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Has a Letter of Credit Been Issued?
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- WICHITA EAGLE BEACON PUBLISHING CO. v. PACIFIC NAT’L BANK OF SAN FRANCISCO
- Notes and Questions
- Problem 104
- 2. Has the Documentary Presentation Complied with the Terms of the Letter of Credit
- COURTAULDS NORTH AMERICA, INC. v. NORTH CAROLINA NAT’L BANK
1. Has a Letter of Credit Been Issued? The first question that must be analyzed is whether a letter of credit has in fact been issued. In analyzing this issue, please look at Revised UCC §§ 5-102(a)(10), 5-103 & 5-104. The following case demonstrates the different treatment of a letter of credit as compared to a guarantee. WICHITA EAGLE & BEACON PUBLISHING CO. v. PACIFIC NAT’L BANK OF SAN FRANCISCO United States District Court, N.D. California 343 F. Supp. 332 (1971) This action arises from a Complaint filed herein on May 4, 1965, by the Wichita Eagle and Beacon Publishing Company, Inc. ["Wichita Eagle"] against the Pacific National Bank of San Francisco ["Bank"]. Facts Beginning in 1962, Wichita Eagle had been a lessee of certain property ["Property"] located in downtown Wichita, Kansas, upon which were three buildings used by the Wichita Eagle for its publication business. In 1960, the then-Wichita Eagle had purchased the assets of a rival newspaper, the Wichita Beacon, and had proceeded to merge the Wichita Beacon into the Wichita Eagle. Among the assets purchased by the Wichita Eagle was a new publishing plant owned by the Wichita Beacon. The Wichita Eagle decided to move its operations to this new plant after the merger and thus freed the Property, upon which its old plant remained, for other development. Following a period of negotiations, on February 28, 1962, Marcellus M. Murdock and others, lessors of the Property ["Lessors"], entered into a 99-year lease ["Lease"] with Circular Ramp Garages, Inc. ["Circular Ramp"] of the Property. By subsequent amendment the date of the Lease was changed to April 28, 1962. Paragraph IV(a) of the Lease required Circular Ramp to exercise due diligence to obtain necessary permits and to commence and complete construction on the Property of a parking garage in accordance with a specified time schedule and having a minimum value of $500,000. Paragraph IV(b) of the Lease required Circular Ramp to deposit cash or government bonds in the amount of $250,000 in a Kansas bank or provide a surety bond, letter of credit, or other form of guaranty in the same amount to guarantee Circular Ramp's performance of paragraph IV(a) of the Lease. Pursuant to this provision, Circular Ramp arranged for the Bank to issue to the Lessors and the Wichita Eagle as beneficiaries an instrument [hereinafter sometimes "instrument"] dated May 9, 1962, and designated "Letter of Credit No. 17084" [see Appendix hereto for full text of the Instrument]. The Bank made and received its usual letter of credit charge for issuing the Instrument. [The court determines that Circular Ramp did not exercise due diligence under Paragraph IV(a) of the Lease. No parking garage was ever built by Circular Ramp.] Because of the defalcation of Circular Ramp, the Lessors executed a new lease of the Property to Macy's on October 30, 1964, the term of which was to start on November 1, 1964. The Macy's lease was for a 30-year period with renewal options to be available for six 10-year periods with contemplated renegotiations of the rental provisions. Also on October 30, 1964, the Lessors and Wichita Eagle executed a "Termination Agreement" and an assignment to the Wichita Eagle of all rights under the letter of credit. During the period from November 1, 1962 to October 30, 1964, Wichita Eagle as lessee of the Property had paid to the Lessors rent in the amount of $226,000 before credit of $37,500.03. On March 17, 1965, counsel for the Wichita Eagle wrote the Bank and enclosed notices sent to Circular Ramp and Pacific Company pursuant to the enforcement provisions of the Instrument. Counsel for the Wichita Eagle indicated that the Wichita Eagle proposed to draw a draft pursuant to the Instrument within a few weeks from that date. On May 3, 1965, Wichita Eagle, as the assignee of the Lessors, presented to the Bank a $250,000 draft drawn upon the "Letter of Credit No. 17084" together with documents specified therein. The Bank refused payment. In a joint pre-trial order filed herein on December 9, 1969, and approved by another judge of this court, said judge ruled as a matter of law that the "Letter of Credit No. 17084" was not a letter of credit at all, but was in fact a performance bond or surety agreement subject to the law of performance bonds and surety agreements. Upon transfer of this case to the undersigned for trial, however, the issue of the nature of the "Letter of Credit No. 17084" was reopened and the ruling of the transferor judge was vacated. Upon reopening the Bank offered expert testimony concerning the nature of the Instrument, and the parties submitted additional written authorities in support of their respective positions. A letter of credit may be broadly defined as an