Letters Of Credit: ISP98 Forms, UCC Article 5, UCP, Draw .
Presenting a live 90-minute webinar with interactive Q&ALetters of Credit: ISP98 Forms, UCC Article 5,UCP, Draw Procedures and MoreDrafting Commercial vs. Standby, Conditional vs. Unconditional, Limited Term vs."Evergreen," Transfer ProvisionsTHURSDAY, SEPTEMBER 6, 20181pm Eastern 12pm Central 11am Mountain 10am PacificToday’s faculty features:Buddy Baker, Vice President, Investment Banking Division, Goldman, Sachs & Co., ChicagoJacob A. Manning, Partner, Dinsmore & Shohl, Wheeling, W.Va.The audio portion of the conference may be accessed via the telephone or by using your computer'sspeakers. Please refer to the instructions emailed to registrants for additional information. If youhave any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
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Jacob Manning is a partner at Dinsmore & Shohl, and advises clients in a variety of businesstransactions, both domestic and cross-border, in contracts, sales of goods, distributorships and licensing,construction, vendor and services. He also advises on commercial fraud.jacob.manning@dinsmore.com / www.dinsmore.com / T. (304) 230-1604Walter (Buddy) Baker is a Vice President in the Investment Banking Division of Goldman Sachs & Co.and has over 40 years of experience in international trade finance. An author of numerous articlesand books on letters of credit and related topics, he is actively involved in projects to standardizenational and international practices around letters of credit. Buddy.Baker@gs.com / T. 312-655-45495
I.II.III.IV.V.VI.VII.VIII.DefinitionsTypes of LCs—commercial vs. standbyCollateral and other bank requirements for issuanceLC laws and rulesA. UCC Article 5B. International Standby Practices 1998 (ISP98)C. Uniform Customs and Practice for Documentary Credits(UCP)D. Standard formsDeal-specific concernsA. Conditional vs. unconditionalB. Limited (typically one year) term vs. evergreenC. TransferabilityDraw proceduresBankruptcy considerationsAlternative credit enhancementsOUTLINE OF DISCUSSION TOPICS6
Letter of Credit Bank undertakes to pay a named beneficiaryupon the timely presentation of complyingdocuments “Applicant” applies to “Issuer” (bank) whichissues the LC to “Beneficiary” “Beneficiary” presents complying documents toIssuer (or “Confirmer,” or “Nominated Bank”) Issuer and confirmer must “honor” a complyingpresentation and pay Beneficiary or “dishonor” anon-complying presentationI. DEFINITIONS7
I. DEFINITIONS8
Nominated Bank Issuing Bank may authorize another bank to receivedocuments and pay Beneficiary Nominated Bank is not authorized to confirm theletter of credit and may not pay until it examinesdocuments and determines that they comply withthe LC requirements Nominated Bank obtains reimbursement from IssuingBankNegotiating Bank Issuing bank may authorize another bank to purchasedocuments from the Beneficiary (usually at adiscount)I. DEFINITIONS9
Advising Bank Issuing bank may utilize another bank to notify theBeneficiary that the letter of credit has been issued oramended No intrinsic authorization to pay Beneficiary or seekreimbursementConfirmation If Seller is unfamiliar with Buyer’s Bank or cannot trustthe letter of credit practice or law in the countrywhere Buyer’s Bank is located, the Buyer’s Bank mayauthorize a local bank to confirm the letter of credit Confirming Bank in effect issues a parallel letter ofcredit to Beneficiary and seeks reimbursement fromBuyer’s BankI. DEFINITIONS10
Confirmation—Two Additional ObligationsI. DEFINITIONS11
Commercial Letter of Credit Bank undertakes to pay to Seller the purchaseprice of the goods upon receipt of Seller’s invoiceor other documents evidencing Seller’s right topayment of the purchase price Other documents may be transport, insurance,customs, inspection, etc.II. TYPES OF LCs12
Standby Letter of Credit Obligations are the same: Bank undertakes to payupon the timely presentation of complyingdocuments Often used in transactions other than the sale ofgoods Beneficiary typically presents a demand with astatement that Applicant is obligated to payBeneficiary the stated amountII. TYPES OF LCs13
Collateral and other bank requirements Application Reimbursement agreement For the vast majority of applicants (with theexception of investment-grade companies), theissuing bank will require 100% collateral, exclusiveof applicable fees Fees for LCs typically range, like loan spreads Standby LC fees typically payable quarterly;commercial LC fees are charged as you goIII. BANK REQUIREMENTS14
