No.

703, Dockets 82-7679, 82-7681

Voest-Alpine Intern. v. Chase Manhattan Bank

No. 703, Dockets 82-7679, 82-7681. Otherwise, a court may unknowingly paint
broadly over the letter of credit's salient features
Argued January 13, 1983.
and compromise its reliability and fluidity.
681 Decided May 12, 1983. *681
BACKGROUND
Christopher F. Meatto, New York City (Andrew
Originally devised to function in international
Berger, Stanley T. Stairs, Breed, Stairs Berger,
trade, a letter of credit reduced the risk of
New York City, of counsel), for plaintiff-appellant,
nonpayment in cases where credit was extended to
cross-appellee.
strangers in distant places. Interposing a known
Andrew J. Connick, New York City (Eugene F. and solvent institution's (usually a bank's) credit
Farabaugh, Scott H. Wyner, Milbank, Tweed, for that of a foreign buyer in a sale of goods
Hadley McCloy, New York City, of counsel), for transaction accomplished this objective. See
defendant-appellee, cross-appellant. Joseph, Letters of Credit: The Developing
Concepts and Financing Functions, 94 Banking
Robert A. Jaffe, New York City (Thomas W. L.J. 816, 816-17 (1977) ( Letters of Credit:
Evans, Shari J. Levitan, Mudge, Rose, Guthrie Developing Concepts). A typical letter of credit
Alexander, New York City, of counsel), for third- transaction, as the case before us illustrates,
party defendant, cross-appellee. involves three separate and independent
Appeal from the United States District Court for relationships — an underlying sale of goods
the Southern District of New York. contract between buyer and seller, an agreement
between a bank and its customer (buyer) in which
Before FEINBERG, Chief Judge, CARDAMONE the bank undertakes to issue a letter of credit, and
and DAVIS_, Circuit Judges. the bank's resulting engagement to pay the
_ Honorable Oscar H. Davis, United States beneficiary (seller) providing that certain
Circuit Judge, United States Court of documents presented to the bank conform with the
Appeals for the Federal Circuit, sitting by terms and conditions of the credit issued on its
designation. customer's behalf. Significantly, the bank's
payment obligation to the beneficiary is primary,
682 *682
direct and completely independent of any claims
which may arise in the underlying sale of goods
CARDAMONE, Circuit Judge: transaction.
This appeal involves an interpretation of the law Several distinct features characterize letters of
applied to commercial letters of credit. When credit. By conditioning payment solely upon the
analyzing that law the unique characteristics of a terms set forth in the letter of credit, the
letter of credit must be kept firmly in mind. justifications for an issuing bank's refusal to honor

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 Voest-Alpine Intern. v. Chase Manhattan Bank 707 F.2d 680 (2d Cir. 1983)

the credit are severely restricted, thereby assuring Frustrations — Part 2, 94 Banking L.J. 493, 505-
the reliability of letters of credit as a payment 06 (1977). Viewed in this light it becomes clear
mechanism. Banks readily issue these instruments that the doctrine of strict compliance with the
because they are simple in form. Hence, they are terms of the letter of credit functions to protect the
convenient and economical for a customer (buyer) bank which carries the absolute obligation to pay
to obtain. Further, employing concepts which the beneficiary. Adherence to this rule ensures
underlie letters of credit in non-sale of goods 683 *683 that banks, dealing only in documents, will
transactions enables these devices to serve a be able to act quickly, enhancing the letter of
financing function, see Letters of Credit: credit's fluidity. Literal compliance with the credit
Developing Concepts at 818-19. And it is this therefore is also essential so as not to impose an
flexibility that makes letters of credit adaptable to obligation upon the bank that it did not undertake
a broad range of commercial uses. See id. at 820- and so as not to jeopardize the bank's right to
51; Note, Judicial Development of Letters of indemnity from its customer. Documents nearly
Credit Law: A Reappraisal, 66 Cornell L.Rev. the same as those required are not good enough.
144, 146-47 (1980) ( Judicial Development of See H. Harfield, Letters of Credit 51 (1979). See
Letters of Credit Law). generally Marino Industries v. Chase Manhattan
Bank, N.A., 686 F.2d 112, 114-15 (2d Cir. 1982);
Letters of credit evolved as a mercantile specialty
Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d
entirely separate from common law contract
461, 464-65 (2d Cir. 1970).
concepts and they must still be viewed as entities
unto themselves. Completely absorbed into the We note that there is a distinction between rights
English common law by the 1700s along with the obtained and obligations assumed under letter of
Law Merchant — of which it had become an credit concepts. While a party may not unilaterally
integral part by the year 1200 — 2 W. Holdsworth, alter its obligations, nothing in the purpose or
A History of English Law 570-72 (1922), letter of function of letters of credit forecloses the party
credit law found its way into American from giving up its rights.
jurisprudence where it flourishes today. Its origins
may be traced even more deeply into history. FACTS
There is evidence letters of credit were used by Metal Scrap Trading Corporation (MSTC) is an
bankers in Renaissance Europe, Imperial Rome, agency of the Indian government that had
ancient Greece, Phoenicia and even early Egypt. contracted to buy 7000 tons of scrap steel from
See Trimble, The Law Merchant and The Letter of Voest-Alpine International Corporation (Voest), a
Credit, 61 Harv.L.Rev. 981, 982-85 (1948). These trading subsidiary of an Austrian company. In late
simple instruments survived despite their nearly 1980 MSTC asked the Bank of Baroda to issue
3000-year-old lineage because of their inherent two letters of credit in the total amount of
reliability, convenience, economy and flexibility. $1,415,550 — one for $810,600 and the other
$604,950 — to Voest to assure payment for the
Since the great utility of letters of credit arises
sale. The credits were expressly made subject to
from the independent obligation of the issuing
the Uniform Customs and Practice for
bank, attempts to avoid payment premised on
Documentary Credits.
extrinsic considerations — contrary to the
instruments' formal documentary nature — tend to The parties originally contemplated that Chase
compromise their chief virtue of predictable Manhattan Bank, N.A. (Chase or Bank) would
reliability as a payment mechanism. See Judicial serve as an advising bank in the transaction. As
Development of Letters of Credit Law at 160; such, Chase was to review documents submitted
Justice, Letters of Credit: Expectations and by Voest in connection with its drafts for payment.

