialists should develop anetwork of options,possibilities, threats, andstrategies and use them in avariety of ways in differentsituations.

Although much of thediscussion referenced Chinaand many situations do relateto China, it was pointed outthat mythical discrepancies canhappen anywhere.

One banker mentioned aninstance at her bank where theissuing bank argued that

Vancouver (in the US state ofWashington) was not seaport,but a river port, so thereforethe bill of lading wasdiscrepant. In fact, Vancouveris considered a seaport.Another dispute had to dowith a credit requiring a “fullset” of insurance documents.The insurance documentpresented did not state howmany originals were issued, sothe issuing bank cited it as adiscrepancy. Bankers explainedthey are getting more push-back of this nature.

Turning to boycott matters,one corporate said that shesometimes sees boycottlanguage on the bid orpurchase order, but not withinthe letter of credit itself. If acompany’s sales reps are notrecognizing such language, thecompany must educate them todetect it. Corporates still haveto comply with US laws andone panelist stated that USanti-boycott regulations havenot changed much at all thelast 5-6 years. Another panelistadded that the only things thathave really changed are thetypes of language boycottingcountries are trying to slipthrough.

Sanctions clauses havebeen in LCs for years and havegone unnoticed in past years.Now, however, new types oflengthy, all-encompassingclauses and are causingproblems. These problematicclauses say that bank policiesmay go beyond the sanctions



and the bank may not paybecause of that. Oneparticipant indicated his bankis struggling internallywhether or not to utilizesanctions clauses. He wouldrather not include thelanguage. If sanctions languageis used, what does a bank do ifit receives a request to removeit? If a bank agrees to remove,the vacuum creates a problembecause one must ask why thesanctions language was therein the first place.

Panelists explained there aretwo kinds of sanctions clauses.The first is informative. Theother kind is a long narrativestatement that may impact thebeneficiary’s right to get paidat the discretion of the issuingbank and could question theirrevocability of theinstrument. Regarding thelatter type, the quality ofclauses being written by banksis worsening. Experts do notthink sanctions clauses aresoon going away. Banklawyers are responsible forthese clauses, not operations.One lawyer said there havealways been sanctions clausesin promise-to-pay documentsdeclaring that regulations mayprevent the obligor frompaying, so this concept is notnew. This current breed ofsanctions clauses in LCs,however, go beyond warnings.

Odd elements of clausesmentioned by bankers: Use ofthe word “apparent”, such as“apparent” violations; a

requirement to notify thebeneficiary if the issuing bankis about to declare bankruptcy;and a bank’s use of one clausein the US and another clausefor the rest of the world.

Turning to one point ofdispute from the US caseLabarge Pipe & Steel Co. v. FirstBank (Mar 2009 DCW 11),panelists asked Annual Surveydelegates: What does theword ‘original’ mean when thecredit requires the ‘originalletter of credit’? If a bankfaxed an LC to the beneficiaryand released the original tothe applicant, and thebeneficiary never receivedwhat was sent to the applicant,would the fax be consideredthe original? One participantexplained that her bank’spolicy is to state that the fax isthe copy and the original willfollow by mail. Anotherdelegate recalled that thematter was considered duringthe drafting of UCP600 to seeif there was a need to definehow an original credit iscreated. It was decided that ithas not been a problem so thediscussion was dropped. Froma lawyer’s point of view, oneexplained that if you fax theLC, then that is the operativeinstrument unless you statesomething to the contrary.Another panelist added thatbanks also need to considerelectronic front-end systems.What is the bank delivering tothe beneficiary? It needs to tellthe beneficiary what it

considers the output to be.

Recent ICC OpinionsRecent ICC OpinionsRecent ICC OpinionsRecent ICC OpinionsRecent ICC Opinions

In ICC Opinion TA644rev, acredit was issued specifyingdetails of shipment, such astransport from and to and alatest shipment date, but thecredit did not require atransport document whichwould evidence such details.Applying UCP600 Article 14(h),the shipment details on thecredit would be disregarded.However, applying UCP600Article 14(d), if a requireddocument contained anyinformation that contradictedany of the shipmentinformation in the credit, thenthat document would bediscrepant. Are these twoarticles contradictory in theway they describe how thissituation should be handled?The ICC Banking Commissionsaid no, and stated so in itsconclusion to this opinion:

Where it has been agreedto handle such atransaction, details such asthe places, ports, orairports from which thegoods are to be shippedfrom and to and the latestshipment date may bedisregarded for thepurpose of determining acomplying presentation andneed not be stated in anyother stipulated documentpresented. However, thedata in the other stipulated



documents will still besubject to review undersub-article 14(d) to ensurethat any data is notconflicting with the data inthe credit. According tosub-article 14(h), bankswill deem a non-documentary condition asnot stated (on the basisthat there is no necessityfor the beneficiary toprovide any evidence ofcompliance) and willdisregard it. Should thebeneficiary, nevertheless,elect to insert such data onany other stipulateddocument, then it mustensure that the data doesnot conflict with the datain the credit. The view ofthe Banking Commission isthat sub-article 14(h) is notabsolute and is qualifiedby the content of sub-article 14(d).

This is a change fromUCP500. Now, if there isadditional information on arequired document and thatadditional informationconflicts, then the document isdiscrepant. When discussed atthe ICC Banking Commissionmeeting, the opinion promptedmany comments and muchcriticism. At the AnnualSurvey, one panelist explainedthat if something is considered“not stated” that means it isnot there. If it is not there,then there can be no conflict.His fear is that this will

eventually extend todocuments presented that arenot required by the credit.Another panelist remindedparticipants that this is extradata on a document. Is itpossible to call the beneficiaryand ask if you can “white out”the conflicting (extra)information on the document?

According to one delegate,European banks find thisopinion acceptable butAmerican courts will object toit. The worst aspect of thisopinion is that it does notdeter non-documentaryconditions in a standby, butencourages them. This furtherdemonstrates the value ofISP98. Another delegateexpressed agreement with theopinion. He sees the twoprovisions as different becauseone deals with a condition,and the other deals with data.

The Annual Survey audiencewas reminded that during theUCP600 drafting process, threevariations of Article 14(d) hadbeen proposed to ICCNational Committees. Amajority chose the version thatis now contained in UCP600.At the time, the US positionwas that Article 14(d) shouldhave specified “data in adocument required by thecredit … .”

One banker wondered whya bank would put a conditioninto a credit without adocumentary requirement.While most may simplyattribute this to inexperience

or carelessness, one bankeroffered regulatory complianceas a possible explanation. Anissuing bank may list thetransport from and to detailsso that the advising bank doesnot need to go back to theissuing bank to request thisinformation due to the lack ofa transport document.

From the corporateperspective, one LC specialiststated her company does notput anything extra in itsdocuments. They ask for non-documentary conditions to betaken out. Now, they aregetting discrepancies forconflict when their packing listdoesn’t total up or match theair waybill by 10 kilograms.Another specialist remarkedthat this has always been truebut that it is just moreprevalent now.

Some background wasoffered to explain howguidelines for non-documentary conditions cameabout. Concern was expressedin the 1980s about theincreasing number of non-documentary conditions inletters of credit. Peopledealing with guaranteesaround the world strugglewith a similar issue. Is aguarantee independent or atype of contract? So, whatshould be done with non-documentary conditions? LCspecialists dealt with the sameproblem with UCP500, ISP98,UCC Art. 5, and now withUCP600 for standbys. It is



more of a struggle withcommercial LCs. For one LCexpert, the result of ICCOpinion TA644rev is notdisastrous but its ramificationsfor standbys are worrisome asit seems to create an openinvitation to lawyers andapplicants to insert languageinto UCP600 standbys.

In ICC Opinion TA672rev, acommercial LC was issuedavailable by deferred paymentwith the confirming bank. Theconfirming bank incurred thedeferred payment undertakingand prepaid the beneficiary.The issuing bankcommunicated its acceptanceof the documents. One daybefore the maturity date, theissuing bank notified theconfirming bank that it wouldnot be effecting paymentbecause it had been servedwith a judicial order

preventing payment. Uponreceipt of a faxed copy of thejudicial order, the confirmingbank noted that the orderprevented the issuing bankfrom paying the beneficiary.The confirming bank remindedthe issuing bank of itsobligation under UCP600Article 7(c)2 and also that the

issuing bank had authorizedthe confirming bank to prepayper Article 12(b).3

The ICC BankingCommission noted that locallaw prevails over thetransaction and agreed withthe confirming bank that “theissuing bank should seek toresist such an injunction inorder to preserve the integrityof its credit and the UCP” byattempting to have theinjunction removed byinforming the court of therelevant UCP articles and that

the confirming bank has paidthe beneficiary.

As explained by onepanelist, the crux of thisOpinion was what theinjunction said. It made adifference that the prohibitionwas against paying thebeneficiary rather than thenominated bank. Because ofthis, the issuing bank isobligated to pay thenominated bank per Article7(c). The panelist alsomentioned that this Opinionreferenced ICC Opinion R519.4

Another panelist added thateven under UCP600 this kindof payment is still riskybecause negotiable instrumentlaws do not back thenominated bank as a holder indue course. The point wasmade to the Annual Surveyaudience that this is not just amatter of rule versus law.Rather, it is a matter ofinjunctions versus everythingelse. Injunctions operateoutside rules and sometimeseven outside laws. Does ICCOpinion TA672rev help or hurt

2. UCP600 Article 7(c) states: “An issuing bank undertakes to reimburse a nominated bank that has honoured ornegotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for theamount of the complying presentation under a credit available by acceptance or deferred payment is due at maturity,whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimbursea nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

3. UCP600 Article 12(b) states: “By nominating a bank to accept a draft or incur a deferred payment undertaking, anissuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred paymentundertaking incurred by that nominated bank.

