Presenting Letters of Credit — Copies Don’t Cut It (for the Beneficiary)
Landlords and other holders of standby letters of credit will be surprised to learn about Friday’s important Massachusetts Appeals Court opinion, Proquip Limited vs. Northmark Bank.
The holder (known as the beneficiary) has access to cash up to the full amount of the letter of credit by “drawing down” on a letter of credit when certain events occur. In our real estate practice, standby letters of credit are most often used in commercial leases for a security deposit, as an alternative to cash. In Proquip, the buyer provided a letter of credit to guarantee payment to the seller.
Letters of credit include instructions the beneficiary must follow to receive the money. This typically includes delivery of the original letter of credit and any amendments to a specific bank office with a statement that confirms that the party is the beneficiary and, if the letter of credit requires, that a default has occurred. When the instructions in the letter of credit are followed, the bank promptly releases the funds.
Unfortunately for Proquip, it presented the bank with the original letter of credit and a copy of its one amendment. Fearing the bank might take issue with its presentment and with only days remaining before the letter of credit’s expiration, Proquip also delivered an “affidavit and indemnity” for the bank’s benefit. The bank refused to honor the demand, because this letter of credit required the beneficiary to provide “the original of and all amendments, if any, to this Letter of Credit for our endorsement.”
The Appeals Court determined the bank’s refusal to honor the demand was warranted under a strict reading of the letter of credit terms and the governing Massachusetts commercial laws. Refusal was justified even though the bank had performed in accordance with the amendment’s automatic renewal and expiration provisions for several years.
Proquip is a reminder that the omnipresent .pdf copy is not always omnipotent. The proliferation and ease of use of imaging software has made copies ubiquitous in commercial transactions. However, the Appeals Court analysis holds that only originals of both letters of credit and amendments thereto count.
Clients that are beneficiaries of letters of credit should ensure they have all the original documents for presentment. In addition, holders of letters of credit would be wise to consult with their counsel to review letter of credit documentation and to address any deficiencies with issuing banks well in advance of expiration dates.
David Blumberg may be reached by email at firstname.lastname@example.org or by phone at 617.790.3418.