FEATURE - The Institute of International Banking Law & Practice

FEATURE 

2008 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 

AMERICAS CONFERENCE SUMMARY (PART 1 OF 2) 

By Lisa CHIN* 

Edited by Christopher BYRNES** 

Tampa 

2008 

Annual Survey 

of LC Law & Practice 

For the 17 th consecutive 

year, the Institute of 

International Banking Law and 

Practice (IIBLP) conducted its 

Americas Annual Survey of LC 

Law & Practice on 13-14 March 

2008. The conference was cosponsored 

and hosted by Citi 

at its Global Transaction 

Services headquarters in 

Tampa, Florida. This year 

marked the first time the event 

was held in Tampa. The 2008 

Americas Annual Survey 

attracted over 75 delegates 

from Canada, Ireland, Mexico, 

Spain, and 17 US states. 

Led by Americas Annual 

Survey Co-Chairs Professor 

James E. BYRNE and Vincent 

M. MAULELLA of IIBLP and 

Co-Chair James G. BARNES 

(Baker & McKenzie), the 

conference featured 15 local, 

regional, and international 

experts. Panelists included 

Buddy BAKER (Atradius 

Trade Credit); Harold 

BURMAN (US State 

Department); Tony 

CALLOBRE (Bingham 

McCutchen LLP); Leo 

CULLEN (Coastline 

Solutions); Shelly 

GANNAWAY (Comerica); Dr. 

Benjamin GEVA (Osgoode Hall 

Law School, Canada); Paul 

GREAVES (Bank of America); 

Fran MARTELL (Citi); Sandra 

STERN (Uniform Law 

Commissioners); Donald 

SMITH (Norman 

Technologies); Charnell C. 

WILLIAMS (Citibank); and 

Jim WILLS (SWIFT). 

Additional sponsors of the 

2008 Americas Annual Survey 

included Comerica, Coastline 

Solutions, and Documentary 

Credit World. 

Fran MARTELL, Global 

Trade Product Manager at Citi, 

delivered an opening address 

to welcome delegates to the 

event. 

Prior to the start of the 

conference discussions, 

Professor BYRNE recognized 

Vincent MAULELLA for whom 

the 2008 ANNUAL SURVEY OF LC 

LAW PRACTICE book is dedicated 

for his years of service to the 

letter of credit community 

(Apr. 2008 DCW 7). 

Hot Topics 

To commence this first 

discussion, each panelist 

identified a “hot topic” of 

particular significance to them. 

One panelist has seen an 

increase of “important” 

applicants claiming fraud. 

These applicants threaten to 

sever business ties with the 

bank if the institution pays out 

under the letter of credit and 

the bank is unsure as to what 

to do. Another panelist 

suggested that the applicant 

should be referred to US 

* Lisa CHIN is a banker based in Chicago, IL, and regular participant in the Americas Annual Survey of LC Law & 

Practice. Specializing in global trade risk, she has over 15 years experience in the industry and is a Certified Documentary 

Credit Specialist. 

** Christopher BYRNES is Managing Editor of Documentary Credit World. 

May 2008 Documentary Credit World 15


Uniform Commercial Code 

(UCC) Article 5-109 which sets 

forth the criteria needed to 

convince a judge of fraud 

under an LC subject to US law. 

A bank should contact its inhouse 

counsel and might 

recommend its customer seek 

its own legal assistance. 

Some bankers noted that in 

recent months they have 

experienced more of these 

types of calls. When an 

underlying transaction goes 

bad, an applicant might claim 

that bank never advised it that 

this could happen or that the 

applicant was, in fact, at risk. 

One retired banker advised 

delegates that banks need to 

have controls in place for 

employees who advise 

customers and have standard 

language to use. 

One attorney stated that a 

bank does not have a fiduciary 

duty to a customer unless the 

bank has a trust relationship 

with that customer. Two years 

ago, the US federal evidence 

laws changed for electronic 

discovery such that a bank’s e- 

mail communications and 

phone calls can be retrieved. 

One panelist gave an 

example of a long-time bank 

customer having extensive 

discussions with the bank’s 

sales officer about using an LC 

for the first time. The sales 

officer did not give 

alternatives on how to be 

better protected. For example, 

a third party document could 

be required. The document 

could be forged, but it is less 

likely than a beneficiary’s 

certificate being falsified. 

Since UCC Revised Article 5 

came into being in the US 

there have been fewer LC 

fraud cases and fewer 

applicant claims that a bank 

has breached its fiduciary 

responsibility. An applicant 

may ask the bank to notify 

them of a draw. (It was 

reported that European banks 

routinely notify applicants of 

draws.) One panelist maintains 

that a bank should tell the 

applicant when a draw comes 

in so the applicant can seek a 

temporary restraining order 

(TRO) if it chooses to do so. 

BYRNE stated that in the 

US, UCC Article 5-109(c) is the 

starting point. As a bank, you 

can refuse to pay, but if you do 

so, then you (as the bank) have 

the burden of proving that 

there is fraud. If you elect to 

take that risk, you will want to 

be indemnified by the 

applicant. 

What do banks do when an 

applicant asks it to find 

discrepancies A bank must be 

extremely careful how it 

responds. The answer needs to 

be that the bank will follow 

international standard banking 

practice. One delegate added 

that LC specialists should also 

notify the relationship 

manager at the bank. 

Moving to the hot topic of 

negotiation, A segment of the 

banking community still seems 

confused by the term. Bankers 

have not realigned their 

thinking with the new UCP600 

definition and several financial 

institutions have not changed 

their forms accordingly. To be 

a negotiating bank, a bank has 

to be nominated and 

documents must comply. As a 

result, negotiation “under 

reserve” or indemnity doesn’t 

make sense since this does not 

qualify as negotiation. 

To get the special protection 

of UCP600, a bank has to be 

nominated. Part of the 

problem is that there exist two 

systems that overlap each 

other: letter of credit law and 

negotiable instrument law. 

One participant expressed a 

degree of frustration with 

some Indian banks and 

Japanese banks that ask to be 

nominated as the negotiating 

bank when the letter of credit 

is freely negotiable. For one 

panelist, the problem is that 

UCP600 left out the phrase 

“freely negotiable” and now 

says “available with any bank” 

(UCP600 Article 6(a)). Banks 

need to adjust their LC forms 

with the new UCP600 

terminology. This means 

dropping the phrase “give 

value” [UCP500 wording] and 

instead using “purchase” 

[UCP600 wording]. 

Another panelist mentioned 

that banks in United States 

generally don’t negotiate. 

From an issuing bank 

perspective, this doesn’t come 

up unless there is a fraud 

allegation. One needs to look 

16 Documentary Credit World May 2008


at a bank’s accounting entries 

to determine whether 

negotiation is actually 

happening or not. In some 

instances, bankers are just 

hitting a computer key without 

knowing what entries are 

being done. 

The prudent bank needs to 

have an agreement with the 

beneficiary on what the bank 

is doing with these documents, 

no matter whether or not the 

bank is negotiating or just 

charging an examination fee. Is 

the bank taking responsibility 

with the beneficiary for 

compliance with the terms and 

conditions of the credit The 

agreement language should 

mirror UCP 600 language. A 

presenting bank need not 

make a certification to the 

issuers saying that it has 

negotiated. And issuers don’t 

challenge banks that do, unless 

there is a fraud claim. 

How many bankers claim 

reimbursement and state that 

they have negotiated For one 

panelist, a presenting bank 

should only so state if it is 

truly negotiating. If a problem 

later emerges, then the 

presenting bank has 

established its relationship upfront. 

Others disagreed, 

contending that a presenting 

bank does not have to state 

this in its message to the 

issuing bank as the presenting 

bank is only responsible to the 

beneficiary at this point. A 

presenting bank needs to look 

at the reimbursement terms 

stated in the LC. If the credit 

states that the negotiating 

bank can claim reimbursement, 



then a bank cannot exert 

negotiating bank status if it 

has not truly negotiated. 

Another panelist maintained 

that the presenting bank need 

not tell the issuing bank what 

it has done. The presenting 

bank should just state on the 

cover letter that it is 

presenting documents for 

honor. If the presenting bank 

needs to get more detailed 

later, it can inform the issuing 

bank of its status at that time. 

How many bankers charge a 

“negotiation” fee as opposed 

to an “examination” fee One 

delegate responded that their 

bank charges a document 

handling fee. One panelist 

cautioned that if a bank 

charges a fee by percentage of 

the draw, it might appear to 

the beneficiary that the bank is 

taking responsibility for 

checking the documents and 

any mistakes the bank may 

make. The bank would not be 

taking any credit risk, but it 

would be taking documentary 

risk. Another panelist added 

the bank would have a risk 

anyway whether it charges a 

flat fee or a percentage 

because the bank may have 

lost recourse rights. 