4. ICC Opinion R519, an unpublished opinion under UCP500, dealt with similar issues and reached the sameconclusion. Because the credit in that query was available by acceptance, there was an additional question of whetherthe ICC recognizes the position of a holder in due course. The ICC Banking Commission responded, “The status of‘holder in due course’ comes by virtue of bill of exchange law and not through UCP.”

Does ICC Opinion TA672rev help or hurt

nominated banks in the event of an injunction?



nominated banks in the eventof an injunction?

Another panelist advisedthat if a nominated bankreceives notice of an injunctionfrom the issuing bank, thenominated bank shoulddemand a copy of theinjunction by fax. Sometimesthe injunction just does notexist or it may only cover notallowing the issuing bank todebit the applicant’s account,which is different fromhonoring the LC obligation.

Another panelist noted thatevery country has negotiableinstruments law, whether it isthe Geneva Convention (civillaw) or the Bills of ExchangeAct or the UniformCommercial Code (commonlaw). A nominated bank needsto inform the court that it is anegotiating bank and the courtmay lift the injunction. Onedelegate reminded fellowparticipants of the 2005 Frenchcase, Crédit Lyonnais v. CanaraBank, where a time draft wasnot honored due to a fraud.

ICC Opinion TA677revdeals with clauses in creditsstating that documentspresented must be correct onfirst presentation and nocorrection of documents isallowed. The ICC BankingCommission stated that aclause, which stated that thedocuments must not evidenceany corrections, is “one that

the beneficiary would have toabide by, unless the credit wassubsequently amended torefuse the condition, and anominated bank would berequired to refuse documentsthat contained anycorrections.” However, theother requirement thatdocuments must be correct onthe first presentation“represent bad practice, andissuing banks should refrainfrom including such terms andconditions in their credit.”

If the beneficiary has onechance to present complyingdocuments and no correctionsare allowed, panelists statedsuch a clause puts a hugeburden on the nominatedbank. Another panelist notedthat such a clause is differentthan one stating thatdocuments bearing correctionsare not permitted.

In ICC Opinion TA658, anissuing bank had refused a setof documents due to anincorrect LC number on thebill of lading (one characterwas different). The queryasked if this was a validdiscrepancy, particularly inlight of the fact that the issuingbank misquoted the LCnumber is in its refusal. Also, ifa nominated bank sends arevised document afterreceiving a refusal, does thisimply that the nominated bankhas accepted the cited

discrepancies as valid?The ICC Banking

Commission replied that theincorrect credit number wasnot a valid reason for refusal.Also, the fact that thenominated bank or beneficiarysends a replacement orcorrected document “does not,in itself, signify the nominatedbank’s or beneficiary’sacceptance of the discrepancy.”

One panelist stated that inmany countries, if you send areplacement document, thenyou are indicating to issuingbank that you accept thediscrepancy. The rationale forthat attitude is this: either youoriginally had a cleandocument and were nowsending a discrepant one, oryou are agreeing with theirassessment on the discrepancy.Another panelist reminded theaudience that the LC numberappearing on all documents isrequired by law in somecountries or is customarypractice where the examinersdo not speak English, as it ispart of their marks andnumbers.

This Opinion TA658 alsoreferenced Opinion R289.5

Courts have made thedistinction in contractsbetween terms and conditions.The discrepancy must bematerial in order not to pay.One delegate stated that areasonable document checker

5. ICC Opinion R289 stated that the purpose of requiring a credit number on a document “is only to assist in tracingdocuments should they go astray. “


would come to the conclusionthat the incorrect creditnumber is a typo.

It was pointed out thatISP98 uses a rational approachto this issue in that it suspendsthe time to honor until thebank figures out the properstandby to check against.6

Delegates were againreminded that queries to theICC Banking Commission areanswered based solely on theexact specifics contained in thequery.

To conclude this paneldiscussion, one panelist alerteddelegates of DOCDEXDecision No. 271. The mostimportant of recent DOCDEXdecisions in his opinion, itconcerns banks that give arelease to a carrier and thenreceive discrepant documents.The panelist contends thatsince the two transactions aredifferent, the bank can refusethe documents. Thebeneficiary then has a claimagainst the carrier. When thatoccurs, the carrier will claimagainst the release the bankissued.

Standby Issues &Standby Issues &Standby Issues &Standby Issues &Standby Issues &Guarantee IssuesGuarantee IssuesGuarantee IssuesGuarantee IssuesGuarantee Issues

Given the current state ofthe economy, panelists predict

6. ISP98 Rule 3.03(c) states: “If the issuer cannot determine from the face of the document received that it should beprocessed under a standby or cannot identify the standby to which it relates, presentation is deemed to have beenmade on the date of identification.”

7. US OCC Final Rule Amendments to Part 7 – Bank Activities and Operations (§7.1016 and §7.1017), Federal Register,Vol. 73, No. 80; reprinted at 2009 ANNUAL REVIEW 343.


more litigation and disputes inthe future. Even within banks,sales and operations personneldesperate to complete dealswill likely battle with theirbank’s in house counsel.

Asked by the panel if theyare experiencing more drawson standbys, less than half theaudience indicated such. Onebanker remarked that he hadseen more draws in 4th quarter2008 when liquidity problemsfirst emerged. Since then, thenumber of draws have taperedoff. Professor BYRNE reportedto Americas Annual Surveydelegates that in recentmeetings of IIBLP’s RegionalAdvisory Councils (Asia,Europe, Middle East) bankersare seeing more refusals instandbys.

A question was raised aboutUS banks now being able toissue true (accessory)guarantees.7 Up until recently,it was thought that a bank hadto have express authority in itscharter or be involved in thetransaction (like a steamshipguarantee). Otherwise, theanswer was no. LC legalexperts believe the onlypractical change in the newrule allowing this is to be ableto add avals to drafts. BYRNEexplained that by adding anaval, a bank is an

accommodation endorser ofthe draft under US law.BYRNE suggested that bankpersonnel be told not to addtheir signatures to anythingthat states “aval” on it.Another panelist added that ifbanks want to offer thisservice they need to carefullyconsider what is involved.Would you handle the draft?Would you hold it or give itback? Where should it bepresented at maturity? Howwould it be reflected on yourbooks?

One former banker statedthat at his institution avalizeddrafts would say “Domiciledat” to indicate where topresent it. These days, he saysthere is some trade in theMiami market handled byforfaiting operations. Theavals are obligations of theirhome country, so they feelcomfortable with the countryrisk. An active banker addedthat she believes avals are adying product and that thereis little market for them withinthe United States. Someinterest remains in LatinAmerica, but even there theaval market is drying up.Another banker stated that hisbank had done many of thesefor shoes in the 1970s andwould send the avalized drafts



back in Italy. His bank used tobook them as bankers’acceptances. The Italian bankswould discount. They are nowgetting more requests to dothis.

One panelist stated thatfailing to give proper notice ofdishonor would be a problem.This is not an old-fashionedguarantee. In the US, it wouldbe the same (no differencebetween a guarantee and anLC). Another panelist statedthat it abolished the effect ofthe signature on theinstrument. One delegateadded that collections comingin from Turkey wanted avals.Another delegate cautionedbanks to make sure theiremployees are trained and canrecognize these words. Hereferenced a past situationinvolving orange juice fromArgentina where it wasdiscovered that the bank didnot have recourse to the buyer.

The panel then brieflyreturned to the Jaffe and 2002Irrevocable Trust casespreviously discussed duringthe Hot Topics panel. In thesecases, the judges did not takeinto account UCC Art. 5. PerUCC Art. 5, only beneficiaryfraud can excuse the issuer’sLC obligation. The lender ofthe shipbuilder was thebeneficiary. The lender did notcommit fraud. In Jaffe, thecourt granted relief. In 2002Irrevocable Trust, the partiesworked out the LC aspect andthe case proceeded on

substantive issues.In Lennar Homes, L.L.C. v. V

Ventures, LLC (Nov/Dec 2008DCW 22), Lennar Homes hadsecured an option to purchasereal estate by having a standbyLC issued in favor of theseller. Lennar failed to closethe purchase and V Venturesdrew on the standby. Lennarclaimed it was not in defaultbecause its performance wasprevented by a governmentalrestriction. The USgovernment had determinedthat the land had been apanther habitat so thepurchaser of the real estatewas required to acquire “1,100panther migration units” (apermit) in order to developthe property. Lennar tried toenjoin the issuer fromhonoring the draw, claimingLC fraud. Whose responsibilitywas it to get the permit? Thecourt decided it was a contractdispute and properly refusedinjunctive relief.

One banker asked thelawyers present if they believethat most cases where fraud isalleged are really contractdisputes. One lawyer said yes;no others responded to thecontrary.

In Foster Poultry Farms, Inc.v. Suntrust Bank (May 2009DCW 11), Foster Poultrywished to purchase a chickenprocessing facility and theseller required that Fosterissue four negotiablepromissory notes backed by anLC. The LC was syndicated to

ten separate financialinstitutions. Because thepromissory notes weretransferable, there was atransfer clause in the LCstating that the credit wastransferable to any successoror assignee that became aholder of the notes. Althoughthe buyer gave the notes to theseller, the buyer did notendorse the notes. The issuerdid transfer the credit by re-issuing two separatereplacement credits. The termsof the notes allowed them tobe “monetized” (converted tocash).

