WESTERN INTERN. FOREST PRODUCTS v. Shinhan Bank

• Decision Date: 16 August 1994
• Docket Number: 93 Civ. 7301 (MGC).
• Citation: 860 F. Supp. 151
• Parties: WESTERN INTERNATIONAL FOREST PRODUCTS, INC., Plaintiff, v. SHINHAN BANK, Defendant.
• Court: U.S. District Court — Southern District of New York

860 F. Supp. 151

WESTERN INTERNATIONAL FOREST PRODUCTS, INC., Plaintiff, v. SHINHAN BANK, Defendant.

93 Civ. 7301 (MGC).

United States District Court, S.D. New York.

August 16, 1994.

Seward & Kissel by M. William Munno, New York City, for plaintiff.

Sullivan, Donovan, Bond & Bonner by Thomas J. Bonner, New York City, for defendant.

OPINION

CEDARBAUM, District Judge.

Plaintiff was the beneficiary of an irrevocable letter of credit which defendant refused to honor. Both sides move for summary judgment under Fed.R.Civ.P. 56. For the reasons discussed below, defendant's motion is granted and plaintiff's motion is denied.

Background

The following facts are undisputed. In 1993, plaintiff Western International Forest Products, Inc. contracted to sell lumber to Nam Moon Co., a Korean company. The logs were shipped from Alaska to Korea. To pay for the timber, Nam Moon arranged for a Korean bank, defendant Shinhan Bank ("Shinhan Bank Korea"), to issue an irrevocable letter of credit in favor of Western. The drawee on the letter of credit was Shinhan Bank's branch office in the City of New York. ("Shinhan Bank New York"). The letter of credit provides that it is subject to the 1983 revision of the Uniform Customs and Practices for Documentary Credits (the "UCP").

The letter of credit described one of the documents required for payment as follows: "Inspection certificate must be issued by Mr. Sam Tae Shin (passport No. DG0101712) of Nam Moon Lumber Co., In Korea." Shin is the president of Nam Moon. On July 9, 1993 Shin inspected the logs in Alaska. He then visited Western's offices in Portland, Oregon, and returned to Korea. Back in Korea, Shin executed the inspection certificate required by the letter of credit and faxed it to Western. The inspection certificate is dated July 26, 1993, but Western did not receive the facsimile until July 28, 1993.

After receiving the facsimile inspection certificate, Western shipped the logs to Nam Moon in Korea. Someone at Western stamped the facsimile inspection certificate "original" and sent it to A.C. Wilson Co., Western's freight forwarder. On August 19, 1993, A.C. Wilson's senior partner, Arlene Wilson, presented documents and a payment draft to Shinhan Bank New York and requested payment under the letter of credit for Western. A Shinhan Bank New York employee, Diane Masone, examined the documents presented and noted that the inspection certificate was a facsimile and did not bear an original signature. On August 20, 1993, Masone telephoned Wilson, advised her of the problem, and told her that Shinhan Bank New York would refuse payment. Wilson asked Masone to cable Shinhan Bank Korea and request authorization to pay on the letter of credit. Masone did.

Masone's cable to Shinhan Bank Korea reads in part:

DOCUMENTS RECEIVED UNDER THE ABOVE MENTIONED L/C WITH THE FOLLOWING DISCREPANCIES: ... 1) FAX COPY OF INSPECTION CERT. WAS PRESENTED (NO ORIGINAL) PLEASE URGENTLY ADVISE IF WE MAY PAY.

On August 25, 1993 Shinhan Bank Korea cabled back:

PLS BE INFORMED THAT OUR CUSTOMER REFUSED TO ACCEPT MENTIONED DISCREPANCIES.

Masone then told Wilson that Shinhan Bank New York refused to pay and returned the documents that had been presented the week before.

Shinhan Bank argues that it is entitled to summary judgment because Western never presented an original inspection certificate and therefore violated the strict compliance rule. Western argues that Shinhan Bank is precluded from asserting a strict compliance defense because Shinhan Bank Korea consulted Nam Moon and did not decide whether to pay the letter of credit solely on the basis of the documents presented.