Do bankers ever say they 

are the paying bank based on 

what the draft indicates 

Based on one response, it 

doesn’t matter what the draft 

says, but it is also in 

conjunction with which bank 

the credit is available. If the 

drafts are drawn on the bank 

in question, then the credit 

should be available by 

“[I]f a bank charges a fee by percentage of the 

draw, it might appear to the beneficiary that the 

bank is taking responsibility for checking the 

documents and any mistakes it may make.” 

payment. If the drafts are 

drawn on another, then the 

credit should be available by 

negotiation. 

One panelist has observed 

an increase in the number of 

requests to add arbitration 

language in standby LCs. Over 

one-third of the audience 

agreed they have seen a rise as 

well. While there are different 

arbitration rules available, one 

expert familiar with arbitration 

strongly discouraged this 

option which is quite 

expensive. In addition, 

historically it has not proven 

useful for letter of credit 

disputes and offers no 

advantages over a judicial 

approach. For customers who 

insist on arbitration clauses 

inserted in LCs, several 

panelists thought banks would 

be wise to offer some 

resistance. For example, 

applicants might believe that 

arbitration is cheaper and 

faster, but it is not. An 

applicant pursuing an 

injunction will have to go to 

court even if the letter of 

credit contains arbitration 

language. Above all, customers 

who are not intimately familiar 

with arbitration rules risk 

unintended consequences. 

In summary of the Hot 

Topic panel discussions, 

BYRNE suggested that 

bankers should have a plan in 

place to deal with applicants 

alleging fraud. Banks should 

resist arbitration clauses and 

attempt to convince parties not 

to use them. For negotiation, 

banks should have very clear 

ideas what they are doing 

with regard to forms, 

recourse, fees, and claims from 

the issuing bank. 

ICC Opinions Revisited 

(in Light of UCP 600) 

The query relating to ICC 

Opinion TA629 involved a 

credit calling for a full set of 

marine bills of lading. Field 

44E (Port of loading/airport of 

departure) showed “Umea, 

Sweden.” Field 44F (Port of 

Discharge/airport of 

destination) showed “Port 

Jebel Ali, Dubai by vessel.” 

Under Field 47 (Additional 

Conditions) was stated 

“Multimodal transport 

document is acceptable”. 

Documents were presented. 



The bill of lading showed the 

following information: 

Place of receipt: 

Umea, Sweden 

Ocean vessel: 

“vessel xx” 

Port of Loading: 

Hamburg 

Port of Discharge: 

Port Jebel Ali, Dubai 

by vessel 

The bill of lading stated that 

the goods were received for 

shipment and did not show 

any on board notation. The 

issuing bank’s advice of refusal 

stated: “B/L doesn’t show 

port of loading as required 

under L/C field 44E.” The 

presenting bank argued that 

because the credit allowed for 

presentation of a multimodal 

transport document, the bill of 

lading should be examined in 

accordance with UCP600 

Article 19 (Transport 

Document Covering at Least 

Two Different Modes of 

Transport). The presenting 

bank also stated that the letter 

of credit wording was 

ambiguous because it allowed 

for a document covering at 

least two different modes of 

transport and required 

transportation between two 

(sea) ports. The issuing bank 

disagreed. In its analysis, the 

ICC agreed that the wording 

was ambiguous and further 

stated that this was a common 

way of structuring credits. The 

ICC pointed out that the 

issuing bank bears the risk of 

such ambiguity. The conclusion 

stated that the multimodal 

transport document complied 

as it showed transport 

between Umea and Jebel Ali. 

Panelist moderator 

MAULELLA stated that, based 

on this opinion, the advising 

bank should go back to the 

issuing bank to clarify 

requirements if such 

requirements are not clear. 

Other panelists added that the 

problem stems from the fact 

that issuers do not think about 

what they are going to receive. 

Due to volumes, many bank 

do not take the time to 

mitigate this type of risk. 

James WILLS (SWIFT) 

stated that the banking 

industry had been asking for 

these SWIFT Field changes for 

years but now that they are 

available, use of them has been 

“under-whelming”. Banks 

need to know how to use them 

and change their forms 

accordingly. 

ICC Opinion TA632rev 

relates to the situation of a 

100% transfer with no 

substitution. In addition to 

modifications that may be 

made per UCP600 Article 

38(g), can a transferring bank 

also modify Article 38(k) to 

allow presentation directly to 

the issuing bank instead of to 

the transferring bank If so, 

how should the transferring 

bank handle this and how 

does the issuing bank know 

this modification has been 

made The Opinion’s 

conclusion stated that a 

transferring bank can so 

modify sub-Article 38(k) and 

should inform the issuing bank 

who would otherwise have no 

way of knowing of the 

modification or even that a 

transfer has been effected. 

If the transferring bank 

does this without informing 

the issuing bank, one delegate 

mentioned that the 

transferring bank would be 

setting up the second 

beneficiary for a discrepancy 

because the issuing bank 

doesn’t know this has 

occurred. 

How does one reconcile this 

provision with UCP600 Article 

6(a) where the beneficiary can 

go directly to the issuing 

bank Some delegates believe 

there seems to be a conflict 

between UCP600 Articles 38(k) 

and 6(a), while others see no 

conflict. 

In the situation of this 

particular query when there is 

a 100% transfer with no 

substitution, the Opinion 

allows banks to modify 

UCP600 Articles 38(k). 

At least one panelist views 

this as a perfect example of 

UCP 600 Article 38(k) not 

being enforceable in some 

situations and finds it shocking 

that the ICC would allow this 

sub-article to be unilaterally 

modified. If a transferring 

bank becomes insolvent or 

goes out of business, then the 

issuing bank should not be 



able to refuse to honor. 

However, the issuing bank 

should be able to demand 

proof of the transfer. The 

issuing bank could not escape 

its obligation if the transfer is 

proven. 

Moving discussion to ICC 

Opinion TA639rev, the panel 

focused on its first query 

relating to UCP600 Article 35. 

The Opinion references letters 

of credit with clauses that 

modify this article to allow the 

issuing bank to require copies 

of all documents to be 

presented and examined for 

compliance prior to 

reimbursing a nominated 

bank. Delegates were asked if 

anyone has changed their 

processes, such as keeping 

copies of documents, because 

of credits containing such 

language that modifies this 

article to require copies before 

honoring or negotiating. 

Some delegates indicated 

their bank issues credits that 

modify or delete Article 35. 

For instance, one bank’s 

import LCs contain hardcoded 

language which 

modifies Article 35. 

One panelist posed the 

following question for 

delegates to ponder: If 

documents are lost under an 

export LC and a US-based 

presenting bank is about to 

send copies to the issuing 

bank, does the examiner recheck 

those document copies 

again for compliance as the 

OFAC list may have changed 

in the time since they were 

first checked 

Others said they had hoped 

this article would have been 

written similar to ISP98 (Rule 

6.13) in that the issuing bank 

should be able to defer honor 

until the issuing bank receives 

the copies. As it is now 

worded, UCP600 Article 35 is 

ambiguous. Some panelists 

observed that the article does 

not say that the issuing or 

confirming bank has the right 

to ask for copies. 

Discussion then shifted to 

the query contained in ICC 

Opinion TA636rev regarding 

treatment of International Air 

Transportation Association 

(IATA) codes in ISBP 

Paragraph 141. The query 

asked if the same could be 

applied to the carriers’ IATA 

codes. The ICC conclusion 

states that although IATA 

airport codes are “widely used 

and understood by banks 

globally”, the majority of 

carriers would not be known 

by a two-letter code. 

Therefore, this cannot be 

applied to carriers’ IATA codes 

and carrier names should be 

spelled out in full. 

Some panelists questioned 

this aspect of the Opinion, 

pointing out the inconsistency 

of allowing codes for airports 

but not codes for carriers. 

Moreover, others stated that 

this ICC conclusion also does 

not reflect the reality of how 

air waybills are issued. 

ICC Opinion TA.644 covers 

how to handle shipping 

information where the credit 

does not require a transport 

document. At the time of this 

Annual Survey discussion, part 

of the ICC Conclusion stated: 

“Sub-article 14(h) allows for 

the beneficiary and banks to 

disregard such conditions to 

the extent that there is no 

necessity to provide evidence 

of compliance. Should the 

beneficiary, nevertheless, elect 

to insert such data on any 

other stipulated document, 

then they must ensure that it 

does not conflict with the data 

in the credit [as per sub-Article 

14(d)].” 

One panelist believes that 

this Opinion was written very 

casually and cautioned 

delegates that they should not 

assume a court would reach 

the same conclusion. In his 

view, this Opinion is 

unfortunate for commercial 

credits and will be a burden 

for standbys issued subject to 

UCP600. Another panelist 

specifically alerted 

beneficiaries within the 

audience that if certain 

information in not required, 

then they should not give such 

information gratuitously. 

Further, it is very clear that if 

data in an extraneous 

document breaches compliance 

matters, then it must be 

considered. 

The panel also briefly 

discussed ICC Opinions 

TA.641 (documentary 

requirement showing place of 



delivery) and TA.625rev 

(apparent name of carrier and 

agent for the carrier 

inconsistency). 

