1 professor of law loyola law school, los angeles chapter 1 introduction
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- C. Bank Collection of Documentary Drafts
- RHEINBERG-KELLEREI GmbH v. VINEYARD WINE CO.
- Notes and Questions
- RHEINBERG KELLEREI GmbH v. BROOKSFIELD NATIONAL BANK OF COMMERCE
- Problem 111
- D. Obligations of Carriers
Note and Questions This case demonstrates that even in cases involving fraud, the payment of the letter of credit will not be enjoined if there is a holder in due course of a draft drawn under the letter of credit that is taken after acceptance by the issuer of the letter of credit. See UCC § 5-109(a)(1)(iii). A holder in due course is basically a bona fide purchaser of a negotiable instrument. Negotiable instruments are covered by Article 3 of the Uniform Commercial Code, and include most promissory notes and checks. In this case, the court held that the advising bank had purchased a negotiable instrument, the document (called a “draft”) that had been issued by the seller of the goods ordering the issuing banks to make payment. There is an additional discussion of “drafts” in the next section of these materials. Once the issuing bank has “accepted” the draft, it might be sold at a discount as was apparently done in this case. The beneficiary of the letter of credit might need money now, and its bank might be willing to purchase the draft from the beneficiary at a discount that takes into account when the draft is due (in this case, in approximately 90 days). The remaining issue in this case that must be resolved on remand is whether the purchaser of the drafts was acting in good faith. The court in this case is using the subjective test of good faith that existed before Article 3 of the UCC was amended in 1989. The definition of good faith, from pre-revision UCC § 1-201(19) was “honesty in fact in the conduct or transaction concerned.” Under Revised UCC § 3-103(a)(4), the definition is “ honesty in fact and the observance of reasonable commercial standards of fair dealing.” If the court were to apply the revised good faith definition, would the case be decided the same way, based on the facts that are given? Does the court not pay enough attention to the requirement that the holder be without notice of a claim or defense? Why should a holder in due course be immune from the fraud defense to payment of a letter of credit? C. Bank Collection of Documentary Drafts In some situations, the parties may decide to forego a letter of credit and to instead condition delivery of the document of title to the buyer upon the buyer’s payment for the goods. The banking system may be used in these cases to transmit the documents from the seller’s place of business to the buyer’s place of business. At that location, the buyer will inspect the documents and if they are in order, make payment. The presenting bank will then give the documents to the buyer, enabling the buyer to take delivery of the goods. In this transction, the seller of goods will draw up a document ordering the buyer to pay for the goods. This document is called a “draft,” and it is a negotiable instrument if it orders the buyer to pay to the order of the seller or some other named person. It is covered by Articles 3 and 4 of the UCC. You can think of a draft as being like a check. When you draw a check from your bank account, you are ordering the bank to pay to the order of the person you name as the payee. In the documentary sales transaction, the seller will draw a draft ordering the buyer to pay the seller, or somebody else designated by the seller. The buyer is thus like the bank in the check example, and is referred to as the “drawee” of the draft. See UCC § 3-103(a)(2). The seller is the “drawer.” UCC § 3-103(a)(3). The draft, the bill of lading, and any other documents required by the sales contract, such as inspection certificates, will then be forwarded by the seller through the banking system to a bank located near the buyer. The buyer will be notified that the documents have arrived, and will go to the bank to inspect them. If the documents are in order, the buyer will pay the draft and receive possession of the documents if the draft is immediately payable. If the parties have decided to do business on credit, meaning that the buyer has more than 3 days to make payment after presentment of the draft, the buyer is required to “accept” the draft, meaning that the buyer acknowledges liability. See UCC § 4-503(1). “Acceptance” occurs by the buyer simply signing the draft. UCC § 3-409. If the buyer refuses to accept or pay, the presenting bank is required to give notification to the seller of dishonor, and await instructions regarding disposition of the goods. UCC §§ 4-501 & 4-503. The following case deals with the seller’s obligations under a documentary draft transaction. RHEINBERG-KELLEREI GmbH v. VINEYARD WINE