engagement by a bank or other person at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. While in a sense every letter of credit is a form of guaranty, the letter of credit differs from the classical surety undertaking in that it is a primary obligation between the issuer and the beneficiary. The issuer of the credit is not concerned with the arrangements existing between the beneficiary and issuer's account party. The Bank contends that the Instrument is not a letter of credit but is instead a performance bond, surety agreement, or other such guaranty. The Bank argues that there can be only two types of letters of credit, "clean" and "documentary." A clean letter of credit requires only the submission of a draft (or drafts) for payment, while a documentary letter of credit requires specified accompanying documents as well. The Instrument here, however, is neither clean nor documentary, the Bank claims, since at least two of its three stated conditions are not documentary. The Bank's approach is, however, too parochial and exalts formalism over commercial reality and usage. The authorities are uniform, for example, that a letter of credit need be in no particular form. Although letters of credit have been most commonly used in sales transactions, they are certainly not unknown in the context of a construction contract, as here. One of the reasons behind the growth and spread of the letter of credit as a commercial tool has been the willingness of the courts to align case law with progressive and current commercial practice. The very type of letter of credit being questioned here by the Bank as a radical departure from traditional usage is but another example of the commercial community pouring old wines into new flasks. In finding the Instrument to be a letter of credit this court gives respect to one of the oldest canons of contractual construction, namely giving effect wherever possible to the intent of the contracting parties. Here the parties intended to enter into a letter of credit arrangement; said letter was drafted by an attorney who was counsel for the Pacific Company and later for Circular Ramp and approved by both the Wichita Eagle and the Bank; the Bank charged and received its usual letter of credit charge; and the letter clearly and conspicuously calls itself a letter of credit. Although the question is not free from doubt, the Instrument denominated "Letter of Credit No. 17084" should be treated as a letter of credit and be subject to the law respecting letters of credit to the extent applicable and appropriate. The letter of credit listed three conditions precedent to the payment of any sight drafts presented against the letter: First, that Circular Ramp had failed to perform the terms and conditions of paragraph IV(a) of the Lease; Second, that the payee have sent a written notice to the Pacific Company and Circular Ramp specifying how Circular Ramp had failed to perform the terms and conditions of said paragraph IV(a) of the Lease and have delivered to the signatories for the Bank an affidavit signed by Marcellus M. Murdock stating that the written notices required were sent to the Pacific Company and Circular Ramp, such notices to have been sent more than thirty days prior to the date the draft is drawn; and Third, that either Circular Ramp or the Pacific Company had failed during the thirty days following the delivery of the notices to them to cure any actual default existing under the terms of said paragraph IV(a) of the Lease as so specified in the written notices. The Wichita Eagle complied with all the conditions precedent sufficient to require that the Bank have honored its $250,000 draft drawn against the letter of credit. [In the balance of the opinion, the court calculates the damages that should be awarded for the wrongful refusal to pay the letter of credit and determines that due to mitigation of damages, Wichita Eagle should only be entitled to recover $163,000 in damages.] APPENDIX
PACIFIC NATIONAL BANK OF SAN FRANCISCO International Department May 9, 1962 Marcellus M. Murdock; Victor Delano; Katherine M. Henderson; Marsh Murdock and Victoria Neff, as the Trustees of the Pearl Jane Murdock Trust; Wichita Eagle, Inc.; and the Prairie Improvement Company, Inc. Gentlemen: We hereby establish our Letter of Credit No. 17084 in your favor on the terms and conditions herein set forth for the account of Circular Ramp Garages, Inc. for the total sum of $250,000.00. available by drafts drawn at sight on the Pacific National Bank providing that all of the following conditions exist at the time said draft is received by the undersigned: 1. That Circular Ramp Garages, Inc. has failed to perform the terms and conditions of paragraph IV(a) of the lease dated February 28, 1962, as amended to April 28, 1962, between all of you as Lessor and Circular Ramp Garages, Inc. as Lessee, a copy of which lease is attached hereto. 