UCC Standards Apply to International Letters of Credit
Description Appeals court upheld a verdict against a Brazilian bank, which attempted to cancel a letter of credit and then dishonored requests for payments. The cancellation of the credit did not meet the "clear and unequivocal" notice required by the UCC. That standard applies to this letter, which was issued under International Chamber of Commerce rules for credit.
Topic Negotiable Instruments/Commercial Paper
Key Words Letter of Credit; Fraud in the Transaction
C A S E   S U M M A R Y
Facts Banco do Brasil issued a letter of credit in 1994 to support payments of Comp Service to 3Com. The letter contained an "evergreen clause" that provided automatic renewal of the credit on every May 20 unless Banco sent 3Com "written notice that [Banco] ... elected not to renew the letter of credit beyond such date." Banco extended credit until it sent a notice in early May 1996 stating that it was "requesting cancellation of the standby letter of credit" and that it "cannot accept the automatic renewal" of the credit to 3Com on behalf of Comp. After the notice, 3Com presented Banco with drafts for the full amount of the credit for debts owed 3Com by Comp. Banco gave notice of dishonor of the drafts on the grounds that the credit expired on May 20, 1996. 3Com sued for wrongful dishonor. The district court held for 3Com, ruling that a notice of non-renewal must be "clear and unequivocal," which Banco's notice was not, so 3Com was due payment. Banco appealed.
Decision Affirmed. The credit expressly incorporates the International Chamber of Commerce's Uniform Customs and Practice (UCP) for Documentary Credits. Although the UCP is not law, it enjoys a unique status because issuers generally incorporate it into their credits. The New York UCC 5-102(4) expressly provides that it "does not apply to a letter of credit ... if by its terms or by agreement, course of dealing or usage of trade such letter of credit ... is subject in whole or in part to the [UCP]." Banco's argument fails because "Simplicity and certainty are the hallmarks of the letter of credit transaction and explain the letter of credit's great utility." Termination or extension of credit must be "clear and unequivocal." Banco's attempt to cancel the credit did not rise to that standard.
Citation 3Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739 (2nd Cir., 1999)

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