Discussion

This case presents two novel questions under the UCP. Although the UCP is not law, it is made applicable by agreement of the parties to most letters of credit. See Alaska Textile Co., Inc. v. Chase Manhattan Bank, 982 F.2d 813, 816 (2d Cir.1992) (discussing "unique status" of the UCP). Furthermore, the New York UCC expressly does not apply to letters of credit incorporating the UCP. N.Y.U.C.C. § 5-102(4). The issues presented are: (1) whether a facsimile is an original under UCP Article 22c; and (2) whether UCP Article 16b precludes an issuer from asking a customer to waive a defect in presentment.

1. Is a Facsimile an Original?

A fundamental tenet of letter of credit law is that a beneficiary must present precisely conforming documents in order to be paid. Under the "strict compliance" rule, "the terms and conditions of a letter of credit must be strictly adhered to." Corporation de Mercadeo Agricola v. Mellon Bank International, 608 F.2d 43, 47 (2d Cir.1979). As Lord Sumner stated in an oft-quoted remark, this standard leaves "no room for documents which are almost the same or which will do just as well." Equitable Trust Co. v. Dawson Partners, Ltd., 27 Lloyd's List Law Rep. 49, 52 (H.L.1927); see also Alaska Textile, 982 F.2d at 816 (discussing importance of the strict compliance rule); Voest-Alpine International Corp. v. Chase Manhattan Bank, 707 F.2d 680, 682-83 (2d Cir.1983) (same).

One manifestation of the strict compliance rule is the long-standing practice among issuers to require original documents unless the letter of credit stipulates otherwise. Albert J. Givray, Letters of Credit, 45 Bus.Law. 2381 (1990); Trifinery v. Banque Paribas, 762 F.Supp. 1119, 1121 (S.D.N.Y. 1991) (beneficiary presented original but issuer refused to honor because letter of credit required a copy of invoice). The 1983 version of the UCP does not explicitly require original documents, but that rule is implicit in Article 22c:

Unless otherwise stipulated in the credit, banks will accept as originals documents produced or appearing to have been produced:

i. by reprographic systems;

ii. by, or as the result of, automated or computerized systems;

iii. carbon copies,

if marked as originals, always provided that, where necessary, such documents appear to have been authenticated.

Moreover, the ICC Group of Experts of the ICC Banking Commission has interpreted Article 22c as requiring an original document unless the letter of credit says or allows otherwise. Jan Dekker, ed., More Case Studies on Documentary Credits 22, ICC Pub. No. 489 (1991). The opinions of the Group of Experts, of course, are not law, but they are entitled to some persuasive weight in interpreting the UCP. An "originals only" rule is in keeping with the strict compliance rule. It avoids a potential uncertainty about when an issuer must honor a beneficiary's draft.

Western argues that the document Arlene Wilson presented to Shinhan Bank New York complied with the literal language of Article 22c. The facsimile was, Western observes, produced by an "automated or computerized system," was marked as an original, and "appears to have been authenticated." The difficulty with this argument is that Article 22c (and all of the cases and commentary that have been cited by the parties) are silent as to who must mark a document as an original and authenticate it in order for it to be considered an original.

Under Western's argument, Article 22c anticipates marking and authentication by beneficiaries. That cannot be. It cannot be that the beneficiary of a letter of credit can create conforming documents simply by marking them originals and doing something that "appears" to authenticate the documentation. For Article 22c to make sense it must mean that only the issuer of a document can designate a copy as an original by marking it as such and authenticating the mark.

Under this rule, the facsimile Western presented to Shinhan Bank New York was nonconforming. Western, not Nam Moon or Shin, marked the document "original." Nor did Nam Moon or Shin do anything that can be construed as authenticating the facsimile. Accordingly, Western's presentment was defective.

2. Can the Issuer Seek Waiver from the Customer?

UCP Article 16b requires an issuing bank to examine documents only:

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, it must determine, on the basis of the documents alone, whether to take up such documents, or to refuse them and claim that they appear on their face not to be in accordance with the terms and conditions of the credit.

Western argues that Shinhan Bank is precluded from asserting the defense of nonconforming documents because it did not decide whether to pay "on the basis of documents alone." After noticing that Western had presented the facsimile, Shinhan Bank New York, at the request of Western's freight forwarder, sought advice from Shinhan Bank Korea, which in turn consulted the account party, Nam Moon. The bank formally refused to honor Western's draft after Nam...