ProQuip Limited v. Northmark Bank

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22-P-701 Appeals Court
PROQUIP LIMITED vs. NORTHMARK BANK.
No. 22-P-701.
Essex. March 8, 2023. – August 18, 2023.
Present: Massing, Hershfang, & D'Angelo, JJ.
Uniform Commercial Code, Letter of credit. Letter of Credit.
Contract, Letter of credit, Performance and breach.
Damages, Breach of contract. Practice, Civil, Summary
judgment.
Civil action commenced in the Superior Court Department on
November 3, 2021.
The case was heard by Kristen R. Buxton, J., on motions for
summary judgment.
Thomas N. O'Connor for the defendant.
Edward J. Denn for the plaintiff.
HERSHFANG, J. This case asks us to interpret a portion of
the Uniform Commercial Code -- Letters of Credit, G. L. c. 106,
§§ 5-101 et seq. "A standby letter of credit acts to assure a
seller that it will be promptly paid in the case of default by
the buyer, and is payable upon certification of the buyer's
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nonperformance of the underlying contract." E & H Partners v.
Broadway Nat'l Bank, 39 F. Supp. 2d 275, 280 (S.D.N.Y. 1998),
citing J.F. Dolan, Letters of Credit, Commercial and Standby
Credits ¶ 1.04 (rev. ed. 1996). "[T]he letter of credit serves
the basic purpose of providing an inexpensive means of assuring
payment in the course of a transaction to the party that
furnishes the goods or services. It does this by creating a
primary obligation on the part of the issuer of the letter of
credit to pay upon the party's compliance with the terms and
conditions enumerated in the letter, which usually calls for the
presentation of specified documents." Insurance Co. of N. Am.
v. Heritage Bank, N.A., 595 F.2d 171, 173 (3d Cir. 1979).
Here, we must determine whether, under G. L. c. 106, § 5-
108's "strict compliance" standard, an issuer of a letter of
credit must pay the beneficiary where the letter of credit
required presentment of "the original of and all amendments, if
any, to this Letter of Credit," and the beneficiary presented
the original letter of credit and a photocopy of its sole
amendment. We conclude that payment is not required in such
circumstances. We therefore reverse the allowance of summary
judgment for the plaintiff beneficiary and direct entry of
summary judgment in favor of the defendant bank.
Background. The plaintiff, ProQuip Limited (ProQuip), a
Scottish company, makes golf apparel. It entered into an
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agreement with Marblehead Weather Garments, LLC (MWG) under
which MWG would buy and resell the plaintiff's apparel. The
agreement required MWG to procure and provide a letter of credit
guaranteeing payment to ProQuip. From the defendant, Northmark
Bank (bank), MWG procured the standby letter of credit at issue
in this suit (LoC), which designated ProQuip as the beneficiary.
The LoC contained the following term: "Credit shall be
available with us by payment against presentation of . . . the
original of and all amendments, if any, to this Letter of Credit
for our endorsement." The LoC also stated that it was "subject
to the Uniform Customs and Practices for Documentary Credits
(2007 Revision), International Chamber of Commerce Publication
No. 600 [(UCP 600)] and the laws of the Commonwealth of
Massachusetts."
The LoC expired one year after its date of issue. Two days
before the expiration date, at the request of MWG, the bank
issued an amendment to the LoC, titled "Amendment 1," which
(1) extended the LoC by one year, and (2) added a provision for
its automatic extension, unless the bank notified ProQuip, in
writing, forty-five days before the expiration date that the LoC
would not be renewed. Amendment 1 specified, "All other terms
and conditions of the subject Letter of Credit No. 2011161
remain unchanged and are hereby ratified and confirmed."
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By the automatic renewal process set out in Amendment 1,
the LoC was renewed for many years until, in 2020, the bank
timely notified ProQuip that the LoC, as amended, would not be
renewed. Six days before the expiration date, ProQuip made a
demand for payment under the LoC. The demand was accompanied by
the original LoC. However, ProQuip did not present the original
of Amendment 1. Rather, it provided a copy of Amendment 1,
together with a document entitled, "Original Document Affidavit
and Indemnity," in which ProQuip's company secretary (1) averred
that a diligent search had failed to locate the original
Amendment 1, and (2) undertook to hold the bank harmless from an
enumerated list of potential liabilities relevant to
Amendment 1.1 The bank refused to honor the demand because
ProQuip "ha[d] not presented to [it] the original of Amendment 1
with [ProQuip's] Demand for Payment as required by the terms of
the subject Letter of Credit as amended." ProQuip commenced an
action in the Superior Court alleging breach of contract and
1 ProQuip averred that it "hereby defends, indemnifies and
holds harmless the Issuer, its successors, officers, directors,
employees, managing agents and assigns, of and from any and all
demands, claims, causes of action, liabilities, losses, cost or
damage, including, but not limited to, reasonable attorneys'
fees, arising out of, pertaining to, or in any manner connected
with or related to the First Amendment not arising from the
negligence or willful misconduct of the Issuer or any of its
officers, directors, owners, employees or agents."
