Letters of Credit

• Pages: 1237-1254
• Date: 01 October 2024
• Published date: 01 October 2024
• Author: Carter Klein
• Subject Matter: Administrative & Public Law

Letters of Credit

By Carter Klein*

This survey concentrates on the most signif‌icant letter of credit (“LC”)

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issues

addressed in cases decided primarily in the United States

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in the year 2023, com-

ments on the 2022 UCC Amendments affecting Article 5,

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and notes develop-

ments in electronic and digital documents in LC transactions.

The discussion of this survey can be broken down into f‌ive sections: (1) new

developments—2022 UCC Amendments and electronic/digital documents mod-

ernizing and making LC practices more eff‌icient; (2) threshold issues addressed

by courts, such as whether an undertaking is an LC, whether U.C.C. Article 5

applies, and questions of jurisdiction, sovereign immunity, governing law,

venue, and duty to post an LC; (3) pre-honor LC cases that can include issuer

dishonor due to noncompliance of documents presented,

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proper and timely no-

tice of dishonor,

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draws made after expiration,

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fraud justifying dishonor or

* James G. Barnes, a long-time partner/senior counsel with Baker & McKenzie LLP and author/co-

author of this Letters of Credit survey for many years, retired on June 30, 2022. The letter of credit

community is grateful for his over f‌ifty years of contributions reporting on and improving letter of

credit law and practice. Carter Klein is Of Counsel at Jenner & Block LLP and a previous co-author

of the Payments annual survey and the last three years’ co-author or author of the Letters of Credit

annual survey. The author thanks Christopher S. Byrnes of the Institute of International Banking Law

and Practice (“IIBLP”) and editor of Documentary Credit World (“DCW”) for his continuing assis-

tance and Wayne Barnes of Texas A&M University School of Law for his careful edits and review

of this survey.

1. Unless otherwise indicated,“LC” or “credit” means “letter of credit,” “SBLC” means “standby let-

ter of credit,” “U.C.C.” refersto the Uniform Commercial Code (2022) unless otherwise noted,“ULA/

ALI” refers to the Uniform Law Commissionand the AmericanLaw Institute, Article 5 refers to Article

5 of the U.C.C., “2022UCC Amendments” refers to the 2022 Amendmentsto the U.C.C. proposed by

the ULA/ALI, “ICC” refers to the International Chamber of Commerce, “UCP” refers to the Uniform

Customs and Practice for Documentary Credits, 2007 revision (ICC Pub. No. 600), “URDG” refers

to the ICC’s Uniform Rulesfor Demand Guarantees (ICC Pub. No. 758), and “ISP” refersto the Inter-

national Standby Practices (ICC Pub. No. 590). Except for the 2022 UCC Amendments, the texts of

these laws and rulesand ISP annotated model forms are reprinted in LCRULES &LAWS( James E. Byrne

ed., 8th ed. 2022).

2. A signif‌icant foreign case of import regarding U.S. and international sanctions affecting LCs is

also discussed. Criminal cases involving LC fraud are not covered by this year’s survey. For cases on

LC scams, see Jacob Manning’s recurring Scam Survey column in monthly issues of DCW.

3. See 2022 Amendments to Uniform Commercial Code,U

NIF.L.COMMISSION, https://www.uniform

laws.org/committees/community-home?CommunityKey=1457c422-ddb7-40b0-8c76-39a1991651ac

(last visited May 3, 2024) [hereinafter 2022 UCC Amendments with Comments].

