Court Opinion

ID: 9483778
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:31:10.581989+00
Date Added: 2024-06-11T17:49:49.908462
License: Public Domain

*425JON 0. NEWMAN, Circuit Judge,
concurring:
I concur in the judgment in favor of Westpac Banking Corporation (“Westpac” or “the bank”) but for reasons quite different from those set forth in Judge Oakes’s opinion. The issue that separates us concerns the rarely litigated issue of whether there can be an enforceable contract to issue a letter of credit. He concludes, for all practical purposes, that the answer is “no” because of his view that a letter of credit “subsumes any prior contract to issue a letter of credit,” and that courts should thereafter look only to the terms of the credit. I think that any bank foolish enough to make a contract to issue a letter of credit should be liable for its breach, but that in this case the breach by Westpac should be considered waived by reason of the promisee’s failure to complain promptly-
1. Was a contract made? The making of the contract emerges upon consideration of two key facts, only the first of which is recounted in the Court’s opinion. The first fact, as the Court notes, is the bank’s June 28, 1985, letter containing the following statement:
The Bank hereby undertakes to issue the credit in the draft form provided by your Company, or as mutually agreed upon between your Company and the Bank.
The “draft form,” prepared by counsel for Reefer Express Lines Pty. Ltd. (“Reefer”), was a standby letter of credit for the benefit of Reefer’s wholly owned subsidiary, Mutual Export Corporation (“Mutual”), in the amount of $500,000. The draft form included the following expiration provision:
This Letter of Credit expires on [45 days after the later of the last possible day on which Kumul Express or Lakatoi Express charter may terminate].
The bracketed phrase, which was in the original, referred to the expiration of two charter parties. This letter was sent to Reefer, the parent corporation of Mutual.
The second fact, not mentioned by the Court, concerns the closing that occurred in reliance on the bank’s June 28 letter. The closing concerned the sale of another wholly owned subsidiary of Reefer, Refrigerated Express Lines (Australasia) Pty. Ltd. (“Refrigerated”). The bank sent the letter because there was not time to issue the formal letter of credit by June 28, when, to the bank’s knowledge, the closing of the transaction for which the letter of credit was needed was scheduled to occur. The letter of credit was needed to guarantee Refrigerated’s payments to Mutual under the charter parties because, after the sale, Refrigerated would no longer be an affiliate of Mutual. The June 28 letter was received at the closing. Armed with the bank’s letter and relying upon it, Reefer closed the transaction.
As the District Court correctly ruled, the June 28 letter, reasonably relied upon by Reefer and its subsidiary, Mutual, created a contract obligating the bank to issue a letter of credit in the “form” provided by Reefer, or in such other form “as mutually agreed upon between” Reefer and the bank.
2. Do the terms of the contract survive the letter of credit? The Court rules that the letter of credit issued by the bank “subsumes” any prior contract to issue a letter of credit. Maj.Op. at 424. No authority is cited for this proposition. The June 28 letter was not a preliminary step in negotiation of a final contract, in which event it could be said that the final contract constitutes an integration of the parties’ terms. See Restatement (Second) of Contracts § 213 (1981). The June 28 letter was itself a final contract, issued by the bank with clear knowledge of its importance to the forthcoming closing.1 The terms of this contract do not disappear or *426become "subsume[d]” when the letter of credit that was contracted for is issued. Instead, in my view, the issue becomes whether the credit, as issued, complies with the prior contract.
3. Was the contract breached? The letter of credit issued by the bank did not comply with the form submitted by Reefer. Instead of providing an expiration date keyed to 45 days after the expiration of the charter parties, the bank inserted an expiration date of June 30, 1986. Plainly, this date, unilaterally selected by the bank, breached the June 28 letter agreement.
The majority contends that the credit, as issued, conformed to the contract by virtue of the "mutually agreed upon” clause of the contract. In the majority’s view, mutual agreement occurred because of Mutual’s failure to complain promptly about the change in the expiration date. I disagree. When a contract calls for performance of a specified event (here, issuance of a credit with an expiration date keyed to the charter parties) and includes the opportunity for a variation in performance upon mutual agreement, it must be construed to mean that the parties remain free, prior to performance, to agree on a variation. Where, as in this case, the parties do not agree to any variation prior to performance, the ob-ligor’s performance must comply with the terms of the contract. Since the bank did not obtain Mutual’s assent to the changed expiration date (or the assent of anyone else) prior to issuing the credit, the bank remained obligated to issue a credit with the expiration date called for by the June 28 contract. The credit, with the modified date, was not in compliance.