Standby Issues 

Use of ISP98 has increased 

dramatically, according to 

BYRNE, which includes a rise 

in usage in other countries 

besides the United States. 

After polling experts around 

the world in 2007, the IIBLP 

decided there is no compelling 

reason to revise ISP98. Instead, 

it will expend more effort on 

education, creation of 

standard forms, and a revision 

of the Official Commentary on 

ISP98. The IIBLP also has been 

working with Coastline 

Solutions to develop a tenhour 

online training program 

for ISP98 anticipated for 

release in September 2008. 

ISP98 Model Forms are 

currently being developed. 

They will include a standard 

standby and one that can be 

used as a counter standby. The 

forms will be freely available 

online. 

Panelists next took on a 

scenario which has been the 

subject of recent discussion: If 

an LC requires a statement 

signed by “authorized signer”, 

does the statement have to 

show the words “authorized 

signer” below the signature 

Opinions among panelists and 

delegates were divided. One 

panelist believes the words 

“authorized signer” convey 

having a status and are 

needed. Another disagreed 

because outside of LC practice, 

an “authorized signer” means 

nothing as a status and no 

lawyer or judge would 

distinguish between 

“authorized signer” and 

“signer”. In this regard, there 

seems to be a conflict between 

law and letter of credit 

practice because of the 

mindset. One possible solution 

is that the issuing bank can 

include in the default 

statement that the signer is an 

authorized signer. 

The panel then discussed 

ICC Opinion TA.646 which 

was to be posed to the ICC 

Banking Commission at its 

April 2008 meeting. This 

standby-related Opinion 

concerns a Spanish company 

which modified its name from 

“ABC, S.L. (sociedad 

unipersonal)” to “ABC, S.L.” 

According to the text of the 

Query, “It is merely a formal 

change since final ownership 

remain the same; therefore, 

the new denomination is not a 

successor of the old 

denomination (and ISP98, Rule 

6.12 [Additional Document in 

Event of Drawing in 

Successor’s Name] would not 

fully fit).” Does the company 

need to have all their standby 

letters of credit amended And 

if not, could an issuing bank 

cite a discrepancy if an unpaid 

invoice does not include 

“(socieded unipersonal)” next 

to “ABC, S.L.” 

The Conclusion to the 

Opinion states: “The removal 

of ‘sociedad unipersonal’ from 

the letterhead of the 

beneficiary should not detract 

from the fact that it is the same 

beneficiary that is making a 

claim under the standby letter 

of credit. However, and to 

avoid any possible confusion, 

where there are copy invoices 

presented and one or more of 

these indicate differing styles 

of letterhead of the 

beneficiary, it should be 

suggested to the beneficiary 

that they provide a statement 

on their notice of default (or 

claim) that with effect from 

dd/mm/yyyy the 

shareholding status of the 

company denoted by ‘sociedad 

unipersonal’ has changed but 

the name of the company 

remains as that of the 

beneficiary under the standby 

letter of credit.” The 

Conclusion went on to add: 

“[W]ith regard to ISP98, the 

content of rule 6.12 … may 

also be applicable.” 

When polled, some bankers 

in attendance stated that they 

would want to amend all the 

credits. Panelists expressed 

doubt that the Opinion is 

useful. Noting that Spanish 

banks could tell this was the 

same entity, one panelist 

considers it strange that the 

query was asked. (It would be 

different if these entities were 

international.) 

This panel discussion 

concluded with the 

observation that a rise in the 



use of standbys is common in 

bad economic times to transfer 

risk. Panelists referenced CTFC 

v. Vandeveld (noted at Nov/Dec 

2007 DCW 21). This was an 

investor fraud case where it 

was promoted that since the 

investment was backed by a 

standby letter of credit, the 

investment was risk-free. In 

his research, BYRNE added 

that he has seen an increase in 

prime bank scams, high-yield 

programs, and misuse of the 

words “standby letters of 

credit” in certain transactions. 

Issues in UCP600 

To begin this panel 

discussion, moderator Buddy 

BAKER first reviewed 

commonly-referenced 

problems with UCP500, 

including: High discrepancy 

rates; The original documents 

controversy; Clean but 

“unmerchantable” transport 

documents; Improper refusals; 

and Fraud and deferred 

payment undertakings. 

He next summarized major 

changes made in the revision 

to UCP600, including: The time 

of honor or dishonor from 

seven days to five days 

(UCP600 Article 14(b)); The 

addresses of applicant and 

beneficiary need not match 

[those stated in the credit] 

(Article 14(f)); issuing bank 

allowed to rescind refusal of 

documents (Article 

16(c)(iii)(b)); Nomination 

authorized discounting of 

deferred payment (Article 

12(b)); Consistency 

requirements restated (Article 

14(d)); Lost documents 

(Article 35); The revised 

definition of negotiation 

(Article 2); and Bill of lading 

means port-to-port (Article 

20). 

BAKER then identified 

areas of concern which might 

be viewed as problems with 

UCP600, including: Is there 

still a reasonable time 

standard (UCP600 

Article14(b)); Discrepant 

documents presented under a 

transfer credit (Article 38(i)); 

Documents created using laser 

printers and scanned 

signatures (Articles 17(b), 

17(c), and 28(a)); Deemed 

acceptance of amendments 

(Article 10(c)); How the 

procedure for lost documents 

will actually function (Article 

35); and Banks excluding 

certain UCP600 articles. 

Regarding exclusion 

clauses, some bankers have 

seen UCP600 Article 35 as a 

common choice for exclusion. 

WILLS stated that SWIFT 

has changed to accommodate 

the new rules such that the 

issuing bank has to specifically 

choose the rules to which the 

credit is subject. (Before the 

change, the default was 

UCP500.) One banker 

mentioned that she has seen 

credits subject to UCP600 in 

Field 40E, but that exclusions 

are given in Field 47 

(Additional Conditions). 

Panel members next 

mentioned that in order to 

take advantage of the 

protections afforded in 

UCP600 Article 12(b), a bank 

has to act under the scope of 

its nomination. ICC Opinion 

TA655 relates to this issue. In 

this Opinion, a nominated 

bank sent a message to the 

advising bank stating: “Please 

be informed that the 

documents are accepted by us 

for maturity date June 05, 2008 

(Jun 04, 2008 is a holiday in 

our country). At maturity date 

we will revert to the matter of 

payment of proceeds.” When 

asked to clarify the last 

sentence, the nominated bank 

replied: “As the credit was not 

confirmed by us, we are not in 

a position to guarantee 

payment at the maturity date.” 

The query to the ICC was 

whether the nominated bank 

had deemed to have incurred 

its deferred payment 

undertaking because the 

message stated that the 

documents had been accepted 

by the nominated bank and 

also gave the maturity date. 

The ICC said no, that the 

message meant that the 

presentation was compliant. 

Panelists foresee there will 

be more questions about 

deferred payments in the 

years ahead. They cautioned 

banks to be very careful about 

wording on claims and 

presentation cover letters so 

that they don’t give the 

impression that they have 

incurred their own obligations 



when they haven’t. Others 

added that the message 

doesn’t matter that much 

because the bank hasn’t 

obligated itself on its books. 

One delegate said that use of 

the word “accept” is 

unacceptable and is similar to 

sending “documents under 

collection”. Bankers within the 

Americas need to be aware 

that around the world the first 

language is not English. One 

panelist expressed concern that 

banks won’t make the 

necessary adjustments on their 

books for a direct (rather than 

contingent) liability. If the 

bank doesn’t make the entry, it 

will lose in court. 

One panelist asked the 

audience if they would incur a 

deferred payment undertaking 

if the credit is not confirmed. 

Some banks indicated they 

would do so if there was a 

credit line available [for the 

issuing bank]. Others will do it 

if the customer asks and if it is 

a “big” customer. Some 

customers don’t want to pay a 

confirmation fee up front and 

are willing to take the chance 

that the line is available at the 

time of presentation. In such 

instances, does the bank use a 

disclaimer in its advices 

Responses were mixed. For 

one bank, it will not advise a 

credit with drafts drawn in it. 

Instead, it will revert to the 

issuing bank to have the drafts 

drawn on the issuing bank. 

Another bank will install a 

clause that will treat this as an 

unconfirmed deferred 

payment credit and will make 

payment when they receive it. 

One panelist reported that 

banks in Germany and Turkey 

do not want anyone to 

discount their deferred 

payments. Instead of making 

the credit available with 

themselves, they simply 

exclude UCP600 Articles 7(b) 

and 7(c). Another panelist 

cautioned that any bank acting 

under their nomination with 

this language in the credit is 

taking on incredible risk. The 

purpose of this language is to 

restrict presentation and 

payment at their own 

counters. 

