AB1036: Bill Text

Under current law, a beneficiary may not transfer its right to demand performance under a letter of credit, unless the letter of credit provides that it is transferrable. This bill retains this restriction on a beneficiary's transfer of the right to demand performance under a letter of credit. Furthermore, under this bill, even if the letter of credit is transferrable, the letter of credit may impose conditions of transfer or the issuer may impose reasonable requirements consistent with the standard practice of financial institutions that deal in letters of credit. Except for requiring a beneficiary to comply with applicable law, this bill does not specify the conditions or requirements a beneficiary must fulfill in order to transfer its rights to demand payment.

Transfer of beneficiary's rights by operation of law

Under this bill, a successor beneficiary may consent to amendments, sign and present documents, and receive payment under a letter of credit, either in its own name as a successor or in the name of the original beneficiary. However, if the successor discloses its status as a successor beneficiary, the issuer generally may require the successor to meet certain requirements consistent with the standard practices of financial institutions that deal in letters of credit. For example, the issuer may require the successor beneficiary to present a certificate of merger or certificate of appointment as bankruptcy trustee before the issuer will recognize the transfer. Furthermore, any confirmer or nominated person may decline to recognize the presentation required by the issuer. Current law does not contain provisions specifically regarding transfer of a beneficiary's rights by operation of law.

Assignment of proceeds of letter of credit

Under current law, a beneficiary may assign its right to receive payment under a letter of credit, as long as the beneficiary delivers the letter of credit or advice of the letter of credit to the assignee. The issuer may continue honoring demands for payment under the letter of credit until it receives adequate notification of the assignment. After receiving notification and in order to avoid double payment, the issuer may stop honoring demands until the assignee shows the issuer the letter of credit or advice.

This bill clarifies that the assignment of proceeds of a letter of credit is different from a transfer of the right to demand payment under a letter of credit. Unlike after a transfer, the beneficiary retains the right to demand payment under the letter of credit after an assignment. It is that payment, or a portion of it, that the beneficiary assigns to a third party. Also, under this bill, an issuer or nominated person may refuse to honor an assignment of proceeds until the issuer or nominated person consents to the assignment. However, an issuer or nominated person generally may not unreasonably withhold this consent. Furthermore, this bill clarifies that an assignee's rights are subordinate both to the rights of a transferee beneficiary and to the rights of a nominated person.

Scope of UCC, article 5, and choice of law

This bill restricts the potential scope of UCC, article 5, by clarifying that the article does not apply to a guaranty or surety agreement. Furthermore, unlike current law, this bill provides that an applicant and an issuer generally may agree to vary from the requirements of UCC, article 5, in establishing their obligations to one another, with certain exceptions. However, an issuer may not vary its obligations to an applicant simply by inserting a boilerplate disclaimer or limitation of remedy clause in the parties' agreement.

Under current law, the parties to a transaction under UCC, article 5, generally may agree which state's law applies when the transaction is reasonably related to both Wisconsin and another state or nation. If the parties make no agreement, then the laws of Wisconsin apply, as long as the transaction bears a reasonable relation to this state.

This bill expands the ability of parties to choose what law will apply, in certain circumstances. Under this bill, if the issue is the liability of a nominated person, issuer, or adviser, but not an applicant, the parties may choose the law of any state regardless of that state's relation to the transaction. If the parties do not agree, then the law of the jurisdiction where the issuer, nominated person, or adviser subject to the action is located applies. In addition, this bill allows for further development of commercial practices by providing that a rule of practice or custom that is incorporated into a letter of credit will govern the issue of a nominated person's, issuer's, or adviser's liability, if the rule or custom conflicts with certain provisions of UCC, article 5.

Subrogation

Current law is silent as to whether and when an applicant, issuer, or nominated person may assume the rights of another party to a letter of credit transaction in the event of breach. Because the letter of credit is independent of the underlying transaction between a buyer and a seller, some courts have held that this right of subrogation does not exist. This bill does not grant a right of subrogation. However, this bill clarifies that an applicant, issuer, or nominated person seeking subrogation has the right that would exist if the person seeking subrogation were a guarantor, surety, or other secondary obligor. Furthermore, this bill requires a party to perform under a letter of credit before it may assert a right of subrogation. Thus, the bill prevents a party from using subrogation to avoid the duty to honor a letter of credit.

Repealed statutes

This bill eliminates certain sections of Wisconsin's version of UCC, article 5, as obsolete or covered by other law. For example, this bill deletes the section currently dealing with notation letters of credit and allows the parties to a letter of credit to determine by contract whether they must follow requirements similar to those contained in that section. This bill also eliminates the current section on indemnity agreements in letter of credit transactions, leaving the parties to rely on existing contract and indemnity law. In addition, this bill eliminates the current section dealing with bank insolvency because insolvency issues are covered by other law.