4. Has Mutual waived the bank’s breach? In my view, the real question in this case is whether Mutual has waived what I consider a clear breach of a clearly enforceable contract.2 Unless some special rule applies, a promisee is normally not under an obligation to complain promptly about nonconforming performance on pain of waiving a breach of contract claim.3 See John C. Reitz, Against Notice: A Proposal to Restrict the Notice of Claims Rule in U.C.C. § 2-607(3)(a), 73 Cornell L.Rev. 534, 535 n. 5 (1983) (discussing common law rule and citing cases); Restatement (Second) of Contracts § 277 (1981) (renunciation of damages claim must be in writing). However, a contrary rule applies in some circumstances, for example, with respect to nonconformity in the sale of goods. See U.C.C. § 2-607(3).4 I believe a similar rule should be applied to a contract to issue a letter of credit. Facilitation of commercial transactions will be enhanced if those who contract to issue credits are assured that any claim of noncomplying performance will be promptly called to the promisor’s attention.
In this case, the majority somewhat overstates the matter in saying that “nothing was done to modify the terms of the letter of credit.” Maj.Op. at 422. In fact, as the Court acknowledges, correspondence from Andrew Consentino, counsel for Reefer and Mutual, to Virginia Pearce, counsel for Refrigerated, complained of deficiencies in the letter of credit as originally issued, and specifically objected to the changed expiration date. Westpac does not dispute that it was informed of this correspondence. Indeed, the bank demonstrated its awareness by issuing a revised letter of credit, making some of the revisions called for by Consen-tino.
However, neither Mutual nor Reefer complained directly to Westpac after issuance of the original credit or the revised credit, both of which contained the June 30, *4271986, expiration date. Though there is some indication in the record that Consenti-no had an expectation that Pearce would forward correspondence to the bank, a promisee under a contract to issue a letter of credit must be held to a strict standard to notify a bank promptly, properly, and definitively of any deficiency in the credit as issued. Mutual makes no claim that Pearce was the bank’s agent. Indeed, Mutual acknowledges that after receiving the revised credit with the nonconforming expiration date, “the ball was dropped by Mutual, Reefer, and its attorney.” Brief for Appellee at 14.
The District Court viewed the lack of a prompt complaint about the expiration date as an issue of laches. Judge Knapp concluded that a laches defense was not available to Westpac since Mutual’s lack of prompt complaint was not significant in view of the parties’ assumption for at least two years that the credit was still in force and since the bank was not harmed by Mutual’s delay. Those observations adequately reject a laches defense, but they do not excuse the lack of prompt notification of defects that contract law must impose upon a promisee of a contract to issue a letter of credit.
I cannot be confident that these views accord with Australian law on contracts (or letters of credit), but in the absence of Australian case law dealing specifically with contracts to issue credits, I deem it the sounder approach to apply a rule of prompt notification of nonconforming performance, rather than to say, as the majority does, that the prior contract has been “subsume[d]” in the credit or, alternatively, that the credit complied with the contract. For these reasons, I concur in the judgment.

. Nor may the June 28 letter be regarded as "preliminary notification to the beneficiary for information only and without responsibility” within the meaning of U.C.P. art. 14. That provision applies “[i]f incomplete or unclear instructions are received to issue, confirm, advise, or amend a credit.” Id. Westpac had not received "incomplete or unclear instructions.” It knew precisely the terms of the credit its customer wanted, and it contracted to issue the credit in the form requested by the customer.

. It would probably be more precise to phrase the issue as whether the plaintiff has forfeited its right to seek damages for breach of the contract by lack of prompt notification of nonconforming performance, since the issue is really whether the law should impose an adverse con sequence for plaintiff's omission.

. It is questionable how much force this principle ought to have as to a unilateral contract enforceable solely by the promisee’s reasonable reliance.

."Where a tender has been accepted (a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy;....” U.C.C. § 2-607(3).