2. That you have sent by registered United States mail, return receipt requested, with all postage and registration fees prepaid, a written notice to Circular Ramp Garage, Inc. at 343 Sansome Street, San Francisco 4, California, and to The Pacific Company Engineers and Builders at 801 Cedar Street, Berkeley, California specifying how Circular Ramp Garages, Inc. has failed to perform the terms and conditions of said paragraph IV(a) of said lease and further that you have delivered to the undersigned an affidavit signed by Marcellus M. Murdock stating 333 Montgomery Street California San Francisco 20, Cable Address: Panabank that he sent said written notice in such manner to the above Circular Ramp Garages, Inc. and The Pacific Company Engineers and Builders, to which affidavit shall be attached the return receipt from said registered mail delivery, which affidavit and any attached return receipt shall show that said notice was delivered to said Circular Ramp Garages, Inc. and The Pacific Company Engineers and Builders more than thirty days prior to the date the draft is drawn by you against this Letter of Credit. 3. That either Circular Ramp Garages, Inc. of The Pacific Company Engineers and Builders has failed during said thirty days following the delivery of said notice to them to cure any actual default existing under the terms of said paragraph IV(a) of said lease as so specified in said written notice. The credit extended under this lease shall terminate at the time and upon the happening of any of the following: a. At the time that the City of Wichita, Kansas refuses to issue a permit to construct a circular ramp parking garage building in accordance with plans and specifications submitted by Circular Ramp Garages, Inc. or its engineer or architect, on the property subject to said lease and fails to issue said permit to either Circular Ramp Garages, Inc. or the contractor hired to construct said building, provided, however, that said refusal is accepted as a final refusal by Circular Ramp Garages, Inc. or by said contractor. However, if Circular Ramp Garages, Inc. or said contractor has been unable to obtain such a permit by October 28, 1962 and either of them wishes to continue trying to obtain said permit, this Letter of Credit shall be automatically reduced at said date to a principal sum of $50,000.00 until terminated by any of the following conditions or events. b. At the time that the contractor who is to construct said building obtains a performance bond from a surety company licensed to conduct a bonding business in Kansas insuring that said building will be completed in accordance with the plans and specifications therefore within three years after Circular Ramp Garages, Inc. is obligated to take possession of said premises or April 28, 1965, whichever date shall first occur. c. At the time after such permit from the City of Wichita, Kansas is obtained that no construction loan or takeout loan to finance the construction of said building is obtainable, if the reason that said loan is not obtainable is due to some provision in said lease between you and Circular Ramp Garages, Inc. which you refuse to amend pursuant to the requirements of said Lease. For the purposes of this paragraph it will be deemed that no such construction loan or takeout loan is obtainable if such has not been obtained after application to three lending companies which have theretofore made loans in Kansas for the purpose of constructing buildings or amortizing the cost thereof, if Circular Ramp Garages, Inc. then elects not to apply to any other lending company. d. At the time that Circular Ramp Garages, Inc. has performed or caused to be performed the terms of said paragraph IV(a) of said lease. e. At the end of three years from the date of this letter. Upon termination of the credit established under this letter you are to return the letter to the Pacific National Bank. This Letter of Credit shall be irrevocable from its date providing that you accept the same within ten days from said date. Your acceptance is to be shown by the receipt by the undersigned of a copy of this letter with your acceptance shown by signing below. PACIFIC NATIONAL BANK OF SAN FRANCISCO /s/ A. G. Cinelli A. G. Cinelli Vice President /s/ D. Bannatyne D. BANNATYNE for Cashier The terms of the above Letter of Credit are accepted. Dated May 17, 1962. /s/ Marcellus M. Murdock MARCELLUS M. MURDOCK WICHITA EAGLE & BEACON PUBLISHING CO. v. PACIFIC NAT’L BANK OF SAN FRANCISCO United States Court of Appeals, Ninth Circuit 493 F.2d 1285 (1974) We do not agree with the district court that the instrument sued upon is a letter of credit, though it is so labeled. Rather, the instrument is an ordinary guaranty contract, obliging the defendant bank to pay whatever the lessee Circular Ramp Garages, Inc., owed on the underlying lease, up to the face amount of the guaranty. Since the underlying lease clearly contemplated the payment of $250,000 in case of default, and since this provision appears to be a valid liquidated damages clause, the judgment below must be modified to award the plaintiff $250,000 plus interest. We do not base our holding that the instrument is not a letter of credit on the fact that payment was triggered by default rather than performance or on the fact that the instrument was written in a lease context, for we recognize