AB1036,1,4 1An Act to amend 402.512 (1) (b), 440.92 (3) (c) 3., 565.25 (5) (b) 3. and 707.49
2(4); to repeal and recreate chapter 405; and to create 401.105 (2) (bm) of the
3statutes; relating to: adopting revised Article 5 of the Uniform Commercial
4Code, concerning letters of credit.

Under current law, a letter of credit is a promise to pay certain amounts to a
third-party beneficiary upon presentation of certain documents required by the
letter of credit. A letter of credit typically facilitates dealings between a commercial
buyer and seller by involving the buyer's bank, which promises to pay specified
amounts to the seller or another beneficiary. Parties also frequently use a letter of
credit to facilitate an international transaction. For example, a domestic bank may
issue a letter of credit, substituting its credit for that of the buyer who is purchasing
goods from a seller in another country. A letter of credit, however, is not a guaranty
or surety agreement. Rather, a letter of credit is independent of the underlying sales
contract between a buyer and seller and generally must be honored regardless of the
performance of the underlying transaction.

Currently, Wisconsin's version of the Uniform Commercial Code (UCC), article
5, governs letters of credit. On November 13, 1995, the National Conference of
Commission on Uniform State Laws and the American Law Institute promulgated
changes to the UCC, article 5. This bill incorporates these changes and other updates
to the UCC into Wisconsin law.

Under current law, a bank other than the issuer of a letter of credit may act as
an intermediary between the issuer and the beneficiary of a letter of credit. For
example, in a commercial transaction, the buyer's bank may send a letter of credit
it has issued to a correspondent bank in the seller's location, rather than directly to
the seller. Under current law, the correspondent bank may then provide two types
of notice to the seller. The correspondent bank may act as a confirmer, independently
verifying that it will honor the letter of credit already issued by the buyer's bank or
that the issuer or a third party will honor the letter of credit. Otherwise, the
correspondent bank may act as an adviser, simply notifying the seller that the
buyer's bank has issued the letter of credit. This bill does not substantially change
the rights and duties of a confirmer or adviser. However, this bill clarifies that
persons other than banks may act as confirmers and advisers.

In addition, current law establishes a third level of involvement for a bank that
negotiates under a letter of credit. Often, a letter of credit is freely negotiable,
allowing the beneficiary to present the required documents to a third party and
authorizing the third party to pay out to the beneficiary under the terms of the letter
of credit. The issuer then reimburses this third party, if the documents presented are
in order. This bill further outlines this third level of involvement for persons the
issuer nominates to negotiate under a letter of credit. This bill provides that a
nominated person who is not a confirmer generally has no duty to a beneficiary of a
letter of credit and may generally refuse to receive the documents presented.

Current law provides different times at which the same letter of credit may
become effective as to the applicant and as to the beneficiary. For an applicant, a
letter of credit is effective when the letter of credit is sent to the applicant or when
the letter of credit or advice of its issuance is sent to the beneficiary. For a beneficiary,
the letter of credit is effective when the beneficiary receives the letter of credit or
advice of its issuance. As a result of these different effective dates, an issuer may
have different rights to modify a letter of credit depending upon whether the
modification effects the applicant or the beneficiary. This bill creates a single test
for when a letter of credit is effective by providing that a letter of credit generally
becomes enforceable when the issuer sends the letter to the beneficiary or to another
person the issuer authorizes to advise the beneficiary.

Under current law, a letter of credit may be revocable or irrevocable. A
revocable letter of credit generally may be amended by the issuer without notice. The
current statute provides no default rule, though, that applies if a letter of credit is
silent as to revocability. Federal courts interpreting similar statutes of other states
have held that a letter of credit that is silent as to revocability is irrevocable and,
therefore, may not be freely amended by the issuer. This bill codifies this holding into
the statutes.

Current law similarly provides no default rule regarding the term of a letter of
credit. This bill establishes a default rule by providing that, if a letter of credit
contains no stated duration, the letter of credit expires after one year. In addition,

under this bill, a letter of credit that states that the letter of credit is perpetual
expires after five years.