In order to accomplish this,the buyer had to givepermission according to thenotes. The seller wanted tomonetize the notes and use thefunds for competition with thebuyer. The buyer refusedpermission to monetize thenotes, but the issuer got a legalopinion that stated thatendorsement of the notes inblank and their deliverytogether with the letter ofcredit would satisfy thetransfer clause in the originalLC. The issuer, however, failedto re-issue the LCs so itbecame unclear who coulddraw on the credits. The buyersued the issuer, stating that theissuer had a duty of disclosurebased on their confidentialrelationship.

The panelist discussing thecase asked what the issuermeant by the transfer clause.The issuer did not have a right



to use confidential informationto its own ends in a differenttransaction. Besides thetransfer clause, did the issuercheck that the transferee wasthe new holder of the notes? Isit a non-documentarycondition? How does thesyndicated agreement comeinto play when the frontingagent is the one who isnegligent? There are a host ofwarning lessons to bankscontained in this case.

Issues in UCP600Issues in UCP600Issues in UCP600Issues in UCP600Issues in UCP600

This panel began by notingthe rise in exclusions ofcertain UCP600 articleswithout replacing them,particularly portions ofUCP600 Articles 14, 15, and16.8 Others mentioned UCP600Articles 10(c)9 and 10(f)10 For atleast one institution, the bankwill not confirm LCscontaining these exclusionswithout specific replacements.Such LCs are primarily comingfrom countries in SoutheastAsia.

Panelists conducted aninformal poll of delegateregarding the impact ofexclusions. If you exclude anarticle, then is the oppositesituation true? If you excludean article, then does it means itis not there (leaves a hole)?Most all bankers presentthought that exclusion leaves ahole. It was observed thatlawyers present would notcommit to an opinion. Onelawyer did state that thisrequires an interpretation as towhy the clause is beingexcluded, adding that “onceyou start trying to guess whatthe intent of the issuing bankis, you’re in trouble.”

If a bank excludes UCP600Article 14(i), could you acceptdocuments presented todayand dated tomorrow?11 Mostbankers said yes. One statedthat it depended on thecontent of the document. (Forinstance, he would certainlynever accept an on-boardnotation dated tomorrow.)Another specialist added thatit makes a difference whether

it is a commercial LC or astandby LC when subject toUCP600. Under a standby, itdoes not really matter. Forcommercial credits, heunderstands why it would because for concern.

One delegate soughtclarification regardingwhether, when there is abeginning inland point, onecould not use “Free on Board”terms but rather must use“Free Carrier” terms becausethe transport document wouldbe a multimodal bill of lading.One panelist informeddelegates that Incoterms arecurrently being revised andwill be finished next year.They will be called Incoterms3000 with an effective date of 1January 2011.

The panel next discussedconfusion over on boardrequirements on transportdocuments. There are multipleissues, but the main one relatesto the requirement of thevessel name and port ofloading with the on boardnotation on the bill of lading

8. UCP600 Article 14 is “Standard for Examination of Documents.” UCP600 Article 15 is “Complying Presentation.”UCP600 Article 16 is “Discrepant Documents, Waiver and Notice.”

9. UCP600 Article 10(c) states: “The terms and conditions of the original credit (or a credit incorporating previouslyaccepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance to thebank that advised such amendment. The beneficiary should give notification of acceptance or rejection of anamendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any notyet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As ofthat moment, the credit will be amended.”

10. UCP600 Article 10(f) states: “A provision in an amendment to the effect that the amendment shall enter into forceunless rejected by the beneficiary within a certain time shall be disregarded.”

11. UCP600 Article 14(i) states: “A document may be dated prior to the issuance date of the credit, but must not bedated later than its date of presentation.”


when the place of receipt isdifferent from the port ofloading. Although wordingchanged slightly from UCP500to UCP600, the requirementremained the same. Onepanelist believes that thismisconception (of the vesselname and port of loading nolonger being required) appearsto have started in Vietnam andmoved across the continent.

Participants were informedthat the UCP600 DraftingGroup is developing a matrixof transport articles and whatis required for each to signifyshipment. This will be issuedas an educational document inearly 2010. For the last 20years, multimodal transporthas been the global standard.When the multimodal articlewas moved in front of the billof lading article in UCP600,this helped LC specialistsappreciate this.

One panelist stated that ifthere is no pre-carriage (themultimodal transport isoccurring at the end of thejourney), then the on boardnotation must contain thevessel name. Another addedthat it depends on what typeof document one has andwhether the multimodaltransport occurs at thebeginning or end or both. Ifthere is no inland transport at

the beginning, then thetransport document must havea normal on board notation.

Discussion turned to theterms and conditions ofcarriage and how these willnot be examined. Carriershave started putting some ofthis language on the front atthe top of the signature block.What do you need (or neednot) examine? Where does thisstart and end?

Other transport-relatedcomments regarded whether abill of lading requires amerchandise description.Panelists indicated no. Doesthere need to be linkagebetween the bill of lading andother documents? Delegateswere reminded that “linkage”had been addressed in aposition paper relating toUCP500 which no longerapplies under UCP600.

A delegate then mentioneda scenario regardingmerchandise descriptions. Onthe LC, the merchandisedescription was given as “hotrolled steel rods”. On the billof lading, it was “hot rolledrods”. Panelists agreed thatthis was not a conflict andtherefore, not a discrepancy.Another delegate revised thescenario with the bill of ladingshowing a more specificdescription, but the panel still

believed there would be noconflict.

One delegate stated that hewould not accept a bill oflading without a merchandisedescription. Others repliedthat the absence of amerchandise description on abill of lading is still acceptableunder the UCP, although acarrier would likely not issue abill of lading without amerchandise description.

It was mentioned that thedelivery clause on bills oflading is making a“comeback”. This cannot bedealt with in UCP becausethere is no definition in theUCP of a negotiable bill oflading, but is subject to a legaldefinition. Nonetheless, atleast one banker said she isstill seeing banks cite this as adiscrepancy. The panelrecommended that she shouldask the bank to show herwhere in UCP it states thatwould be a discrepancy. Thebanker added that some banksare issuing LCs stating thatbills of lading cannot show thisclause, but this is problematicbecause the clause may beburied within the terms andconditions.

Regarding use ofconsolidated shipment clauses,it was pointed out that this isstill not a discrepancy.12 Is it an

12. It must be noted that this is addressed by the International Standard Banking Practices (ISBP) Paragraph 114: “If abill of lading states that the goods in a container are covered by that bill of lading plus one or more other bills of lading,and the bill of lading states that all bills of lading must be surrendered, or words of similar effect, this means that all thebills of lading related to that container must be presented in order for the container to be released. Such a bill of ladingis not acceptable unless all the bills of lading form part of the same presentation under the same credit.”



unspoken assumption thatwhen a bill of lading isrequired, that it must be anegotiable bill of lading? TheICC Banking Commission hassaid no. A panelist then addedthat the real definition of anegotiable bill of lading isdetermined by each country’slaws which is why the UCPnever dealt with it. Thepanelist agreed with thestrategy of stating in the creditthat it is not acceptablebecause this will graduallyforce carriers to remove therequirement that a bill of

lading be negotiable. Others,however, observed that thiscould be part of the terms andconditions that banks are notsupposed to read. It wasmentioned that there havebeen cases in Singapore wherea straight consigned bill oflading was still required fordelivery. One delegate notedthat the clause states that thecarrier may deliver with anoriginal, but the carrier maychoose not to do so. If it doeschoose to do so, then it cannotbe sued for misdelivery. Thepanel agreed.

Another delegate asked if abank could cite UCP600 Article14(d) and say that thedocument conflicts with itselfbecause it is not really anegotiable document. Othersresponded that some banksare making the argument thatregulatory matters are beyondtheir control so that the forcemajeure article applies. This isa misapplication of UCP600Article 36. ■

(Part 2 of the 2009 AmericasAnnual Survey conferencesummary will appear in nextmonth’s DCW.)


2009 Guarantee & Standby Forum2009 Guarantee & Standby Forum2009 Guarantee & Standby Forum2009 Guarantee & Standby Forum2009 Guarantee & Standby Forum

MARK YOUR CALENDAR NOW & PLAN TO ATTEND!

EUROPE: London – 11-12 May 2009 (hosted by JPMorgan)MIDDLE EAST: Dubai – 17-18 May 2009

HONG KONG: 13 Jul 2009SE ASIA: Singapore – 20 Jul 2009

AMERICAS: NYC – 29 Oct 2009 (hosted by Bingham McCuthchen)

for complete details, contact: +1-301-869-9840 • www.iiblp.org

IIBLP

TheTheTheTheThe Global Authority for Global Authority for Global Authority for Global Authority for Global Authority forGuarantees & Standbys.Guarantees & Standbys.Guarantees & Standbys.Guarantees & Standbys.Guarantees & Standbys.

Panel Discussions Include:

• Hot Topics in Guarantees and Standbys:Distinguishing Accessory Undertakings

• The URDG RevisionRevision Update Including Its Impact onGuarantee & Standby Practice

• Expiration and Evergreens• Abusive Drawings

• Special IssuesDrawing, Transfer, & Inoperative Conditions

• Counter Guarantees & Counter Standbys:Practices and Problems

• Economic Impact of the DepressionWhat You Need to be Aware of for Your Practice,Including Unexpected Drawings

• Guarantee & Standby Law Review• Open Forum

What Additional Topics Matter Most to You?