United States Uniform Commercial Code, Article 5 United Nations Convention on Independent Guarantees andStandby Letters of Credit People’s Republic of China (New Statute) Uniform Customs and Practice for Documentary Credits(“UCP600”) (ICC Publication No. 600) The Provisions of the Supreme People’s Court on Several IssuesConcerning the Trial of Disputes over Letters of Credit (the LCJudicial Interpretations)International Standard Banking Practice for the Examination ofDocuments Under Documentary Credits (“ISBP”) (ICC PublicationNo. 745)International Standby Practices (“ISP98”) (ICC Pub. No. 590)IV. LETTER OF CREDIT LAWS & RULES15
Scope (Article 5-103) “This article applies to letters of credit and tocertain rights and obligations arising out oftransactions involving letters of credit.” Article 5 does not attempt to cover all rights andobligations UCP600 or ISP98 may still apply by reference Does not apply to “guarantees”“With the exception of . . . [certain Sections] . . .the effect of this Article may be varied byagreement or by a provision stated orincorporated by reference in an undertaking.” General disclaimer of liabilities is not sufficient.UCC ARTICLE 516
Independence Principle (5-103(d)) “Rights and obligations of an issuer to abeneficiary or a nominated person under a letterof credit are independent of the existence,performance, or nonperformance of a contract orarrangement out of which the letter of creditarises or which underlies it, including contracts orarrangements between the issuer and theapplicant and between the applicant and thebeneficiary.” Distinguish “guarantees” Exception for the defense of a fraudulent drawing Reverse of the independence principle is not trueUCC ARTICLE 517
Formal Requirements (5-102(10) & 5-104) Record (includes SWIFT transmissions) Authenticated By a signature or In accordance with an agreement of the parties orstandard practiceDefinite undertaking by an issuer to a beneficiaryat the request of an applicant to honor adocumentary presentation by payment or deliveryof an item of valueUCC ARTICLE 518
All Credits ExpiryTime allowed for documentexaminationParts of the procedure forrefusalConfirmationForce majeure Commercial Only Transport docs Acceptance andnegotiation of drafts Parts of the procedure forrefusal Insurance Partial shipments Installment shipments Late presentation Partial transfers Assignment of proceedsAPPLICABILITY OF THE UCP TOSTANDBY CREDITS19
Continuing problem with lawsuits involvingstandbys UCP reflects commercial LC practice standby practice sometimes differs(e.g., Articles 17 (Force Majeure), 41 (InstallmentDrawings), 43 (Late Presentation), & 48 (Transfers)) many practices are not covered in the UCP Sometimes UCP is unclear (or wrong) URDG too vagueWHY WAS THE ISP CREATED?20
UCP600ISP98Force majeureLC expires nonethelessConsistency of documentsData in documents must not Documents need not beconflictconsistentTime allowed for dishonor5 banking days 4 days reasonable 7 days unreasonableOriginal documents“In copies” means oneoriginal of each document“Copies” means copiesTransport documentsExtensive, detailedrequirementsTreated like “other”documentsDisposition of documentsStrict requirementsNo requirementsDeemed acceptance ofamendmentsIf documents complyw/ amended termsIf documents will not complyw/o amendmentTransferOne time but multiplepartial transfers allowedMultiple times but always inentiretyUCP VS. ISPExpiry extended 30 daysafter bank re-opens21
Form 1:Model Standby Incorporating Annexed Form of Payment Demand withStatementForm 2:Model Standby Providing for Extension and Incorporating Annexed Formof Payment Demand with Alternative Non-Extension StatementForm 3:Model Standby Providing for Reduction and Incorporating AnnexedForm of Reduction DemandForm 4:Model Standby Providing for Transfer and Incorporating Annexed Formof Transfer DemandForm 5:Simplified Demand Only StandbyForm 6:Model Counter Standby with Annexed Form of Local Bank UndertakingForm 7:Model Standby Requiring ConfirmationForm 8:Model Confirmation of StandbyForm 11.1: Model Government Standby (U.S.)ISP98 MODEL STANDBY FORMS( http://www.iiblp.org/resources/isp-forms/)22
FORM 1: FOUNDATION23
FORM 1: FOUNDATION24
FORM 2: EVERGREEN25
FORM 3: REDUCTION BY DEMAND26
FORM 4:TRANSFERABLE27
FORM 5: MINIMUM CONTENTFORM 6: COUNTER-STANDBY28
FORM 7: CONFIRMED LC29
FORM 8: CONFIRMATION30
FORM 11.1: GOVERNMENT BENEFICIARY31
FORM 11.1: GOVERNMENT BENEFICIARY32
FORM 11.1: GOVERNMENT BENEFICIARY33
FORM 11.1: GOVERNMENT BENEFICIARY34
