This is a case of first impression requiring us to determine how a letter of credit issuer’s duties under the Uniform Customs and Practices for Documentary Credits, Int'I Chamber of Commerce Pub. No. 400 (1983 Revision) (the “UCP” or “Uniform Customs”), are affected by a beneficiary’s presentation of documents “on an approval basis.”
Alaska Textilé Co. sued Chase Manhattan Bank in the United States District Court for the Southern District of New York (Metzner,
J.)
for wrongful dishonor of two letters of credit that Chase had issued
BACKGROUND
A brief description of what a letter of credit is and how it works may illuminate the discussion. Suppose that B, a Japanese buyer, wants to buy cloth from S, a New York seller. S does not know B and is reluctant to ship the cloth to Japan on credit, with no solid assurance that B will ever pay him.
To allay S’s concerns, B may arrange to have a bank issue an irrevocable letter of credit in favor of S. S may then ship the cloth to Japan, secure in his own mind that he will be paid by the bank. The commercial letter of credit, then, is a common payment mechanism in international trade that permits the buyer in a transaction to substitute the financial integrity of a stable credit source (usually a bank) for his own.
In its classic form, the letter of credit is only one of three distinct relationships between three different parties: (1) the underlying contract for the purchase and sale of goods between the buyer (“account party”) and the seller (“beneficiary”), with payment to be made through a letter of credit to be issued by the buyer’s bank in favor of the seller; (2) the application agreement between the bank and the buyer, describing the terms the issuer must incorporate into the credit and establishing how the bank is to be reimbursed when it pays the seller under the letter of credit; and (3) the actual letter of credit which is the bank’s irrevocable promise to pay the seller-beneficiary when the latter presents certain documents
(e.g.,
documents of title, transport and insurance documents, and commercial invoices) that conform with the terms of the credit.
See generally First Commercial Bank v. Gotham Originals, Inc.,
The great utility of the letter of credit derives from the fact that these three relationships are utterly independent of one another:
The fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued.
Bank of Nova Scotia v. Angelica-Whitewear Ltd.,
36 D.L.R.4th 161, 166 (Sup.Ct.Can.1987),
quoted in
John F. Dolan,
Documentary Credit Fundamentals: Comparative Aspects,
3 Bank. & Fin.L.Rev. 121, 127 (1989);
see also Marino Ind. Corp. v. Chase Manhattan Bank, N.A.,
Because the credit engagement is concerned only with documents, “the terms and conditions of a letter of credit must be strictly adhered
to____” Corporacion De Mercadeo Agricola v. Mellon Bank Int’l,
Letters of credit are
sui generis.
Virtually unknown at Roman Law, letters of credit were woven into the fabric of the common law, largely under the aegis of Lord Mansfield as he fashioned the law merchant
(lex
mercatoria) to the needs of the 18th Century Industrial Revolution. Although they share certain characteristics of contracts, negotiable instruments, and guarantees,
see
Henry Harfield, Letters of Credit 1-2 (1979), letters of credit have “evolved as a mercantile specialty entirely separate from common law contract concepts and they still must be viewed as entities unto themselves.”
Voest-Alpine Int’l Corp. v. Chase Manhattan Bank, N.A.,
These developments are embodied in the UCP, a compilation of internationally accepted commercial practices,
1
first issued in 1930 by the International Chamber of Commerce and revised approximately every ten years since.
See generally
Frans P. de Rooy, Documentary Credits 10-11 (1984). The UCP enjoys a unique status. Although it is not law, the UCP applies to most letters of credit (including the ones at issue in this case) because issuers generally incorporate it into their credits,
see
Lazar Sarna, Letters of Credit 54-55 (2d ed. 1986) (“most issuing banks today make express reference to the [UCP]”); Henry Harfield,
Code Treatment of Letters of Credit,
48 Cornell L.Q. 92, 96 (1962) (“all of the banks in New York which do any letter of credit business have, over the years, and as a matter of course, subjected their letters of credit to the [UCP]”); and the New York Uniform Commercial Code expressly provides that it “does not apply to a letter of credit or a credit if by its terms or by agreement, course of dealing or usage of trade such letter of credit or credit is sub
FACTS
Plaintiff-appellant Alaska Textile Co., which is owned and operated by Amnon Kashi, is a New York-based textile company that exports fabric from India. Lloyd Williams Fashions, Inc. (“Lloyd”), a manufacturer of women’s clothing, contracted with Alaska in early 1988 to buy several thousand yards of Indian silk which were to be delivered to Lloyd’s facility in Hong Kong. To make payment, Lloyd arranged for defendant-appellee Chase Manhattan Bank to issue two letters of credit in favor of Alaska, for $82,500 and $47,141.25, respectively.
