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Esso Petroleum Canada v. Security Pacific Bank

    Brief Fact Summary. “Esso alleges that Security Pacific Bank wrongfully dishonored its irrevocable standby letter of credit by failing to specify the discrepancies which caused the Bank to reject the documents submitted by Esso or to notify Esso of the discrepancies in a timely fashion.” Synopsis of Rule of Law. A bank is required to state the discrepancies on which it based its refusal at the time it notified the plaintiff of its refusal to honor the letter of credit.

    Facts. Prior to October 22, 1987, plaintiff Esso Petroleum Canada (the “plaintiff”) entered into a contract with Valley Oil Co., Inc (“Valley Oil”) to sell Valley Oil aviation gasoline. A condition of sale was that Valley Oil obtain a standby letter of credit naming the plaintiff as beneficiary. As a condition to issuing the standby letter of credit, the defendant Security Pacific Bank (the “defendant”) required Valley Oil to obtain a backup letter of credit from Valley Oil’s customer Western Pioneer, Inc. On October 22, the defendant issued to the plaintiff an irrevocable standby letter of credit. On November 1, the plaintiff delivered the fuel to Valley Oil. The letter of credit provided that it was governed by the Uniform Customs and Practice for Documentary Credits International Chamber of Commerce (the “UCP”). On Friday, November 13, 1987, the plaintiff presented its draft drawn on the defendant under the letter for credit, and documents fulfilling the terms and conditions of the letter of credit. Later that same day, the defendant informed the plaintiff that it would not honor the draft and demand for payment due to certain discrepancies. The defendant was unable to supply a list of discrepancies until the following Monday. The plaintiff attempted to correct the discrepancies, but again, the defendant failed to honor the draft. On January 20, 1988, various creditors of Valley Oil filed a petition for bankruptcy naming Valley Oil as a debtor. On February 10, 1988, the plaintiff filed this action against the defendant seeking money damages in the amount of $1,218,116.90 plus interest. The second amended complaint stated several claims for relief in contract and tort.

    Issue. Did the defendant properly notify the plaintiff of its decision to reject the documents by specifying the alleged discrepancies in accordance with Article 16(d)?

    Held. No. Both parties agree that they are bound by Article 16 of the UCP. Under Article 16(d) of the UCP, the defendant was required to state the discrepancies on which it based its refusal at the time it notified the plaintiff of its refusal to honor the letter of credit. The defendant did not state the discrepancies at that time and under UCP Article 16(e), the defendant is precluded from claiming that the “documents were not in conformance with the terms and conditions of credit.” Therefore, the court held that the plaintiff is entitled to collect funds from the defendant under the letter of credit.

    Discussion. The court cited several cases in reaching its decision. In Bank of Cochin v. Manufacturers Hanover Trust Co., the court held that an issuing bank was estopped under the UCP from claiming that a bank did not comply with the terms of a letter of credit where the issuing bank delayed twelve to thirteen days in notifying the bank of specific defects in the presented documents. The court stated that ‘without delay’ is defined neither in Article 8 nor in any case law dealing with international letters of credit. However, the phrase is akin to ‘immediate (at once), instant, instantaneous, instantly, prompt’.” In Datapoint Corp. v. M & I Bank the court held that, “[u]nder the provision of the Uniform Customs and Practice, incorporated by the Letter of Credit, once defendant decided to refuse the Original Draft, it was obligated to notify plaintiff to that effect without delay by telecommunications or, if that was impossible, by other expeditious means.”


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