14 Documentary Credit World ■ June 2009


Annual Surveyof LC Law & Practice

Charlotte2009

2009 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICEAMERICAS CONFERENCE SUMMARY (PART 2 OF 2)

By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*By Lisa CHIN*

Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**Edited by Christopher BYRNES**

* Lisa CHIN is a banker based in Chicago, IL, and regular participant in the Americas Annual Survey of LC Law &Practice. Specializing in global trade risk, she has over 16 years experience in the industry and is a CertifiedDocumentary Credit Specialist.

** Christopher BYRNES is Managing Editor of Documentary Credit World.

1. United States v. Winstar Corp., 518 U.S. 839 (1996).

(Part 1 of the 2009 AmericasAnnual Survey conferenceappeared in the May 2009 DCWissue at page 18.)

Impact of the FinancialImpact of the FinancialImpact of the FinancialImpact of the FinancialImpact of the FinancialCrisis on LCsCrisis on LCsCrisis on LCsCrisis on LCsCrisis on LCs

To begin this paneldiscussion, Professor BYRNEreviewed the US case AnchorSavings Bank, FSB v. UnitedStates (summarized at Oct. 2008DCW 13) because “itencapsulates what ishappening now.” In the 1980s,the US Federal Home LoanBank Board responsible for

certain regulatory mattersasked Anchor Savings Bank toacquire four failing financialinstitutions. In return, Anchorwas told it could include“supervisory good will” as acapital asset amortized over a25-to-40 year period to counttoward capital requirements.In 1989, the US FinancialInstitutions Reform, Recoveryand Enforcement Actdisallowed use of supervisorygood will which causedAnchor to become severelyundercapitalized. Anchor suedthe United States in 1995 forbreach of contract and otherfinancial institutions with thesame problem also sued.

In a 1996 decision1, the USSupreme Court ruled that theUnited States had breached itscontract with those financialinstitutions. Anchor claimedthat the breach forced it to sella subsidiary, the ResidentialFund Corporation (RFC), forless than its proper value in

1990 to put toward its capitalshortfall. The US argued thatAnchor would have had to sellRFC anyway because RFC’soperational structure requiredtoo much regulatory capital forAnchor (a thrift institution) toown since RFC used letter ofcredit-backed structures forcredit enhancement. The judgedetermined that Anchor was inthe process of transitioningfrom LCs as a creditenhancement to a senior/subordinate structure for itsmortgage-backed securitiesand held the subordinatesecurities in its own portfolio.The court determined thatRFC could have operatedprofitably. In 1995, Anchor wasawarded over US$382 millionin damages.

For BYRNE, this caseillustrates that the financialsystem will never be sounduntil piecemeal regulation isabandoned in favor of treatingproducts with a similar

June 2009 ■ Documentary Credit World 15


function in a similar fashion.This will help deter strategiesto avoid or circumventregulatory schemes.

Dan TAYLOR referenced arecent survey conducted byICC in which 122 banks in 59countries responded. Thepurpose of “Rethinking TradeFinance 2009: An ICC GlobalSurvey” was to track letter ofcredit activity and the impactof the financial crisis. Theforthcoming results generatedno real surprises.

Among the Survey findingshighlighted: 33% ofresponding banks experiencedan increase in demand thatthey were unable to satisfyfrom 4Q07 to 4Q08; more thanhalf (52%) experiencedincreased confirmationrequests during the sameperiod; 20% of issuersexperienced increased pressurefrom applicants to refusedocuments, usually promptedby “falling commodity prices”;some 40% experienced anincrease in the number ofspurious or questionablerefusals; 30% experienced ajump in claims under standbysand guarantees; 12%experienced an increase incourt injunctions; and 40%experienced a decrease intrade credit lines forcorporates, while even more(51%) experienced a decreasein trade credit lines forfinancial institutions.

Overall, there are morestringent credit criteria and

capital allocation restrictions. Anumber of banks are exitingthe market. Trade finance hasbecome a very important topicon the global stage and amajor subject at G20 meetings.Concerned that Basel IIrequirements are nowinhibiting trade, US federalregulators have elected topostpone its implementationuntil 1 April 2011.

Another panelist familiarwith a new US Governmenttrade agenda have sensed anera of “creepingprotectionism”. In his opinion,the Obama Administrationwants a more rule-based tradeagenda along with more socialaccountability in trade policy.The president also wants touse trade to achieveenvironmental policy andtrade agreements mustaddress frictions betweencountries. In recent years, thispanelist says it has been a realchallenge to promote USexports but his hope is that theObama Administration’sapproach toward trade willtranslate into positive help forexports.

Delegates were curious ifthere is data to explain howthe financial crisis hasimpacted open accounttransactions. One panelistresponded that data is hard tocome by for open accounttransactions because they areclean payments. They are nottracked well and not all bankshandle open account

transactions. One participantstated that logically, if creditlines are down on both LCissuances and confirmations,then the number of LCs willalso decrease and the numberof open account transactionswill rise. Others noted thiswas logical, but not alwaystrue.

Reporting on SWIFT figures,Jim WILLS (SWIFT) stated thatMT700 volume was flat from2001 through 2007. Volumethen declined 13% in 2008 andeven further during the firsttwo months of 2009. Forguarantees and standbys,MT760 message volume in2008 was up 3% in 2008 andincreased further in 2009.

Other recent LC usagetrends observed and expressedby Americas Annual Surveydelegates:

• Small exporters do notwant to use LCs as they areconsidered too expensive andcause payment delays.

• There has been a shift inAsia from open account to LCsfor financing purposes.

• Instances of acceptancesand discounting for applicantsdropped considerably in 4th

quarter 2008. In Korea, anapplicant wanted 180-dayfinancing, but could not obtainit. The exporter could notabsorb the financing costs.

• A perceived reduction in



business from China. “No onewants to approve credit foranyone and when credit isapproved, it is taking a verylong time.”

Trade finance has alwaysbeen a risky business, notedone delegate, but now she hasdetected a tremendous spikein operational risk, especiallyfrom places never seen before.Sales and domesticcorrespondents areapproaching LC specialistswith more creative financingsolutions. The questionbecomes: Is this a trade deal ora working capital deal? Banksmust be very vigilant aboutoperational risk.

Over the last 50 years, LCshave become increasinglymore technical. One cannotfind answers in UCP and ISBPfor every possible situation, sothat is why there are ICCopinions. Even then, bankersnoted, they cannot always besure of the answer. IIBLPintends to create an expeditedLC whereby a standardinvoice would be part of theLC. This would allow the LCto become a tool of payment.IIBLP is prepared to seekregulatory approval for it tobe treated as a commercial LC.

Regarding compliancematters against the backdropof financial crisis, panelistNelson EVERHARDT offeredsome thoughts to the audience.Annual Survey delegates werecautioned that US regulators

“will not let up” on BankSecrecy Act (BSA) and Anti-Money Laundering (AML)regulations and expectations.This includes terroristfinancing, fraud, scams,reporting of suspicious activity,and “Know Your Customer”(KYC) due diligence efforts. Indismal financial times, certaincriminal elements may act ifthey think bankers aredistracted by credit worriesand other concerns.

There is a perception thattrade is higher risk, but not allaspects of the business arehigh risk. EVERHARDT urgedbankers their institutions needa system to measure risk. It isup to banks to conduct a riskassessment to determine whatrisks are high and low and putpolicies in place to addressthem in practice. He believesthat there is insufficientunderstanding of trade financeby banks’ sales forces. Thereneeds to be adequate means tomeasure, identify, and mitigatethe risks. EVERHARDT saidthat banks don’t necessarilyhave to spend the most oncompliance, but todemonstrate to regulators thatthey are doing the right thing.

One banker stated that he isstarting to see higher feesbeing charged because bankersare “waking up” to compliancecosts. He is also witnessing anincrease in collateralization.One delegate from a smallfinancial institution remarkedthat since her bank is not

rated, her bank’s confirmationfees have doubled or otherbanks are unwilling to confirmher LCs at all. Another bankerreplied that larger banks havehad to start making toughdecisions for whom to provideconfirmations since lines aretighter.

No one can deny the highunit cost of regulatorycompliance. According toEVERHARDT, BSA/AMLmatters are the single-mostexpensive area with whichbanks have to deal. Some Tier1 banks have spent US$30-40million for systems, but arestill not in full compliance.Banks, however, cannot takethe stance that they are notgoing to address problems andmust appoint people within thebank to review the higher risktransactions.

Troublesome LCTroublesome LCTroublesome LCTroublesome LCTroublesome LCPractice TrendsPractice TrendsPractice TrendsPractice TrendsPractice Trends

Bankers are seeing morebankruptcy clauses in LCs.One bank lawyer maintainedthat this is problematic fromboth a bankruptcy standpointand an LC standpoint. Hetypically turns down requeststo add such clauses in credits,but it is often hard to convincea beneficiary that the clause isa bad idea. Clauses usuallymean that if a payment ismade from the applicant to thebeneficiary in the 90 days priorto a bankruptcy filing, then theLC obligation is resurrected.



2. According to itlaw.wikia.com, “a clawback clause is a contract provision that requires a party who has received abenefit to return that benefit due to specially arising conditions.”

An LC payment is notconsidered preferential. If paidby the applicant, then thebeneficiary can draw underthe LC and essentially get paidtwice. It is also a bad practicefor banks since they cannoteasily figure out when to takethe obligation off their books.When do banks releasecollateral? Do banks continueto charge fees?