There is no obligation to 

inform the beneficiary on the 

cover letter of exclusions and 

panelists advised delegates to 

refrain from doing so. Other 

panelists questioned what 

excluders think they are 

getting. He used the exclusion 

of UCP600 Article 7(c) as an 

example. Per United States 

law, Article 7(c) is not 

necessary because a 

Hong Kong 

Singapore 

2008 Annual Survey 


reimbursement is expected if a 

bank acts pursuant to its 

nomination. 

One panelist contends that 

if banks refuse to advise or 

confirm credits with such 

exclusions, then issuing banks 

will stop making these 

exclusions and it will diminish 

this bad practice. 

With regard to exclusion of 

UCP600 Article 35, one panelist 

noted that an issuing bank can 

challenge the presenting bank 

to prove that the documents 

complied and that they were 

lost. In this manner, before the 

issuing bank reimburses, it can 

confirm that this was done. 

Given today’s technology, 

one panelist was curious about 

how banks treat scanned 

documents to see if such 

documents are originals. One 

delegate added that exporters 

can go to a carrier’s website 

and print out bills of lading, so 

how do banks know that these 

documents are originals and 

not photocopies There are no 

simple answers and the same 

holds true for standby 

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drawings. The tests for 

originality used 10 to 15 years 

ago no longer work and banks 

need new criteria for 

determining validity and 

acceptance. Banks have to find 

a comfort level to accept 

documents and this relates to 

knowing who their customers 

are and use of signed 

agreements. 

UN LC Convention: 

US Adoption 

Interest in the United 

Nations Convention on 

Independent Guarantees and 

Standby Letters of Credit (UN 

Convention) has been 

rekindled due to the 

involvement of the Uniform 

Law Commissioners (ULC), 

the Uniform Law Conference 

of Canada, and a delegation 

from Mexico. 

Completed in 1995, the UN 

Convention codifies the 

fundamental principle of 

independence, defers to LC 

practice, and provides a legal 

conceptual framework for LC 

practice. It is thought to be 

particularly valuable to 

countries without codified 

letter of credit law. Text of the 

UN Convention is freely 

available on the UNCITRAL 

website (www.uncitral.org). 

ULC is a US multi-state 

body involved in commercial 

law and treaties. Sandra 

STERN of the ULC explained 

that it has formed a committee 

to actively study the UN 

Convention and make 

recommendations. 

Harold BURMAN of the US 

State Department indicated his 

office has had a major interest 

in letters of credit and 

promoting trade that benefits 

the US and others. In past 

years, political issues have 

stalled progress toward US 

adoption. According to 

BURMAN, he believes these 

issues have “dissipated” and 

the UN Convention has 

“turned the corner”. The US 

State Department hopes to 

have a coordinated approach 

among the NAFTA states. If 

US banks believe having the 

US UCC Article 5 extended at 

the international level, then 

the UN Convention would be 

useful. 

A member of the law group 

exploring Canadian adoption 

explained that once Canada 

ratifies the UN Convention, it 

must be approved by Canada’s 

individual provinces. The 

member believes the world 

would benefit from wider 

adoption of the UN 

Convention. Among its 

advantages, the UN 

Convention would offer 

greater harmonization within 

North America and would 

provide general standards for 

LCs in concert with the UN 

Convention process. The 

member supports the “mutual 

constructiveness’ underway 

between the US and Canada to 

adopt the UN Convention. 

One panelist explained that 

the US UCC Article 5 covers 

more than what the UN 

Convention does, but the UN 

Convention usefully cover 

critical elements. It provides 

for a fraud exception for 

standbys. It has a separate 

provision for interim injunctive 

relief. It has mandatory 

conflict of law rules patterned 

after US law. The credit can 

specify the law, but where not 

specified, then it is the law of 

the issuer. This will only affect 

outbound cross-border 

standbys. The UN Convention 

will be an enormous help to 

corporates that take 

independent guarantees from 

abroad, but only if it is 

adopted by the US. 

What difference would the 

UN Convention make for US 

banks As a United States 

issuer, one may expect that the 

credit will be subject to US law 

if it is silent as to governing 

law. If a dispute is litigated in 

the US, then this is true. If a 

dispute is litigated elsewhere, 

then this may not be true. For 

example, BYRNE referenced 

the countries of Holland, Saudi 

Arabia, Singapore, and 

Nigeria. For different reasons 

in each, one cannot be 

comfortable of the outcome if 

the dispute is litigated subject 

to those laws. The UN 

Convention is a viable 

alternative to US law when 

one cannot get US law. The 

only criterion is that you have 

to opt out of it if you don’t 

want the UN Convention to 

apply to the credit. Another 



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panelist added that a big 

advantage to using the UN 

Convention is that even if you 

get a beneficiary to agree to 

US UCC Article 5, in the event 

of a dispute, UCC Article 5 

may not be interpreted in the 

beneficiary’s country the same 

way it would be in the US. 

Panelists mentioned 

instances where countries use 

the laws of accessory 

guarantees which is a serious 

problem. For example, bankers 

in Romania might issue a 

guarantee and not know if it 

was an accessory guarantee or 

an independent guarantee 

unless a dispute emerges and 

it goes to court. 

STERN believes that the UN 

Convention would facilitate all 

sorts of international 

transactions; not just the crossborder 

trade of goods and 

other panelists added that it 

would provide greater 

certainty for such 

transactions. 

(Part 2 of the 2008 Americas 

Annual Survey conference 

summary will appear in next 

month’s DCW.) 

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• 12 Articles 

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Contracting Out of US Rev. 

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and the US. 

• 91 Case Summaries 

from 9 countries and regions 

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Clough Engineering (Interim 

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Good Earth (Interpretation) 

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• 3 Government Actions 

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2008 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 

AMERICAS CONFERENCE SUMMARY (PART 2 OF 2) 

By Lisa CHIN* 

Edited by Christopher BYRNES** 

Tampa 

2008 

Annual Survey 


(Part 1 of the 2008 Americas 

Annual Survey conference 

summary appeared in the May 

2008 DCW at page 15.) 

Troublesome LC 

Practice Trends 

The panel discussion to 

open Day 2 of the Americas 

Annual Survey began with 

comments regarding bad letter 

of credit formats. One panelist 

stated that certain mandated 

forms from government 

agencies really might not be 

letters of credit at all. For 

analysis of how this can 

happen, he referenced 

Professor James BYRNE’s 

article “Contracting Out of 

Revised UCC Article 5 (Letters 

of Credit)” (reprinted at 2008 

ANNUAL SURVEY 87). Panelists 

are seeing increased reliance 

on these bad formats as 

applicants and beneficiaries 

are trying to craft the letter of 

credit as a substitute for their 

underlying agreement. 

One corporate in the 

audience stated that 

companies sometimes get a 

surety bond and attempt to 

turn it into a letter of credit. 

The corporate cannot get this 

letter of credit changed 

because this business practice 

has been the norm for several 

decades. 

Another delegate 

mentioned a state agency in 

California that uses a 

preprinted form that it expects 

banks to sign. The agency will 

not entertain any requests for 

modification. In many 

instances, formats are 

mandated by codes of the 

relevant US state, so they 

cannot be changed. A bank 

that does not have a branch in 

California must be careful for a 

variety of reasons, including 

tax implications. On certain 

occasions, a bank might use a 

trust agreement and issue a 

letter of credit in favor of the 

trust department. 

Panelists believe that a bank 

should have in its credit policy 

that the risk department has 

final say on whether or not to 

accept the wording. This 

should not be a business 

decision. For example, the 

panel cited the US case, Wichita 

Eagle & Beacon Publishing Co. v. 

Pacific Nat’l Bank, 493 F.2d 1285 

(9th Cir. Cal. 1974), where the 

bank said it issued a letter of 

credit, but the language (which 

should have been turned down 

as a letter of credit) was 

construed by the court to be a 

guaranty contract. One 

participant added that banks 

should not issue instruments 

based on others’ required 

forms without legal advice 

because the bank may not 

know what it is actually 

issuing. 

* Lisa CHIN is a banker based in Chicago, IL, and regular participant in the Americas Annual Survey of LC Law & 

Practice. Specializing in global trade risk, she has over 15 years experience in the industry and is a Certified Documentary 

Credit Specialist. 

** Christopher BYRNES is Managing Editor of Documentary Credit World. 

June 2008 ■ Documentary Credit World 13


Panelists noted that if the 

beneficiary is a state agency, an 

individual bank might have no 

ability to insist that language 

be changed. With this in mind, 

what can banks do to get these 

unsatisfactory formats 

changed Banks need to have 

the state legislators change the 

forms. IIBLP has offered to try 

and assist with this process. 

Another perceived 

troublesome trend involves 

applicants taking original 

standby letters of credit to 

closings and later returning 

the credits, trying to cancel 

them. One delegate mentioned 

that the issuing bank has little 

choice but to chase the 

beneficiary for cancellation if 

the original is not required for 

presentation as the beneficiary 

may have gotten a copy. 

One panelist recalled a court 

case where a letter of credit 

had been returned to the 

issuing bank without a cover 

letter and the issuing bank 

cancelled the credit. The 

beneficiary then drew and 

claimed the credit has been 

returned for safekeeping. The 

beneficiary won the case. 

