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ACT NO. 65
Uniform Commercial Code; Letters of Credit
This act revises Article 5 of the Uniform Commercial Code (Letters of Credit) in accordance with the recommendations of the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Revised provisions include the following.
Revised Article 5 clearly and forcefully states the independence of the letter of credit obligations from the underlying transactions that was unexpressed in, but was a fundamental predicate for, the original Article 5 (Sections 5-103(d) and 5-108(f)). Certainty of payment, independent of other claims, setoffs or other causes of action, is a core element of the commercial utility of letters of credit.
The revision authorizes the use of electronic technology (Sections 5-102(a)(14) and 5-104); expressly permits deferred payment letters of credit (Section 5-102(a)(8)) and two party letters of credit (Section 5-102(a)(10)); provides rules for unstated expiry dates (Section 5-106(c)), perpetual letters of credit (Section 5-106(d)), and non-documentary conditions (Section 5-108(g)); clarifies and establishes rules for successors by operation of law (Sections 5-102(a)(15) and 5-113); conforms to existing practice for assignment of proceeds (Section 5-114); and clarifies the rules where decisions have been in conflict (Section 5-106, Comment 1; Section 5-108, Comments 1, 3, 4, 7, and 9; Section 5-109, Comments 1 and 3; Section 5-113, Comment 1; and Section 5-117, Comment 1).
Revisions have been made to Article 5 to coordinate the Article 5 rules with current international practice (e.g., deferred payment obligations, reasonable time to examine documents, preclusion, nondocumentary conditions, return of documents, and irrevocable unless stated to be revocable).
Section 5-111 precludes consequential and punitive damages, but provides incentives for issuers to honor, including provisions for attorneys fees and expenses of litigation, interest, and specific performance.
Section 5-115 establishes a one-year statute of limitation from the expiration date or from accrual of the cause of action, whichever occurs later. Because it is usually obvious to all when there has been a breach, a short limitation period is fair to potential plaintiffs.
Section 5-116 permits the issuer (or nominated party or adviser) to choose the law of the jurisdiction that will govern even if that law bears no relation to the transaction. Absent agreement, Section 5-116 states choice of law rules.
Section 5-114 conforms more fully to existing practice and provides an orderly procedure for recording and accommodating assignments by consent of the issuer (or nominated party).
Section 5-117 clarifies the subrogation rights of an issuer who has honored a letter of credit. These rights of subrogation also extend to an applicant who reimburses and a nominated party who pays or gives value.
Section 5-116(c) expressly recognizes that if the Uniform Customs and Practice for Documentary Credits is incorporated by reference into the letter of credit, the agreement varies the provisions of Article 5 with which it may conflict except for the nonvariable provisions of Article 5.
Section 5-110 specifies the warranties made by a beneficiary. It gives the applicant on a letter of credit which has been honored a direct cause of action if a drawing is fraudulent or forged or if a drawing violates any agreement augmented by a letter of credit.
Absent agreement to the contrary, the issuer must dishonor a presentation that does not strictly comply under standard practice with the terms and conditions of the letter of credit (Section 5-108).
New Section 5-117 clarifies the parties' rights of subrogation if the letter of credit is honored.
Section 5-103(c) limits the effect of general disclaimers and waivers in a letter of credit, or reimbursement or other agreement.
A letter of credit is irrevocable unless the letter of credit expressly provides it is revocable (Section 5-106(a)).
Section 5-108(b) requires examination and notice of any discrepancies within a reasonable time not to exceed the seven business day after presentation of the documents.
Section 5-108(c) now provides that the issuer is precluded from asserting any discrepancy not stated in its notice timely given, except for fraud, forgery or expiration.
New Section 5-113 allows a successor to a beneficiary by operation of law to make presentation and receive payment or acceptance.
The damages provided are expanded and clarified. They include attorneys fees and expenses of litigation and payment of the full amount of the wrongfully dishonored or repudiated demand, with interest, without an obligation of the beneficiary to mitigate damages (Section 5-111).
Effective Date: Jan. 1, 1999