Lawyers referred to theseas “clawback” clauses.2 Onesolution is to utilize a direct–pay LC to pay down theobligation. The clawbackclause would have the creditexpiry go beyond thepreference period. The issuerwould put LC proceeds into anescrow account until theoutcome of the bankruptcyproceeding. One clause mightdefine bankruptcy as a forcemajeure event so that it wouldextend 30 days past the statedexpiry date.

Bankers are understandablyconcerned if the beneficiarygets paid twice. One lawyerreplied that the bankruptcytrustee would require that oneof the payments will have togo back, but it will notnecessarily be returned to thebank. Furthermore, the bankcannot get reimbursed by theapplicant if the applicant is inbankruptcy.

On the trend of very shorttime limits for standby

payments, one bankerexpressed hope that bankscould ban together as a groupand push back onrequirements for same daypayment. Some applicants haveproblems funding that quicklythrough no fault of their own.One senior banker recalled thisfrom the 1970s whenbeneficiaries lined up in personat the bank to get paid. Now,this banker just says no tosame day payment. Anotherbanker added that same daypayment clauses are mostcommon in industrial revenuebond (IRB) payments. For thisbank, is a significant challengebecause they have 600 IRBpayments per monthhappening at the same time.They try to “push back” if theLC is anything but an IRB.

One bank accepts faxdemands because those termsare contained within the LC.This is especially true whenthe beneficiary wantspresentation in a locationwhere the bank is no longerpresent. Another bankeradded that he can cope withregular, expected drawings,but has had a problem with“surprise drawings”. Bankersrecommended being veryspecific on the place and timeof presentation. If presentedafter that time, the draw willbe considered as beingpresented on the next business

day.Are banks receiving

requests to put credit ratinglanguage in LCs where theissuer would notify thebeneficiary if the issuer’srating drops? In addition, arebanks seeing language wherethe issuer has to notify thebeneficiary if the issuer is citedfor an “apparent” violation ofa government regulation? Suchrequests for what one bankertermed “impossibleconditions” represent atroublesome trend. Bankersexpressed that they woulddecline to incorporate thislanguage in credits. On IRBs,one banker indicated he seeslanguage stating that if therating drops, the beneficiarycan draw or the applicant mustreplace it with a bank with abetter rating. One lawyeradded that credit default swapspreads information belongsnot in the credit, but in theunderlying agreement undernegative events for the issuer.If the spread widens, it isconsidered a problem but thekey here is that it should bekept out of the credit.

Discussed shifted to use of arelationship managementapplication (RMA) where onecan make a conscious decisionto accept or reject specifictransactions. It can be used asa risk management tool. Thereis a corporate concern about



managing open account risktoday. The SWIFT TradeServices Utility (TSU) is a neweffort to match up informationbetween buyer and seller.

On the issue of fluctuationclauses in oil LCs, manybankers are struggling withmeans of managing them.Banks need a cap, butcustomers would prefer not tohave one. An attendee statedthat his bank absolutely puts avisible cap on its LCs,otherwise it would not issuesuch a credit. The bank does amark to market and adds 20%,then tracks it internally. Whowill monitor such credits? Thisis a contested issue withinmany banks.

Another consideration: If abank is asked to confirm an LCwhich does not contain a cap,should the bank put a cap onits confirmation? One bankerreplied that this is absolutelyessential since the confirmingbank must book its maximumobligation.

Asked one delegate: Couldoil credits be treated similar toforeign exchange letters ofcredit? The issuer could add apercentage and if the amountgets close to the maximumamount booked, then theissuer could require additionalcollateral per thereimbursement agreement. Formost bankers, the question ofwho is responsible formonitoring such creditsremains. Bankers areconvinced they need to keep

the monitoring process assimple as possible for tradeoperations staff.

On the topic of applicantindemnities, when do banksuse them? One lawyersuggested establishing tighttimeframes for bank action, forexample. How enforceable areindemnities if the letter ofcredit is poorly drafted? Asthese indemnities areenforceable and can shift riskto the applicant, anotherlawyer said that this should bedone as an addendum to theexisting agreement.

Some bankers noted theytry to avoid use ofindemnities. When anindemnity is needed, then onebanker indicated preferencefor the indemnity in thereimbursement agreement sothe bank is only dealing withthe one document. She agreeswith the approach for anaddendum to thereimbursement agreement.Another banker disagreed,stating that he prefers to dothe indemnity separately inorder to show the applicanthow important it is and howbad the credit is.

Has there been “braindrain” within the LC industryas experienced personnel retireor are laid off? One specialistbelieves that banks haveunwisely gone too much forfunctional processing whereemployees are responsible fornarrow areas and specific

tasks. When a financial cruncharrives, banks are not able tocope well with the conditions.Veteran bankers recall they dida bit of everything in the pastand that is how they learned.This knowledge, they fear, isnot being transitioned andthey need to find a way tocultivate the learning.

One banker reported seeingstrange expiration dateclauses from stategovernments in the US. If thetransaction goes to litigationand the court decides that theLC was poorly drafted, butthe issuing bank has recourseto the applicant, will the riskgo back to the applicant? Alawyer reminded delegatesthat an ambiguous LC will beconstrued against the issuer.Another lawyer added thisproblem dates back to the1980s when bond counselsstarted drafting financialletters of credit. Such lawyerswere great bond counsels, butthey were not adequatelyknowledgeable of LCs. For thesame reason, the standardsyndicated credit agreement isusually poor due to bondcounsel drafting. For manybankers within the audience,these matters demonstrate thevalue of skilled letter of creditlawyers. Some LC lawyershave worked together andattempted to contact “powerbeneficiaries” in order toexplain to them why certainformats are problematic.



The LC Year in ReviewThe LC Year in ReviewThe LC Year in ReviewThe LC Year in ReviewThe LC Year in Review

Leo CULLEN (CoastlineSolutions) first introduceddelegates to CoastlineSolutions’ newest advancedonline training programs. ISPMaster, written by ProfessorBYRNE in conjunction withICC Banking CommissionTechnical Adviser GaryCOLLYER, consists of over 12hours of online instruction andtraining on ISP98. Since itsrelease, ISP Master hasgenerated considerableinterest within the US as wellas from other countries. Itspractical training formatincludes case studies andqualifies CertifiedDocumentary CreditSpecialists (CDCS) users for 12Professional DevelopmentUnits (PDU). Written byCOLLYER, DC Master isadvanced training ondocumentary credit practicewith particular focus on areasthat are misunderstood ormisapplied, as evidenced byICC Opinions and DOCDEXdecisions. This training alsoearns 12 PDUs for CDCSrecertification. These twolatest offerings further bolsterCoastline Solutions’ suite ofonline training programmesaimed at beginners as well asexperienced specialists whoneed continued education.Coastline Solutions also has afree monthly newsletter whichinterested parties can sign upfor at its website,

www.coastlinesolutions.comDan TAYLOR (International

Financial Services Association)updated the audience on theCertified Documentary CreditSpecialist (CDCS) program.Currently there are 6,000CDCS holders around theworld, the vast majority ofwhich are based in China. TheIFSA and the ifs School ofFinance (England) whichjointly developed and maintainthe CDCS program retainabout 65% of the specialistswho pass the exam. At thetime of the Americas AnnualSurvey, 2,601 individuals wereregistered to take the examaround the world in April2009. It is the largest numberever registered in one year forthe annual exam. For 2010,there will be a minor revisionto the test to accommodate thenew Uniform Rules for Bank-to-Bank Reimbursementsunder Documentary Credits(URR 725) which was revisedin October 2008.

Jim WILLS (SWIFT)recognized the IFSA for itshelp in the SWIFT standardschange as well as IIBLP for itsassistance. SWIFT does twomillion cover payments (openaccount) each day, promptingWILLS to mention that ifbankers find it hard gettingsomeone to pay attention totrade, they should referencethis figure. Previously, therewere unknown parties thatwere not available to theintermediary bank. However,

now there will betransparency. There will be anew MT798 message forcorporates. SWIFT is seekingfeedback on corporate-to-banktrade messaging. There was anew (second) TSU release inMarch 2009. The TSU isdesigned for open accounttransactions. Banks aremembers of the TSU andsubmit information on behalfof their corporates with SWIFTacting as a matching engine.Banks would add this to theirproduct offerings. They have83 banks in the TSU.

One delegate stated thattransparency can be a realproblem for regulators asthere can be a disguise of thedownstream bank. Allinformation may need to starttraveling with the other data.WILLS added that theupcoming SWIFT standardchange of November 2009 ismandatory; banks must adoptit.

Buddy BAKER explainedthere was not a great deal newto report regarding the BaselII capital adequacyrequirements. Basel I had beena very easy computation andBasel II takes a much moresophisticated approach. Banksare expected to use their owninternal risk ratings andconduct a statistical analysis oftheir potential loss. Thequestion of Basel II’s impact onLCs is still unanswered andprobably will change soon.Costs relating to exposure to



non-US banks will becomemuch higher. Instead of a 20%weighting, it will probably belike a corporate risk. Banks’confirmation fees, however,will be increased as well. Atpresent, there is a great deal ofconcern at the US Fed whetherbanks are adequatelycapitalized and it is not reallyfocused on Basel II. ManyEuropean banks have alreadyconverted to Basel II in 2008.Within the US, 11 bankscurrently meet the criteria formandatory adoption. Othersare allowed to move to BaselII on an elective basis. A bankwould really only do so if itscapital requirement would beless under Basel II than underBasel I. The Bank forInternational Settlements isalready looking at refiningBasel II or deciding if thereshould even be a Basel III.Basel II is heavy on statisticalanalysis with a 10-yearwindow, but it does not takeinto account the presentfinancial climate.

