Armac Industries, Ltd. v. Citytrust

• Decision Date: 05 May 1987
• Docket Number: No. 13022,13022
• Citation: 203 Conn. 394,525 A.2d 77
• Court: Connecticut Supreme Court
• Parties: , 3 UCC Rep.Serv.2d 1512 ARMAC INDUSTRIES, LTD. v. CITYTRUST.

Page 77

525 A.2d 77

203 Conn. 394, 3 UCC Rep.Serv.2d 1512

ARMAC INDUSTRIES, LTD. v. CITYTRUST.

No. 13022.

Supreme Court of Connecticut.

Argued March 11.

Decided May 5, 1987.

Gary P. Sklaver, New Haven, for appellant (plaintiff).

Richard J. Buturla, Milford, for appellee (defendant).

Before PETERS, C.J., and HEALEY, SHEA, SANTANIELLO and CALLAHAN, JJ.

PETERS, Chief Justice.

The decisive question in this case is whether an issuing bank rightfully dishonored a demand for payment of a letter of credit because of discrepancies between the demand and the terms of the letter of credit. The plaintiff, Armac Industries, Ltd., the designated beneficiary of an irrevocable letter of credit, brought an action against the defendant Citytrust to recover $49,766.41, the face amount of the credit issued by the defendant at the request of its customer, Pac Corporation. After a hearing, the trial court rendered judgment for the defendant and the plaintiff has appealed.

The facts are undisputed. The Pac Corporation (Pac) arranged for the defendant to issue a commercial letter of credit in conjunction with Pac's purchase, on December 10, 1979, of an extrusion blow molding machine from the plaintiff. The plaintiff, a manufacturer of such machines, is a New York corporation which, at the time of the sale, had its principal place of business in Westbury, New York. Pac is a Connecticut corporation whose principal place of business is in Watertown. The defendant is a Connecticut bank. The purchase price for the machine was partially paid in cash, with the remainder to be paid through the letter of credit.

The defendant issued an irrevocable letter of credit in favor of the plaintiff for the sum of $49,766.41 on April 27, 1981. As subsequently amended on May 8, 1981, the credit required the beneficiary to present for payment, through a commercial bank, a draft and a signed performance statement, in accordance with detailed specifications contained in the credit. The credit indicated that drafts were to be dated no earlier than May 25, 1981, and no later than June 30, 1981.

On behalf of the plaintiff, the European American Bank and Trust Company (EAB) sent a collection letter to the defendant on or about May 19, 1981, which was received on May 22, 1981. The collection letter referred to the letter of credit by number, and contained as attachments an unsigned draft and a bill of lading. The defendant determined that it would not honor this request for payment, because it deemed the presentment not to conform to the terms of the letter of credit, and because, in the interim, it had been served with a garnishment and restraining order in an action brought by its customer, Pac, against the plaintiff. Accordingly, on June 2, 1981, the defendant so advised EAB by telex, indicating in some detail the noncompliance of the draft with the terms of the letter of credit, and noting that the bill of lading did not satisfy the requirement for a signed performance statement. This telex was confirmed, two days later, when the defendant wrote EAB, returning to it the collection letter, together with the draft, bill of lading, letter of credit and amendment thereto. Although the letter of credit did not expire until June 30, 1981, the plaintiff made no further effort to tender a timely and proper demand for payment in conformity with its terms.

Several years later, in early 1985, the civil action between Pac and the plaintiff ended with a judgment for the plaintiff in the amount of $49,766.41. Upon the release of the garnishment issued in connection with that action, the plaintiff renewed its demand that the defendant honor the letter of credit. When the defendant refused to do so, the present action ensued.

The trial court concluded that the plaintiff could not prevail because its demand for payment did not conform with the express terms and conditions of the letter of credit as amended. The court determined that the unsigned draft and the absence of the required performance statement constituted significant discrepancies in the plaintiff's tender. In assessing the significance of these discrepancies, and in rejecting the plaintiff's argument of waiver, the court attached considerable importance to the defendant's timely notification of the plaintiff, well in advance of the expiration date of the letter of credit, and to the plaintiff's failure to take any further timely steps to present proper documentation to the defendant.

The plaintiff's appeal from the judgment in favor of the defendant raises four issues. The plaintiff claims the trial court erred: (1) in failing expressly to define the standard of compliance that governs letters of credit; (2) in holding that the unsigned draft did not comply with the terms of the letter of credit; (3) in concluding that dishonor was justified because the tender lacked a performance statement; and (4) in failing to find waiver or estoppel with regard to the discrepancy in the size of the extruder as described in the letter of credit and the bill of lading. We find no error.