that the commercial use of letters of credit has expanded far beyond the international sales context in which it originally developed. The instrument involved here strays too far from the basic purpose of letters of credit, namely, providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract. The instrument neither evidences an intent that payment be made merely on presentation on a draft nor specifies the documents required for termination or payment. To the contrary, it requires the actual existence in fact of most of the conditions specified: for termination or reduction, that the city have refused a building permit; for payment, that the lessee have failed to perform the terms of the lease and have failed to correct that default, in addition to an affidavit of notice. True, in the text of the instrument itself the instruments is referred to as a 'letter of credit,' and we should, as the district court notes, 'give effect wherever possible to the intent of the contracting parties.' 343 F.Supp. at 338. But the relevant intent is manifested by the terms of the agreement, not by its label. And where, as here, the substantive provisions require the issuer to deal not simply in documents alone, but in facts relating to the performance of a separate contract (the lease, in this case), all distinction between a letter of credit and an ordinary guaranty contract would be obliterated by regarding the instrument as a letter of credit. It would hamper rather than advance the extension of the letter of credit concept to new situations if an instrument such as this were held to be a letter of credit. The loose terms of this instrument invited the very evil that letters of credit are meant to avoid-- protracted, expensive litigation. If the letter of credit concept is to have value in new situations, the instrument must be tightly drawn to strictly and clearly limit the responsibility of the issuer. The bank contends that whatever the nature of the instrument, by its terms it had either reduced to $50,000 or terminated entirely by the time the draft was drawn. But the district court found that the lessee 'failed to use due diligence to obtain the necessary building permits,' and the lease provides that the lessee must 'use due diligence to obtain all permits necessary.' Since the instrument is a guaranty rather than a letter of credit, the bank should not be able to interpose a defense not available to the lessee unless such an intent is clear in the instrument. Therefore, we interpret the termination provisions to be subject to the duty of due diligence imposed by the lease. Since the lessee did not proceed with due diligence, it was not entitled to regard the building permit as refused, and the bank was not entitled to terminate the instrument because of the lessee's representations to that effect. Since the instrument is not a letter of credit, the amount due depends upon what the lessee owes for the admitted breach. The underlying lease contemplates forfeiture of the entire $250,000 security in the event of total breach. The issue is whether the forfeiture clause is a valid provision for liquidated damages, or provides for a penalty and is therefore unenforceable. The district court found that the lessor's damages 'might well have been the face amount of the draft presented, $250,000.' We take this to be a finding that the amount of actual damages that would flow from a total breach was uncertain and that the amount set was a reasonable forecast of such damages. Indeed, the defendant bank seems to concede that these two criteria for enforceable stipulated damages have been met; it argues only that no 'intent' to liquidate damages was proven. Brief for Appellee and Cross-Appellant at 23- 30. But 'intent' to liquidate damages, as opposed to intent to provide a penalty for breach, does not appear to be an independent element for enforcement of liquidation clauses in either Kansas or California. Although the California courts sometimes talk in terms of intent, in fact the cases turn solely on the reasonableness of the estimate and the difficulty of determining actual damages. The district court's fact finding on the necessary prerequisites for enforcing a stipulated damages clause is supported by the evidence. We therefore hold the stipulated damages clause to be valid, and plaintiff is entitled to judgment for the amount stipulated. And since the claim is for a liquidated amount, plaintiff is also entitled to an award of interest from the date of the bank's refusal to honor the draft. Reversed and remanded, with directions to enter judgment for plaintiff and against defendant in the amount of $250,000 together with interest thereon at the legal rate from and after May 3, 1965. Notes and Questions 1) The result by the Ninth Circuit Court of Appeals was approved by the drafters of Revised Article 5. See Revised UCC § 5-102, official comment 6. 