CO. North Carolina Court of Appeals 53 N.C. App. 560, 281 S.E.2d 425 (1981) Plaintiff, a West German wine producer and exporter, instituted this action to recover the purchase price of a shipment of wine sold to defendant and lost at sea en route between Germany and the United States. Subsequent to a hearing, the court, sitting without a jury, made the following findings of fact. Plaintiff is a West German corporation engaged in the business of producing, selling, and exporting wine. Defendant, a North Carolina corporation, is a distributor of wine, buying and selling foreign and domestic wines at wholesale. Frank Sutton, d/b/a Frank Sutton & Company and d/b/a The Empress Importing Company, and other names, of Miami Beach, Florida, is a licensed importer and seller of wines. During 1978-1979 Sutton served as an agent for plaintiff and was authorized to sell and solicit orders for plaintiff's wine in the United States. During 1978 and early 1979, Randall F. Switzer, then of Raleigh, North Carolina, was a broker soliciting orders of wine on behalf of several producers and brokers, including Sutton, on a commission basis. [Defendant contracted through Switzer and Frank Sutton to purchase 620 cases of plaintiff’s wines.] On or about 27 November 1978, plaintiff issued notice to Sutton giving the date of the shipment, port of origin, vessel, estimated date of arrival and port of arrival. Sutton did not give any of such information to defendant or to Switzer and did not notify defendant of anything. There was never any communication of any kind between plaintiff and defendant, and defendant was not aware of the details of the shipment. Plaintiff delivered the wine ordered by defendant, consolidated in a container with the other wine, to a shipping line on 29 November 1978, for shipment from Rotterdam to Wilmington, North Carolina, on board the MS Munchen. Defendant did not request the plaintiff to deliver the wine ordered to any particular destination, and plaintiff and its agent, Sutton, selected the port of Wilmington for the port of entry into the United States. The entire container of wine was consigned by plaintiff to defendant, with freight payable at destination by defendant. After delivering the wine to the ocean vessel for shipment, plaintiff forwarded the invoice for the entire container, certificate of origin and bill of lading, to its bank in West Germany, which forwarded the documents to Wachovia Bank and Trust Company, N.A., in Charlotte, North Carolina. The documents were received by Wachovia on 27 December 1978. The method of payment for the sale was for plaintiff's bank in West Germany to send the invoice, certificate of origin and bill of lading, to Wachovia whereupon defendant was to pay the purchase price to Wachovia and obtain the shipping documents. Wachovia then would forward payment to plaintiff's bank, and defendant could present the shipping documents to the carrier to obtain possession. Wachovia mailed to defendant on 29 December 1978, a notice requesting payment for the entire consolidated shipment, by sight draft in exchange for documents. The notice was not returned by the Post Office to the sender. On or about 24 January 1979, defendant first learned that the container of wine had left Germany in early December 1978 aboard the MS Munchen, which was lost in the North Atlantic with all hands and cargo aboard between 12 December and 22 December 1978. Defendant did not receive any wine from plaintiff and did not pay Wachovia for the lost shipment. Plaintiff released the sight draft documents to Frank Sutton. Defendant was not furnished with any copy of said documents until receiving some in March and April 1979 and the others through discovery after this action was filed. The order and "Special Instructions,” mailed by Sutton to plaintiff, but not to defendant, provided inter alia : (1) "Insurance to be covered by purchaser"; (2) "Send a 'Notice of Arrival' to both the customer and to Frank Sutton & Company"; and (3) "Payment may be deferred until the merchandise has arrived at the port of entry." From judgment in favor of the defendant, dismissing plaintiff's action, both plaintiff and defendant have appealed. WELLS, Judge. The first question presented by plaintiff's appeal is whether the trial court was correct in its conclusion that the risk of loss for the wine never passed from plaintiff to defendant due to the failure of plaintiff to give prompt notice of the shipment to defendant. Plaintiff made no exceptions to the findings of fact contained in the judgment and does not contend that the facts found were unsupported by the evidence. All parties agree that the contract in question was a "shipment" contract, i. e., one not requiring delivery of the wine at any particular destination. The Uniform Commercial Code, as adopted in North Carolina, dictates when the transfer of risk of loss occurs