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 Voest-Alpine Intern. v. Chase Manhattan Bank 707 F.2d 680 (2d Cir. 1983)

Amendments to the letters of credit increased VOEST...." The Bank of Baroda apparently
Chase's responsibilities and changed its status to looked at the documents with more care than
that of a confirming bank, independently obligated Chase. It promptly advised Chase that the
on the credit to the extent of its confirmation. documents did not comply with the requirements
of the letters of credit, that it would therefore not
The contract between MSTC and Voest provided
honor the drafts, and that it would hold the
that Voest, as seller, would ship the scrap metal no
documents at Chase's disposal. When Voest
later than January 31, 1981. The terms and
presented the drafts for payment on July 30 Chase
conditions of the credits required proof of
684 refused to honor them. *684
shipment, evidenced by clean-on-board bills of
lading; certificates of inspection indicating date of Voest thereupon instituted the present suit. It
shipment; and weight certificates issued by an asserted that Chase waived the right to demand
independent inspector. Sometime between strict compliance with the terms of the credits and
February 2 and February 6 (beyond the January 31 therefore wrongfully dishonored the drafts. Voest
deadline), the cargo was partially loaded aboard further alleged that regardless of whether the
the M.V. ATRA at New Haven. Unfortunately, the documents conformed to the letters of credit
ATRA never set sail for India. A mutiny by the Chase was liable on the drafts because it accepted
ship's crew disabled the ship and rendered it them. Chase, in turn, served a third-party
unseaworthy. The scrap steel was later sold to complaint on the Bank of Baroda, alleging that
another buyer for slightly over a half million were Chase to be held liable for wrongfully
dollars, nearly a million dollars less than the dishonoring the drafts, the Bank of Baroda should
original contract price. be liable to Chase in the same amount. In granting
summary judgment against Voest the United States
On February 13, two days before the expiration
District Court for the Southern District of New
date of the credits, Voest presented three drafts
York (Duffy, J.), 545 F.Supp. 301, found that
with the required documentation to Chase. The
Chase had not waived compliance with the terms
documents contained what the district court
and conditions of the letters of credit and that the
termed "irreconcilable" inconsistencies. The bills
drafts had not been wrongfully dishonored. The
of lading indicating receipt on board of the scrap
district court also rejected Chase's affirmative
metal were signed and dated January 31 by the
defense that Voest committed fraud in presenting
captain of the ATRA. The weight and inspection
documents which contained such obvious
certificates accompanying the drafts revealed,
discrepancies. Voest has appealed from the order
however, that the cargo was loaded aboard the
insofar as it granted summary judgment against it
ATRA sometime between February 2 and
and Chase has cross-appealed from that part of the
February 6.
order which dismissed its third-party complaint
Despite this glaring discrepancy Chase advised the against the Bank of Baroda.
Bank of Baroda on February 25 that the drafts and
documents presented to it by Voest conformed to
DISCUSSION [16] I. Waiver
the terms and conditions set forth in the letters of Voest urges that summary judgment was
credit. At Voest's request (Chase having provided inappropriate because there were disputed factual
Voest with an advance copy of the advice it issues as to whether Chase accepted the
planned to forward to the Bank of Baroda), Chase documents submitted and, if so, thereby waived
added the following language: "PAYMENT OF any deficiencies in them. Chase contends that a
ABOVE-MENTIONED DRAFT ... WILL BE waiver analysis is inappropriate because the
MADE AT MATURITY ON JULY 30, 1981, TO defects in Voest's documentation were "incurable."

