The need for strict adherence to the terms of a letter of credit was made painfully clear in a recent federal appeals court decision to uphold a district court ruling. (Mago Int’l, LLC v. LHB AG. 2nd Circuit. No. 15-2776. Aug.15.)
New York-based Mago International agreed to sell chicken, beef, and other meat products to NTP Genita, located in Pristina, Kosovo. To ensure it received payment, Mago required Genita to obtain a standby letter of credit, or SLOC, issued by the Kosovo-based Bank for Business, and confirmed by the German firm LHB AG.
Under the terms of the letter, if Genita failed to pay Mago within 45 days after the date of an invoice, Mago could present a defined set of documents to LHB and obtain payment on the standby letter of credit.
According to the Credit Research Foundation, “A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit…Essentially, the issuing bank replaces the bank’s customer as the payor.”
Among the 2nd Circuit decisions the court referred to in the Mago ruling was Beyene v. Irving Tr. Co. (1985), which noted the “issuing bank, or a bank that acts as confirming bank for the issuer, takes on an absolute duty to pay the amount of the credit to the beneficiary, so long as the beneficiary complies with the terms of the letter,” adding “this absolute duty does not arise unless the terms of the letter have been complied with strictly.”
In Voest‐Alpine Int’l Corp. v. Chase Manhattan Bank (1983), the 2nd Circuit explained, “Adherence to this rule ensures that banks, dealing only in documents, will be able to act quickly, enhancing the letter of credit’s fluidity,” and that literal compliance is “so as not to impose an obligation upon the bank that it did not undertake and so as not to jeopardize the bank’s right to indemnity from its customer.”
Among the documents LHB required was a photocopy of the bill of lading “evidencing shipment of the goods to the applicant.” Mago shipped 12 containers of products to Genita under four invoices, designated 199(1‐5), 199(6‐7), 208(1‐2), and 208(3‐5), respectively.
Genita defaulted on all four invoices.
The first two times Mago tendered documents, they contained unsigned bills of lading for the 199 invoices and were rejected. On Oct. 8, 2012—the last day possible to submit a demand for payment—Mago submitted signed bills of lading for the 208 invoices, but instead of unsigned bills of lading for the 199 invoices, the company submitted telexes from Mediterranean Shipping Co. stating MSC had retained the original signed bills of lading in its files and authorized release of the shipments to Genita without the latter presenting the original bill of lading. LHB rejected this tender as well.
When Mago tendered a set of documents on Oct. 11, 2012, that containing signed bills of lading for each invoice, LHB rejected that tender as untimely.
Mago sued LHB and Bank for Business in district court, alleging wrongful dishonor of the standby letter of credit. LHB and Mago cross‐moved for summary judgment, and the district court issued an order granting LHB’s motion and denying Mago’s.
“As the district court noted, resolution of this case turns on whether Mago strictly complied with the terms of the SLOC—specifically, whether presentation of unsigned copies of bills of lading satisfy the credit’s requirement that Mago submit a ‘photocopy of B/L evidencing shipment of the goods to the applicant,’” the 2nd Circuit said.
Mago argued that under the Uniform Customs and Practice for Documentary Credits (UCP) and interpretive guidance issued by the International Chamber of Commerce Banking Commission, where a letter of credit requires “copies” of transport documents like bills of lading, those copies do not need to be signed.
Although the letter of credit explicitly incorporated the UCP, the 2nd Circuit said Mago’s argument failed because “LHB’s letter did not simply require a copy of a bill of lading, but required one that ‘evidenc[ed] shipment of the goods to the applicant.’ Thus, whatever general guidelines are applicable, the copies here were required to evidence shipment” and the documents “did not strictly comply.”
Although Mago presented conforming documents for the 208 invoices, when the district court “expressly asked for clarification on the differences between the 199 and 208 invoices—Mago still did not contend it was owed at least partial payment,” and it cited a precedent under which it would only consider arguments explicitly raised before the court.
