Opinion ID: 457969
Heading Depth: 1
Heading Rank: 3

Heading: Withholding Payment on the Letter of Credit

Text: 17 Pro-Fab contends that Community Bank cannot hide behind the discrepancies in the documents Pro-Fab presented to refuse payment for the March 10 shipment. Pro-Fab first argues that the district court erred in refusing to apply the equitable doctrines of waiver and estoppel. Pro-Fab points out that the bank had paid for two shipments before March 10 and one shipment after, despite the fact that it presented nonconforming documents each time. According to Pro-Fab, Community Bank cannot now assert the defects as a basis for dishonor. 18 Although letters of credit are subject to the statutory provisions in Article 5 of the Uniform Commercial Code, Ga.Code Ann. Secs. 11-5-101 to -117, the predecessor to this court has recognized that equitable doctrines such as waiver and estoppel apply to these types of transactions. Barclays Bank D.C.O. v. Mercantile National Bank, 481 F.2d 1224, 1236-37 (5th Cir.1973), cert. dismissed, 414 U.S. 1139, 94 S.Ct. 888, 39 L.Ed.2d 96 (1974). In Barclays Bank, Mercantile Bank notified Barclays that it would not honor its demand for payment because the issuer of the letter of credit refused to pay, although Mercantile stated that all of the required documentation had been submitted with the draft. When Barclays sued, Mercantile claimed for the first time that it was not required to pay because Barclays had not submitted proper documents. Id. at 1236. The fifth circuit held that Mercantile had waived the defects by failing to object to them in its letter and to give Barclays an opportunity to cure. Id. Other cases that have used waiver and estoppel principles against dishonoring banks have arisen under similar circumstances, where banks have given presenters of nonconforming documents no hint of the noncompliance. See, e.g., Chase Manhattan Bank v. Equibank, 550 F.2d 882, 885-87 (3d Cir.1977) (if bank authorized a delayed presentation of documents, it cannot refuse payment because of expiration of letter of credit); Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 466 (2d Cir.1970) (bank that paid for shipment of goods would be estopped from later claiming it did not have to pay additional charges included under the letter of credit because the shipment was only partial); Schweibish v. Pontchartrain State Bank, 389 So.2d 731, 737-38 (La.Ct.App.1980) (where bank did not require strict compliance with terms of prior letters of credit to same beneficiary, it could not assume totally inconsistent position by insisting on strict compliance for subsequent letter of credit). 19 Community Bank's acts do not fall into this category. It is clear that in this case Community Bank did not waive any of the discrepancies by paying for the other shipments. If it had made any independent modification of the terms of the credit, it risked losing its right of reimbursement from Vipa-Cal. See Ga.Code Ann. Sec. 11-5-106(2). The bank did not pay until it had received authorization from Vipa-Cal, and it notified Pro-Fab with each check that payment was being made despite the specifically listed discrepancies. This is not a case in which the bank misled the presenter to its detriment. Pro-Fab was fully aware of the defects before it shipped. Without Vipa-Cal's waiver the bank properly refused payment. See Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802, 807 (4th Cir.1975). 20 Pro-Fab also argues that the court should have ordered the bank to pay because it substantially complied with the terms of the letter of credit. The argument is based on First National Bank v. Wynne, 149 Ga.App. 811, 256 S.E.2d 383 (1979), which held that if from all the documents presented to the issuer by the beneficiary there is substantial compliance with the terms of the letter of credit and there is no possibility that the documents submitted could mislead the issuer to its detriment, there has been compliance with the letter of credit. 256 S.E.2d at 386-87. Pro-Fab contends that it cured all but three of the deficiencies as soon as the bank notified it on March 30. The remaining three deficiencies were: a prohibited partial shipment, no oceangoing bills of lading, and no inspection certificates. The bank had possession of the bills of lading and the inspection certificates according to Pro-Fab, because the bank was responsible for forwarding Vipa-Cal's documentation to permit Vipa-Cal to be paid from the Taiwanese letter of credit. Pro-Fab therefore claims that the bank actually had all the necessary documents, either from Pro-Fab or another source. The prohibition against partial shipments should be irrelevant, in Pro-Fab's view, because it was obvious to all parties that there would be more than one shipment. Guerriero would have had no reason to ask the bank for an extension on the letter of credit if the only contemplated shipment was the first one on January 28. 9 21 Despite Pro-Fab's contentions, however, we agree with the district court that these circumstances are well beyond the Wynne court's minor departure from the rule of strict compliance. Our decision is based on the peculiar strictures of the letter of credit transaction. The letter of credit contract between Vipa-Cal, the customer, and Community Bank, the issuing bank, is completely separate from the underlying contract between Pro-Fab and Vipa-Cal. The bank's duties to the beneficiary, Pro-Fab, are likewise distinct from the other contracts. The bank is obligated to look only to the requirements of the letter of credit, not to any other activity between the parties. See Ga.Code Ann. Secs. 11-5-109 to -114. 10 See also Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230, 235 (5th Cir.1983); Courtaulds, 528 F.2d at 805-06. The beneficiary must strictly conform to the requirements of the letter of credit, because the bank is bound to adhere to them and not look beyond the face of the documents presented. If the beneficiary does not comply, the bank is not required to pay. See Philadelphia Gear, 717 F.2d at 235-36; Courtaulds, 528 F.2d at 805-06; Venizelos, 425 F.2d at 465. 22 Some courts, like the Georgia appellate court in Wynne, have allowed a small measure of flexibility in the general rule of strict compliance by looking at the documents submitted as a whole instead of passing on each piece of paper in isolation. If the documents taken together satisfy the letter of credit, the bank should pay. These cases, however, concern only small discrepancies. In Wynne, for example, the letter of credit required the beneficiary to submit a signed notice of default that referred to the letter of credit by number and a draft that referred to the letter of credit by number. The beneficiary submitted the letter of credit itself, a fully conforming notice of default, and a draft that was correct except for the omission of the letter of credit number. The bank refused to pay because the number was missing from the draft. The Georgia appellate court held that the submitted letter of credit and notice of default sufficiently tied the demand for payment to the particular letter of credit and the omission from the accompanying draft was not a material variance. Wynne, 256 S.E.2d at 384-86. See also Flagship Cruises, Ltd. v. New England Merchants National Bank, 569 F.2d 699 (1st Cir.1978) (payment is proper where documents, if taken as a whole, offer no possibility of misleading issuer); Banco Espanol de Credito v. State Street Bank and Trust Co., 385 F.2d 230 (1st Cir.1967), cert. denied, 390 U.S. 1013, 88 S.Ct. 1263, 20 L.Ed.2d 163 (1968) (variance in inspection certificates, largely created by conflicting instructions from customer, too insignificant to justify dishonor). 23 Pro-Fab's documentation did not simply contain a few clerical errors. Two documents were omitted, including the ocean bill of lading, which is the only evidence that the wheels actually went to Taiwan. The fact that the bill of lading and inspection certificate passed through another department of Community Bank 11 on the way to Taiwan does not satisfy Pro-Fab's presentment duty. Community Bank is not required, indeed is not permitted to look beyond the documents submitted by Pro-Fab. See, e.g., Marino Industries v. Chase Manhattan Bank, 686 F.2d 112, 119 (2d Cir.1982). Our research has revealed no case in any jurisdiction that has found substantial compliance by a beneficiary that failed, as Pro-Fab did, to present all the documents called for in the letter of credit.