4. U.C.C. § 5-108(a) (2022); ISP Rules 3 & 4; UCP Articles 7, 14 & 15.

5. U.C.C. § 5-108(b) (2022); ISP Rule 5.01; UCP Article 16d.

6. U.C.C. §§ 5-106(c) & (d), 5-108(d) (2022); ISP Rules 1.09(a) & 3.05; UCP Article 6d & e.

1237

injunction against honor,

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sanctions and regulatory orders preventing honor,

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force majeure affecting the issuing bank,

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assertion of set-off rights by the issuing

bank, improper assignment or transfer by the benef‌iciary,

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statute of limitations

bar,

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and other causes claimed to justify or require dishonor, usually in the con-

text of claims of injunction, wrongful dishonor,

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or breach of contract of the LC

brought by the benef‌iciary; (4) post-honor cases of reimbursement claims, claims

of wrongful honor, and disputes between the benef‌iciary and the applicant based

on breach of the underlying contract supported by the LC, breach of warranty

under U.C.C. section 5-110, subrogation under U.C.C. section 5-117, and

other legal theories; and (5) LC cases worthy of note, including liability of the

advising and conf‌irming banks based on representations made to their custom-

ers, supersedeas LCs, LCs in bankruptcy, and injunctive or declaratory relief re-

quiring LCs to be posted.

2022 UCC AMENDMENTS AND ELECTRONIC LC DOCUMENTS

Subject to their enactment in the various states,

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last year’s survey explained

how the 2022 UCC Amendments when adopted by the various states affect LC

transactions. Besides clarifying that choice of law for separate branches of banks

that issue LCs is the location of the branch from which the LC was issued when

no choice of law is specif‌ied in the LC,

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U.C.C. section 5-116(e) and the Off‌icial

Comments to that section under the 2022 UCC Amendments now expressly in-

clude the ISP, URDG, UCP, and eUCP

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as rules that supplement and modify the

U.C.C. Article 5 LC rules.

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The 2022 UCC Amendments also revise section 5-

104 of the U.C.C. to expand the formal requirements for LCs to comport with

modern technology. Instead of requiring an authentication of an LC only by

written signature, agreement of the parties, or standard bank practice,

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7. U.C.C. § 5-109 (2022).

8. These include orders of other courts as well as sovereign sanctions requiring dishonor. See

U.C.C. § 5-101 cmt. (2022) (mentioning other, potentially overriding, U.S. laws that are outside

of but affect rights and duties under Article 5).

9. ISP Rules 3.13 & 3.14; UCP Article 36.

10. U.C.C. §§ 5-112, 5-113 & 5-114 (2022); ISP Rule 6; UCP Articles 38 & 39.

11. U.C.C. § 5-115 (2022).

12. Id. § 5-111.

13. As of the date of the writing of this survey (July 1, 2024), twenty-two states and the District of

Columbia have enacted and six more states have bills pending to enact the 2022 UCC Amendments.

14. See U.C.C. § 5-116(d) (as revised by the 2022 UCC Amendments).

15. The latest edition of the eUCP is Version 2.1 adopted by the ICC in 2023 as Uniform Customs

and Practice for Documentary Credits for Electronic Presentation (eUCP) Version 2.1 to align it with

UNCITRAL’s Model Law on Electronic Transferable Records (“MLETR”). It contains an appendix with

recommendations for S.W.I.F.T. MT700 Field requirements for a credit subject to eUCP Version 2.1.

16. See U.C.C. § 5-116 cmt. 3 (as revised by the 2022 UCC Amendments).

17. This was the wording for authentication used in the text of section 5-104 before the 2022 UCC

Amendments were adopted. U.C.C. § 5-104 (2011). Off‌icial Comment 2 to the revised section 5-104

of the U.C.C. states the 2022 UCC Amendments make reference to “agreement of the parties or stan-

dard [LC banking] practice . . . [as] no longer necessary” because “[t]hose forms of authentication are

subsumed by the revised and expanded def‌inition of ‘sign’ in Section 1-201(b)(37), which is broad

and f‌lexible.” U.C.C. § 5-104 cmt. 2 (2022). Even before the 2022 UCC amendment to section 5-

104, Off‌icial Comment 3 to section 5-104 of the U.C.C. provided that “many banking transactions,

1238 The Business Lawyer; Vol. 79, Fall 2024