One banker explained that 

in his bank’s letter of credit 

application, there is language 

stating that if the applicant 

returns the original credit to 

the bank, the bank cannot 

cancel the credit without the 

beneficiary’s consent. He 

added that occasionally his 

bank will offer an indemnity 

for large customers. 

If a letter of credit is a bid 

bond, then one panelist 

pointed out that the issuing 

bank can determine if the bid 

has been awarded or not. If 

the purpose is for a closing, 

then the lender can take the 

letter of credit to the closing 

rather than delivering the 

credit to the applicant. 

The next trend discussed 

was non-extension notices 

under standby LCs. A 

particularly problematic 

situation is finding evidence 

that the non-extension notice 

was sent when there has been 

a bank merger and the file 

[from a predecessor bank] 

cannot be located. Some banks 

have a special place where 

they keep these files with a 

“no destroy” instruction. 

Some years ago in the US in 

the face of California’s reinsurance 

fund crises, one 

panelist remembers that a 

California politician directed 

her state officials to draw on 

every standby letter of credit 

and make banks prove they 

had sent notices. 

Beneficiaries would have a 

problem knowing whether or 

not credits are open. Even if a 

beneficiary has not received a 

non-extension notice, it still 

asks for affirmation that the 

credit is open. One delegate 

suggested that perhaps 

legislation is needed that 

mandates that there is a final 

expiration date of ten years 

after issuance. At that point, 

the credit would be dead no 

matter what. Other 

participants cautioned against 

sending a non-extension notice 

as an amendment. 

Moving to the next 

troublesome trend, one 

panelist cited the increasing 

number of standby draws, a 

by-product of the struggling 

economy. She noted that when 

requiring a copy of a court 

order or a judgment under a 

credit subject to UCP600, an 

issuing bank must be very 

specific on what it wants to 

see. ISP98 Rule 4.19 gives 

guidance on what an issuing 

bank should consider 

requiring. 

Another stiff challenge 

banks are facing is compliance 

with government regulations. 

Banks are trying to interpret 

what the regulations mean 

because they are not always 

clear. As banks deal with this 

added dimension, it was 

pointed out that banks need to 

reexamine their pricing to 

determine if it adequately 

reflects the increased cost of 

compliance. 

Panelists briefly referenced 

some initiatives. A joint effort 

is underway between the 

Bankers’ Association for 

Finance and Trade (BAFT) and 

the International Financial 

Services Association (IFSA) on 

how to interpret anti-money 

laundering regulations. A 

document based on the Bank 

Secrecy Act/Anti-Money 

Laundering Examination 

Manual issued in 2007 by the 

14 Documentary Credit World ■ June 2008


US Federal Financial 

Institutions Examination 

Council has been put forth to 

bankers for comment. 

In addition, the Financial 

Action Task Force (FATF) has 

approached the ICC and asked 

them to establish a task force 

on money laundering. Its first 

step is to look at UN Security 

Council sanctions then narrow 

its focus to address certain 

aspects of trade. 

For standbys, how far do 

banks go in determining 

details of a transaction for 

compliance purposes One 

participant indicated that if the 

request is received for a trade 

standby, his bank gets copies 

of the export license if it was 

required by the government 

for the export. 

Panelists noted that these 

regulations are not only for 

money laundering, but also to 

detect outright fraud. Some 

speculated that perhaps issuing 

banks might have uncovered 

the massive Solo Industries 

fraud of the 1990s much 

sooner if these regulations had 

been in place and were 

followed. Another panelist 

mentioned a case where a 

company had an office that 

was under-invoicing in South 

America to avoid Brazilian 

taxes, demonstrating that even 

with “good” companies, banks 

must exercise diligence. 

One panelist cautioned that 

based on reports of IFSA 

committee meetings, banks 

should give the same level of 

careful attention to their 

standbys’ commercial 

documents as they would for a 

commercial letter of credit. He 

is being told by the examiners 

that banks need to check 

everything, even on 

collections. 

One commenter urged 

banks not to limit themselves 

by product. Although one 

bank indicated it was able to 

“push back” a bit on 

compliance expectations for 

reimbursement products, 

banks need to put into place 

controls for their whole suite 

of products, including their 

open account transactions. 

Banks are expected to know 

more about their regular 

customers. As banks 

increasingly get transactions 

for the same beneficiary, 

regulators will observe that 

the bank has established a 

relationship with that 

beneficiary and expect that the 

bank would do “Know Your 

Customer” checks. One 

participant stated that banks 

need to be careful because 

“relationship” has not been 

defined. The USA PATRIOT 

Act states that a bank only has 

to know one party in the 

transaction. Another attendee 

believes that a bank does not 

need to do a “KYC” on a 

beneficiary until it has done 

around six transactions for 

that beneficiary. 

Instead of KYC, sometimes 

a bank only has to do a 

Customer Identification 

Program (CIP) check which is 

less onerous. However one 

panelist told bankers in the 

audience that they need to 

warn their sales group that a 

KYC check is necessary before 

they start calling on new 

business since the regulations 

say that these prospects are 

customers if sales is calling on 

them. 

Moving on to other topics, 

the de-materialization of 

documents and 

authentication matters are not 

troublesome, but are 

continuing trends. Two large 

initiatives currently underway 

were highlighted by one 

panelist. An electronic invoice 

initiative begun by the 

European Union could 

significantly reduce traderelated 

processing. The target 

is to have this completed and 

formats available for EU 

countries by year-end 2009. A 

similar initiative regarding 

electronic invoice has also 

commenced in the United 

States. 

Some LC specialists noted 

their industry struggles with 

authentication and digital 

signature differences. There 

needs to be two standards 

where the receiver wants an 

authentic message (i.e., the 

message has not changed 

between sender and receiver) 

and the digital signature of the 

issuer. 

While one panelist stated 

that Europe has laws in place 

to deal with this, there is no 



established recognition for a 

digital signature in the United 

States and banks have to 

follow standard practice. 

There is a “digital signatures 

act”, but there is no national or 

recognized system that 

authenticates them. Banks 

were advised to be very 

careful on how they use the 

words “digital signatures”. 

Any authentication system 

only identifies the sender, not 

the actual person who sent the 

message. 

A related issue is an MT700 

(Issue of a Documentary 

Credit) where the receiving 

bank assumes that the sender 

is the issuer, but the 

instructions state to send 

documents to a completely 

different bank. If the 

presenting bank gets a refusal 

from the other entity, is it 

proper Where does the 

engagement lie Others agreed 

this can be troublesome, 

noting that some banks use an 

MT700 rather than an MT710 

(Advice of a Third Bank’s or a 

Non- Bank’s Documentary 

Credit) as they should. 

Overview and Update: 

The LC Year in Review 

Jim WILLS gave an 

overview of SWIFT for the 

past year. SWIFT has not 

received any requests for 

changes due to the 

implementation of UCP600. 

The deadline for submitting 

changes for the next revision 

of SWIFT standards is June 

2008. The most common 

message sent is the MT103. 

Messages regarding trade 

transactions account for only 

about one percent of the total 

messages going through 

SWIFT. Open account 

messages are growing much 

more dramatically. 

The following changes take 

effect in November 2008: 

1. The MT760 (Guarantee) 

will be renamed to include 

standby letters of credit. 

2. The MT769 (Advice of 

Reduction or Release) will also 

apply to standby letters of 

credit. 

3. In Field 40C (Applicable 

Rules) of the MT760, SWIFT 

will add the code word ISPR 

and remove the code word 

URCG. The code words 

NONE and OTHR will remain 

unchanged. 

4. Unless otherwise 

specified, the rules specified in 

Field 40C will also be the rules 

to which the counterguarantee 

is subject. This was 

the number one change 

requested last year, mainly by 

Europe. Banks should used the 

code word NONE if the rules 

to which the counter guarantee 

are subject are not the same as 

the rules to which the 

guarantee is subject. 

5. Field 79 (Narrative) of 

the MT499 and the MT799 Free 

Text Messages will still be the 

same size in the number 

characters, but the field will be 

repeatable until it reaches a 

maximum limit of 10,000 

characters. 

6. Field 79 of the MT707 

(Amendment to a 

Documentary Credit) can be 

repeated, but only twice. The 

maximum message size will 

increase from 2,000 characters 

to 10,000 characters. 

7. In the MT734 (Advice of 

Refusal), Field 77J 

(Discrepancies) will increase in 

size to 70*50. 

The Trade Services Utility 

(TSU) is an open account 

mechanism. Shipping 

documents and certificates are 

now a part of this. Fifty-four 

trade banks in 24 countries or 

territories are currently 

participating. SWIFT is looking 

at 2009 to start the process of 

changing trade messages to an 

XML format. 

Among questions raised by 

the audience, Annual Survey 

delegates were reminded that 

because MT 760 Field 40C can 

contain laws, and not just ICC 

rules, banks have to be careful 

in how it is used. 

