Opinion ID: 565254
Heading Depth: 1
Heading Rank: 2

Heading: The Standard for Compliance with the Terms of the Credit

Text: 18 Having determined that the waiver of notice by DBC was not effective to modify the agreement between the Bank and LeaseAmerica, we must now address LeaseAmerica's arguments concerning the lower court's ruling on the standard of compliance required for parties to a letter of credit. Minnesota law applies to this case, but the parties have cited us no authority in point and we have found none. However, the weight of authority favors a rule requiring strict compliance with the terms of a letter of credit, see, e.g. Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461 (2d Cir.1970); Insurance Company of North America v. Heritage Bank, N.A., 595 F.2d 171 (3d Cir.1979); Chase Manhattan Bank v. Equibank, 550 F.2d 882 (3d Cir.1977); Courtaulds North American, Inc. v. North Carolina National Bank, 528 F.2d 802 (4th Cir.1975); Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir.1983); Bossier Bank and Trust Co. v. Union Planters National Bank, 550 F.2d 1077 (6th Cir.1977); Board of Trade v. Swiss Credit Bank, 728 F.2d 1241 (9th Cir.1984); American Airlines, Inc. v. Federal Deposit Ins. Corp., 610 F.Supp. 199 (D.C.Kan.1985); Armac Industries, Ltd. v. Citytrust, 203 Conn. 394, 525 A.2d 77 (1987); Kelly-Springfield Tire Co. v. Dakota Northwestern Bank, N.A., 321 N.W.2d 516 (N.D.1982); Ronald A. & Caroline Olson, Inc. v. United States Nat. Bank, 70 Or.App. 460, 689 P.2d 1021 (1984), and we adopt that rule. Adoption of a substantial compliance standard would place issuing banks in uncertain positions with respect to their obligations. In this case LeaseAmerica argues that it substantially complied because it presented a waiver of the ten days' notice requirement by DBC, the party for whom the notice provision was included. However, if this court were to adopt this standard, the issuing bank would be required to apply a legal or commercial analysis, often without benefit of professional advice, in every situation in which compliance was colorably substantial. We believe that this would burden an issuing bank unduly and would fetter the commercial purposes of the letter of credit. 4 Adoption of a substantial compliance standard on grounds that the result will more likely meet the parties' expectations might also erode the principle that a letter of credit is independent of contracts between the bank's customer and the beneficiary. See, e.g., Prudential Insurance Co. v. Marquette National Bank, 419 F.Supp. 734, 736 (D.Minn.1976) (letter of credit is independent of the agreement between the customer and beneficiary). 19 Having adopted the strict compliance standard, we must now determine whether the district court erred by applying a less rigorous substantial compliance standard to the conduct of the Bank. Similarly, we must determine whether the terms of the 1983 revision of the UCP preclude the Bank from dishonoring the draw, as counsel for LeaseAmerica contended at oral argument. 20 LeaseAmerica argues that the Bank did not comply with two requirements of Article 16(d) of the UCP, as it did not convey its notice of dishonor by telecommunication, although both the Bank and 21 LeaseAmerica had facsimile machines, and it did not notify LeaseAmerica whether it was holding the documents or returning them. With regard to the requirement of notice by telecommunication, we agree with the District Court that the Bank fulfilled this requirement when it telephoned LeaseAmerica to give notice of the dishonor. 5 We therefore find that failure to notify by facsimile machine was not a violation of the UCP. 22 There is no dispute that the Bank did not notify LeaseAmerica whether it was holding or returning the documents. We hold that failure to so notify LeaseAmerica does not preclude the Bank from dishonor, as the defect was incurable. Lease-America cannot avoid the adverse results of an incurably defective compliance by invoking a strict compliance standard to the conduct of the Bank or by applying the provisions of the UCP. 23 Our analysis requires careful consideration of Article 16(e) of the UCP, which reads as follows: 24 If the issuing bank fails to act in accordance with the provisions of paragraphs (c) and (d) of this article and/or fails to hold the documents at the disposal of, or to return them to, the presenter, the issuing bank shall be precluded from claiming that the documents are not in accordance with the terms and conditions of the credit. 25 LeaseAmerica contends that this provision unambiguously provides that the Bank is precluded from dishonoring the draw, as the Bank did not follow the requirements in paragraph (d) that notice of refusal of the documents be sent by telecommunication, if possible, and that the notice state whether the issuing bank is holding the documents or returning them. 6 We have already held that the Bank met the requirement that the notice be given by telecommunication. Yet it did not state in its notice whether it was holding the documents or returning them. 26 The language of this article does not specifically address the timeliness of the presentment. We believe that this language was included in the UCP to give a beneficiary a chance to cure a curable defect, not to require the issuing bank to honor an untimely presentment. The presentment by LeaseAmerica was untimely and incurable. 27 Other courts applying the preclusion provisions of Article 16 indicate that the reason for these provisions is to give the beneficiary an opportunity to cure. For example, in Offshore Trading Co. v. Citizens National Bank, 650 F.Supp. 1487 (D.Kan.1987), the court commented that the reason for the requirements of Article 16 is to give the beneficiary notice of the discrepancies in order to allow it to correct the documentation.... As a result, if the Bank failed to give notice of any nonconformity other than failure to provide the reciprocal letter of credit, it is precluded from doing so now. Id. at 1491. Similarly, in Datapoint Corp. v. M & I Bank, 665 F.Supp. 722 (W.D.Wis.1987), the court applied the preclusion of Article 16 to an issuing bank that had failed to give notice without delay by telecommunication of its dishonor of a presentment one day before the expiration date. Instead of using telecommunication, the issuing bank had sent notice by mail. The court found that [c]ommon experience would have suggested that it was unlikely that Colonial would receive this notice in time to correct the variance ... Id. at 727. Unlike our situation, these cases involved timely presentment of documents with curable defects.