Nondocumentary Conditions (UCC 5-108(g)) “If an undertaking constituting a letter of credit underSection 5-102(a)(10) contains nondocumentaryconditions, an issuer shall disregard the nondocumentaryconditions and treat them as if they were not stated.” Examples: “Shipment must not be made on vessels more than 15years old” An award by a “duly-appointed arbitrator” Differing certifications depending on the nature of defaultException (where condition is central to issuer’sobligation): Example: where issuer is required to determine whetherBeneficiary performed or Applicant defaultedV. DEAL SPECIFIC CONCERNSA. CONDITIONAL VS. UNCONDITIONAL35
Preclusion Rule (UCC 5-108) Issuer shall honor a presentation that appears on its faceto comply with the terms and conditions of the letter ofcredit “(c) Except as otherwise provided in subsection (d), anissuer is precluded from asserting as a basis for dishonorany discrepancy if timely notice is not given, or anydiscrepancy not stated in the notice if timely notice isgiven.” Exceptions for fraud, forgery, or expirationV. DEAL SPECIFIC CONCERNSA. CONDITIONAL VS. UNCONDITIONAL36
Expiration Dates (UCC 5-106(c) & (d)) “(c) If there is no stated expiration date or otherprovision that determines its duration, a letter ofcredit expires one year after its stated date ofissuance or, if none is stated, after the date onwhich it is issued.” “(d) A letter of credit that states that it is perpetualexpires five years after its stated date of issuance,or, if none is stated, after the date on which it isissued.”V. DEAL SPECIFIC CONCERNSB. LIMITED TERM VS. EVERGREEN37
ExampleGolden West Refining Co. v. SunTrust Bank, 538 F.3d 1233 (9thCir. 2008) “This letter of credit shall expire one year from thedate hereof provided however, that it shall bedeemed automatically renewed withoutamendment for additional one year periods from thepresent or any future expiration date hereof, unless atleast 30 days prior to any such date(s), [Beneficiary]shall have sent [Issuing] Bank notice by certified mail,return receipt requested, or overnight courier servicethat [Beneficiary] elects not to require this letter ofcredit renewed for any such additional period.” When does the letter of credit expire?V. DEAL SPECIFIC CONCERNSB. LIMITED TERM VS. EVERGREEN38
Example (continued) Courts hold that Because the letter of credit did not use the word,“perpetual” the five-year expiration date does notapply Because the Beneficiary may terminate, the letter ofcredit had an expirationIssues Letters of credit are intended to be obligations oflimited duration Over-emphasis on the word, “perpetual” instead ofprovisions’ effect UCC Section 5-106(d) is a non-variable provisionV. DEAL SPECIFIC CONCERNSB. LIMITED TERM VS. EVERGREEN39
Perpetual Letter of Credit(example no. 2)“Perpetual Irrevocable Letter ofCredit”“The issuing bank understands that thisperpetual irrevocable letter of creditposted in lieu of a wage bond mayonly be terminated with the approvalof the [Beneficiary] . . . .”EVERGREEN LETTERS OF CREDIT40
Contain language that says the expiration dateautomatically extends unless the bank sendsnotice of non-extension Commonly, extension is one year at a time Notice of non-extension must be sent a specifiedamount of time in advance, often 30 or 60 days Upon receipt of a notice of non-extension, thebeneficiary is usually entitled to draw for the fullbalance of the LC No notice is sent of extensionEvergreen clauses do create problems that might be avoided byissuing LCs with expiries that match the underlying agreements and/orby using amendments to extend expiry as necessaryEVERGREEN LETTERS OF CREDIT41
Transfer of Letter of Credit (UCC 5-112) “Except as otherwise provided in Section 5-113,unless a letter of credit provides that it istransferable, the right of a beneficiary to draw orotherwise demand performance under a letter ofcredit may not be transferred.” Provisions of letter of credit regarding who maydraw are treated like documents and anattempted drawing by a transferee beneficiarywithout approval may be discrepantV. DEAL SPECIFIC CONCERNSC. TRANSFERABILITY42
Strict Compliance (UCC 5-108) “(a) Except as otherwise provided in Section 5-109,an issuer shall honor a presentation that, asdetermined by the standard practice referred to insubsection (e), appears on its face strictly to complywith the terms and conditions of the letter of credit.Except as otherwise provided in Section 5-113 andunless otherwise agreed with the applicant, anissuer shall dishonor a presentation that does notappear so to comply.”VI. DRAW PROCEDURES43
Strict Compliance (continued) Importantly, “strict compliance” is according tostandard practice What is strict compliance depends on the item Description of goods must be exact Contents of documents not required forpresentation need not be considered Invoice for an amount in excess in the amountavailable under the letter of credit may bedishonored as discrepant or may be honored for theamount availableVI. DRAW PROCEDURES44