Buddy BAKER (Atradius) 

followed with an update of 

Basel II. Already effective in 

Canada, Mexico, and Europe, 

Basel II will not go into effect 

in the United States until 2009. 

At that time it will be 

mandatory for the 11 

institutions categorized as 

“core banks” in the United 

States which represent onethird 

of the assets in the US. 

This covers regulatory capital 



requirements and states the 

minimum capital level to 

secure bank loans. The 

minimum in United States is 

eight percent, but now the 

assets are equal. Letters of 

credit are not equal to loans in 

capital requirements 

(requirements are less). Letters 

of credit are off balance sheet 

items because they are 

contingent liabilities. 

Within the US, it was 

decided in July 2007 to drop 

Basel IA. Other than the core 

banks, institutions have the 

option of moving to Basel II. If 

they choose to do so, non-core 

banks need to move to one of 

three Basel II approaches. 

Banks opting for the 

standardized approach would 

utilize S&P risk ratings. Under 

the advanced approach, a bank 

would use its own statistical 

experience (five to seven years 

worth of data) to determine 

the risk and capital. 

A brief update on the 

Certified Documentary Credit 

Specialist (CDCS) program 

followed. The exam, offered 

annually in April, is 

administered electronically 

within the the Americas but is 

still given in paper format 

elsewhere. There are now 

3,535 CDCS worldwide, an 

increase of over 600 from last 

year. There has also been an 

increase in the number of 

people taking the exam. 

Further information, including 

a CDCS practice test, is 

available on the program’s 

website at: www.cdcs.org. 

Leo CULLEN (Coastline 

Solutions) concluded panel 

with an update on DC-PRO. 

Its major development is 

Upskill 600, an online training 

program for UCP 600, which 

has been used by 8,000 people 

around the world. DC-Mentor 

has 12 hours of online training 

containing four modules. 

Coastline Solutions is in the 

process of developing an 

online course for ISP98 and an 

advanced training course for 

letters of credit. 

LC Compliance 

Panel discussion began with 

ICC Opinion TA.548. A credit 

subject to UCP600 was issued 

which contained a clause 

stating that the issuing bank 

may be prohibited from 

engaging in transactions that 

may fall within the guidelines 

of US Government sanctions. 

The credit requested 

confirmation, which the 

nominated bank added. 

Documents were presented 

and the confirming bank 

negotiated without recourse to 

the beneficiary. Upon receipt 

of the documents, the issuing 

bank sent a message to the 

confirming bank stating that 

the issuer could not participate 

in the transaction due to US 

sanctions against Iran and the 

issuer had closed its files. The 

issuing bank returned the 

documents to the confirming 

bank and did not reimburse. 

Among the questions asked 

were if the issuing bank acted 

properly (especially since it 

did not give an advice of 

refusal in accordance with 

UCP600 Article 16) and if the 

confirming bank would have 

had a stronger case if the letter 

of credit did not have the 

sanctions clause. The ICC 

Opinion’s Conclusion stated 

that the issuing bank cannot 

ignore local law and it can 

only give an advice of refusal 

if the documents do not 

comply with the terms and 

conditions of the credit. Also, 

it would not have mattered 

either way if the sanctions 

language appeared in the 

credit or not as “it would be 

for the confirming bank to be 

aware of any regulatory 

conditions under which any 

issuing bank may be subject.” 

Panelists pointed out that 

non-US branches can also be 

subject to their parent’s laws 

as well as their own country 

laws, so non-US branches need 

to put this language in their 

credits. Others added that just 

because a non-US branch states 

this does not mean that the 

conflict of laws does not apply, 

and a local court would not 

decide that only the local law 

applies. Panelists noted they 

do not want to promote the 

doctrine of illegality to not 

honor. Although versions of 

UCP prior to 1962 did address 

this, the current UCP does not 

help in this area. 

How do bank managers 

teach their associates about 



compliance matters when there 

is no manual for this new and 

evolving aspect of the 

business An IFSA Trade 

Compliance Committee is now 

in place to help deal with the 

subject. As institutions of other 

countries have started to put 

in their own compliance 

clauses, US banks acting as a 

confirmer or nominated bank 

need to exercise caution if they 

cannot screen on other lists. 

Another banker added that 

banks should make applicants 

and beneficiaries aware that 

they have responsibilities for 

compliance as well. Applicants 

should understand that there 

may be regulations or laws in 

the country of the beneficiary 

that might affect them. 

Citing the ICC Opinion’s 

Conclusion, one panelist 

emphasized that an issuing 

bank cannot ignore the law in 

which they are required to 

operate. Banks must follow 

their policies and procedures. 

Bankers among the audience 

were asked if they request 

export licenses to review. One 

banker replied that it depends 

on the merchandise. Others 

responded that they check 

export licenses for “high-risk 

goods”, but otherwise do not 

ask for export licenses. 

One panelist referenced Part 

736 of the US Export 

Administration Regulations 

which applies to parties who 

provide financing or support 

the transaction. This may or 

may not include an advising 

bank. Ten general prohibitions 

are outlined which extend to 

financing and support so banks 

should exercise caution if it is 

an export transaction. Banks 

should not ask based on the 

merchandise, but they would 

want to be aware of the 

underlying transaction to 

ensure that it makes sense. 

Panelists reminded bankers 

that their applicants need to 

sign a statement on the 

application that they agree to 

comply with all United States 

laws. 

To conclude this discussion, 

the panel invited questions. 

One scenario was raised 

regarding an export LC where 

the transport document 

required is a waybill or a bill 

of lading and Fields 44A and 

44B have not been completed. 

What should a bank do One 

panelist replied that the terms 

are unclear and the beneficiary 

needs to be involved in 

clarifying the language. Others 

added that if the LC is ex works 

terms, the beneficiary should 

not agree to provide a 

transport document. In this 

respect, others agreed that it is 

best for the beneficiary and 

bank to omit the transport 

document. Returning to the 

original scenario, one panelist 

noted the bank might be able 

to accept anything, but 

perhaps this should be worked 

out with the issuing bank 

before the credit is issued. 

Another question was 

posed: How many banks issue 

letters of indemnity (steamship 

guarantees) under open 

account or collections and how 

much do you book for and 

how do you prevent the risk 

of under holding One panelist 

suggested requesting copies of 

documents from the bank. 

Others said it depends on the 

customer. 

Major Commercial LC 

Cases 

In their research, James G. 

BARNES (Baker & McKenzie) 

and Professor James BYRNE 

have detected a steady drop in 

letter of credit court cases in 

the United States, a trend 

largely attributed to US 

Revised UCC Article 5. This 

has been accompanied, 

however, by an increase in LC 

cases in other jurisdictions 

around the world. Overall, 

reported LC cases are roughly 

split evenly between standbys 

and commercials. 

The first case discussed was 

SewChez Int’l Ltd. v. CIT Group 

(abstracted at May 2008 DCW 

10). SewChez (beneficiary) had 

presented multiple sets of 

documents under one draft. 

Three of the sets were 

discrepant, but since the three 

sets were all contained in one 

presentation, the entire 

presentation was refused. 

Eventually, the account party 

went into bankruptcy and the 

CIT Group (applicant and 

financier of the account party) 

sold the merchandise. As it 

was a secured creditor, it was 



able to keep the proceeds. The 

beneficiary sued the applicant 

for fraudulent concealment, 

breach of contract, unjust 

enrichment, and conversion. 

The beneficiary also sued 

JPMorgan Chase Bank (Issuer) 

for wrongful dishonor. The 

beneficiary lost both suits. 

The legal arguments made 

by the beneficiary may have 

worked 20 years ago, but no 

longer. This was a special case 

where the counterparty was 

not the applicant, but really 

the applicant’s creditor. Some 

panelists are worried a bit that 

a court may treat that 

differently. The court 

determined that there was a 

single presentation because of 

one draft. Another panelist 

added that a draft was 

required even though it was 

not listed in 46A (Required 

Documents). 

Some delegates suggested 

that perhaps the beneficiary 

presented only one draft in 

order to avoid fees on their 

side. One problem is that if 

only one set of documents is 

discrepant within an otherwise 

complying presentation, the 

presenting bank has only one 

reference number for the 

entire presentation thereby 

complicating refusals. One 

person stated that banks do 

that to protect themselves. 

Others said that most banks 

charge by the set, not by the 

presentation. In this court case, 

this was true since wording to 

this effect was used in the 

credit. One banker mentioned 

that in-house legal counsel 

would instruct her that the 

bank would have had to refuse 

in the same situation because 

of the Bill of Exchange Act. 

Others agreed, stating that 

payment would have to be 

made for all or nothing. Some 

added that the issuing bank 

can make an agreement with 

the beneficiary to only endorse 

the draft for the amount paid 

and then return the draft to 

the beneficiary. The draft 

would then only be good for 

the amount remaining. 

