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All Ambiguities Re: Letters of Credit Resolved Against the Issuer—“Independence Principle” Applied—Beneficiaries of Letters of Credit Entitled to Payment

In a full-fledged opinion by Justice Andrias, the First Department reversed Supreme Court and determined plaintiffs were entitled to payment as beneficiaires of irrevocable standby letters of credit.  The opinion is detailed and meticulously resolved all ambiguities in the relevant documents against the issuer of the letters of credit.  The opinion includes an extended discussion of the “independence principle” in this context.  With respect to the basic analytical principles to be applied, the court wrote:

Under New York law, in order to recover on its claim that the issuer wrongfully refused to honor its request to draw down on a letter of credit, the beneficiary must prove that it strictly complied with the terms of the letter of credit … . “The corollary to the rule of strict compliance is that the requirements in letters of credit must be explicit, and that all ambiguities are construed against the [issuer]” … . The reasoning is that “[s]ince the beneficiary must comply strictly with the requirements of the letter, it must know precisely and unequivocally what those requirements are” … . “Where a letter of credit is fairly susceptible of two constructions, one of which makes it fair, customary and one which prudent men would naturally enter into, while the other makes it inequitable, the former interpretation must be preferred to the latter, and a construction rendering the contract possible of performance will be preferred to one which renders its performance impossible or meaningless” … . * * *

In November 2000, the independence principle was codified in a general revision of article 5 of the UCC. UCC 5—103(d) now provides that:

“[r]ights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.”

The doctrine of independent contracts, as codified in UCC article 5, allows the letter of credit to provide ” a quick, economic and trustworthy means of financing transactions for parties not willing to deal on open accounts'”… . “Only staunch recognition of this principle by the issuers and the courts will give letters of credit the continuing vitality that arises from the certainty and speed of payment under letters of credit” … .BasicNet SpA v CFP Servs Ltd, 2014 NY Slip Op 04585, 1st Dept 6-19-14

 

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