in this situation. [The court quotes from UCC § 2-509(1)(a).] Before a seller will be deemed to have "duly delivered" the goods to the carrier, however, he must fulfill certain duties owed to the buyer. In the absence of any agreement to the contrary, these responsibilities, set out in UCC § 2-504, are as follows: [The court quotes section 2-504.] The trial court concluded that the plaintiff's failure to notify the defendant of the shipment until after the sailing of the ship and the ensuing loss, was not "prompt notice" within the meaning of UCC § 2-504, and therefore, the risk of loss did not pass to defendant upon the delivery of the wine to the carrier pursuant to the provisions of UCC § 2-509(1)(a). We hold that the conclusions of the trial court were correct. The seller is burdened with special responsibilities under a shipment contract because of the nature of the risk of loss being transferred. Where the buyer, upon shipment by seller, assumes the perils involved in carriage, he must have a reasonable opportunity to guard against these risks by independent arrangements with the carrier. The requirement of prompt notification by the seller, as used in UCC § 2-504(c), must be construed as taking into consideration the need of a buyer to be informed of the shipment in sufficient time for him to take action to protect himself from the risk of damage to or loss of the goods while in transit. It would not be practical or desirable, however, for the courts to attempt to engraft onto § 2-504 of the U.C.C. a rigid definition of prompt notice. Given the myriad factual situations which arise in business dealings, and keeping in mind the commercial realities, whether notification has been "prompt" within the meaning of U.C.C. will have to be determined on a case-by-case basis, under all the circumstances. In the case at hand, the shipment of wine was lost at sea sometime between 12 December and 22 December 1978. Although plaintiff did notify its agent, Frank Sutton, regarding pertinent details of the shipment on or about 27 November 1978, this information was not passed along to defendant. The shipping documents were not received by defendant's bank for forwarding to defendant until 27 December 1978, days after the loss had already been incurred. Since the defendant was never notified directly or by the forwarding of shipping documents within the time in which its interest could have been protected by insurance or otherwise, defendant was entitled to reject the shipment pursuant to the term of UCC § 2-504(c). Affirmed. Notes and Questions 1) Please read official comment 5 to UCC § 2-504. Was the foregoing case properly decided in light of that comment? 2) How would this case be decided under the CISG? See CISG Articles 31, 32, 34 & 67. 3) What are the duties of the presenting bank in a documentary draft transaction? See UCC §§ 4-501 – 4-504 and the following case. RHEINBERG KELLEREI GmbH v. BROOKSFIELD NATIONAL BANK OF COMMERCE United States Court of Appeals, Fifth Circuit 901 F.2d 481 (1990) GARZA, Circuit Judge: American bank did not notify German bank of difficulty in payment on international collection order which came due on arrival of goods in Houston; the collection order was eventually dishonored. The district court held that the American bank did not know, and had no duty to inquire, whether goods had arrived, and entered take nothing judgment. Because we find that the American bank was on notice of the possibility of dishonor and should have told the German bank of the problem in collection, we REVERSE. FACTS In January of 1986, J & J Wine, an American company, ordered a shipment of wine from a German firm, Rheinberg Kellerei GmbH, through an importer, Frank Sutton & Co.58 Payment was to be made through an international letter of collection handled by Edekabank in Germany and Brooksfield National Bank of Commerce Bank in San Antonio ("NBC Bank").59 On March 27, NBC Bank received the letter of collection, bill of lading and invoices from Edeka. The letter of collection noted that payment was due "on arrival of goods in Houston harbor," and called for NBC Bank to notify Sutton "in case of any difficulty of lack payment." The invoices noted an estimated time of arrival: April 2, 1986. NBC Bank then presented the documents to J & J Wine on March 27. There is some dispute as to what, exactly, J & J Wine told NBC Bank about its financial situation at the time, but it is sure that J & J Wine did not pay the amount due, and instead asked NBC Bank to hold the letter for a time while J & J Wine worked to raise the money for payment. NBC Bank did not notify Edeka or Sutton of J & J Wine's failure to pay on presentment. In fact, NBC Bank did nothing further until early May, when Sutton informed them that the wine was still at the Houston port and NBC Bank cabled Edeka for further instructions. The wine had arrived in Houston