Okla. Stat. tit. 12A, § 5-108
(b) An
issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of its receipt of documents:
(c) Except as otherwise provided in subsection (d) of this section, an
issuer is precluded from asserting as a basis for dishonor any discrepancy if timely notice is not given, or any discrepancy not stated in the notice if timely notice is given.
(d) Failure to give the
notice specified in subsection (b) of this section or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery as described in subsection (a) of Section 12A-5-109 of this title or expiration of the letter of credit before presentation.
(e) An
issuer shall observe standard practice of financial institutions that regularly issue letters of credit. Determination of the issuer's observance of the standard practice is a matter of interpretation for the court. The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.
(f) An
issuer is not responsible for:
(g) If an undertaking constituting a
letter of credit under paragraph (10) of subsection (a) of Section 12A-5-102 of this title contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.
(h) An
issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter.
(i) An
issuer that has honored a presentation as permitted or required by this article:
(5) Is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged.
Oklahoma Code Comment
1. Honor and Examination of Documents. The Issuer under former Article 5 had the obligation to act in good faith and to observe general banking usage in its examination of documents to ascertain whether on their face the documents appeared to comply with the requirements of the letter of credit. Under revised Section 5-108, the standard is more explicit: the issuer must honor if, as determined by the standard practice of financial institutions that regularly issue letters of credit, a presentation appears on its face to comply strictly with the terms and conditions of the letter of credit. The revised Section rejects the standard that commentators have called "substantial compliance." This is consistent with Oklahoma case law. See First State Bank, Ketchum v. Diamond Plastics Corp., 891 P.2d 1262 (Okla.1995). It also clarifies that, consistent with UCP 500, non-documentary conditions (other than relating to time, place and mode of presentation) must be disregarded (but liability to the applicant in that event is not precluded). A determination of what constitutes "standard practice" is an issue for the courts.
Under former Article 5 and revised Sections 5-108 and 5-109, the issuer's obligation to pay on a letter of credit is completely independent from the underlying transaction between the beneficiary and the applicant. Therefore, the issuer must honor a proper demand even if the beneficiary has breached the underlying contract. See Centrefugal Casting Mach. Co. v. American Bank & Trust Co., 966 F.2d 1348 (10th Cir.1992). The issuer cannot look to course of dealings or performance in the underlying transaction to justify dishonor. It can dishonor, however, if there is fraud in the transaction between the beneficiary and the applicant. See Ward Petroleum Corp. v. FDIC, 903 F.2d 1297 (10th Cir.1990); Arbest Constr. Co. v. First Nat'l Bank & Trust Co., 777 F.2d 581 (10th Cir.1985).
Under former Article 5, the issuer could defer honor until the close of the third banking day following receipt and further defer honor if the presenter consented. Under revised Section 5-108, the issuer has a reasonable time to honor, but not beyond the seventh business day after receipt unless the letter of credit provides a different time. This brings revised Article 5 into line with UCP 500. If the issuer dishonors, then it must give notice of the discrepancies or be precluded from asserting any discrepancy not noted as a basis for dishonor. This clarifies an issue that existed under former Article 5. The preclusion, however, does not apply to fraud, forgery or expiration, nor should it arise merely on the basis of past waivers of discrepancies. To that extent, this aspect of the court's opinion in First State Bank, Ketchum, supra, is open to question, given Official Comment 7.
Both in revised Section 5-108 and former Article 5, if the issuer dishonors, then it may fulfill its duty to return the draft and documents by holding them at the disposal of the presenter or beneficiary and by sending notice to that effect. Failure to return the draft could result in liability in conversion for its value (which, admittedly, might be questionable). See First State Bank, Ketchum, supra. See also revised subsection 5-111(c).
Revised Section 5-108 re-codifies the fundamental notion, consistent with the independence principle, that proper honor of a presentation is final and cuts off any claims of the beneficiary or presenter. With limited exceptions, honor of a conforming presentation is final as to the beneficiary and to any drawers or indorsers of drafts presented. Accordingly, under revised Section 5-108, the issuer that has honored: (i) takes the documents free of claims of the beneficiary or presenter, (ii) is precluded from asserting any right of recourse on the draft, (iii) is precluded from restitution for money paid by mistake when the mistake appears on the face of the documents, although the issuer may have recourse on a warranty under Section 5-110 or in subrogation consistent with Section 5-117, and (iv) is discharged to the extent of performance under the letter of credit unless it honored a forged signature of the beneficiary.
Revised subsection 5-108(i)(5) makes it clear that the issuer's obligation to the true beneficiary is not discharged in the event of payment on a forged presentation. This is consistent with the concept embodied in revised subsection 5-109(a)(1), that innocent third parties should not bear the risk of fraud or forgery. In such event, the issuer's right of reimbursement against the applicant upon proper honor is not compromised.
2. Issuer's Right to Reimbursement. Revised subsection 5-108(i)(1) re-codifies the issuer's reimbursement rights set forth in former subsection 5-114(3). An issuer is entitled to reimbursement from the applicant upon proper honor of a presentation under the letter of credit. Proper honor includes payment on a presentation conforming to the terms of the letter of credit, as required under revised subsections 5-108(a) and 5-109(a)(1). Proper honor also includes those situations where the issuer has the right, but not the obligation, to honor. Such cases may include payment on a presentation which on its face complies with the terms of the letter of credit but there is evidence of forgery or material fraud, and where the applicant has waived or is estopped to assert an objection to payment on a non-conforming presentation.
Revised subsection 5-108(i)(1) removes language of former subsection 5-114(3) which permitted the parties to vary the issuer's right of reimbursement by agreement. Subject to the Official Comments to revised subsections 5-108(a) and (e), this change would seem to eliminate the repugnant possibility of an agreement preserving the issuer's reimbursement rights in cases of payment upon non-conforming documents. There can be no right of reimbursement upon improper payment. See, e.g., Resolution Trust Corp. v. Kimball, 963 F.2d 820, 825- 826 (5th Cir.1992). Revised subsection 5-108(i)(1) also clarifies that the right of reimbursement accrues not later than the date funds are paid.
Revised subsection 5-108(i)(1) is consistent with current Oklahoma law. See, e.g., Centrifugal Casting Mach. Co. v. American Bank & Trust Co., 966 F.2d 1348 (10th Cir.1992); First State Bank, Ketchum v. Diamond Plastics Corp., 891 P.2d 1262 (Okla.1995).
Prior Statutory Provisions:
15 Okla. Stat. §§ 403, 406 (1910).
Laws 1961, SB 36, p. 133, §