982 F.2d 813 (2nd Cir. 1992), 263, Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A.
|Docket Nº:||263, Docket 92-7468.|
|Citation:||982 F.2d 813|
|Party Name:||ALASKA TEXTILE CO., INC., Plaintiff-Appellant, v. CHASE MANHATTAN BANK, N.A., Defendant-Appellee.|
|Case Date:||December 28, 1992|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued Oct. 16, 1992.
Brett J. Meyer, New York City (David H. Relkin, Kreindler & Relkin, P.C., of counsel), for appellant.
Andrew S. O'Connor, New York City (James A. Batson, Liddle, O'Connor, Finkelstein & Robinson, of counsel), for appellee.
Before: ALTIMARI and McLAUGHLIN, Circuit Judges, and WARD, District Judge. [*]
McLAUGHLIN, Circuit Judge:
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'l 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 Textile 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
in favor of Alaska. Alaska conceded that its documents did not conform to the credits, but argued that Chase should be precluded from relying on the discrepancies because Chase violated the timely notice provisions of UCP Article 16(c). See UCP art. 16(e) (issuer violating art. 16(c) "shall be precluded from claiming that the documents are not in accordance with the terms and conditions of the credit"). The district court granted judgment for Chase, holding that Alaska had waived Chase's compliance with Article 16(c) by submitting documents "on an approval basis." Alaska Textile Co. v. Lloyd Williams Fashions, Inc., 777 F.Supp. 1139 (S.D.N.Y.1991). We now affirm, not on a waiver theory, but on the ground that Chase acted on Alaska's demand for payment on the credits within the "reasonable time" mandated by Article 16(c).
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., 64 N.Y.2d 287, 294-95, 486 N.Y.S.2d 715, 718-19, 475 N.E.2d 1255, 1258-59 (1985); Henry Harfield, Who Does What to Whom: The Letter of Credit Mechanism, 17 UCC L.J. 291, 292-94 (1985).
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., 686 F.2d 112, 115 (2d Cir.1982) ("It is the complete separation between the underlying commercial transaction and the letter of credit that gives the letter its utility in financing transactions."); First Commercial Bank, 64 N.Y.2d at 294, 486 N.Y.S.2d at 719, 475 N.E.2d at 1259 ("The fundamental principle governing [letter of credit] transactions is the doctrine of independent contracts."). This independence principle infuses the credit transaction with the simplicity and certainty that are its hallmarks. The letter of credit takes on a life of its own as
manifested by the fact that, "[i]n credit operations all parties concerned deal in documents, not in goods, services, and/or other performances to which the documents may relate." UCP art. 4; accord U.C.C. §§ 5-109 & 5-114(1); United Bank Ltd. v. Cambridge Sporting Goods Corp., 41 N.Y.2d 254, 259, 392 N.Y.S.2d 265, 270, 360 N.E.2d 943, 948 (1976).
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, 608 F.2d 43, 47 (2d Cir.1979). "There is no room for documents which are almost the same, or which will do just as well." Equitable Trust Co. v. Dawson Partners,  Lloyd's List L.R. 49, 52 (1926) (appeal taken from Eng.C.A.), quoted in Supreme Merchandise Co. v. Chemical Bank, 70 N.Y.2d 344, 352, 520 N.Y.S.2d 734, 738, 514 N.E.2d 1358, 1362 (1987). "This rule [of strict compliance] finds justification in the bank's role in the transaction being ministerial, and to require it to determine the substantiality of discrepancies would be inconsistent with its function." United Commodities-Greece v. Fidelity Int'l Bank, 64 N.Y.2d 449, 455, 489 N.Y.S.2d 31, 33, 478 N.E.2d 172, 173 (1985) (citations omitted). Issuers are likewise held to rigorous standards. If the documents do comply with the terms of the credit, the issuer's duty to pay is absolute, regardless of whether the buyer-account party complains that the goods are nonconforming. Issuers, moreover, must swiftly and carefully examine documents submitted for payment; and they are estopped from complaining about discrepancies they did not assert promptly.
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., 707 F.2d 680, 682 (2d Cir.1983); see also U.C.C. § 5-101 official comment (Article 5 established "to set an independent theoretical frame for the further development of letters of credit"). Thus, letters of credit are governed by the lex mercatoria, see John F. Dolan, The Law of Letters of Credit p 2.02, at 2-5 (2d ed. 1991); Harfield, Letters of Credit, supra, at 1; Rufus J. Trimble, The Law Merchant and the Letter of Credit, 61 Harv.L.Rev. 981 passim (1948), and, in applying this body of law, we are appropriately solicitous of the necessities of commerce and of developments in other jurisdictions.
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 subject
in whole or in part to the [UCP]." N.Y.U.C.C. § 5-102(4) (McKinney's 1991).
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...
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