on March 31, but NBC Bank did not receive notice of that. Because J & J Wine had not taken delivery of it, the wine sat, exposed, at Houston harbor in metal containers until it had deteriorated completely. U.S. Customs agents eventually sold it at auction.60 J & J Wine subsequently went out of business, and Rheinberg Kellerei was never paid for the wine. Rheinberg Kellerei then brought this suit, alleging that NBC Bank had negligently failed to inform it of J & J Wine's failure to pay, and that because of that negligence, the wine had spoiled at Houston harbor. After a bench trial, the district court entered a take-nothing judgment for NBC Bank. The court reasoned that, because payment was not due until the wine's arrival, and NBC Bank had no notice of that arrival and no duty to inquire further, NBC Bank had no knowledge that J & J Wine was in breach of the payment terms. For that reason, the district court held that NBC Bank could not be held liable for failure to inform Edeka of J & J Wine's default. Complaining that the district court improperly applied the requirements of the International Rules for Collection (the "Rules") and erred in construing the letter of collection itself, Rheinberg Kellerei brought this appeal. DISCUSSION I. Duty to Inform NBC Bank presented the letter of collection and the other documents to J & J Wine for payment on March 27, 1986, before the wine had arrived and before the payment was due. Rheinberg Kellerei argues that, regardless of whether NBC Bank knew when the wine had arrived, once NBC Bank presented the documents, it had a duty to inform Edeka of any problem in collecting J & J Wine's payment. We agree. That duty arises both from the Rules and the collection letter itself. A. Letter of Collection The letter, which is the primary source of responsibility in this case, instructs NBC Bank to notify Sutton "in case of any difficulty of lack payment." The district court found that section demanded notice only if there were a "lack of payment or failure to pay." Likewise, NBC Bank emphasizes that the trigger for notice is a lack of payment. What the court below and NBC Bank ignore is the word "difficulty." The letter did not instruct NBC Bank to notify Sutton only if there were a default, or a failure to pay, or a lack of payment. Rather, NBC Bank was called on to act also if there were any difficulty in collecting payment. And the request that NBC Bank hold the letter while J & J Wine sought financing certainly posed a difficulty in collection. Once NBC Bank knew that J & J Wine had asked for time to come up with the money, it should have notified Sutton in accordance with the letter's instructions. The Rules specify that any special instructions posted on a letter of collection should be "complete and precise." General Provisions, sec. C. While the instructions given on this letter could have been in clearer language, they are sufficiently precise to make NBC Bank aware of its duty to notify Sutton once difficulty arose in the collection. B. International Rules for Collection Article 20(iii)(c) of the Rules provides that the "collecting bank [NBC Bank] must send without delay advice of non-payment or advice of non-acceptance to the bank from whom the collecting order was received [Edeka]." The court below and NBC Bank submit that section called on NBC Bank to notify Edeka if J & J Wine had not paid on the letter at the time it came due: on arrival of the goods in Houston harbor. And, they argue, since NBC Bank had no actual notice of the arrival of the goods, it did not breach that duty to notify. The issue, it seems, is the definition of "non-payment" as it is used in Art. 20(iii)(c). Does it refer to a failure to pay on presentment? Does it require an affirmative statement of intent not to pay? Must the due date have arrived? No court has yet defined the term and its attendant duties, so we must look for guidance elsewhere. The Rules were adopted to aid in "defining, simplifying and harmonizing the practices and terminology used in international banking." I.C.C. Banking Commission, Statement of Services to Business. They serve, for the international banking community, the same function as the Uniform Commercial Code does for domestic players. There is no reason, then, to ignore the U.C.C. as an advisory source. Section 4-502 of the U.C.C. governs payment of "on arrival" drafts, such as were presented in our case. Under that section, a bank such as NBC Bank may, but need not, present the documents to the buyer before the goods arrive. But if the buyer does not pay at that time, the bank must notify the seller's bank: "Refusal to pay or accept because the goods have not arrived is not dishonor; the bank must notify its transferor of such refusal but need not present the draft again...." U.C.C. § 4-502 (emphasis added). The U.C.C. imposes on the presenting bank a duty to notify