2) If the bank’s undertaking was to pay $250,000 upon receipt of a certification by the beneficiary that Circular Ramp Garages, Inc. had failed to comply with Paragraph IV(a) of the lease rather than being conditioned on whether there had in fact been a failure to comply, would the undertaking be a “letter of credit” as defined in Revised UCC § 5-102(a)(10)? Would the bank be required to pay even if there was no default under the lease? Revised UCC § 5-108(a). If the undertaking is a letter of credit, does it matter if the $250,000 was a reasonable liquidated damages amount, or can the policy against penalty clauses in contracts be circumvented via a letter of credit? See McLaughlin, Standby Letters of Credit and Penalty Clauses: An Unexpected Synergy, 43 Ohio St. L.J. 1 (1982). Problem 104 - A bank’s undertaking states that the bank is to pay the beneficiary upon presentation of bills of lading showing the shipment of goods by sea. The undertaking also indicates that shipment is not to be on ships that are over 15 years old. The beneficiary presents bills of lading showing that the goods have, indeed, been shipped. The buyer calls the issuer to complain that the goods have been shipped on a 20 year old freighter. Is the undertaking a letter of credit? If so, what is the distinction between this hypothetical and Wichita Eagle? Should the bank pay? See Revised UCC §5-102, official comment 6. See also UCC § 5-108(a) & (g), official comment 9. 2. Has the Documentary Presentation Complied with the Terms of the Letter of Credit? Revised UCC § 5-108 describes the issuer’s duties when presented with a demand to pay under a letter of credit. The issuer is required to use standard banking practices in examining the documents presented and must determine whether they strictly comply with the terms of the letter of credit. If they do comply, the issuer is generally required to honor the presentation and pay. The issuer is then entitled to reimbursement from the applicant, i.e. the party who requested the issuance of the letter of credit (e.g. a buyer of goods). If the documents do not comply, the issuer should not pay unless the applicant waives any discrepancies. If the issuer pays on a non-complying presentation, the issuer may not be entitled to reimbursement. The following case demonstrates the principle of “strict compliance.” COURTAULDS NORTH AMERICA, INC. v. NORTH CAROLINA NAT’L BANK United States Court of Appeals, Fourth Circuit 528 F.2d 802 (1975) A letter of credit with the date of March 21, 1973 was issued by the North Carolina National Bank at the request of and for the account of its customer, Adastra Knitting Mills, Inc. It made available upon the drafts of Courtaulds North America, Inc. 'up to' $135,000.00 (later increased by $135,000.00) at '60 days date' to cover Adastra's purchases of acrylic yarn from Courtaulds. The life of the credit was extended in June to allow the drafts to be 'drawn and negotiated on or before August 15, 1973.' Bank refused to honor a draft for $67,346.77 dated August 13, 1973 for yarn sold and delivered to Adastra. Courtaulds brought this action to recover this sum from Bank. The defendant denied liability chiefly on the assertion that the draft did not agree with the letter's conditions, viz., that the draft be accompanied by a 'Commercial invoice in triplicate stating (inter alia) that it covers . . .100% acrylic yarn'; instead, the accompanying invoices stated that the goods were 'Imported Acrylic Yarn.' Upon cross motions for summary judgment on affidavits and a stipulation of facts, the District Court held defendant Bank liable to Courtaulds for the amount of the draft, interest and costs. It concluded that the draft complied with the letter of credit when each invoice is read together with the packing lists stapled to it, for the lists stated on their faces: 'Cartons marked: -- 100% Acrylic.' After considering the insistent rigidity of the law and usage of bank credits and acceptances, we must differ with the District Judge and uphold Bank's position. The letter of credit prescribed the terms of the drafts as follows: 'Drafts to be dated same as Bills of Lading. Draft(s) to be accompanied by: 1. Commercial invoice in triplicate stating that it covers 100,000 lbs. 100% Acrylic Yarn, Package Dyed at $1.35 per lb., FOB Buyers Plant, Greensboro, North Carolina Land Duty Paid. 2. Certificate stating goods will be delivered to buyers plant land duty paid. 3. Inland Bill of Lading consigned to Adastra Knitting Mills, Inc. evidencing shipment from East Coast Port to Adastra Knitting Mills, Inc., Greensboro, North Carolina.' The shipment (the last) with which this case is concerned was made on or about August 8, 1973. On direction of Courtaulds bills of lading of that date were prepared for the consignment to Adastra from a bonded warehouse by motor carrier. The yarn was packaged in cartons and a packing list referring to its bill of lading accompanied each carton. After the yarn was delivered to the carrier, each bill of lading with the packing list was sent to Courtaulds. There invoices for the sales were made out, and the invoices and packing lists stapled together. At the same time, Courtaulds wrote up the certificate, credit memorandum and draft called for in the letter of credit. The draft was dated August 13, 1973 and drawn on Bank by Courtaulds payable to itself. All