The silk was shipped from India to Hong Kong on April 2, 1988, but Alaska, the shipper, did not forward the necessary documents to its collecting bank, 2 Merchants Bank of New York, until April 26, 1988. Merchants’s letter of credit examiner— known as Junior to all involved in this litigation — reviewed Alaska’s documents and noted three discrepancies: (1) the documents were stale, i.e., presented more than twenty-one days after the goods had been shipped, see UCP art. 47(a); (2) the description of goods did not strictly conform to the credits; and (3) the airway bill lacked a “notify party” designation. Junior informed Alaska of these discrepancies, at least one of which, late presentation, was incurable. Undeterred, Alaska directed Merchants to present the discrepant documents to Chase anyway “as is, with discrepancies.”
Merchants presented the documents and a form collection letter to Chase the very next day. Under a space on the form denominated “SPECIAL INSTRUCTIONS,” Merchants typed, “Documents are presented on an approval basis.” The district court found that this is an industry-accepted phrase used “to indicate that discrepancies in the documents existed, and that Alaska was asking Chase to request Lloyd to waive these discrepancies and authorize payment.”
Chase examined the documents corresponding to the two letters of credit, respectively, on the third and fourth banking days following presentment. Chase noted discrepancies in the documents that justified dishonor, promptly advised Lloyd of the discrepancies, and asked whether it would waive them. While Lloyd was considering whether to waive the discrepancies, Kashi contacted Lloyd’s president to persuade him to authorize payment under the credits. Over the next two weeks, Alaska and Lloyd, both in desperate financial condition, continued to negotiate over payment for the silk.
In the meantime, on May 9, 1988 (eight banking days after presentment), Chase told Junior at Merchants Bank that there were discrepancies in the documents which justified dishonor, but that Lloyd had not yet decided whether to waive them. When Chase asked how to proceed, Junior essentially instructed Chase to sit on the documents, pending Lloyd’s decision whether to authorize payment. Chase sent a telex to Merchants Bank on May 18, 1988, restating the discrepancies justifying dishonor and stating that the documents were being held at Alaska’s disposal. The record does not indicate whether Chase sent the telex at Alaska’s or Lloyd’s behest.
In September 1988, Alaska sued Chase in New York Supreme Court for wrongful dishonor of the letters of credit. Chase removed the action to federal court, and the case was tried before Judge Metzner. Kashi, Junior, and Chase’s letter-of-credit examiner testified, and each side presented expert testimony regarding standard banking practice and Chase’s obligations under the UCP. It was undisputed that Alaska’s
DISCUSSION
We begin with the only point upon which the parties and the district court agree — the meaning of the phrase “presented on an approval basis.” It is an “industry accepted phrase ... indicating] that discrepancies in the documents existed, and that Alaska was asking Chase to request Lloyd to waive these discrepancies and authorize payment.” 777 F.Supp. at 1140; see also id. at 1141 (by submitting documents on an approval basis, “Alaska was asking Chase to refrain from exercising its right to reject the discrepant documents immediately after inspection, and instead to request the customer’s waiver of the discrepancies”). Neither party disputes this factual finding, which was supported by the testimony of their expert witnesses.
The parties and the district court, however, have vastly different views about the legal implications of submitting documents on an approval basis: the district court intimated that Chase may have violated Article 16(c)’s timely notice provisions but held that Alaska “ha[d] waived its right to strict compliance with UCP’s Article 16(c)” by submitting documents on an approval basis. 777 F.Supp. at 1141. Chase eschews a waiver analysis, arguing instead that Article 16(c) is not even applicable to presentations made on an approval basis.
