Letters of Credit

California’s Commercial Code, Division 5, is known as the Uniform Commercial Code—Letters of Credit.

Section 5102 provides definitions for the following terms: “adviser,” “applicant,” “beneficiary,” “confirmer,” “dishonor,” “document,” “good faither,” “honor,” “issuer,” “letter of credit,” “nominated person,” “presentation,” “presenter,” “record,” “successor of a beneficiary,” “accept,” “acceptance,” and “value.”

Section 5103 states that this division applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit. The statement of a rule in this division does not by itself require, imply, or negate application of the same or a different rule to a situation not provided for, or to a person not specified, in this division.

Section 5104 states that a letter of credit, confirmation, advice, transfer, amendment, or cancellation may be issued in any form that is a signed record. Section 5105 says that consideration is not required to issue, amend, transfer, or cancel a letter of credit, advice, or confirmation.

Section 5106 provides that a letter of credit is issued and becomes enforceable according to its terms against the issuer when the issuer sends or otherwise transmits it to the person requested to advise or to the beneficiary. A letter of credit is revocable only if it provides that.

Section 5107 specifies that a confirmer is directly obligated on a letter of credit and has the rights and obligations of an issuer to the extent of its confirmation. The confirmer also has rights against and obligations to the issuer as if the issuer were an applicant and the confirmer had issued the letter of credit at the request and for the account of the issuer.

A person requested to advise may decline to act as an adviser. An adviser that is not a confirmer is not obligated to honor or give value for a presentation. An adviser undertakes to the issuer and to the beneficiary accurately to advise the terms of the letter of credit, confirmation, amendment, or advice received by that person and undertakes to the beneficiary to check the apparent authenticity of the request to advise. Even if the advice is inaccurate, the letter of credit, confirmation, or amendment is enforceable as issued.

Section 5108 requires an issuer to honor a presentation that, as determined by the standard practice, appears on its face strictly to comply with the terms and conditions of the letter of credit. An issuer is required to dishonor a presentation that does not appear to comply with requirements. An issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of its receipt of documents:

Failure to give the notice specified or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery or expiration of the letter of credit before presentation. An issuer must observe standard practice of financial institutions that regularly issue letters of credit. Determination of the issuer’s observance of the standard practice is a matter of interpretation for the court. An issuer is not responsible for three specified actions.

If an undertaking constituting a letter of credit contains nondocumentary conditions, an issuer must disregard the nondocumentary conditions and treat them as if they were not stated. An issuer that has dishonored a presentation must return the documents or hold them at the disposal of, and send advice to that effect to, the presenter. Five conditions apply to an issuer that has honored a presentation as permitted or required by this division.

Section 5109 states that, if a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant the issuer must honor the presentation in specified instances.

If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds four conditions are satisfied.

Section 5110 provides that, if its presentation is honored, the beneficiary warrants two specified conditions.

Section 5111 specifies that, if an issuer wrongfully dishonors or repudiates its obligation to pay money under a letter of credit before presentation, the beneficiary, successor, or nominated person presenting on its own behalf may recover from the issuer the amount that is the subject of the dishonor or repudiation. If the issuer’s obligation under the letter of credit is not for the payment of money, the claimant may obtain specific performance or, at the claimant’s election, recover an amount equal to the value of performance from the issuer. In either case, the claimant may also recover incidental but not consequential damages.

If an issuer wrongfully dishonors a draft or demand presented under a letter of credit or honors a draft or demand in breach of its obligation to the applicant, the applicant may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach.

Section 5112 specifies, unless a letter of credit provides that it is transferable, the right of a beneficiary to draw or otherwise demand performance under a letter of credit may not be transferred. Even if a letter of credit provides that it is transferable, the issuer may refuse to recognize or carry out a transfer if either of two conditions is met.

Section 5113 states that a successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in the name of the beneficiary without disclosing its status as a successor. A successor of a beneficiary may consent to amendments, sign and present documents, and receive payment or other items of value in its own name as the disclosed successor of the beneficiary.

An issuer is required to recognize a disclosed successor of a beneficiary as beneficiary in full substitution for its predecessor upon compliance with the requirements for recognition by the issuer of a transfer of drawing rights by operation of law under the standard practice or, in the absence of a practice, compliance with other reasonable procedures sufficient to protect the issuer. Also, an issuer is not obliged to determine whether a purported successor is a successor of a beneficiary or whether the signature of a purported successor is genuine or authorized.

Section 5114 defines the term “proceeds of a letter of credit.” A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit. An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.

In addition, an issuer or nominated person does not have any obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor. Also, rights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds.

Section 5115 provides that an action to enforce a right or obligation arising under this article must be commenced within one year after the expiration date of the relevant letter of credit or one year after the cause of action accrues, whichever occurs later. A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach.

Section 5116 states that the liability of an issuer, nominated person, or adviser for action or omission is governed by the law of the jurisdiction chosen by an agreement in the form of a record signed by the affected parties or by a provision in the person’s letter of credit, confirmation, or other undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction.

For the purpose of jurisdiction, choice of law, and recognition of interbranch letters of credit, but not enforcement of a judgment, all branches of a bank are considered separate juridical entities and a bank is considered to be located at the place where its relevant branch is considered to be located existing law. A branch of a bank is considered to be located at the address indicated in the branch’s undertaking. If more than one address is indicated, the branch is considered to be located at the address from which the undertaking was issued.

Section 5117 provides that an issuer that honors a beneficiary’s presentation is subrogated to the rights of the beneficiary to the same extent as if the issuer were a secondary obligor of the underlying obligation owed to the beneficiary and of the applicant to the same extent as if the issuer were the secondary obligor of the underlying obligation owed to the applicant. An applicant that reimburses an issuer is subrogated to the rights of the issuer against any beneficiary, presenter, or nominated person to the same extent as if the applicant were the secondary obligor of the obligations owed to the issuer and has the rights of subrogation of the issuer to the rights of the beneficiary.

In addition, a nominated person who pays or gives value against a draft or demand presented under a letter of credit is subrogated to the rights of three specified individuals. The rights of subrogation do not arise until the issuer honors the letter of credit or otherwise pays and rights do not arise until the nominated person pays or otherwise gives value. Until then, the issuer, nominated person, and the applicant do not derive under this section present or prospective rights forming the basis of a claim, defense, or excuse.

Section 5118 says that an issuer or nominated person has a security interest in a document presented under a letter of credit to the extent that the issuer or nominated person honors or gives value for the presentation. So long as an issuer or nominated person has not been reimbursed or has not otherwise recovered the value given with respect to a security interest in a document, the security interest continues and is subject to three specified conditions.