of these documents--the draft, the invoices and the packing lists--were sent by Courtaulds to its correspondent in Mobile for presentation to Bank and collection of the draft which for the purpose had been endorsed to the correspondent. This was the procedure pursued on each of the prior drafts and always the draft had been honored by Bank save in the present instance. Here the draft, endorsed to Bank, and the other papers were sent to Bank on August 14. Bank received them on Thursday, August 16. Upon processing, Bank found these discrepancies between the drafts with accompanying documents and the letter of credit: (1) that the invoice did not state '100% Acrylic Yarn' but described it as 'Imported Acrylic Yarn,' and (2) 'Draft not drawn as per terms of (letter of credit), Date (August 13) not same as Bill of Lading (August 8) and not drawn 60 days after date' (but 60 days from Bill of Lading date 8/8/73). Finding of Fact 24. Since decision of this controversy is put on the first discrepancy we do not discuss the others. On Monday, August 20, Bank called Adastra and asked if it would waive the discrepancies and thus allow Bank to honor the draft. In response, the president of Adastra informed Bank that it could not waive any discrepancies because a trustee in bankruptcy had been appointed for Adastra and Adastra could not do so alone. Upon word of these circumstances, Courtaulds on August 27 sent amended invoices to Bank which were received by Bank on August 27. They referred to the consignment as '100% Acrylic Yarn', and thus would have conformed to the letter of credit had it not expired. On August 29 Bank wired Courtaulds that the draft remained unaccepted because of the expiration of the letter of credit on August 15. Consequently the draft with all the original documents was returned by Bank. During the life of the letter of credit some drafts had not been of even dates with the bills of lading, and among the large number of invoices transmitted during this period, several did not describe the goods as '100% Acrylic Yarn.' As to all of these deficiencies Bank called Adastra for and received approval before paying the drafts. Every draft save the one in suit was accepted. Conclusion on Law The factual outline related is not in dispute, and the issue becomes one of law. It is well phrased by the District Judge in his 'Discussion' in this way: 'The only issue presented by the facts of this case is whether the documents tendered by the beneficiary to the issuer were in conformity with the terms of the letter of credit.' The letter of credit provided: 'Except as otherwise expressly stated herein, this credit is subject to the 'Uniform Customs and Practice for Documentary Credits (1962 revision), the International Chamber of Commerce, Brochure No. 222'.' Finding of Fact 6. Of particular pertinence, with accents added, are these injunctions of the Uniform Customs: 'Article 7.--Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. 'Article 8.--In documentary credit operations all parties concerned deal in documents and not in goods. 'If, upon receipt of the documents, the issuing bank considers that they appear on their face not to be in accordance with the terms and conditions of the credit, that bank must determine, on the basis of the documents alone, whether to claim that payment, acceptance or negotiation was not effected in accordance with the terms and conditions of the credit. 'Article 9.--Banks . . . do (not) assume any liability or responsibility for the description, . . . quality, . . . of the goods represented thereby . . .. 'The description of the goods in the commercial invoice must correspond with the description in the credit. In the remaining documents the goods may be described in general terms.' Also to be looked to are the North Carolina statutes, because in a diversity action, the Federal courts apply the same law as would the courts of the State of adjudication. Here applicable would be Article 5 of the Uniform Commercial Code. [The court quotes from pre-revision § 5-109, the provisions of which appear in Revised UCC § 5-108.] In utilizing the rules of construction embodied in the letter of credit--the Uniform Customs and State statute--one must constantly recall that the drawee bank is not to be embroiled in disputes between the buyer and the seller, the beneficiary of the credit. The drawee is involved only with documents, not with merchandise. Its involvement is altogether separate and apart from the transaction between the buyer and seller; its duties and liability are governed exclusively by the terms of the letter, not the terms of the parties' contract with each other. Moreover, as the predominant authorities unequivocally declare, the beneficiary must meet the terms of the credit--and precisely--if it is to exact performance of the issuer. Failing such compliance there can be no recovery from the drawee. That is the specific failure of Courtaulds here. Free of ineptness in wording the letter of credit dictated that each invoice express on its face that it covered 100% acrylic yarn. Nothing less is shown to be tolerated in the trade. No