In the Canadian case, 

Nareerux Import Co. v. Canadian 

Imperial Bank of Commerce (Mar 

2008 DCW 14), the issuing 

bank had served a few 

different roles in the ongoing 

transactions between a buyer, 

a supplier, and a wholesaler 

for the supply of shrimp. 

Instead of acting as an 

independent party as far as the 

LCs were concerned, the 

issuing bank failed to provide 

required documentation and 

basically ensured that the 

wholesaler (beneficiary) would 

not get paid. This was done in 

order to lessen the bank’s 

outstanding obligations. By 

first acting under its own 

interests, the bank broke a 

duty of good faith. The 

beneficiary had lost control of 

the documentary 

requirements. Panelists 

wonder if the seller had a 

perfected security interest in 

the goods that the bank 

converted (took the 

documents). This case 

illustrates that a beneficiary 

should always be concerned 

about documents that are not 

under their control. 

Brief attention was given to 

TradeCard Inc. v. S1 Corp. (2008 

ANNUAL SURVEY 343) involving 

patent infringement. The 

court ruled that because 

another bank had developed a 

similar program prior to the 

patent date, the patent was 

invalidated. The plaintiff’s 

system was merely the next 

step in innovation. 

Frequently, problems arise 

mainly from the parties 

responsible for the contract to 

provide an LC, not from the 

banks. A buyer and seller may 

use boiler plate language that 

does not adequately specify 

details of the letter of credit in 

the contract. In Cereal Inv. Co. v. 

ED&F Man Sugar Ltd. (Mar 

2008 DCW 19), there was an 

ambiguous term of the 

contract regarding the 

permissible loading period 

which the buyer interpreted as 

an earlier date than the seller 

did. The contract required the 

buyer to provide a letter of 

credit in “fully workable 

form”. When the seller 

received the LC with the 

earlier latest shipment date 

shown, it tried to arrange for 

an amendment from the buyer 

who demanded that the seller 

withdraw the request. When 

the seller refused to do so, the 

buyer terminated the contract 



stating that the seller had 

repudiated the contract. The 

seller sued the buyer. The 

court stated that the LC terms 

were inconsistent with the 

contract terms; therefore the 

letter of credit was not 

workable under the contract. 

Panelists noted it is 

unfortunate that words “fully 

workable LC” are used a lot in 

contracts. 

Adani Exports Ltd. v. AMCI 

Export Corp. (2008 ANNUAL 

SURVEY 233) involved another 

dispute between buyer and 

seller over contract terms. The 

two parties had negotiated 

terms back and forth. There 

was no one document that 

evidenced the full terms of 

their agreement, but there was 

an “acknowledgement of 

purchase” from the buyer and 

a “confirmation of purchase” 

from the seller. Because of a 

disagreement over the details, 

shipment was never made and 

the seller sued the buyer for 

breach of contract. One 

written communication 

stipulated that payment was to 

be made upon presentation of 

shipping documents under a 

confirmed LC. The seller 

testified that he understood 

that a contract had to be 

signed before an LC could be 

opened. The buyer argued that 

the LC was a condition 

precedent to the formation of 

a contract under US Uniform 

Commercial Code. The court 

quoted UCC Article 2-235(a) 

which states that “failure of 

the buyer seasonably to 

furnish an agreed letter of 

credit is a breach of contract 

for sale.” It was noted by one 

of the panelists that there is a 

distinction between the letter 

of credit terms and the letter 

of credit contract terms. There 

is a procedure outlined in UCC 

Article 2 where a seller may 

seek written assurance if it 

thinks the other party is not 

going to perform. If the seller 

does not get the written 

assurance, it can repudiate the 

contract. 

In SMC Corp. Ltd. v. Lockjaw, 

LLC (2008 ANNUAL SURVEY 336), 

a manufacturer and a sales 

agent had concluded a contract 

with open account payment 

terms (30 days from bill of 

lading date). After 27 orders 

were completed, the 

manufacturer notified the sales 

agent that for future orders, 

payment must be made in 

advance of shipment. Shortly 

thereafter, the manufacturer 

terminated the contract and 

the sales agent sued. The court 

noted that the manufacturer 

was entitled to adequate 

assurance of performance, of 

which the sales agent had 

offered to provide by having 

LCs issued for future orders 

or depositing cash with the 

court or another third party at 

the time the orders were 

placed. Because of this, the 

court stated that the 

manufacturer’s actions 

evidenced “a lack of good 

faith.” Panelists added that a 

letter of credit itself can be the 

written assurance for 

performing the contract. 

In Rosedale Developments Inc. 

v. Toronto (Jun 2008 DCW 10), 

an applicant had filed for 

bankruptcy. The underlying 

contract had been transferred 

by the applicant to the new 

buyer and new buyer claimed 

it was entitled to use the LC as 

security in dealings with the 

beneficiary. The issuing bank 

objected to this on the grounds 

that the beneficiary could not 

produce the required 

documentation for payment. 

This was because the credit 

only allowed for draws for 

obligations incurred by the 

named applicant (now 

bankrupt). The issuing bank 

sued the beneficiary, 

demanding return of the letter 

of credit. The court dismissed 

the bank’s request for an order 

requiring return of the LC. 

One panelist added that 

banks should use a date or 

event of expiry such as a 

beneficiary’s statement of 

cancellation and return. 

Another panelist recalled a 

past case where the applicant 

confirmed that the beneficiary 

no longer existed, so the 

issuing bank cancelled the 

standby LC, but the bank who 

had loaned the beneficiary 

money drew. 

Panelists then discussed the 

bankruptcy case, Enron Power 

Mktg., Inc. v. California Power 

Exch. Corp. (2008 ANNUAL 

SURVEY 258). The proceeds paid 



out to the beneficiary were not 

Enron’s property. Although the 

concept of bankruptcy estate 

property is fairly broad, the 

New York court stated that the 

definition could not be 

expanded to include these 

letter of credit proceeds. 

Panelists discussed whether, 

after some period of time, 

proceeds morph into the 

applicant’s property. One 

panelist noted that it is very 

common that proceeds are 

held as cash collateral rather 

then retiring the applicant’s 

debt. Others added that one 

reason a letter of credit is 

popular rather than cash 

collateral is that it is an 

independent instrument. It 

follows that in the event of 

bankruptcy, the person to 

whom debt is owed cannot 

perfect their security interest 

in it. 

In L-Jalco Holdings Co. v. Bard 

(2008 ANNUAL SURVEY 290), a 

plaintiff was required by a 

court to post cash security for 

a possible judgment against it. 

The plaintiff received 

permission from the 

defendant’s attorney to 

instead post a letter of credit 

to the court instead of cash. 

The defendant opposed this 

motion, but the court 

determined that this 

opposition was a tactic to force 

the plaintiff to settle the case 

and so allowed the LC to be 

posted. 

In Morgan Creek Residential v. 

Kemp (2008 ANNUAL SURVEY 

295), a borrower obtained 

guarantors who provided 

guarantees to secure a loan he 

had arranged. These 

guarantees were not sufficient 

to the lender, so the developer 

(who was improving property 

amenities for the borrower) 

obtained an LC to supplement 

the guarantees. When the 

borrower defaulted under the 

loan, the lender drew the full 

amount of the credit and was 

paid. The developer 

reimbursed the lender for the 

draw. The developer then 

sued the guarantors for 

equitable contribution and 

subrogation, as the draw 

under the credit was a 

disproportionate amount 

compared to the amounts of 

the guarantees. The appellate 

court affirmed dismissal of the 

case. One panelist observed 

this case does a nice job of 

explaining the between letters 

of credit and suretyship 

guarantees. 

Panelists then reported that 

in 2007, there were 

approximately six letter of 

credit fraud cases in the US. 

All followed US Revised UCC 

Article 5-109 and none were 

remarkable. 

In Jameson v. Pine Hill Dev. 

LLC (Oct 2007 DCW 16), a 

buyer signed a contract to 

purchase a condominium unit. 

The buyer placed cash in 

escrow as earnest money and 

also put up a standby LC in 

favor of the seller. The 

contract contained an 

arbitration clause that applied 

to any disputes that arose 

under the contract and a 

liquidated damages clause that 

entitled the seller/beneficiary 

to all the money in the escrow 

account should the buyer/ 

applicant default. When the 

condominium unit was 

completed, the buyer/ 

applicant refused to close on 

the unit and instead went to 

court to rescind the contract. 

The buyer/applicant also 

sought a temporary restraining 

order to prevent the seller/ 

beneficiary from drawing on 

the LC. The seller/beneficiary 

sued the buyer/applicant and 

asked the court to compel the 

arbitration provision in the 

contract. Ultimately, the court 

denied the request for the 

restraining order because 

buyer/applicant failed the 

balance of convenience test. 

The court found that the 

buyer/applicant did not prove 

that “irreparable injury will be 

suffered if the relief is not 

granted.” 

The next case discussed was 

Langley v. Prudential Mortgage 

Capital Co., LLC (Jan 2008 DCW 

11). A borrower sought two 

loans from a lender and they 

entered into two “Rate Lock 

Agreements” which locked the 

interest rates on these loans. 

