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.
In construing the terms of a letter of credit, the same general principles apply which govern other written contracts.View Full Point of Law
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.”