Statute of limitations

Although the current UCC, article 5, is silent with regard to a statute of limitations for actions brought under that article, the general six year statute of limitations for breach of contract would likely apply. This bill shortens the statute of limitations by requiring a party to commence an action within one year after the later of the date the letter of credit expires or the date the breach occurs.

Other changes

This bill makes certain changes to definitions applicable to UCC, article 5, and to the formal requirements of a letter of credit. These changes generally validate current commercial practices and allow for further expansion of the use of letters of credit in commercial transactions. The bill does not affect current law regarding the security interests of issuers of letters of credit or nominated persons.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB1036, s. 1 Section 1. 401.105 (2) (bm) of the statutes is created to read:

AB1036,7,2 401.105 (2) (bm) Section 405.116 on letters of credit.

AB1036, s. 2 Section 2. 402.512 (1) (b) of the statutes is amended to read:

AB1036,7,5 402.512 (1) (b) Despite tender of the required documents the circumstances would justify injunction against honor under s. 405.114 405.109 (2).

AB1036, s. 3 Section 3. Chapter 405 of the statutes is repealed and recreated to read:

AB1036,7,9 Chapter 405 Uniform Commercial Code — Letters of Credit

AB1036,7,11 405.101 Short title. This chapter may be cited as uniform commercial code — letters of credit.

AB1036,7,12 405.102 Definitions. (1) In this chapter:

AB1036,7,15 (a) "Adviser" means a person who, at the request of the issuer, a confirmer, or another adviser, notifies, or requests another adviser to notify, the beneficiary that a letter of credit has been issued, confirmed, or amended.

AB1036,8,2 (b) "Applicant" means a person at whose request or for whose account a letter of credit is issued. The term includes a person who requests an issuer to issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.

AB1036,8,5 (c) "Beneficiary" means a person who under the terms of a letter of credit is entitled to have its complying presentation honored. The term includes a person to whom drawing rights have been transferred under a transferable letter of credit.

AB1036,8,8 (d) "Confirmer" means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another.

AB1036,8,11 (e) "Dishonor" of a letter of credit means failure timely to honor or to take an interim action, such as acceptance of a draft, that may be required by the letter of credit.

AB1036,8,17 (f) "Document" means a draft or other demand, document of title, investment security, certificate, invoice, or other record, statement, or representation of fact, law, right, or opinion that is presented in a written or other medium permitted by the letter of credit or, unless prohibited by the letter of credit, by the standard practice referred to in s. 405.108 (5) and that is capable of being examined for compliance with the terms and conditions of the letter of credit. A document may not be oral.

AB1036,8,18 (g) "Good faith" means honesty in fact in the conduct or transaction concerned.

AB1036,8,21 (h) "Honor" of a letter of credit means performance of the issuer's undertaking in the letter of credit to pay or deliver an item of value. Unless the letter of credit otherwise provides, honor occurs in any of the following circumstances:

AB1036,8,22 1. Upon payment.

AB1036,8,24 2. If the letter of credit provides for acceptance, upon acceptance of a draft and, at maturity, its payment.

AB1036,9,2 3. If the letter of credit provides for incurring a deferred obligation, upon incurring the obligation and, at maturity, its performance.

AB1036,9,5 (i) "Issuer" means a bank or other person that issues a letter of credit, but does not include an individual who makes an engagement for personal, family, or household purposes.

AB1036,9,10 (j) "Letter of credit" means a definite undertaking that satisfies the requirements of s. 405.104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.

AB1036,9,11 (k) "Nominated person" means a person whom the issuer:

AB1036,9,13 1. Designates or authorizes to pay, accept, negotiate, or otherwise give value under a letter of credit; and

AB1036,9,14 2. Undertakes by agreement or custom and practice to reimburse.

AB1036,9,16 (L) "Presentation" means delivery of a document to an issuer or nominated person for honor or giving of value under a letter of credit.

AB1036,9,18 (m) "Presenter" means a person making a presentation as or on behalf of a beneficiary or nominated person.

AB1036,9,20 (n) "Record" means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium, and is retrievable in perceivable form.

AB1036,9,25 (o) "Successor of a beneficiary" means a person who succeeds to substantially all of the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an administrator, executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator, and receiver.

AB1036,10,2 (2) Definitions in other chapters applying to this chapter and the sections in which they appear are:

AB1036,10,3 (a) "Accept" or "acceptance", s. 403.409.

AB1036,10,4 (b) "Value", ss. 403.303 and 404.211

AB1036,10,6 (3) Chapter 401 contains certain additional general definitions and principles of construction and interpretation applicable throughout this chapter.