Both agreements required the 

borrower to provide a deposit 

equal to twice the “Potential 

Unwind Costs” which would 

be incurred by the lender if 

the loans were not executed 



and the transactions had to be 

“unwound.” For this, the 

borrower provided standby 

LCs in favor of the lender. The 

lender then told the borrower 

that only one component of 

the interest rate was locked 

and that it would not honor 

the locked interest rates as 

stated in the agreement “due 

to changes in the capital 

market.” The lender also 

required two additional LCs 

from the borrower. Because of 

these changes, the borrower 

terminated the agreements. 

The lender then sought the 

“unwind costs” for both loans 

by drawings under the 

existing LCs. The borrower 

sought a temporary restraining 

order (TRO) against the 

issuing bank from honoring 

the draws and also against the 

lender to prevent future 

draws. The court stated that 

for the lender to assert that 

the interest rates were not 

locked despite the agreements 

“smacks of fraud” and ruled in 

favor of the borrower. 


McIngvale v. AGM, LLC (Feb 

2008 DCW 13). To make a loan, 

a lender required a guarantee 

from a guarantor and an LC 

from the guarantor’s brother. 

The LC required a default 

statement issued by the 

beneficiary stating that “all 

reasonable recovery efforts 

against [Borrowers], the 

collateral securing obligations 

under [the Loan Agreement] 

and all guarantors 

guaranteeing the obligations 

under [the Loan Agreement]” 

had been exhausted.” The 

borrowers defaulted, and the 

collateral was sold at auction. 

The applicant applied for a 

TRO to enjoin drawing under 

the LC which the court 

granted for a period of 45 

days. At the end of this 

period, the applicant sought to 

extend the order and the 

beneficiary moved for 

summary judgment. The court 

denied the applicant’s motion 

and granted summary 

judgment in favor of the 

beneficiary. The court noted 

that because the beneficiary 

had not yet even drawn under 

the letter of credit, the 

applicant could not claim that 

beneficiary had failed to 

exhaust all of its options 

before drawing under the 

credit. Therefore, the court 

concluded, “this claim does 

not present a ripe 

controversy.” 


Musket Corp. v. PDVSA Petroleo, 

S.A. (Feb 2008 DCW 15). A 

buyer had a standby LC issued 

to cover payment for the sale 

of diesel fuel. Subsequently, 

the buyer agreed to pay for 

the freight costs to deliver the 

fuel, provided that this 

payment would be credited 

against the amount owed by 

the buyer. When the buyer 

paid the lesser amount, the 

seller drew on the LC for the 

balance owed. The buyer sued 

the seller for breach of 

contract and unjust 

enrichment. The buyer also 

sought an ex parte attachment 

for the letter of credit 

proceeds. The court granted a 

temporary attachment, but 

later refused to confirm the 

order, stating that the buyer 

did not prove a likelihood of 

success in the breach of 

contract and unjust enrichment 

action. 

The panel then moved to 

Romika-USA, Inc. v. HSBC Bank 

USA, N.A. (Mar 2008 DCW 13). 

In order to purchase footwear, 

a buyer had a commercial LC 

issued in favor of a sales agent 

in the United States. The credit 

stated that in the event 

discrepant documents are 

presented, the issuing bank 

reserved the right to pay the 

beneficiary if the bank 

received a waiver of 

discrepancies from the 

applicant. The beneficiary 

made multiple presentations. 

When there was a noncompliant 

presentation, 

sometimes the applicant would 

waive the discrepancy(ies). 

But, other times, the applicant 

refused to do so. The 

beneficiary sued the applicant 

claiming breach of contract, 

tortious interference with a 

business relationship, and 

breach of a third party 

beneficiary contract. The 

beneficiary claimed that the 

applicant tortiously interfered 

with the business relationship 

between the issuing bank and 

the beneficiary by not waiving 



the discrepancies. The court 

rejected this argument, stating 

that the applicant was 

protecting its own business 

interests. The beneficiary also 

argued that it was a thirdparty 

beneficiary to the “LC 

contract”. The court rejected 

this argument too, as the 

beneficiary was clearly listed 

as a party. 

The panel next discussed 

the English case, Oliver v. Dubai 

Bank Kenya Ltd. (2008 ANNUAL 

SURVEY 308), involving claims of 

non-documentary conditions 

and issuer-controlled 

conditions A standby LC had 

been issued requiring 

presentation of an 

“[a]uthenticated swift msg and 

tested telex addressed to 

beneficiary’s bank through 

advising bank issued by us i.e. 

Dubai Bank of Kenya Limited 

confirming the beneficiary’s 

fulfillment of their 

commitments” towards the 

account party. The issuing 

bank never received 

instructions from the applicant 

to issue such a message, so it 

declined to do so. The 

beneficiary sued the issuing 

bank, claiming that the 

condition was either nondocumentary 

or that the 

issuing bank should be 

compelled to issue the 

message. The court ruled that 

the request was documentary 

and denied the beneficiary’s 

action. Panelists noted that the 

text of the case suggests to 

them that this was a surety 

Fully indexed for easy 

reference to terms 

from “Advice” 

to “Wrongful Dishonor” 

and all items in between! 

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Highlights of this 

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• 12 Articles 

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Contracting Out of US Rev. 

UCC Art. 5 by Professor 

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analysis of the UCP600 

provisions from experts in 

Asia, Europe, Middle East, 

and the US. 

• 91 Case Summaries 

from 9 countries and regions 

around the world including 

Clough Engineering (Interim 

Injunction) from Australia, 

Good Earth (Interpretation) 

from Hong Kong, and Oliver 

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transaction because of the 

requirements. 

Prior to completing the LC 

cases discussion, panelists 

reported that Mexico adopted 

legislation on 1 February 2008 

regarding letters of credit (see 

Apr 2008 DCW 9). Panelists 

called upon Americas Annual 

Survey delegates from Mexico 

for further details. One of the 

bankers from Mexico 

explained that, previously, 

banks were not authorized to 

issue standby letters of credit 

without the permission of the 

central bank. This legislation 

now empowers banks to issue 

standbys. Panelists believe this 

will likely open the door for 

Mexico to seek more LCs 

(instead of bonds) for 

government-related business. 

Open Forum 

As with each Annual Survey, 

the 2008 Americas conference 

closed with an opportunity for 

delegates to pose questions to 

panel members and fellow 

delegates. The session began 

with one corporate LC user 

asking for an interpretation of 

what “irrevocable” means and 

to whom “irrevocability” 

applies. In some instances, 

trading partners want 

applicant-controlled 

documents and some banks 

are saying that this affects the 

irrevocability. One panelist 

stated that banks don’t want 

to be put in a position 

whereby an applicant might 

withhold signing a document. 

Referencing ISP98 Rule 4.10, 

the panelist explained that a 

standby should not allow 

applicant-controlled 

documents, but if such 

document is required by the 

credit, the issuer cannot waive 

this requirement. 

The worry, another panelist 

noted, is that this would create 

an “unfair” surprise that is 

undesirable. The LC 

community should want to 

protect the reputation of the 

LC instrument. Another 

participant added that if the 

applicant wants a provision in 

the LC that allows the issuing 

bank to cancel if the applicant 

presents something proving it 

has completed its part of the 

contract, then that would be a 

revocable credit. 

Regarding communication 

between bank and applicant, 

one delegate asked if a bank 

would be “inviting trouble” if 

it would advise an applicant 

that the applicant can only stop 

the bank from paying by 

getting an injunction. Could 

the bank be accused of 

collusion Some panelists 

opined that they would not be 

concerned about a collusion 

allegation, but they urged 

banks not to “advise” the 

applicant. Instead, the bank 

might reference US Revised 

UCC Article 5-109 (which 

contains the law that would 

govern the situation) and 

mention the applicant might 

consult a lawyer. Also, banks 

should not give a time 

deadline for the applicant to 

reply. Delegates explained this 

scenario is a real concern to 

them, but panelists reiterated 

their belief that a deadline 

should not be given and stated 

that a bank should not change 

its procedures on document 

examination over this matter. 

A participant asked about 

an applicant certificate for an 

automatic decrease especially 

where there is a counter 

guarantee. One panelist stated 

that the standby is in one 

direction and commercial is in 

the other direction, so this is 

determinable from the bank’s 

own records when payment is 

made and the bank can reduce. 

He cautioned, however, that 

this must be tightly controlled. 

Another participant asked 

about a local guarantee which 

contained language stating 

that it was freely assignable 

and transferable without 

notice to the issuing bank. 

How could one make sure that 

the letter of credit is not 

transferred or assigned to a 

prohibited party One 

delegate suggested that within 

the language of the draw of 

the counter standby, the local 

bank must certify who was 

drawing under their local 

guarantee. Panelists noted that 

in some instances, applicants 

do not do their homework and 

submit formats that local 

banks cannot issue. ■

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