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seeking declaratory judgment pursuant to G. L. c. 231A, §§ 1 et
seq.
On cross motions for summary judgment, the judge allowed
ProQuip's motion. In so doing, she applied rules of contract
interpretation and concluded that the LoC did not "clearly
require presentment of the original of Amendment 1 for payment."
After acknowledging that strict compliance was the applicable
standard under Massachusetts law, she reasoned that, in the
circumstances, there was "no risk that [the bank] will be
harmed" and that equity supported judgment in favor of ProQuip.
This appeal followed.
Discussion. We review the allowance of summary judgment de
novo to determine whether, "viewing the evidence in the light
most favorable to the nonmoving party, all material facts have
been established and the moving party is entitled to judgment as
a matter of law" (citation omitted). Casseus v. Eastern Bus
Co., 478 Mass. 786, 792 (2018). "When parties have filed cross
motions for summary judgment, 'we view the evidence in the light
most favorable to the party against whom summary judgment was
entered.'" Berry v. Commerce Ins. Co., 488 Mass. 633, 636
(2021), quoting Conservation Comm'n of Norton v. Pesa, 488 Mass.
325, 330 (2021).
A letter of credit is "a definite undertaking . . . by an
issuer to a beneficiary . . . to honor a documentary
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presentation by payment or delivery of an item of value." G. L.
c. 106, § 5-102 (a) (10). The statute requires, with an
exception not relevant here, that "an issuer shall honor a
presentation that, as determined by the standard practice
referred to in subsection (e), appears on its face strictly to
comply with the terms and conditions of the letter of credit.
Except as otherwise provided in section 5-113 and unless
otherwise agreed with the applicant, an issuer shall dishonor a
presentation that does not appear so to comply." G. L. c. 106,
§ 5-108 (a). Subsection (e) provides that "[a]n issuer shall
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." G. L. c. 106, § 5-108 (e).
By its terms, the LoC was also subject to UCP 600, which,
although not law, "is made applicable by agreement of the
parties to most letters of credit." Western Int'l Forest
Prods., Inc. v. Shinhan Bank, 860 F. Supp. 151, 153 (S.D.N.Y.
1994). Article 17(a) of UCP 600 states, "At least one original
of each document stipulated in the credit must be presented."
ProQuip's presentment included the original LoC, but only a
copy of Amendment 1. For payment, the LoC required presentment
of "the original of and all amendments, if any, to this Letter
of Credit for our endorsement." The language is not a paragon
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of clarity, and, were we to apply contract principles, it would
not be unreasonable to construe it as requiring presentment of
the original of the letter of credit, along with all amendments
(without specifying originals or copies).
In the circumstances, however, we reach the opposite
conclusion. "Letters of credit are unique commercial
instruments. . . . Traditional contract rules apply 'only to
the extent that contract principles do not interfere with the
unique nature of credits.'" Mutual Export Corp. v. Westpac
Banking Corp., 983 F.2d 420, 423 (2d Cir. 1993), citing J.F.
Dolan, Letters of Credit ¶ 2.02, at 2-5 (2d ed. 1991).2 "[T]he
letter of credit serves the basic purpose of providing an
inexpensive means of assuring payment in the course of a
transaction to the party that furnishes the goods or services."
Insurance Co. of N. Am., 595 F.2d at 173. "[E]ssential to the
2 Professor Dolan criticizes "the tendency of common-law
courts to weaken the strict law of letters of credit when there
is a perception that the operation of that law will yield an
unfair result. A desire to protect consumers and an awareness
of asymmetry in the negotiating strength of contracting parties
prompted that tradition in the law of contracts. Importing this
tradition into letter of credit law harms this credit device.
By relaxing strict rules of performance and introducing
equitable notions of good faith, unconscionability, and the
like, courts have substituted a continuum for a binary approach
and have rendered problematic the effort of reducing to express
terms the conditions of a contracting party's undertaking.
There appears to be general agreement in some situations that
these departures from strict contract rules are worth the cost."
J.F. Dolan, 1 Letters of Credit § 6.02 (2022).
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viability of this device is the certainty that it provides.
. . . If courts deviate from the rule of strict compliance and
insist in certain undefined situations that banks make payments
notwithstanding the fact that the beneficiary failed to comply
with the terms stipulated in the letter of credit, the certainty
that makes this device so attractive and useful may well be
undermined, with the result that banks may become reluctant to
assume the additional risks of litigation." Id. at 176.