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 Voest-Alpine Intern. v. Chase Manhattan Bank 707 F.2d 680 (2d Cir. 1983)

In urging that such defects preclude any waiver on such a waiver merely jeopardizes a bank's right to
its part, Chase relies upon Flagship Cruises Ltd. v. reimbursement from its customer, in the case of an
New England Merchants National Bank of Boston, issuing bank, see Courtaulds North American, Inc.
569 F.2d 699 (1st Cir. 1978) and American v. North Carolina National Bank, 528 F.2d 802,
Employers Insurance Co. v. Pioneer Bank and 806 (4th Cir. 1975), or from the issuing bank, in
Trust Co., 538 F.Supp. 1354 (N.D.Ill. 1981). the case of a confirming bank. Id. at 886-87 n. 6.
These cases afford the Bank little comfort. In
Chase argues that Equibank is distinguishable
neither case was there any indication that the
because in that case the defects were arguably
issuing or confirming bank accepted defective or
curable while in the present case they are not.
untimely documents.
685 Chase contends that *685 incurability of defect
Two other cases including a decision of this Court defeats any possibility of waiver. We reject this
have indicated that the terms and conditions of a argument because it is totally at odds with the
letter of credit may be waived. In Marino concept of waiver, which is defined as the
Industries Corp. v. Chase Manhattan Bank, N.A., intentional relinquishment of a known right.
686 F.2d at 117, one of the questions raised was Whether or not a defect can be cured is irrelevant,
whether an official of Chase, with apparent for it is the right to demand an absence of defects
authority to act, had waived the expiration date of that the party is deemed to have relinquished.
a letter of credit. Since that issue had not been
Since a waiver by Chase of the inconsistencies in
resolved by the trial court the case was remanded
the documents is possible, we must determine
for further consideration. By remanding on the
whether Voest presented sufficient evidence
waiver issue, the Marino court impliedly approved
which, if believed, could establish a waiver. As
a waiver analysis even though it reaffirmed its
proof of waiver Voest relies most heavily on
adherence to the rule of strict compliance
deposition testimony by the Chase official who
expressed in Venizelos, S.A., 425 F.2d at 465.
inspected the documents that he "must have
Moreover, the Court apparently recognized that a
noticed" the discrepancy between the dates in the
confirming bank may waive the requirements
documents. Other evidence of waiver included: an
contained in the credit without approval of either
initialed approval of the documents by a Chase
the issuing bank or its customer who originally
official on the Voest letter which accompanied the
established the credit. Id. In the instant case Chase
presentation of the documents; a letter from Voest
could have waived the right to demand strict
to Bank of Baroda, allegedly co-authored by a
compliance without approval from either the Bank
Chase official, stating that the documents had been
of Baroda or MSTC.
accepted; the statement which appeared at the
In Chase Manhattan Bank v. Equibank, 550 F.2d bottom of Chase's advice to Bank of Baroda that
882 (3d Cir. 1977), Chase, as beneficiary of a payment of the draft would occur on July 30; and
letter of credit, contended that its untimely a deposition by a Voest official in which he quotes
presentation of documents resulted from an an unknown Chase employee as stating that Chase
agreement with the issuing bank (Equibank) to had accepted the drafts and that payment would
extend the time beyond that specified in the credit. definitely be forthcoming.
The Third Circuit held that the possibility of a
All parties seem to agree that New York law
waiver of the time requirement by Equibank
governs. To establish waiver under New York law
existed. The court stated that in such instances the
one must show that the party charged with waiver
"beneficiary bases his claim on the letter of credit
relinquished a right with both knowledge of the
as modified by the bank and acceptable to him."
existence of the right and an intention to relinquish
Equibank, 550 F.2d at 886. The court noted that