the seller's bank of any delay or failure to pay on presentment of an "on arrival" draft, whether or not the draft is yet due. If section 4-502 were applied to our case, NBC Bank would have a duty to notify Edeka of J & J Wine's failure to pay the letter of collection when it was presented on March 27, even though the goods were not yet in Houston harbor and the payment was not yet due. This is not to say that J & J Wine was in default at that time or had dishonored the letter. Rather, the notice is an act of prudence, an exercise in due care. And, as the aims of the Rules and the U.C.C. are more than consistent, and both demand the exercise of due care, we find that the Rules impose the same duty. NBC Bank should have notified Edeka of J & J Wine's failure to pay at presentment, as that failure constituted a "non-payment" under Art. 20(iii)(c). NBC Bank and the court below rely heavily on the fact that NBC Bank had no actual knowledge of the wine's arrival in Houston, and had no duty to inquire further. We agree with those premises, but do not feel they affect NBC Bank's duty to notify. That duty arose--under both the Rules and the letter itself-- when J & J Wine failed to pay on presentment and asked for time. Arrival of the wine did not trigger it. And NBC Bank cannot avoid liability by hiding from knowledge of arrival and claiming that ignorance as a defense. II. Damages State law governs the measure of damages in a case such as this one. UCC § 2-709 gives the relevant standard: "the seller may recover, together with any incidental damages under the next section, the price (1) of goods accepted or of conforming goods lost or damaged ... after risk of their loss has passed to the buyer." Risk of loss had passed to J & J Wine when the goods arrived at Houston harbor and were available for J & J Wine to take delivery. UCC § 2-509(1)(b). The district court found that because the wine was exposed for such a long period in Houston harbor, it was " 'over cooked' and had deteriorated, lost its original flavor, freshness, was flat and should not be sold into the market that it was intended." Since the goods were so damaged, Rheinberg Kellerei is entitled to the contract price plus the unpaid freight costs, as provided in U.C.C. § 2-709(1)(a). NBC Bank is entitled to a credit for the net proceeds of any resale of the damaged wine. Customs agents sold the wine at auction, but we have no evidence before us of the price paid or the net amount remaining after customs fees, wharfage, and the costs of the auction were paid. For that reason, we remand this case to the district court for the limited purpose of calculating that net amount. After finding that net amount, the district court should enter judgment for Rheinberg Kellerei for the contract price plus freight charges, less the net proceeds of the customs auction. CONCLUSION NBC Bank had a duty to notify Edeka or Sutton, which was triggered when J & J Wine failed to pay the letter of collection on presentment and asked for more time. That duty arose from two sources: the Rules and the letter itself. Though payment was not due until the wine arrived in Houston harbor, that arrival was not a triggering event for the duty to arise, and lack of knowledge of it is no defense. The judgment of the district court is, therefore, REVERSED, and this cause is REMANDED for calculation of damages. It is so ordered. Problem 111 - Assume that a contract for sale of wine calls for payment against documents with the documents to be presented through banks. The documents are expected to arrive before the wine. The negotiable bill of lading states “shipper’s weight, load and count.” The bill of lading states “32 cases of wine,” which was consistent with the terms of the contract for sale. Is buyer allowed to inspect the shipment before paying? See UCC § 2-513. Assume that the buyer pays the presenting bank and receives the bill of lading. The buyer then takes delivery of the goods. The buyer learns that only 31 cases of wine were shipped and delivered. In addition, one of the cases is filled with bottles of vinegar rather than wine (note: the bottles were vinegar before they were shipped; not bad wine that turned into vinegar!). May the buyer reject the goods? See UCC §§ 2-602, 2-605(2) & its official comment 4. Is the carrier liable for the misdescription? See UCC § 7-301(1) & (2) (49 USC § 80113 is similar). Is the presenting bank liable for the misdescription? See UCC § 7-508. D. Obligations of Carriers The carrier is obligated to deliver goods to the holder of a negotiable bill of lading or the consignee of a non-negotiable (straight) bill of lading. This section deals with the liability of carriers if (a) goods are delivered to the wrong person or (b) goods are lost or destroyed in transit. Download 1.49 Mb. Share with your friends:
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