The UCP says nothing about presentations made on an approval basis. Nor does any reported decision, or scholarly authority, of which we are aware. Nonetheless, presentation of documents “on an approval basis” — as that phrase was defined by the district court — is the functional equivalent of presentation “on a collection basis” under a letter of credit; and there is persuasive, albeit scant, authority construing the latter terminology.
Presentation of documents “on a collection basis”
under a letter of credit
has the same meaning as “on an approval basis,” indicating that payment is sought from the bank as principal under the letter of credit. Depending on the circumstances, however, “on a collection basis” can indicate that the documents are being sent on a basis independent of the letter of credit,
i.e.,
for simple collection under the Uniform Rules for Collections, Int’l Chamber of Commerce Pub. No. 322 (1978) (“Collections Rules”), with the bank acting as the beneficiary’s agent by delivering the documents to the account party against payment:
Documents which are known not to conform to the credit are sometimes sent to the issuing bank ... “on a collection basis” or “for collection”. Such phrases are themselves ambiguous, and their meaning must be obtained from the context. The meaning may be that the documents are sent on the basis that they are being presented under the credit with what is in effect a request for the waiver of the discrepancies, such as that they be accepted out of time. In such a case the Uniform Customs will apply, and if the documents are accepted all the obligations of the issuing bank ... will become effective. Or it may be that the documents are being sent on a basis independent of the credit (or, it may be said, outside it), namely for simple collection, the bank probably being made the agent of the party sending them to collect on them from the buyer if the buyer is prepared to take them. In such a case the [International Chamber of Commerce’s] Uniform Rules for Collections are likely to apply. It appears that, if the correspondence shows that the presentation is being made under the credit, it will fall into the former category.
Applicability of Article 16
Chase’s position that UCP Article 16(c) does not apply to presentations made on an approval basis is contradicted by Harlow & Jones Ltd. v. American Express Bank Ltd., [1990] 2 Lloyd’s Rep. 343 (Q.B.), a wrongful dishonor case in which the plaintiff-beneficiary had presented discrepant documents “on a collection basis.” The defendant-issuer argued that “ ‘on a collection basis’ ... meant that the documents were to be sent to the issuing bank outside the letter of credit, the issuing bank being authorized to act simply as a collecting agent without any further responsibility for payment____” Id. at 347-48. The Commercial Court rejected this contention, holding:
These then were the clear instructions which the issuing bank received with the documents, and they admit of only one possible meaning: namely, that the documents were forwarded under the letter of credit; that the issuing bank was to decide, no doubt in consultation with its customer, whether or not the documents were acceptable to it under the terms of the letter of credit; and, in either event, what consequences were to follow. The process was, of course, that required by art. 16 of the UCP.
Id.
at 346 (emphasis added);
see also Michael Doyle & Assocs. Ltd. v. Bank of Montreal,
140 D.L.R.3d 596 (Sup.Ct.B.C.1982) (rejecting confirming bank’s claim that beneficiary waived its claim under letter of credit by agreeing to submission on a collection basis).
Compare Merchants Bank of New York v. Credit Suisse Bank,
This case presents the same core facts as
Harlow & Jones:
Alaska submitted documents under — not outside — the letters of credit. And, although the documents were admittedly discrepant, Alaska hoped that Lloyd would nonetheless accept them and authorize payment under the credits. Thus, we agree with
Harlow & Jones
that the UCP, including Article 16 in its entirety, applied to Alaska’s presentation of documents for payment under the credits. Indeed, that the UCP governs presentations on an approval basis is even clearer here than when the beneficiary submits documents on a collection basis under a letter of credit because the latter terminology is inherently ambiguous by virtue of its use of the word “collection,” which could be taken to refer to the Collections Rules.
See, e.g., Merchants Bank,
This determination is amply supported by the record. Both Junior and Alaska’s expert testified that submission of documents on an approval basis neither removed the transaction from the UCP generally, nor from Article 16(c) specifically. But the testimony of Chase’s own credit examiner also does not support its contention that Alaska rendered Article 16(c) nugatory by presenting documents on an approval basis. Although she testified that the bank treated
This conclusion likewise counsels against a finding that Alaska waived Chase’s compliance with Article 16(c) by submitting documents on an approval basis. “To establish waiver under New York law one must show that the party charged with waiver relinquished a right with both knowledge of the existence of the right and an intention to relinquish it.”