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 Voest-Alpine Intern. v. Chase Manhattan Bank 707 F.2d 680 (2d Cir. 1983)

it. See City of New York v. State of New York, 40 letters of credit may become less useful payment
N.Y.2d 659, 669, 389 N.Y.S.2d 332, 357 N.E.2d devices because of the increased risk of forfeiting
988 (1976); Werking v. Amity Estates, Inc., 2 the right to reimbursement from their customers
N.Y.2d 43, 52, 155 N.Y.S.2d 633, 137 N.E.2d 321 which banks would soon face. Nonetheless,
(1956), cert. denied, 353 U.S. 933, 77 S.Ct. 812, 1 because Voest offered evidence which, if believed
L.Ed.2d 756 (1957). There is little doubt that by the trier of fact, could establish the requisite
Voest sufficiently established Chase's knowledge intentional relinquishment of Chase's right to
of an existing right. Chase clearly had the right to insist on strict compliance, summary judgment
demand strict compliance with the specifications was inappropriately granted to Chase in this case.
required by the letters of credit, and since it is an
established commercial bank we may assume that II. Acceptance
it had constructive, if not actual, knowledge of that Having discussed Voest's claim that Chase waived
right, see Barry-Dorn, Inc. v. Texaco, Inc., No. 74 686 strict compliance, we turn to *686 Voest's
Civ. 5526 (S.D.N.Y. October 30, 1978) contention that Chase "accepted" the drafts drawn
(constructive knowledge of right sufficient), aff'd, under the letters of credit. The issue is specifically
607 F.2d 994 (2d Cir. 1979); Zeldman v. Mutual addressed by Uniform Commercial Code (U.C.C.)
Life Insurance Co. of New York, 269 A.D. 53, 53 § 3-410. This section states that acceptance is the
N.Y.S.2d 792 (1st Dep't 1945) (same). The drawee's signed engagement to honor the draft as
remaining question is whether that right had been presented and that it "must be written on the
intentionally relinquished. draft." The official comment acknowledges that §
3-410 was intended to eliminate "virtual"
The intention to relinquish a right may be
acceptances by written promise to accept a draft
established either as a matter of law or fact.
still to be drawn and "collateral" acceptances
Examples of the former include instances of
proved by separate writing. By requiring written
express declarations by a party or situations where
acceptance on the draft the U.C.C. impliedly
the party's undisputed acts or language are "so
eliminated oral acceptances as well. Id. The
inconsistent with his purpose to stand upon his
present record is silent as to whether Chase
rights as to leave no opportunity for a reasonable
actually accepted the drafts by proper notation on
inference to the contrary." Alsens American
them. Since this issue was not ruled on by the
Portland Cement Works v. Degnon Contracting
district court, it should be remanded for further
Co., 222 N.Y. 34, 37, 118 N.E. 210 (1917). More
consideration.
commonly, intention is proved through
declarations, acts and nonfeasance which permit III. Fraud
different inferences to be drawn and "do not Presentation of fraudulent documents to a bank by
directly, unmistakably or unequivocally establish a beneficiary subverts not only the purposes which
it." Id. In these instances intent is properly left to letters of credit are designed to serve in general,
the trier of fact. See id.; Sillman v. Twentieth but also the entire transaction at hand in particular.
Century Fox, 3 N.Y.2d 395, 403, 165 N.Y.S.2d Falsified documents are the same as no documents
498, 144 N.E.2d 387 (1957); see, e.g., Barry- at all. See Old Colony Trust Co. v. Lawyers' Title
Dorn, Inc. v. Texaco, Inc., supra. Trust Co., 297 F. 152, 158 (2d Cir.), cert. denied,
Claims by a beneficiary of a letter of credit that a 265 U.S. 585, 44 S.Ct. 459, 68 L.Ed. 1192 (1924);
bank has waived strict compliance with the terms Prutscher v. Fidelity International Bank, 502
of the credit should generally be viewed with a F.Supp. 535 (S.D.N.Y. 1980). We are not
somewhat wary eye. As noted earlier, if equitable persuaded upon the present record, as was the trial
waiver claims are treated too hospitably by courts, court, that Voest did not intend to deceive Chase

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 Voest-Alpine Intern. v. Chase Manhattan Bank 707 F.2d 680 (2d Cir. 1983)

when it submitted deliberately backdated the letters of credit. The Bank of Baroda, as the
documents falsely indicating compliance with the issuing bank, was entitled to strict compliance and
terms of the credits in order to have the documents there is no claim that it waived that right. Further,
accepted. Since Chase has raised a sufficient Chase itself has acknowledged that its cross-
question of fact regarding fraud, a trial of this appeal has been rendered academic in light of
issue is mandated. If it is found that fraud on the Voest's admission regarding the nonconformity of
part of Voest caused Chase to act, then Voest the documents.
would be estopped from claiming any benefit
accruing to it from its misconduct. CONCLUSION
This case must be remanded to determine the
IV. Chase's Cross-Appeal factual issues raised by the claims of waiver,
Finally, we affirm the judgment in favor of the acceptance and fraud. The order appealed from is
Bank of Baroda. All parties have acknowledged thus affirmed in part, reversed in part and
that the documents tendered Chase did not remanded for further proceedings in accordance
conform to the established terms and conditions of with this opinion.