Strict Compliance (examples) Discrepancies among documents Letter of credit requires documents to indicateshipment date. Bill of lading indicates loading onone date and inspection certificates another. Held: noncomplying.Minor discrepancies Letter of credit requires Beneficiary’s draft to state:“Drawn under NEMNB Credit No. 18506” but draftonly says “No. 18506”. Held: complying.VI. DRAW PROCEDURES45
Strict Compliance (examples) Minor discrepancy Beneficiary’s draft was to indicate letter of creditnumber “G-0391” but said “GO391” Held: complyingMinor discrepancies Draft was to state “Drawn under Bank of ClarksvilleLetter of Credit Number 105” but instead stated“drawn under Bank of Clarksville, Clarksville,Tennessee letter of Credit No. 105” Held: complyingVI. DRAW PROCEDURES46
Examination of Documents (5-108) Bank has reasonable time not to exceed sevenbusiness days to examine documents to honor orgive notice of discrepancies Lesser of reasonable time or seven business days Must give notice without delay Contrast with UCP600 Article 14 (five bankingdays) May seek waiver from ApplicantVI. DRAW PROCEDURES47
Fraud and Forgery (5-109) Main contribution Article 5 makes to letter of creditlaw and practice Presentation is made that is complying on its facebut which would work a material fraud by theBeneficiary on the Issuer or Applicant Issuer shall honor if presentation is made byNominated Person, Confirmer, holder in duecourse, or assignee of Issuer’s or NominatedPerson’s deferred obligation (in good faith, givenvalue) Issuer may honor in any other case if acting ingood faithVI. DRAW PROCEDURES48
Fraud and Forgery (continued) Practical for Issuer to honor in close cases even ifApplicant claims fraud, since Issuer may be liablefor wrongful dishonor Applicant may apply for an injunction preventinghonor Standard for obtaining an injunction is necessarilyhigh and must be supported by evidence thatApplicant is likely to show fraud Breach of contract is normally not sufficientVI. DRAW PROCEDURES49
Remedies under the UCC 5-115 (one year statute of limitations) 5-111 (attorney’s fees and litigation expenses—including expert witness fees—must be awardedto prevailing party) 5-108 (Issuer’s observance of standard practice isan issue for the Court, not the jury) 5-111 (wrongful dishonor entitles Beneficiary tospecific performance, incidental damages,interest, attorney’s fees, and costs; no need tomitigate damages) 5-111 (wrongful honor entitles Applicant to samedamages, but must mitigate)VI. DRAW PROCEDURES50
LC draws are usually not prevented by bankruptcy 11 USC Section 541 creates an estate upon filing, which consistsof “all legal and equitable interests of the debtor in property.” “The letter of credit is an independent third party obligation [ofthe issuer bank], and the proceeds are not the debtor’sproperty even if secured by the debtor’s property.” KeeneCorp. v. Acstar Ins. Co., 162 B.R. 935 (S.D.N.Y. 1994) Most draws on LCs are not subject to the preference statute [11USC Section 547(b)]. In re M.J. Sales & Distr. Co., Inc., 25 B.R. 608,615 (Bk. SDNY 1982); but see, In re Air Conditioning, Inc. of Stuart,845 F.2d 293, 299 (11th Cir. 1988).VII. BANKRUPTCY ISSUES51
VIII. ALTERNATIVES52
VIII. ALTERNATIVES53
Jacob Manning is a partner at Dinsmore & Shohl, and advises clients in a variety of businesstransactions, both domestic and cross-border, in contracts, sales of goods, distributorships and licensing,construction, vendor and services. He also advises on commercial fraud.jacob.manning@dinsmore.com / www.dinsmore.com / T. (304) 230-1604Walter (Buddy) Baker is a Vice President in the Investment Banking Division of Goldman Sachs & Co.and has over 40 years of experience in international trade finance. An author of numerous articlesand books on letters of credit and related topics, he is actively involved in projects to standardizenational and international practices around letters of credit. Buddy.Baker@gs.com / T. 312-655-454954
Sep 06, 2018 · Form of Reduction Demand Form 4: Model Standby Providing for Transfer and Incorporating Annexed Form of Transfer Demand Form 5: Simplified Demand Only Standby Form 6: Model Counter Standby with Annexed Form of Local Bank Undertaking Form 7: Model Standby Requiring Confirmati
URDG too vague WHY WAS THE ISP CREATED? 16. UCP600 ISP98 Force majeure L/C expires nonetheless Expiry extended 30 days after bank re-opens Consistency of documents Data in documents must not conflict Documents need not be consistent Time allowed for dishonor 5 banking days 4 days reasonable
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