Voest-Alpine,
The district court premised its conclusion that Alaska had waived Chase’s compliance with Article 16(c) on two facts: (1) Alaska submitted its documents on an approval basis, and (2) Kashi urged Lloyd to waive the discrepancies. As we have already noted, however, a presentation of documents on an approval basis is made under a letter of credit and, therefore, the UCP — including Article 16(c) — applies.
See Harlow & Jones,
[1990] 2 Lloyd’s Rep. at 346. That Alaska itself requested Lloyd to waive the discrepancies is also insufficient to support a finding of waiver. This plea was no different from Alaska’s request that Chase ask Lloyd to waive; and neither is necessarily inconsistent with Alaska’s rights (more accurately, Chase’s obligations) under Article 16(c).
Compare United Commodities-Greece,
Where, as here, a beneficiary presents documents under letters of credit that expressly incorporate the UCP as a template of rights and responsibilities, courts should be chary about altering the parties’ relationship based on equitable doctrines such as waiver.
See Voest-Alpine,
Having determined that Article 16 applied to these transactions and that Alaska had not waived Chase’s adherence to Article 16(c), we must now consider whether Chase complied with that provision.
“Reasonable Time” Under UCP Article 16(c)
The UCP provides that “[t]he issuing bank shall have a reasonable time in which to examine the documents and to determine, as above, whether to take up or to refuse the documents.” UCP art. 16(c). If the issuer does not act in accordance with this provision, it “shall be precluded
Alaska asserts that, in construing “reasonable time” under the UCP, courts have generally equated it with the Uniform Commercial Code’s (“UCC” or “Code”) requirement that the issuer act within three banking days,
3
U.C.C. § 5-112(1).
See An Examination of U.C.C. Article 5 (Letters of Credit),
Report of the Task Force of the Letter of Credit Subcommittee of the U.C.C. Committee, Business Law Section of the American Bar Association XI (James Byrne chair. Sept. 29, 1989),
reprinted in
45 Bus.Law. 1521, 1600 (1990) [“Task Force Report”] (“Some courts have bridged the difference between the U.C.C.’s rigid rule and the reasonable time rule of the U.C.P. by finding that three days constituted a reasonable time.”);
see, e.g., Banque De L’Union Haitienne, S.A. v. Manufacturers Hanover Int’l Banking Corp.,
Courts that bother to offer a rationale for the proposition that “reasonable time” cannot exceed three days generally adopt
Neither the 1983 UCP nor the 1974 UCP defines what constitutes a “reasonable time” to determine if the documents are defective____ When the UCP is silent or ambiguous, analogous UCC provisions may be utilized if consistent with the UCP. The UCC provides for a period of three banking days for the issuer to hon- or or reject a documentary draft for payment____ The “reasonable time” three-day period should be the maximum time allowable for the notification ... requirement.
Bank of Cochin,
We need not enmesh ourselves in the controversy regarding the interplay of the UCP and UCC under New York law, 4 however, because we find Article 16(c) to be neither silent nor ambiguous: it explicitly provides that issuers shall have a reasonable time to act on a beneficiary’s presentation of documents for payment. That “reasonable time” may be imprecise neither makes it ambiguous nor invites interpolation of a fixed time period. In fact, the International Chamber of Commerce gave “[cjonsiderable thought ... to the possibility of replacing ‘reasonable time’ [with] a specific period of time,” but rejected the suggestion. Bernard S. Wheble, UCP 1974/1983 Revisions Compared and Explained, Int’l Chamber of Commerce Pub. No. 411, at 33 (1984): see also Robert M. Rosenblith, Lawyer Robert M. Rosenblith Looks at UCC Provisions Against UCP Rule, 6 Letter of Credit Update 11 (Feb. 1990) (“there is a disparity of opinion on the question of what is a ‘reasonable time’ which precluded international consensus of a particular period”).