substitution and no equivalent, through interpretation or logic, will serve. Harfield, Bank Credits and Acceptances (5th Ed. 1974), at p. 73, commends and quotes aptly from an English case: 'There is no room for documents which are almost the same, or which will do just as well.' Equitable Trust Co. of N.Y. v. Dawson Partners, Ltd., 27 Lloyd's List Law Rpts. 49, 52 (1926). Although no pertinent North Carolina decision has been laid before us, in many cases elsewhere, especially in New York, we find the tenet of Harfield to be unshaken. At trial Courtaulds prevailed on the contention that the invoices in actuality met the specifications of the letter of credit in that the packing lists attached to the invoices disclosed on their faces that the packages contained 'cartons marked: --100% acrylic'. On this premise it was urged that the lists were a part of the invoice since they were appended to it, and the invoices should be read as one with the lists, allowing the lists to detail the invoices. But this argument cannot be accepted. In this connection it is well to revert to the distinction made in Uniform Customs, supra, between the 'invoice' and the 'remaining documents', emphasizing that in the latter the description may be in general terms while in the invoice the goods must be described in conformity with the credit letter. The District Judge's pat statement adeptly puts an end to this contention of Courtaulds: 'In dealing with letters of credit, it is a custom and practice of the banking trade for a bank to only treat a document as an invoice which clearly is marked on its face as 'invoice.” Finding of Fact 46. This is not a pharisaical or doctrinaire persistence in the principle, but is altogether realistic in the environs of this case; it is plainly the fair and equitable measure. (The defect in description was not superficial but occurred in the statement of the quality of the yarn, not a frivolous concern.) The obligation of the drawee bank was graven in the credit. Indeed, there could be no departure from its words. Bank was not expected to scrutinize the collateral papers, such as the packing lists. Nor was it permitted to read into the instrument the contemplation or intention of the seller and buyer. Adherence to this rule was not only legally commanded, but it was factually ordered also, as will immediately appear. Had Bank deviated from the stipulation of the letter and honored the draft, then at once it might have been confronted with the not improbable risk of the bankruptcy trustee's charge of liability for unwarrantably paying the draft moneys to the seller, Courtaulds, and refusal to reimburse Bank for the outlay. Contrarily, it might face a Courtaulds claim that since it had depended upon Bank's assurance of credit in shipping yarn to Adastra, Bank was responsible for the loss. In this situation Bank cannot be condemned for sticking to the letter of the letter. Nor is this conclusion affected by the amended or substituted invoices which Courtaulds sent to Bank after the refusal of the draft. No precedent is cited to justify retroactive amendment of the invoices or extension of the credit beyond the August 15 expiry of the letter. Finally, the trial court found that although in its prior practices Bank had pursued a strict-constructionist attitude, it had nevertheless on occasion honored drafts not within the verbatim terms of the credit letter. But it also found that in each of these instances Bank had first procured the authorization of Adastra to overlook the deficiencies. This truth is verified by the District Court in its Findings of Fact: '42. It is a standard practice and procedure of the banking industry and trade for a bank to attempt to obtain a waiver of discrepancies from its customer in a letter of credit transaction. This custom and practice was followed by NCNB in connection with the draft and documents received from Courtaulds. '43. Following this practice, NCNB had checked all previous discrepancies it discovered in Courtaulds' documents with its customer Adastra to see if Adastra would waive those discrepancies noted by NCNB. Except for the transaction in question, Adastra waived all discrepancies noted by NCNB. '44. It is not normal or customary for NCNB, nor is it the custom and practice in the banking trade, for a bank to notify a beneficiary or the presenter of the documents that there were any deficiencies in the draft or documents if they are waived by the customer.' This endeavor had been fruitless on the last draft because of the inability of Adastra to give its consent. Obviously, the previous acceptances of truant invoices cannot be construed as a waiver in the present incident. For these reasons, we must vacate the decision of the trial court, despite the evident close reasoning and research of the District Judge, Courtaulds North America, Inc. v. North Carolina N.B., 387 F.Supp. 92 (M.D.N.C.1975). Entry of judgment in favor of the appellant Bank on its summary motion is necessary. Reversed and remanded for final judgment. Download 1.49 Mb. Share with your friends:
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