AB1036,10,8 405.103 Scope. (1) This chapter applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.

AB1036,10,11 (2) The statement of a rule in this chapter 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 chapter.

AB1036,10,18 (3) With the exception of this subsection, subs. (1) and (4), ss. 405.102 (1) (i) and (j), 405.106 (4) and 405.114 (4), and except to the extent prohibited in ss. 401.102 (3) and 405.117 (4), the effect of this chapter may be varied by agreement or by a provision stated or incorporated by reference in an undertaking. A term in an agreement or undertaking generally excusing liability or generally limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this chapter.

AB1036,10,23 (4) Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.

AB1036,11,3 405.104 Formal requirements. A letter of credit, confirmation, advice, transfer, amendment, or cancellation may be issued in any form that is a record and is authenticated by any of the following methods:

AB1036,11,4 (1) A signature.

AB1036,11,6 (2) In accordance with the agreement of the parties or the standard practice referred to in s. 405.108 (5).

AB1036,11,8 405.105 Consideration. Consideration is not required to issue, amend, transfer, or cancel a letter of credit, advice, or confirmation.

AB1036,11,12 405.106 Issuance, amendment, cancellation, and duration. (1) 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 so provides.

AB1036,11,17 (2) After a letter of credit is issued, rights and obligations of a beneficiary, applicant, confirmer, and issuer are not affected by an amendment or cancellation to which that person has not consented except to the extent the letter of credit provides that it is revocable or that the issuer may amend or cancel the letter of credit without that consent.

AB1036,11,20 (3) If there is no stated expiration date or other provision that determines its duration, a letter of credit expires one year after its stated date of issuance or, if none is stated, after the date on which it is issued.

AB1036,11,22 (4) A letter of credit that states that it is perpetual expires 5 years after its stated date of issuance, or if none is stated, after the date on which it is issued.

AB1036,12,2 405.107 Confirmer, nominated person, and adviser. (1) 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.

AB1036,12,4 (2) A nominated person who is not a confirmer is not obligated to honor or otherwise give value for a presentation.

AB1036,12,11 (3) 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.

AB1036,12,17 (4) A person who notifies a transferee beneficiary of the terms of a letter of credit, confirmation, amendment, or advice has the rights and obligations of an adviser under sub. (3). The terms in the notice to the transferee beneficiary may differ from the terms in any notice to the transferor beneficiary to the extent permitted by the letter of credit, confirmation, amendment, or advice received by the person who so notifies.

AB1036,12,23 405.108 Issuer's rights and obligations. (1) Except as otherwise provided in s. 405.109, an issuer shall honor a presentation that, as determined by the standard practice referred to in sub. (5), appears on its face strictly to comply with the terms and conditions of the letter of credit. Except as otherwise provided in s. 405.113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply.

AB1036,13,3 (2) An issuer has a reasonable time after presentation, but not beyond the end of the 7th business day of the issuer after the day of its receipt of documents, to do any of the following:

AB1036,13,4 (a) To honor.

AB1036,13,6 (b) If the letter of credit provides for honor to be completed more than 7 business days after presentation, to accept a draft or incur a deferred obligation.

AB1036,13,7 (c) To give notice to the presenter of discrepancies in the presentation.

AB1036,13,10 (3) Except as otherwise provided in sub. (4), 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.

AB1036,13,14 (4) Failure to give the notice specified in sub. (2) 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 s. 405.109 (1) or expiration of the letter of credit before presentation.

AB1036,13,18 (5) An issuer shall observe standard practice of financial institutions that regularly issue letters of credit. Determination 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.

AB1036,13,19 (6) An issuer is not responsible for any of the following:

AB1036,13,21 (a) The performance or nonperformance of the underlying contract, arrangement, or transaction.

AB1036,13,22 (b) An act or omission of others.

AB1036,13,24 (c) Observance or knowledge of the usage of a particular trade other than the standard practice referred to in sub. (5).

AB1036,14,3 (7) If an undertaking constituting a letter of credit contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.

AB1036,14,5 (8) 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.

AB1036,14,7 (9) An issuer that has honored a presentation as permitted or required by this chapter:

AB1036,14,9 (a) Is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds;

AB1036,14,10 (b) Takes the documents free of claims of the beneficiary or presenter;

AB1036,14,12 (c) Is precluded from asserting a right of recourse on a draft under ss. 403.414 and 403.415;

AB1036,14,16 (d) Except as otherwise provided in ss. 405.110 and 405.117, 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 that are apparent on the face of the presentation; and

AB1036,14,19 (e) 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.

AB1036,14,23 405.109 Fraud and forgery. (1) 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: