Opinion ID: 424799
Heading Depth: 2
Heading Rank: 1

Heading: C.C. Pub. 290 art. 8(c)-(f).

Text: 20 Against the background of these provisions, the district court first reasoned that at all times pertinent to the present case Provident was a presenter as defined by La.R.S. 10:5-112 and a remitting bank as defined by article 8(e) of I.C.C. Pub. 290. In consequence, Central was obliged to inform Provident of the precise reasons it considered the tendered documents to be nonconforming. See I.C.C. Pub. 290, arts. 8(c), (e). Concluding in each instance that Central failed to meet this obligation, the district court determined that Central was estopped to raise the documents' deficiencies as a defense, the requirement of strict compliance with the terms of letters of credit notwithstanding. Cf. Flagship Cruises, Ltd. v. New England Merchants Nat'l Bank, 569 F.2d 699 (1st Cir.1978). More, the district court reasoned that estoppel was proper because Central's failure either to return the drafts' supporting documentation or to give notice that it was being held at Provident's disposal violated article 8(f) of I.C.C. Pub. 290, thwarting any attempt to cure the drafts' defects. 21 While the above analysis is plausible, it is incomplete. The primary flaw in this analysis is its approach to the concept of dishonor in credit transactions. The district court focused upon the duty of the issuer to pay, finding Central's performance wanting in this respect. It appears to us, however, that in the first instance dishonor puts at issue the adequacy of the beneficiary's performance under the letter of credit. While the adequacy of that performance must be examined in light of the issuer's corresponding duties, it must always remain the primary focus of analysis. We reach this conclusion by tracing the contours of a credit transaction. 22 Such a transaction usually comprises three separate contracts: [f]irst, the issuing bank enters into a contract with its customer to issue the letter of credit. Second, there is a contract between the issuing bank and the party receiving the letter of credit. Third, the customer who procured the letter of credit signs a contract with the person receiving it, usually involving the sale of goods or the provision of some service. East Girard Sav. Ass'n v. Citizens National Bank, Etc., 593 F.2d 598, 601 (5th Cir.1979); see also note 5, infra. The obligations and duties created by the contract between the issuer and the credit's beneficiary are completely separate from the underlying transaction, with absolutely no consequence given the underlying transaction unless the credit expressly incorporates its terms. See La.R.S. 10:5-109. In consequence, the issuer's duty to pay is conditioned solely upon the credit's terms: usually, as here, the beneficiary's presentation of facially conforming documents. Id., 10:5-114; see also Harfield, Bank Credits and Acceptances at 73-86 (1975) (hereinafter cited as Bank Credits and Acceptances). More, the issuer has no obligation to go beyond a facial examination of the tendered documents in determining whether payment is warranted and, in fact, may incur liability if he does so. 4 Id.; see also Sisalcords do Brazil, Ltd. v. Fiacao Brasileira de Sisal, S.A., 450 F.2d 419 (5th Cir.1971); Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461 (2d Cir.1970). In addition, the issuer's promise to pay under the credit is irrevocable. In concert, these features facilitate economic exchange by providing the beneficiary a source certain of payment in the event the issuer's customer refuses to pay. 5 See generally, Comment,  'Unless Otherwise Agreed' and Article 5: An Exercise in Freedom of Contract, 11 St. Louis L.J. 416 (1967). 23 Since an issuer's duty to pay arises exclusively from the terms of the credit, with no defenses beyond those terms, its liability turns on whether the beneficiary has performed in accordance with the terms and conditions of the credit. See Courtaulds North America, Inc. v. N.C. Nat. Bank, 528 F.2d 802, 805 (4th Cir.1975). The documentation necessary to support payment has the beneficiary as its source and must conform exactly to the requirements of the credit; otherwise the issuer is entitled to refuse payment. See East Girard, supra; Wing On Bank Ltd. of Hong Kong, 457 F.2d 328 (5th Cir.1972). See also Note, Documentary Letters of Credit and the Uniform Customs and Practice for Documentary Credits (1974 Revision): A Selective Analysis, 3 J.Corp.L. 147 (1977); Harfield, Code, Customs and Conscience in Letter of Credit Law, 4 Uniform Commercial Code L.J. 7 (1971). 24 This doctrine of strict compliance is firmly grounded in commercial reality. In the event payment is made upon presentations that do not conform to the credit, the issuer loses its right to reimbursement from its customer. See J. White & R. Summers, Uniform Commercial Code Sec. 18.7 at p. 742-43 (1972) (hereinafter cited as J. White & R. Summers). In this event the beneficiary's debt is satisfied and the customer escapes liability on both the underlying and letter of credit contracts while the issuer incurs a corresponding liability--without defense or recourse. More, the rejection of strict compliance as a doctrine would vitiate the economic value of a credit transaction; for not only would the issuer be compelled to assume the risks of the underlying contract's nonperformance, it would also be required to assume the additional risks of judicial realignment of its obligations under the credit: 25 [T]he peculiar values of the letter of credit are (1) that they provide the assurance of payment, (2) that they can provide that assurance in respect to any transaction, and (3) that they are inexpensive. These values will be lost if performance of the letter of credit is to be infected by the nonperformance of the underlying transaction because when that happens the letter of credit is not an assurance of payment and because if that happens the cost of a letter of credit must include the issuer's problematic litigation expense. 26 Harfield, The Increasing Domestic Use of the Letter of Credit, 4 Uniform Commercial Code L.J. 251, 257 (1972) (emphasis in original). There can be no wrongful dishonor where the drafts presented are nonconforming and the issuer gives timely and sufficient notice to that effect. See La.R.S. 10:5-112, 114. Because it is undisputed that Philadelphia received timely notice of nonpayment, accompanied in each instance by a statement that payment was refused because of Philadelphia's noncompliance with the terms of the credit, our inquiry must focus upon the sufficiency of Central's notice. 27 Central contends and the district court found that there were substantial irregularities in Philadelphia's first ten presentations. See supra note 2. The record reflects that six were accompanied by photocopies of shipping evidences or shipping notices rather than the required inland bills of lading. In addition, the shipping documents accompanying the first ten presentations were stale. Article 41 of ICC Pub. 290, incorporated by reference into the credit, provides that [i]f no ... period of time is stipulated in the credit, banks will refuse documents presented to them more than 21 days after the issuance of the Bills of Lading or other shipping documents. The district court found that Philadelphia was aware of some of these defects at the time of presentation. With respect to the drafts that Philadelphia knew to be defective, we hold that Central's notice was not deficient and that the district court erred in concluding that it wrongfully dishonored these drafts. 28 Philadelphia does not seriously dispute the facts we have stated. Instead, it presents a three-tiered argument designed to vitiate their impact. First, it urges that because the shipping documents were stale by virtue of an agreement between it and United, Central was required to seek United's approval prior to dishonor. Next, it contends that the defects were curable because it could have reshipped the goods, generating fresh bills of lading, had Central permitted United to return the shipped merchandise. Finally, Philadelphia urges that Central possessed an unqualified duty to notify it of the precise defects within its drafts and that absent such notice liability must attach. We believe this argument to be without merit. 29 As noted above, a letter of credit and the underlying contract are completely separate agreements, and the issuer may not use the terms of the underlying transaction as a defense unless the credit expressly incorporates its terms. It follows that an underlying contract may not be used to amplify the terms of a credit not expressly incorporating them. It further follows that because the underlying transaction does not affect the credit, any proof concerning a particular custom or course of dealing between the issuer's customer and the beneficiary within the underlying transaction cannot cure the apparent nonconformity of a required document. See La.R.S. 10:5-109. Nor are we persuaded that custom requires an issuer, in every instance, to notify its customer before rejecting nonconforming drafts. We find nothing in the Code or I.C.C. Pub. 290 that warrants such a result. 30 Louisiana law provides that: [a] course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement. La.R.S. 10:1-205(3). Concomitantly, that law imposes an obligation of good faith in the performance of every contract. Id., 10:1-203. Here it is undisputed that I.C.C. Pub. 290 reflects a codification of accepted banking practice. Article 3(c) of that publication provides that [an irrevocable letter of credit] can neither be amended nor cancelled without the agreement of all parties thereto. This language is precise in its meaning and requires no interpretation. Because Central has obviously chosen to decline Philadelphia's invitation to modify the credit, the only inquiry is whether good faith--required by the law of Louisiana--imposes a duty beyond both custom and the credit's terms. We believe not. Good faith means honesty in fact in the conduct or transaction concerned. La.R.S. 10:1-201(9). Nothing in the record suggests that Central acted dishonestly in any aspect of the present transaction. We are not prepared to hold that the timely rejection of a facially nonconforming draft constitutes an act of bad faith. See Corporacion de Mercadeo Agricola v. Mellon Bank International, 608 F.2d 43, 49 (2d Cir.1979). Nor are we prepared to lay it down that good faith imposes a duty to rewrite a contract where there is no hint of unconscionability or fraud. We recognize that issuers often consult their customers before rejecting nonconforming drafts submitted under a credit: 31 It must not be thought that every instance of alleged noncompliance generates a dispute leading to wrongful dishonor. When doubts arise in the issuer's mind as to whether or not a presentment complies, it is not at all uncommon for the issuer to reach an agreement whereby the customer in effect waives the alleged noncompliance or makes some other adjustment so that the occasion for the beneficiary to assert wrongful dishonor does not arise. 32 J. White & R. Summers, supra Sec. 18.6 at p. 623. Doubtless such a course of action is good commercial etiquette; we cannot, however, require it where the terms of the credit do not. 33 Appellee's second and third points we treat together, since even assuming that the defects in the documentation submitted to Central were curable, we are unable to conclude that the district court's judgment was correct. To answer these compounded issues we must determine the legal consequences where a beneficiary knowingly submits nonconforming documents. The credit clearly permits the issuer to refuse payment on drafts accompanied by bills of lading more than 21 days old. See I.C.C. Pub. 290, article 41. Central refused payment on the ground that each draft failed to comply with the credit and declined to furnish Philadelphia with any amplifying information. At oral argument, Central asserted that the drafts were rejected because the bills of lading were stale. See supra note 2. By the district court's analysis, however, although Philadelphia knew at least some of the drafts to be nonconforming when tendered, Central was required to specify its reasons for refusing payment irrespective of Philadelphia's knowledge. 34 Our reading of the relevant case law and commentaries confirms that at its essence a credit is a peculiar form of executory contract, one whereby the issuer makes a continuing offer to pay upon the beneficiary's performance of the terms and conditions stipulated in the credit. See J. White & R. Summers, supra, Sec. 18.2 at p. 711-715 (and cases cited there). In consequence, an issuer's obligation to pay is wholly conditioned upon the beneficiary's performance, here, the delivery of specified documents. Further, nonpayment by the issuer gives rise to an action by the beneficiary for breach of contract in which the beneficiary must plead and prove due performance on its part. Id. As stated above, due performance may be demonstrated only by a showing of compliance with the credit's terms. 35 As we have noted above, the Code incorporates a standard of good faith in every contract made pursuant to its injunctions. La.R.S. 10:1-203. That standard requires honesty in fact in the conduct or transaction concerned. Id., 10:1-201(9). Section 10:5-111 of the Code provides that a beneficiary warrants, in presentation, that its drafts conform to the conditions of the credit. 