Equating the UCP’s “reasonable time” with the UCC’s three-day limit for examining documents also ignores the contexts in which these provisions appear. The Code and the Uniform Customs adopt vastly different approaches to demands under letters of credit that are not promptly and finally honored. See Bankers Trust Co. v. State Bank of India, [1991] 2 Lloyd’s Rep. 443, 448 (A.C.) (UCC three-day limit “is not exactly analogous [to the UCP], since documents are deemed to be rejected [under the UCC], unless they are accepted within three clear banking days, not the other way round”). See generally James G. Barnes, Nonconforming Presentations Under Letters of Credit: Preclusion and Final Payment, 56 Brooklyn L.Rev. 103, 103-107 (1990) (contrasting UCP and UCC treatment of issuer’s responsibilities and beneficiary’s remedies for breach); Rosenblith, supra, at 11-12 (same).
Under UCP Article 16(e), if an issuer does not dishonor a demand for payment within a reasonable time, it is deemed to have honored it, whether or not the documents actually conform to the terms of the credit. Thus, in an action for wrongful dishonor, the beneficiary can invoke this rule of strict preclusion to estop the issuer from relying on the documents’ nonconformity — regardless of whether the beneficiary has demonstrated detrimental reli
An issuer that does not comply with the Code’s rigid three-day limitation, however, is deemed to have
dishonored
the demand for payment,
see
U.C.C. § 5-112(1);
see also
Rosenblith,
supra,
at 12 (“Dishonor has a host of implications with possible severe consequences on the account party (even the beneficiary) which will ultimately be sought to be visited on the issuer.”); but “the issuer who dishonors by inaction [under the UCC] may raise nonconformity as a defense in the beneficiary’s subsequent action for wrongful dishonor.” Barnes,
supra,
at 104; Only if the beneficiary can satisfy the traditional requirements for estoppel
{e.g.,
detrimental reliance) can it prevail on a wrongful dishonor claim if its documents were nonconforming.
See, e.g., American Coleman Co. v. Intrawest Bank of Southglenn, N.A.,
Finally, those that would incorporate the three-day period of UCC section 5-112(l)(a) into UCP Article 16(c) disregard subdivision (b) of section 5-112(1), which provides that the issuer may “further defer honor if the presenter has expressly or impliedly consented thereto.” This provision has the salutary effect of tempering the rigid three-day rule, yet no one has suggested that it too should be incorporated into Article 16(c). Thus, were we to accept the argument that “reasonable time” really means three days, the issuer would be left with an absolute duty to act within three days, without exception, and violation of this duty would bring down on the issuer the penalty of strict preclusion. See Task Force Report, supra, at 1603 (“fixed three day banking rule coupled with an automatic preclusion rule ... would impose an unduly harsh burden on issuers”). This “rule” bastardizes both the Code and the Uniform Customs, producing a result that resembles neither. We reject it.
“Reasonable time” is a term of art with well-developed implications in the law. What constitutes a reasonable time necessarily depends upon the nature, purpose, and circumstances of each case.
See Zev v. Merman,
In this case, Alaska submitted documents with patent, incurable discrepancies and requested that Chase seek a waiver of the discrepancies from Lloyd. Chase examined one set of documents on the third banking day following presentment, and the other set on the fourth day. It informed Lloyd of the discrepancies and, pursuant to Alaska’s request, asked Lloyd whether it would waive the discrepancies and authorize payment. At that point, Chase had done all that it could, and the matter was out of its control.
Four banking days later (eight banking days after presentment), Chase informed Merchants of the discrepancies and asked what it should do with the documents. In context, it is clear that Chase was asking whether Alaska wanted Chase to give formal notice of dishonor and to return the documents. Junior demurred and requested that, until he heard otherwise from Alaska, Chase should continue to hold the documents pending Lloyd’s decision whether to authorize payment. Fifteen banking days after presentment, Chase sent a telex giving formal notice of dishonor, restating the discrepancies that justified dishonor, and stating that the documents were held at Alaska’s disposal.
We hold that Chase acted reasonably under the circumstances. Until either Lloyd decided whether to waive, or Alaska requested action (one way or the other) on its demand for payment, Chase was proceeding as it had been requested, and the matter was out of its control. See Jack, Documentary Credits, supra note 2, at 87-88 (issder fulfills his obligation “ ‘so long as such delay is attributable to causes beyond his control, and he neither has acted negligently nor unreasonably’ ”) (quoting Hick v. Raymond and Reid, [1893] A.C. 22, 29).