Don SMITH reported on thestatus of the URDG redraftingeffort. As of March 2009, anew draft to consulting groupwas due within a few weeksand would then be sent to ICCnational committees. SMITHalso informed delegates thatthe ICC Banking Commissionis working with InternationalForfeiting Commission inwriting rules for forfeiting.They anticipate that it will take2-3 years to finish such rules.

One can find three documentson the IFSA website undercommittee information for thisproject.

LC ComplianceLC ComplianceLC ComplianceLC ComplianceLC Compliance

Panelists began bysuggesting that banks aresometimes confused over whatthey are required to do underUS Anti-Boycott, OFAC, andBSA/AML compliancerequirements. What can bankshandle, what must banksrefuse, and what must banksreport?

One panelist warned thateven if the US Office ofForeign Assets Control(OFAC) permits a bank toreturn documents and thepresenter subsequently deletesthe offending information, thebank still cannot pay. It wouldbe a violation since the bankalready aware that aprohibited entity was thereoriginally.

Another panelist pointedout that the IFSA haspublished a best practicesmodel to determine who is an“account relationship” whereone has to conduct duediligence. There arerequirements to reportsuspicious activity, but onedoes not necessarily have torefuse a transaction.

Within banks, it is vital thatdepartments communicatewith each other. At one bank,regulators asked during itsaudit how many Suspicious

Activity Reports (SAR) thebank had filed last year.Another area of the bank doesthe filing, but the Risk Groupdid not follow up on the statusof the filing. Now, the RiskGroup monitors filings andreconciles them on a monthlybasis.

Delegates were cautionedthat changes to OFACregulations take effect at12:01am before bankscommerce work. Because ofthis gap, manual checks areneeded. One bankermentioned his institution’sprocess of sending out e-mailsannouncing regulatory updatesand requiring manual checkinguntil such time as it canconfirmed to staff that thesystem has been updated.

Other panelists added thatbanks’ due diligence practicesfor trade should be consistentwith what is done regardingwire transfers. Also, bankswere reminded that they areresponsible for checking alldocuments for compliance,including collections.

One panelist expressed hisopinion that banks should notuse sanction clauses in lettersof credit. If bank must use one,it should keep the clausesimple and informative. Othersagreed that many within theletter of credit communityprefer not to use sanctionclauses, however, LCspecialists receive “pushback”from others and are compelledto insert sanction clauses. In



3. This letter is reprinted in the 2009 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at page 374.

4. See: http://treas.gov/offices/enforcement/ofac/faq/answer.shtml#117 .

5. “1602” refers to Part 1602 (40 CFR 1602) of the US Code of Federal Regulations entitled “Protection of Privacy andAccess to Individual Records under the Privacy Act of 1974”.

certain countries outside theUS, sanction clauses do givebanks protection which issome US banks have startedincluding them. In someinstances, it takes a long timeto get the necessary license topay. In some venues, that isillegal. Banks need to researchin which countries these can beused since they are prohibitedin some venues. This is whysome of the clauses are socomplex.

For US banks, there are ahost of matters to consider.While a bank which follows USregulations would expect UScourts to protect it, a non-UScourts may not. If a US bankneeds to refuse, is it evenallowed to issue its notice ofrefusal? Is it allowed to holdthe documents at thepresenter’s disposal? If not,would it be precluded? Mostsanction clauses do notaddress all these matters..

Another delegate expressedamazement that most sanctionclauses do not deal with courtinjunctions since there is amuch greater chance ofexperiencing them as opposedto sanctions. This is partlybecause most LCs do notcontain choice of law andchoice of forum provisions.Although one can understand

why issuers cannot alwaysinclude a choice of forum,choice of law should be added.Beyond inserting its choice oflaw into the credit (especiallyfor commercial LCs), whatmore can an issuer do?Delegates were referred to aletter written by JamesBARNES to the IFSAregarding mention in LC textof sanctions as a defenseagainst honor.3 Others addedthat inserting a choice of lawcan create problems and mightnot always be possible due toconfirmation or with back-to-back LCs.

For one delegate, there isno substitute for knowing therelevant laws and rules of thejurisdictions in which one doesbusiness. For this reason,having a standard clause is abad idea because it will getskewed and becomeincomprehensible. Othersadded that once you haveincluded sanctions language ina credit and subsequentlyagree to a request to removeit, there is no way of knowingwhat the deletion implies. As aresult, such deletion can bedangerous.

Discussion turned topreclusion clauses in LCs.When one reads an OFAClicense, the entire license must

be read. The license may allowthe sale of goods or services,but not allow a US bank toparticipate in any way. Aquestion-and-answercontained on the OFACwebsite clarifies that a USbank can be a second advisingbank under certain conditions.4

There needs to be anintermediary bank.

Others emphasized todelegates that US regulatorswill not let up in this area andOFAC sanctions are going tobecome even more stringent.The regulators will “dig evendeeper” and are carefullyscrutinizing SARs. Bankerswere advised of theimportance of updating theircompliance systemsimmediately. Reportingsuspicious activity is the heartof the BSA. Regulators haveemphasized that banks shouldnot file an SAR unless it isserious and is truly suspiciousbehavior. In instances where athird SAR is filed against acustomer, banks have stoppedbusiness and closed theaccount so that regulators cancheck. Further, the wording inSARs needs to be reviewedand banks need to have acentralized area to handleSARs. Also, there will be more“1602” requests.5 When



6. Professor Byrne has written a 600-page treatise on US Revised UCC Article 5. As part of a 12-volume UniformCommercial Code Series published by West Publishing, the Article 5 (Letters of Credit) volume is available from IIBLP.

7. US Revised UCC 5-109 (Fraud and Forgery) states the requirements the applicant has to meet in order for a courtto grant an injunction.

examining a bank, USregulators will be evaluatingits risk assessment. If one isnot adequately in place,regulators will establish onefor the bank and no bankwants to be in this position.

Regarding the pricing ofgoods, what do regulatorsexpect of banks? It is expectedthat banks just have todemonstrate that bankers areusing their best effort. Bankassociates do not need to bepricing experts, but need toknow that there arepossibilities for under- orover-pricing and how it maylead to money laundering.

Major Commercial LCMajor Commercial LCMajor Commercial LCMajor Commercial LCMajor Commercial LCCasesCasesCasesCasesCases

Panelist moderator JimBARNES (Baker & McKenzie)began by pointing out thatafter revised US Revised UCCArticle 56 went into effect, thenumber of US court casesinvolving letters of credit hasdropped. In recent years, thenumber has been flat. As somecases are settled, others arenever reported, and becausethere is a time lag forreporting of cases, one cannottell whether there has beenmore litigation in the last sixmonths. It does appear,however, that fraud injunction

actions have increased. Thepanel then discussed specificrecent cases of importance tothe US letter of creditcommunity.

In Lenox Hill Hospital v.American International Group,Inc. (abstracted at 2009 ANNUAL

REVIEW 474), Lenox hadobtained a standby LC infavor of Lexington InsuranceCompany (a subsidiary ofAmerican International Group,Inc.) to partially back amalpractice policy issued byLexington. Lexington issued aloss statement in April 2008which reported a largeincrease in claims related toprior policies. Lenox claimedthat the loss report numberswere “fabricated” andcancelled the insurance policy.Lenox also sued and sought apreliminary injunction againstdrawing under the credit,claiming that Lexington wasusing the false number inorder to prepare a draw underthe LC because its parent, AIG,was in “dire financial straits.”One panelist noted the disputeinvolved a typical fightregarding whether or not theLC should be enjoined. In thiscase, the court properlydetermined there was no LCfraud and therefore should beno injunction.

In Summit Resource Group,

Inc. v. JLM Chemicals, Inc.(abstracted at 2009 ANNUAL

REVIEW 506), Summit had acommercial standby LC issuedin favor of JLM backing itspayment obligation topurchase three orders ofglycine. Some time later,Summit requested that thethree purchase orders becancelled. Because the firstorder had already shipped,Summit paid for that order.JLM informed Summit by e-mail that the other two orderswere cancelled. After that,JLM changed its mind, statingthat its suppliers werepressuring JLM to take theorders, so JLM would notconsider the remaining twoorders as cancelled. Summit,fearing that JLM would drawon the standby for theremaining orders, soughtinjunctive relief and obtained atemporary restraining order instate court. JLM got this actionmoved from the state court tothe federal court, but thefederal trial court issued apreliminary injunction toprevent JLM from drawing onthe standby. Panelists statedthat this was just a typicalbreach of contract dispute.There was no mentionwhatsoever of US Rev. UCCArt. 5 and the court ignoredRev. UCC 5-109.7 For one


8. The protected parties named in US Rev. UCC 5-109(b)(2) are the “beneficiary, issuer, or nominated person whomay be adversely affected”.


attorney on the panel, the caseis his candidate for “worstletter of credit case of theyear”.

Panelists then offered viewsabout what to do when anapplicant alleges that fraud hasoccurred or claims there is animpending fraudulentdrawing. What should bankerstell their in-house attorney?There must be coordinationbetween bankers, attorneys,and operations. Banks shouldremember they have flexibilityin hurrying or not hurryingpayment. Banks should refrainfrom advising the applicant onwhat they should do.

Some bankers added thatthey strongly recommendedthat banks do not say “enjoin”to the applicant. Banks need tostate that if the documentscomply, they will pay. Onelawyer asked bankers if theywould notify the applicant thata drawing was made ifrequested to do so. Onebanker said it would dependon the situation, but that shewould first talk to internalcounsel.