I

The law that governs letters of credit in this state is contained in article 5 of the Uniform Commercial Code, General Statutes §§ 42a-5-101 through 42a-5-117. A letter of credit, under the code, is an engagement by a bank or other person, made at the request of a customer, that the issuer will honor drafts or other demands for payment upon compliance by the beneficiary with the conditions specified in the credit. General Statutes § 42a-5-103(1)(a); New York Life Ins. Co. v. Hartford National Bank & Trust Co., 173 Conn. 492, 498, 378 A.2d 562 (1977); B. Clark, The Law of Bank Deposits, Collections and Credit Cards (Rev.Ed.1981) § 8.2; J. White & R. Summers, Uniform Commercial Code (2d Ed.1980) c. 18.

Letter of credit transactions have a tripartite nature because they involve three separate commitments. The first is the underlying contract between the customer and the beneficiary, here the sales contract between Pac and the plaintiff, Armac. The second is the contract between the customer and the issuer, here the contract between Pac and the defendant, Citytrust, concerning the issuance of the credit in exchange for the customer's promise to reimburse the issuer for payments made in conformance with the terms of the credit. The third is the letter of credit itself, obligating the issuer to honor proper drafts or other demands for payment by the beneficiary, if accompanied by the documentation required by the credit.

In the common law of letters of credit; O'Meara Co. v. National Park Bank, 239 N.Y. 386, 146 N.E. 636 (1925); and under the code; General Statutes §§ 42a-5-114 and 42a-5-109; the single most important legal principle is the independence of these three commitments, and especially the independence of the letter of credit from the underlying commercial agreement between the customer and the beneficiary. As a consequence, § 42a-5-114(1) provides that the issuer must pay upon the tender of facially conforming documentation, "regardless of whether the goods or documents conform to the underlying ... contract between the customer and the beneficiary." ¹ Similarly, § 42a-5-109(2) defines the issuer's duty to its customer as an obligation in good faith to examine documents with care "so as to ascertain that on their face they appear to comply with the terms of the credit...." As a result, a letter of credit customer may have to reimburse a bank for its payments even though the customer might have a defense in a direct action on the underlying contract by the beneficiary of the letter of credit. New York Life Ins. Co. v. Hartford National Bank & Trust Co., supra, 173 Conn. at 498-99, 378 A.2d 562; see also East Girard Savings Assn. v. Citizens National Bank & Trust, Co., 593 F.2d 598, 601 (5th Cir.1979); Colorado National Bank of Denver v. Board of County Commissioners, 634 P.2d 32, 36-37 (Colo.1981); Westwind Exploration, Inc. v. Homestate Savings Assn., 696 S.W.2d 378, 381 (Tex.1985).

The parties to the present litigation do not dispute the general principle that letters of credit are documentary forms of transaction, in which the issuer's duty to pay is measured by the compliance of the beneficiary's tender with the terms of the credit without regard to the beneficiary's performance or nonperformance of the underlying contract. They disagree about a question that is not expressly addressed either by the governing statutes or by the Uniform Customs and Practice for Documentary Credits which the letter of credit in this case incorporated by reference. ² That question is whether the conformity of a tender under a letter of credit is to be measured by a standard of strict compliance or of substantial performance. The trial court's failure to determine the proper standard is the first issue raised by the plaintiff's appeal. We agree that it is important to resolve this question before we undertake to analyze the specific discrepancies in the plaintiff's tender which the trial court held to be sufficient to justify the defendant's dishonor of the credit.

In order to determine the standard by which to measure the compliance of a beneficiary's tender, we must look to the purpose that a letter of credit is intended to serve. "[O]ne of the expected advantages and essential purposes of a letter of credit is that the beneficiary will be able to rely on assured, prompt payment from a solvent party; necessarily, a part of this expectation of ready payment is that there will be a minimum of litigation and judicial interference, and this is one of the reasons for the value of the letter of credit device in financial transactions." New York Life Ins. Co. v. Hartford National Bank & Trust Co., supra, 173 Conn. at 499, 378 A.2d 562. In our view, that purpose can best be served by requiring strict compliance with the terms of a letter of credit. The issuer of a letter of credit has only a short period of time to determine the...