Printable Format84-5-108. Issuer's rights and obligations. (a) Except as otherwise provided in K.S.A. 84-5-109, 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 K.S.A. 84-5-113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply.
(b) 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:
(1) To honor;
(2) if the letter of credit provides for honor to be completed more than seven business days after presentation, to accept a draft or incur a deferred obligation; or
(3) to give notice to the presenter of discrepancies in the presentation.
(c) Except as otherwise provided in subsection (d), an issuer is precluded from asserting as a basis for dishonor any discrepancy if timely notice is not given, or any discrepancy not stated in the notice if timely notice is given.
(d) Failure to give the notice specified in subsection (b) 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 as described in K.S.A. 84-5-109(a) or expiration of the letter of credit before presentation.
(e) An 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. The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.
(f) An issuer is not responsible for:
(1) The performance or nonperformance of the underlying contract, arrangement or transaction;
(2) an act or omission of others; or
(3) observance or knowledge of the usage of a particular trade other than the standard practice referred to in subsection (e).
(g) If an undertaking constituting a letter of credit under K.S.A. 84-5-102(a)(10) contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.
(h) An issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter.
(i) An issuer that has honored a presentation as permitted or required by this article:
(1) Is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds;
(2) takes the documents free of claims of the beneficiary or presenter;
(3) is precluded from asserting a right of recourse on a draft under K.S.A. 84-3-414 and 84-3-415, and amendments thereto;
(4) except as otherwise provided in K.S.A. 84-5-110 and 84-5-117, is precluded from restitution of money paid or other value given by mistake to the extent the mistake concerns discrepancies in the documents or tender which are apparent on the face of the presentation; and
(5) is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged.
History: L. 1996, ch. 202, § 8; July 1.
KANSAS COMMENT, 1996
This section is derived from some of the provisions of the former 84-5-109, 84-5-112, 84-5-114. In addition, the current subsections (c), (e), (f) and (g) of 84-5-108 are new and reinforce the independence principal and encourage reliance on the standard practice of financial institutions. The section is identical to the 1995 Official Text.
84-5-108 is the heart of Article 5, and the extensive Official Comment is worth study. The section deals with the rights and duties of the issuer and, therefore, also defines many of the rights and responsibilities of the beneficiary and the applicant. The section also controls the rights and duties of a confirmer because the confirmer has the rights and duties of the issuer (84-5-107).
Subsection (a) expressly adopts the standard of "strict compliance" with the terms of the letter of credit, as determined by industry standards (subsection (e)). Strict compliance refers to compliance with the face of the letter of credit, and not compliance with the underlying transaction, the basis of the independence principal that the obligations of the issuer of a letter of credit are almost entirely independent of the underlying transaction.
Subsection (e) requires the issuer to observe standard practice of the trade, and that is the standard of practice of "financial institutions that regularly issue letters of credit." Official Comment 8 indicates that this includes international practice as recognized by Uniform Customs and Practice, the rules of trade institutions and local and regional practices, unless these are varied by a specific agreement or a course of dealing. 84-1-205. These practices, and compliance with them, are questions of law to be determined by the court and not by a jury. The fifth paragraph of Official Comment 1 states the same standards used in determining unconscionability in 84-2-304 are to be used to determine the practice of the trade and compliance with it. The parties are free, however, to define which standard practices control in the letter of credit. 84-5-116(a).
Subsection (b) requires the issuer to honor or dishonor the letter, with a required notice of discrepancies, within a reasonable time, not to exceed seven business days. If the issuer does not act within a reasonable time, it is a dishonor. See the last paragraph of Official Comment 2. Note that under subsection (c), the issuer will be precluded from asserting any discrepancy (except fraud, forgery or expiration) if proper, timely notice of the discrepancy is not given. The beneficiary would then be entitled to the remedies specified in 84-5-111. A reasonable time is determined after an inspection of the letters and the documents is made and there is a determination of compliance or noncompliance. See Official Comment 4.
Subsection (c) sets forth the new general rule that the issuer is precluded from asserting any discrepancies as grounds for dishonor if it is not given in timely notice to the presenter. As a practical matter this will often have the result of leaving the issuer liable to the beneficiary. Subsection (d) limits the preclusion resulting from failure to give notice of the discrepancy in the case of fraud or forgery (84-5-109) or expiration of the letter of credit.
Subsection (f) and (g) are new and explicitly adopt the independence principal. Subsection (f) releases the issuer from any duty regarding the underlying transaction or external events. In addition, the only standard practice relevant in determining strict compliance is that determined under subsection (e). Therefore the issuer is to examine only the documentation which constitutes the presentation and the terms of the letter. Subsection (g) deals with conditions in the letter of credit. Documentary conditions in the letter are binding, but nondocumentary conditions in a letter of credit are to be ignored. This raises several fundamental questions. Initially, it must be determined whether the transaction has created a letter of credit under 84-5-102(10) or something else. If it is a letter of credit, the scope of the issuer's duty to the applicant must be determined. 84-5-103(c) permits the parties to vary the effect of Article 5, and the last sentence of that subsection would seem to allow an express reference to a nondocumentary condition. Some of these problems are discussed in Official Comment 9 to 84-5-108 and Official Comment 2 to 84-5-102.
Subsections (h) and (i) deal with the rights and duties of the issuer on dishonor or honor of a presentation. If the draft is dishonored, the documents are to be returned or held for the presenter, according to the agreement of the parties (84-5-103(c)) or according to the standard practice. To avoid preclusion under the terms of 84-5-108(b), the notice needs to include the discrepancies in the presentation. If the draft is honored, the issuer has the right to reimbursement from the applicant. The issuer takes the documents free of the claims of the beneficiary, but also loses any right of recourse on the draft under Article 3. If the documents are regular on their face, the issuer loses any right to restitution for mistaken honor. The issuer is also discharged on its duty to the beneficiary, unless the signature of the beneficiary was forged.
Revisor's Note:
Former section 84-5-108 was repealed by L. 1996, ch. 202, § 91 and the number reassigned to the current text.
CASE ANNOTATIONS
1. Bank must honor draft on letter of credit if documents submitted conform to requirements of letter of credit. Carter Petroleum Products, Inc. v. Brotherhood Bank & Trust Co., 33 Kan. App. 2d 62, 97 P.3d 505 (2004).