The LoC is governed by Massachusetts law, the relevant
portion of which requires that an issuer "observe standard
practice of financial institutions that regularly issue letters
of credit." G. L. c. 106, § 5-108 (e). "Standard practice"
derives from Article 17(a) of UCP 600, which requires
presentment of an original of "each document stipulated in the
credit."3 See Western Int'l Forest Prods., Inc., 860 F. Supp. at
154 ("One manifestation of the strict compliance rule is the
long-standing practice among issuers to require original
documents unless the letter of credit stipulates otherwise").
The parties agreed that "the words 'copy' or 'copies' are not in
3 We are unpersuaded by ProQuip's argument that the bank was
required to submit UCP 600 in evidence. The UCP 600 was
referenced at the summary judgment hearing and ProQuip did not
make this argument or otherwise object. Where this argument was
not raised below, it is waived. See Carey v. New England Organ
Bank, 446 Mass. 270, 285 (2006) ("issue not raised or argued
below may not be argued for the first time on appeal" [citation
omitted]).
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the LoC or in Amendment No. 1." Thus, we analyze the propriety
of the defendant's dishonor through the lens of those cases in
which the letter of credit called for an original, but none was
presented. See e.g., LaBarge Pipe & Steel Co. v. First Bank,
550 F.3d 442, 451-452 (5th Cir. 2008) (where letter of credit
required presentment of "the original Irrevocable Letter of
Credit," facsimile copy was not sufficient to require draw);
Bisker v. Nationsbank, N.A., 686 A.2d 561, 563, 567 (D.C. Cir.
1996) (where letter of credit required that demand for payment
be accompanied by "[o]riginal of the promissory note," rejection
of presentment was appropriate when beneficiary presented copy);
Vanden Brul v. MidAmerican Bank & Trust Co., 820 F. Supp. 1311,
1314-1315 (D. Kan. 1993) (dishonor upheld where plaintiffs
presented photocopy of note but letter of credit called for
presentment of "the original promissory note"). We conclude,
therefore, that the LoC required presentment of the original
Amendment 1 and that ProQuip's presentment of a copy of
Amendment 1 did not strictly comply with the LoC's terms.
Our conclusion is bolstered by our review of the differing
versions of Amendment 1 provided by the parties. "The virtues
of letters of credit include their simplicity, reliability, and
predictability which arise from and depend on the limitation of
the issuer's duties to the ministerial application of a letter's
terms. Since an issuer serves a ministerial role, to require
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that an issuer determine the substantiality of any discrepancies
in document presentation is inconsistent with the issuer's
function." J.F. Dolan, 1 Letters of Credit § 4.08[3] (2022).
"When a court considers the compliance of documents, it must
remember that the document examiner sits at a desk with the
credit, the documents, and a copy of the applicable UCP. The
examiner does not have files of prior transactions, may not know
the applicant or beneficiary, probably knows nothing of their
industry, and does not have a lawyer at his or her elbow." Id.
at § 6.02. While the version offered by the bank included three
handwritten signatures at the bottom of each page of the
document, the photocopy presented by ProQuip included just one.
Thus, the two versions differed from one another, further
emphasizing why the original was required. It was beyond the
scope of the bank's ministerial role to determine that the
variance between the copy presented and the original was
"unimportant" such that the presentment strictly complied with
the requirement for originals.
The case urged upon us by ProQuip, Ladenburg Thalmann & Co.
v. Signature Bank, 128 A.D.3d 36 (N.Y. 2015), does not dictate a
contrary result. In Ladenburg Thalmann & Co., the court held
that the plaintiff's failure to present an original amendment to
the letter of credit did not justify the defendant's dishonor.
Id. at 45-46. In that case, however, the missing amendment had
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been superseded by later amendments and the beneficiary had
presented those originals. Id. at 39. "Even under the strict
compliance standard," the court concluded that "some variances
may be allowable, if they do not 'call upon the reviewing bank
officer to exercise discretion on a commercial matter, [but]
only to exercise discretion as a banker,' or if the errors '[do]
not compel an inquiry into the underlying commercial
transaction.'" Id. at 43, quoting E & H Partners, 39
F. Supp. 2d at 284. Here, by contrast, the variance concerned
the way Amendment 1, which embodied the current terms of the
LoC, was presented. As the LoC required presentment of "the
original of and all amendments, if any, to this Letter of
Credit," and as standard practice, incorporated by the LoC,
requires originals, we are persuaded that, in these
circumstances, the variance was not minor and the defendant
permissibly dishonored payment. Accordingly, we reverse the
judgment in favor of ProQuip and remand the case for entry of
judgment in favor of the defendant.
So ordered.