The Devil in Letter of Credit Details
By Craig N. Landrum [Republished on June 08, 2012 with the kind consent of the author.]
Standby letters of credit have long been issued by banks to assure payment to sellers of goods and services to a customer of the bank, who procures the standby letter of credit. While most bankers are very familiar with the terms of the letter of credit, especially the conditions for payment, they may not be familiar with the requirements imposed by the closing paragraph that usually states "[e]xcept insofar as otherwise expressly stated, this irrevocable letter of credit is subject to the 'Uniform Customs and Practice for Documentary Credits ( Revision) International Chamber of Commerce Brochure Number 400'" (the "UCP 400").
Generally, the original letter of credit must be presented with any drawing when the conditions requiring payment are met. In such cases, the failure to produce the letter of credit is normally a bar to collection. However, in a recent Fifth Circuit case, a bank was liable for payment of a letter of credit, despite the beneficiary’s failure to tender the original letter of credit, because the bank failed to properly dishonor the request to draw by not timely and sufficiently notifying the beneficiary of its intent to dishonor.
By incorporating the UCP 400 into the letter of credit, the period for notice of dishonor was governed by the UCP 400, which required notice without delay rather than the three to seven days allowed under Article 5 of the Uniform Commercial Code ("UCC"). By failing to give notice as quickly as reasonably possible after deciding to dishonor a draw, the bank failed to comply with notice requirements and therefore was held liable. Once the bank decided to dishonor the letter of credit, it was required under Article 16 of the UCP 400 to give notice "without delay by telecommunication or, if that is not possible, by any other expeditious means...to the beneficiary" rather than the three day time limit defined as a reasonable time under Article 5 of the UCC.
Therefore, in the rare instance where a letter of credit may be lawfully dishonored according to its terms, lack of compliance with the requirements of UCP 400 may nevertheless expose a bank to liability.
About the Author Craig Landrum is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Jackson office. His practice focuses on bank regulatory law, corporate law, mergers and acquisitions law, and securities law. He also has experience representing insurance companies and agencies with regard to corporate and regulatory matters, including the licensing of bank subsidiaries as general insurance agencies and underwriters.
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