One bank lawyer stated thathe would view this as anattempt to pull the bank intothe underlying transaction andrecommended that banksresist this as much as possible.Banks should not want to tellthe applicant that they willnotify it. Such notification

mitigates the independence ofthe LC and signals to theapplicant that it is on“borrowed time”. As towhether a bank should directan applicant to US Rev. UCC 5-109, lawyers said a bank cansend them to applicable lawbut do not want it to beconstrued as giving legaladvice. Based on the currentfinancial climate, one lawyerstated he expects to see morecases in the future.

One delegate described asituation in which the applicantrequests that the bank delaynotifying the beneficiary of thediscrepancies in order to givethe applicant time to get aninjunction. How can the bankact? One panelist replied thatthe bank needs to act the wayit always does. For a bank, thisis difficult as it will not be ableto look at the documents thesame way if it is notified inthis manner. The panelistadded that banks do haveflexibility in terms of time aslong as they do not go beyondthe rules, however banks donot want to get into trouble bydelaying the notice. A bank canexamine differently, but youshould not delay.

Discussion followedregarding protected parties asdescribed in UCC 5-109(b)(2).8

One would think that theissuing bank would notify thecourt that another bank is a

protected party. An issuingbank knows it has nominatedanother bank, but the issuingbank does not know if theother bank has undertaken itsnomination. Another panelistadded that the nominatedbank has to show that not onlydid it act, but that it did sowithout the knowledge of thefraud. The issuing bank wouldnot be in a position to knowthat. The beneficiary is usuallynot in court because it is out ofthe jurisdiction. What happensif the beneficiary is involved?

In Guetzko v. KeyBank Nat’lAssoc. (summarized at 2009ANNUAL REVIEW 435), theapplicant obtained a standbyLC in favor of Tri-CountyMetropolitan TransportationDistrict of Oregon (buyer) toassure delivery of railcars. Thereimbursement obligation wasapparently guaranteed byshareholders of the applicant(among others, Mark and LisaGuetzko). When thebeneficiary drew on the LC,guarantors obtained atemporary restraining orderand temporary injunction instate court against payment bythe issuer. The action wasremoved from state court toUS federal court. Thebeneficiary claimed that it wasthe real party in interest (asopposed to the issuer) and wasentitled to intervene. Theguarantors argued that the



beneficiary failed to opposethe state action, so itsintervention in the federalaction was untimely. The Judgerejected this argument andnoted that the beneficiary hadan interest in the injunction asit would be adversely affected.A case like this promptsquestions: Who needs to beserved? Who is considered areal party to the case?

The panel also briefeddelegates of the Singaporecase, DBS Bank Ltd. v. CarrierSingapore (Pte) Ltd. Thisdecision is abstracted in thisDCW issue at page 10.

The next case discussed wasSadacharamani a/l Govindasamyv. G. Narayanan a/l GopalaPanniker (summarized at May2009 DCW 16). Mr.Govindasamy needed a letterof credit but did not have thecredit facilities to have oneissued. He retained a broker,Mr. Panniker, to find an entitythat would be willing to lendits credit facilities. Pannikerfound one and charged a feeof US$95,000. When this feewas not paid, Panniker sued.The court found in favor ofPanniker. Govindasamy soughtan injunction to stay thecollection of the judgmentwhen Panniker tried to placehim into bankruptcy.Govindasamy claimed fraudbecause, according to hisinvestigation, the letter ofcredit never existed. The judgewas not convinced that theinvestigation evidenced fraud

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9. Abstracted at 2001 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 273, full text at 390.

10. US Rev. UCC 5-115 (Statute of Limitations) states: “An action to enforce a right or obligation arising under thisarticle must be commenced within one year after the expiration date of the relevant letter of credit or one year after the[claim for relief] [cause of action] accrues, whichever occurs later. A [claim for relief] [cause of action] accrues when thebreach occurs, regardless of the aggrieved party’s lack of knowledge of the breach.”

and noted the timing of theclaim. The court concludedthat Govindasamy was tryingto avoid the bankruptcy“through the back door andthis amount[ed] to abusing theprocess of [the] court.”

In Uniloy Milacron Inc, v.PNC Bank, N.A. (abstracted at2009 ANNUAL REVIEW 511),buyer, MAB, LLC, had astandby LC by PNC Bank infavor of Uniloy, the seller, forthe purchase of two plasticbottling machines. The LCrequired a dated originalcertificate that Uniloy had notreceived payment from MABwithin 60 days of shipment,copies of unpaid invoices, andcopies of bills of ladingindicating the shipment date.Uniloy presented documentson the expiry date. On thesame day, PNC refused thedocuments due to thefollowing discrepancies: thecertificate was not dated; theserial number shown on oneinvoice did not match theserial number on the LC; andthe merchandise descriptionon the bills of lading did notmatch the credit description.On the notice, PNC stated thatthey were in the process ofcontacting the applicant forwaiver, but never did so. MABwas prepared to waive the

discrepancies, but PNCrefused. When Uniloy re-presented the documents, PNCrefused them due to anexpired credit. Uniloy thensued PNC. PNC argued thatthe documents were not instrict compliance, but the courtdid not believe that thediscrepancies were materialwhen the presentation wasviewed as a whole and cited asimilar decision in the 2000 UScase, Voest-Alpine Trading USACorp. v. Bank of China9. Thecourt entered partial summaryjudgment in favor of Uniloy.PNC sought reconsiderationbecause, throughout the trial,both PNC and Uniloy hadstated that the credit wassubject to UCP500, when infact, it had been subject toISP98. The court denied themotion.

As to the undatedcertification, most bankerswould regard this as adiscrepancy. One panelist saidthat lawyers tend to thinkotherwise, even if it is anexpress requirement under thecredit. Regarding discoverythat credit was subject to ISPrather than UCP, the Judgedecided the results wouldhave been the same. Panelistssuggested the judge may havebeen annoyed at the bank for

this. One lawyer on the panelfinds an important lessonregarding the issuer’s noticethat it was contacting theapplicant for waiver, butfailure to do so. If this isstandard language in a bank’sform, then the bank needs totake it out. Another panelistrecommended that the internallegal counsel in banks shouldalways consult with tradeoperations in answering LCquestions or preparingdefenses.

Turning to the topic ofstatute of limitations, onepanelist said that there is a oneyear limit in US Rev. UCC Art.5 for a reason.10 If one has notbeen reimbursed, one needs toact before the one-year periodelapses. This comment led to adiscussion of Alhadeff v.Meridian on Bainbridge Island,LLC (abstracted at Feb 2009DCW 11). Meridian was thedeveloper of condominiumsand needed financing. KitsapCommunity Federal CreditUnion agreed to provide aconstruction loan if Meridianprovided a US$1 million LC inits favor. Meridian arrangedfor N. Jack Alhadeff to serveas applicant and obtain the LC.Over the next year, the CreditUnion provided additionalfinancing and drew the entire



amount of the LC. The CreditUnion declared Meridian to bein default on its loan andMeridian defaulted on itsagreement with Alhadeff. TheCredit Union was the firstmortgagee, making it likelythat Alhadeff’s mortgagewould yield nothing. Alhadeffsued the Credit Union forbreach of contract, tort, andequitable claims. The CreditUnion argued that the claimwas barred because it hadbeen filed more than one yearafter the transaction. Theappellate court determinedthat Alhadeff’s claims did notall arise under Rev. UCC Art.5. One panelist pointed outthat this case gives aninterpretation of Rev. UCC 5-115. There is some ambiguityregarding how one caninterpret it. The panelistexplained that thereimbursement agreement isnot necessarily subject to thestatute of limitations. TheIIBLP’s written analysis of thecase comments on what theappellate court describes as a“four party letter of credittransaction”. The commentstates: “Hopefully, this newdiagnostic tool will notencourage courts to sketch outthe relationships between allthe parties to the variousunderlying transactions and

the parties to the LCs, such ascarriers, inspectors, freightforwarders, etc. If so, we willsoon be visited with a 10 partyLC. Oh well, the more themerrier.”

Panelists next commentedon some worrisome aspects ofCapital Investments-USA, Inc. v.KeyBank N.A. (summarized atJan 2009 DCW 11), Capital wasinterested in obtaining aUS$41.6 million line of creditto provide LCs to fundcommodity purchases. To thisend, Capital entered intocommunications withKeyBank, which included e-mails, commitment letters, andother documents. Ultimately,KeyBank refused to extend theline of credit and issue theLCs. Capital sued KeyBank forbreach of contract andnegligent misrepresentation.KeyBank argued that it hadsigned no writing as requiredby a US state statute (ColoradoCredit Agreement Statue ofFrauds), which applies to allcredit agreements with aprincipal balance greater thanUS$25,000. Capital argued thatthe various communicationssatisfied the requirement. Thecourt dismissed this, statingthat the statute required thatthe writing actually establish acredit agreement andprohibited implying one. One

panelist stated that this casewas a breach of contract toissue a letter of credit. Itdemonstrates that it isdangerous for a bank’s salesemployees to make certainstatements promoting theirproducts.

The panel then discussedImpex Int’l Corp. v. HSBC BankUSA, N.A. (abstracted at 2009ANNUAL REVIEW 446). Impex, asbuyer, had HSBC issue acommercial LC subject toUCP500 to pay for textiles tobe “on rolls. Each roll tocontain 500 yards. Totalquantity: 80,000 yards”. Threepresentations were made toHSBC. On each presentation,in addition to the goods being“on rolls”, it was alsodescribed as packaged in“bales”. On the thirdpresentation only, thedocuments showed thequantity of goods as exceedingthe amount in the LC by 5%.HSBC honored all threepresentations. Impex suedHSBC for wrongful honor,claiming that mention of“bales” was inconsistent with“rolls”. The court disagreed.