To hold otherwise, and thereby impose liability on Chase for credits that were materially discrepant, would create perverse incentives for issuers. A prudent issuer acting on documents submitted on an approval basis would never risk liability by complying with the beneficiary’s request that it inquire of the account party regarding waiver. Unless the issuer could secure an immediate waiver, the most sensible course would be to dishonor the demand for payment — a result that none of the participants generally favors.
The letter of credit is intended to grease the wheels of trade and commerce. As many as half of the demands for payment under letters of credit are discrepant, yet, in the vast majority of cases, the account party waives the discrepancies and authorizes payment. See Bankers Trust, [1991] 2 Lloyd’s Rep. at 456; Revised Article 5, supra § 5-112 comment 1; Barnes, supra, at 108. This process is efficient, and the law should encourage it, particularly when the beneficiary has acknowledged that its documents are discrepant and has specifically requested that the issuer consult the account party. See Bankers Trust, [1991] 1 Lloyd’s Rep. at 594; Co-Operative Centrale Raiffeisen-Boereleenbank B.A. v. Sumitomo Bank Ltd., [1987] 1 Lloyd’s Rep. 345, 348 (Q.B.1986), rev’d on other grounds, [1988] 2 Lloyd’s Rep. 250 (C.A.); Dolan, The Law of Letters of Credit, supra, 11 6.06[1][b], at 6-58 to 6-59.
We acknowledge that this result is not altogether satisfactory because it leaves open the issue of when, having heard neither from the account party nor the beneficiary, the issuer must nevertheless act on the beneficiary’s demand for payment. This (unfortunate) uncertainty, however, is the inevitable result of the UCP’s acknowledged shortcomings.
See
Jack,
Article 16, supra,
at 486 (“So long as the Uniform Customs provide a reasonable time as opposed to a fixed period, there is bound to be some uncertainty.”).
See generally
Vincent M. Maulella,
UCP Art. 16 Proposal on Notifying the Applicant,
8 Letter of Credit Update 6 (Apr. 1991);
Toward UCP Revision; Article 16 and its Problems,
6 Letter of Credit Update 6 (May 1990). In
We emphasize how narrow is our holding. It applies only to presentations on an approval basis. It is one thing to say that “reasonable time” cannot — as a matter of law — exceed three banking days. It is quite another to say that — as a matter of fact — three banking days generally constitutes a reasonable time to act on a demand for payment in the ordinary letter-of-credit transaction. Our holding today in no way detracts from the latter proposition, which is amply supported by the case law and literature construing Article 16(c). We are not faced with the ordinary transaction, however, as evidenced by the total lack of authority construing “on an approval basis” and the scant authority interpreting “on a collection basis” under a letter of credit.
CONCLUSION
When an issuer has explicitly incorporated the Uniform Customs into its letter of credit, we will not absolve it of its obligations under Article 16 without a substantial showing of cause to do so. Merely submitting documents “on an approval basis” is insufficient to displace the provisions of Article 16(c). Because we find that Chase complied with Article 16(c), we affirm the judgment of the district court.
Notes
. Over 140 countries use the Uniform Customs. See 6 Letter of Credit Update 1, 29-37 (Dec. 1990).
. Alaska erroneously characterizes Merchants as an "advising bank.” Although both advising banks and collecting banks are correspondent banks, they perform different functions. The advising bank is an agent of the issuer and the account party,
see Sound of Market St., Inc. v. Continental Bank Int’l,
. We note the Code’s three-day limit will likely be revised. Article 5 is being overhauled, and section 5-112 will probably be brought in line with the UCP, which is undergoing its decennial revision. See UCC Revised Article 5, § 112(a) & comment 1, Nat'l Conf. of Commissioners on Unif. State Laws (Jan. 28, 1992 draft) [‘‘Revised Article 5’’] (providing for “a reasonable time, not to exceed seven business days" "in an attempt to conform the statute to the proposed rules under the UCP’’); see also James E. Byrne, Point-by-Point Commentary, UCC Article 5 Revision Draft, 8 Letter of Credit Update 16, 18-19 (June 1992) (commenting on an earlier version of revised § 5-112).
.
Compare Algemene Bank Nederland, N.V. v. Soysen Tarim Urunleri Dis Ticaret Ve Sanayi, A.S.,