6 By knowingly tendering nonconforming drafts, Philadelphia breached both of these provisions. It would be a strange rule indeed under which a party could tender drafts containing defects of which it knew and yet attain recovery on the ground that it was not advised of them. See District of Columbia v. Moulton, 182 U.S. 576, 21 S.Ct. 840, 45 L.Ed. 1237 (1901). For these reasons, we conclude that the district court's judgment was in error regarding those drafts in which the deficiencies were known. We do not hold today that a beneficiary may never prevail where its supporting documentation fails to meet the credit's requirements but only that, upon the present facts, the beneficiary has failed so abysmally in meeting its contractual obligations that no inquiry beyond that failure is required. 36 We also find little substance in Philadelphia's contention that the present case is best treated as one for injunctive relief. Because a letter of credit transaction deals solely with the payment of monies there can be no argument that no adequate remedy exists at law. See Productos Carnic S.A. v. Cent. Am. Beef, Etc., 621 F.2d 683 (5th Cir.1980). Next, to our reading the Code contemplates judicial intervention only in narrowly proscribed circumstances: (1) where the issuer's customer seeks to enjoin payment, La.R.S. 10:5-114(2)(b), or (2) where the issuer wrongfully cancels or repudiates a credit prior to presentment or a demand for payment, id., 10:5-115(2). 7 In the former, judicial intervention is predicated upon allegations of fraud and a corresponding fiction. See Sztejn v. J. Henry Schroder Banking Corp., 177 Misc. 719, 31 N.Y.S.2d 631 (Sup.Ct.1941). The fiction provides that although the documents are facially complying, they are in fact noncomplying as a result of the fraud, thus preserving the doctrine that the issuer's duties are defined exclusively by the credit. See Old Colony Trust Co. v. Lawyers Title and Trust Co., 297 F. 152, 158 (5th Cir.1923); see also Harfield, Enjoining Credit Transactions, supra at 602. 37 As to the latter circumstance, because the Louisiana court has yet to make its views known, our analysis relies upon the language of the Code: 38 When an issuer wrongfully cancels or otherwise repudiates a credit before presentment of a draft or demand for payment drawn under it the beneficiary has the rights of a seller after repudiation by the buyer if he learns of the repudiation in time reasonably to avoid procurement of the required documents. Otherwise the beneficiary has an immediate right of action for wrongful dishonor. 39 La.R.S. 10:5-115(2). It appears to us that the above language contemplates a factual pattern where a beneficiary is either prevented from performing because of the issuer's wrongful repudiation of a credit or because presentment would be a needless exercise in view of the issuer's past conduct. It follows that a beneficiary must establish a case of wrongful repudiation. And even in so doing, a court could go no further than to compel the issuer to honor the terms of its agreement. Here appellee has submitted no evidence to that end. An issuer is not compelled to rewrite the terms of a credit so as to acquiesce to substantial compliance, if in fact that is our case. The short of the matter is that every one of appellee's drafts was nonconforming. To the extent that appellee had knowledge of this, there can be no argument of wrongful repudiation. 40 As noted above, the district court found only that Philadelphia knew of some of the defects in the presented drafts: 41 All drafts submitted to Central by Philadelphia failed to conform to the requirements of the letter of credit in various respects. Some of the deficiencies were known to agents of Philadelphia and Provident. All of these defects were curable. 42 Our review of the record indicates that the court did not clearly focus on this aspect of the case. In Philadelphia's brief to us, it twice speaks of the fact that it knew that the documents accompanying the earlier drafts were stale, and the district court's opinion observes that Philadelphia did not seriously dispute that it knew of defects in all the drafts. Since knowledge of the defects is crucial under our holding, we think the best course is to remand. We do so, directing the district court to determine which, rather than some, of the presentations contained deficiencies known to the presenter at the time of presentation, and to enter judgment accordingly. 43 For the reasons stated above, the judgment of the district court is reversed and remanded for further proceedings. In consequence, we do not reach the parties' arguments concerning the proper allocation of damages in credit transactions. 44 REVERSED and REMANDED.