With regard to the 5%excess, the court appliedUCP500 Article 39(b) andstated that the quantityexceeded the tolerancepermitted.11 For the first two

11. UCP500 Article 39(b) states: “Unless a Credit stipulates that the quantity of goods must not be exceeded orreduced, a tolerance of 5% more or 5% less will be permissible, always provided that the amount of the drawings doesnot exceed the amount of the Credit. This tolerance does not apply when the Credit stipulates the quantity in terms of astated number of packing units or individual items.”



presentations, the court foundin favor of HSBC, but for thethird presentation, found infavor of Impex. One panelistpointed out that whatconstitutes wrongful dishonoris governed at least in part bythe agreement between theissuer and the applicant. Onehas the ability to put in areimbursement agreement thatyou can have a substantialcompliance standard. It isinteresting that courts areimposing a 100% forfeiturerule, instead of just thedifference for damages.According to the statute, itshould only be for the extentto which there is breach.Another panelist added that itis also to the extent to whichthe applicant or the beneficiaryhas been damaged unless thereis a wrongful dishonor, inwhich case it is 100% of thedraw amount. This promptedone banker to ask whether itwould be better for a bank to

be sued for wrongful honorrather than wrongful dishonorsince the damages aredifferent. One panelist repliedthat a bank should havelanguage in its reimbursementagreement which makes itvery difficult for the applicantto mitigate the damages. Dothe same principles apply ifone is the negotiating bankbecause it does not have adirect link back to theapplicant (only the issuingbank has a direct link back tothe applicant)? One panelistreplied the same principles donot apply as much; it couldalso be subject to a differentlaw.

In Labarge Pipe & Steel Co. v.First Bank (abstracted at Mar2009 DCW 11), PVF USA, LLC,the buyer, had a standby LCissued by First Bank in favorof Labarge, the seller, to backpayment for its purchase ofsteel pipe. The credit wassubject to UCP400. When

issued, First Bank faxed theLC to Labarge with a coverletter stating, “Here is theletter of credit you requested.”When Labarge requested anamendment, First Bank faxedthe amended credit to Labargewith a cover letter stating,“Here is the revision to theletter of credit you requested.”The faxed credit had thehandwritten signatures of FirstBank’s employees.

The LC requiredpresentation of the originalletter of credit with anydrawing. Labarge relied onthe issuance and shipped thepipe. PVF failed pay for thepipe and subsequently filed forbankruptcy. Labargeattempted to locate theoriginal credit and failed.Labarge drew on the LC,presenting the fax and anaffidavit stating that the“original letter of credit” waslost or destroyed andindemnified First Bank against

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a loss if the original waspresented. First Bank refusedthe documents the same daybut failed to state if it washolding the documents atLabarge’s disposal orreturning them. Three dayslater, First Bank informedLabarge by phone that it wasdishonoring due to the lack ofthe original credit in thepresentation. Labarge suedFirst Bank for wrongfuldishonor, breach of the letterof credit, detrimental reliance,and breach of its good faithobligation. The court agreedwith First Bank that theoriginal letter of credit wasrequired, but also determinedthat First Bank did notprovide a proper notice ofrefusal. One lawyer stated hewould be careful ofdeliberately stalling a notice ofrefusal. Another paneliststated that this case puts torest a previous terribledecision, Philadelphia GearCorporation v. Central Bank(1983) [USA], which confusedpreclusion with estoppel.12

One delegate posed thefollowing variation: Supposedthe original letter of credit isnot required for presentation.

When the credit is beingcancelled and the beneficiarycannot find the original, is itok just to take the letter of thebeneficiary to agree tocancellation? One panelistreplied that there is no specialsignificance to the originalunless it is required fortransfer or presentment. If it islost, but not required forpresentation, one can get anaffidavit from the beneficiary.Another panelist added that itdoes not matter if the credit issubject to ISP98 or UCP. Onebanker asserted that it is a realrisk to just take a letter as thebeneficiary does not want toprovide the bank with anindemnity. Another bankerrecommended to fellowbankers that they shouldrequire an indemnity, butcounty governments are likelyunwilling to do so. A bank willwant someone to at least covercourt costs, especially for anevergreen. One lawyersuggested that banks put intheir credit a particular formatin the form of an appendix thatwould be used forcancellation.

In Joseph Stephens & Company,Inc. v. Cikanek (summarized at

2009 ANNUAL REVIEW 455),Cikanek was a creditor toJoseph Stephens & Company,Inc. (JSC). Cikanek wasawarded a judgment from JSCin arbitration, but JSC failed topay. Cikanek attempted toseize funds in a JSC bankaccount. The bank refused,stating that because of anAssignment and SecurityAgreement, the account fundswere collateral for a standbyLC covering a lease for JSC’sNew York office. Thisagreement allowed the bank toset-off any losses against theaccount in the event of JSC’sdefault. Cikanek rejected thisargument, contending that theright to exercise set-off was“immature” and that the bankhad waived this right byfailing to assert it to Cikanekwhen the account wasdisclosed to him. The courtfound that because of US UCCArticle 9, the bank hadautomatically perfected itssecurity interest simply bymaintaining the account. NewYork law provides that “asecurity interest perfectedprior to entry of judgmenttrumps the rights of anunsecured judgment creditor”.


12. In this case, the issuing bank did not give a proper advice of refusal when it dishonored drafts. Because of this, thecourt ruled that “Central Bank was estopped to raise the documents’ deficiencies as a defense, the requirement of strictcompliance with the terms of letters of credit notwithstanding … . Estoppel was proper because Central’s failure eitherto return the drafts’ supporting documentation or to give notice that it was being held at [beneficiary’s] disposalviolated article 8(f) of I.C.C. Pub. 290, thwarting any attempt to cure the drafts’ defects.” In reality, because the adviceof refusal was insufficient, Central Bank was precluded from claiming that the documents were not in compliance.Interestingly, the court also stated, “It would be a strange rule indeed under which a party could tender draftscontaining defects of which it knew and yet attain recovery on the ground it was not advised of them.” Strange it maybe, but welcome to the world of letters of credit!


Under this law, a depositorybank’s security interest trumpsany other security interest in adeposit account, unless thebank specifically agrees torecognize the other interest.

Open ForumOpen ForumOpen ForumOpen ForumOpen Forum

The Americas AnnualSurvey concluded with theopportunity for delegates topose questions to the entiregroup of panelists.

One participant asked if abank fails under bankruptcy,is the beneficiary considered ageneral creditor. One paneliststated that one situation iswhere the bank’s portfolio isgiven to another bank. But, theUS Federal Deposit InsuranceCorporation (FDIC) could takeover the bank altogether.During the savings and loancrisis, another panelist statedthat the FDIC did repudiatesome LCs.

One banker who previouslyworked at a bank which failedhad heard that the US Fedrepudiated all the letters ofcredit even though 80% werecash-collateralized. When thebank was taken over byanother institution, it did notget the portfolio back. Anotheradded that the same situationhappened with HamiltonBank.

Another delegate familiarwith these issues explained

that if there is a Purchase andAssumption agreement, thenthe portfolio would move tothe acquiring bank. Thebeneficiary can claim against areceivership estate. A panelistadded that the beneficiarywinds up a general creditor.Another panelist referencedFDIC v. Philadelphia Gear Corp.(1986) [USA] as when theFDIC rules changed.

One lawyer noted that theFDIC has issued someguidelines in this area.13 Itdepends on whether or not theletter of credit has been drawnupon. Another lawyer statedthat it is no claim rather than aclaim for 10 cents on thedollar. The guarantee is adeposit guarantee.

One participant then askedwhen an agreement tonegotiate actually commences.One panelist replied that itoccurs when the bank agreesto act. A banker stated thatthere is a beneficiaryexpectation on the timing. Herbank is taking a much harderlook now at this and theagreement. One panelistsuggested having a qualifiedagreement to negotiate withcheckboxes. One lawyerviewed this as a silentconfirmation with options.One must distinguish betweenan agreement to advancefunds and an agreement tonegotiate. Then, one actually


has to agree to negotiate. Thebanker said that the timing isdifferent between anagreement to purchase and asilent confirmation.

Is it considered negotiatingif one advances before thedrawer bank accepts? Onelawyer responded that anagreement to do so is differentfrom actually doing it.

Another participant askedhow long a bank should retainrecords for evergreen credits.The consensus answer wasthat such records must bemaintained forever. Expandingon this topic, another delegateasked about the issuing bank’sresponsibility if the notice ofnon-extension comes backundeliverable. One bankercommented that her bank usesdifferent methods to try tofind a beneficiary’s newaddress and keeps the recordsof these attempts. Anotherbanker suggested that anissuer put language into thecredit stating that a beneficiaryhas a duty to notify the issuerif the beneficiary’s addresschanges. Also, if a bank candemonstrate that it has made agood faith effort to notify thebeneficiary and keeps thoserecords forever then thatshould help convince a judge,if needed. Another participantsuggested seeking theapplicant’s help in trying tolocate the beneficiary. ■

13. “Statement of Policy Regarding Treatment of Collateralized Letters of Credit after Appointment of the FederalDeposit Insurance Corporation as Conservator or Receiver”, reprinted at 2009 ANNUAL REVIEW 335.

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