Anticipatory Repudiation of Letters of Credit

~ Keith A. Rowley, 2003. To be published at 56 SMU L. REV. (2003). Please do not cite or quote this draft without the author’s permission.

† Associate Professor of Law, William S. Boyd School of Law, University of Nevada Las Vegas. J.D., University of Texas School of Law

1 A letter of credit is “a definite undertaking … 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.” U.C.C. § 5-102(10) (1995)

2 Letters of credit facilitate commercial transactions “by providing the credit of a third party, usually a bank, as an independent guarantee of payment to protect the parties. The certainty of payment … encourages hesitant parties to enter into transactions, by providing them with a secure source of credit.” AmSouth Bank, N.A. v. Martin, 559 So. 2d 1058, 1062 (Ala. 1990) (paraphrasing Christopher Leon, Letters of Credit: A Primer, 45 MD. L. REV. 432, 432 (1986)).

3 A number of sources date the origins of letters of credit to the 1100s. See, e.g., Republic National Bank, 578 S.W.2d at 113

4 Other sources date the origins of letters of credit much earlier. See Moog World Trade Corp. v. Bancomer, S.A., 90 F.3d 1382, 1385 (8th Cir. 1996) (“Letters of credit have been used for nearly 3000 years.”)

given time, hundreds of billions of dollars worth of commercial5 and standby6 letters of credit are outstanding.7 In the words of a recent opinion by the New York Court of Appeals, “The importance of letters of credit in international trade and financing cannot be overstated.”8

In a typical commercial transaction, a buyer and a seller agree that the buyer will purchase goods or services from the seller, for cash or on credit, and that the seller will provide the buyer with those goods or services in exchange for the buyer’s payment or promise to pay. Each party undertakes an obligation to the other in expectation of a benefit to be conferred by the other. These obligations are mutually dependent, such that one party’s failure to perform may excuse the other party from performing.9

Letter of credit transactions introduce a third party – the letter of credit “issuer”10 – and two additional undertakings – or, as one leading commentator describes them,

5 See infra notes 39-42 and accompanying text.

6 See infra notes 43-46 and accompanying text.

7 See James E. Byrne, Overview of Letter of Credit Law & Practice in 2000, in 2001 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 3 n.1 (James E. Byrne & Christopher S. Byrnes eds. 2001) (estimating standby and commercial letters of credit outstanding by U.S. issuers and by non-U.S. issuers to U.S. beneficiaries in the third quarter of 2000 in excess of $700 billion)

8 Nissho Iwai Europe PLC v. Korea First Bank, 782 N.E.2d 55, 58 n.1 (N.Y. 2002).

9 See, e.g., U.C.C. § 2-703(a) & (f) (1989) (empowering the seller, inter alia, to withhold delivery of goods or to cancel the contract if the buyer fails to perform as promised)

10 Article 5 defines an “issuer” as “a bank or other person that issues a letter of credit, … not includ[ing] an individual who makes an engagement for personal, family, or household purposes.” U.C.C. § 5-102(a)(9) (1995)

“relationships”11 – to the transaction. The first undertaking in a letter of credit transaction is the underlying contract between the buyer and the seller, which is now conditioned on the buyer arranging for a letter of credit on the seller’s behalf.12 The second undertaking is between the buyer (in this context, the “applicant”13) and the letter of credit issuer, in which the issuer agrees to issue the letter of credit in favor of the seller (in this context, the “beneficiary”14) in exchange for the applicant’s agreement to reimburse the issuer for any amounts the issuer disburses to the beneficiary on the letter of credit.15 The third undertaking, the letter of credit itself, is the issuer’s promise to pay the beneficiary when the beneficiary presents certain documents16 or demands payment.17 This third

11 See 1 JOHN F. DOLAN, THE LAW OF LETTERS OF CREDIT: COMMERCIAL AND STANDBY CREDITS

2.01 (rev. ed. 2003).

12 See Gerald T. McLaughlin, Exploring Boundaries: A Legal and Structural Analysis of the Independence Principle of Letter of Credit Law, 119 BANKING L.J. 501, 507 (2002).

If the letter of credit is a commercial letter of credit, the underlying contract is for the sale of goods. See infra text accompanying notes 39-42. If the letter of credit is a standby letter of credit, see infra text accompanying notes 43-46, the underlying contract may be a promissory note or similar obligation to pay money between a borrower and a lender, see, e.g., Republic Nat’l Bank v. Northwest Nat’l Bank, 578 S.W.2d 109 (Tex. 1979) (involving a standby letter of credit issued against proof of default on a promissory note), or a contract for the purchase and sale of goods or services between a buyer and a seller, see, e.g., B.E.I. Int’l, Inc. v. Thai Military Bank, 978 F.2d 440 (8th Cir. 1992) (involving a standby letter of credit issued to “counterguarantee” the applicant’s obligation to produce and deliver weapon systems to the beneficiary of the standby letter).

13 Article 5 defines an “applicant” to be someone “at whose request or for whose account a letter of credit is issued,” including someone “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.” U.C.C. § 5-102(a)(2)

14 Article 5 defines “beneficiary” to be “a person who under the terms of a letter of credit is entitled to have its complying presentation honored,” including “a person to whom drawing rights have been transferred under a transferable letter of credit.” U.C.C. § 5-102(a)(3)

15 See McLaughlin, supra note 12, at 507-08. Issuers often require applicants to pledge collateral to secure their promise to reimburse the issuer if the issuer has to honor the letter of credit. See 1 DOLAN, supra note 11, at ¶ 9.02[1].

16 See McCormack v. Citibank, N.A., 100 F.3d 532, 537 (8th Cir. 1996) (“To draw on a documentary letter of credit, the beneficiary of that credit must present the issuing bank with whatever

undertaking is independent of the other two.18 As a result, an issuer normally19 cannot refuse to honor a beneficiary’s conforming presentation20 (or, in the case of a “clean”

documentation that is called for by the express terms of the credit.”)

17 See McCormack, 100 F.3d at 537-38 (“[T]o draw on a clean letter of credit, the beneficiary must merely demand payment

18

Rights and obligations of an issuer to a beneficiary … 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.

U.C.C. § 5-103(d)

“Since by its very nature a letter of credit is … independent of the underlying transaction, it necessarily follows that there is no legal distinction between a letter of credit issued before, after, or concomitantly with the consummation of the underlying transaction.” Republic National Bank, 578 S.W.2d at 116.

19 Article 5 recognizes two limited exceptions to the general rule prohibiting an issuer from refusing to honor a conforming presentation based on some infirmity in the beneficiary’s performance of its contract with the applicant. Section 5-109(a)(2) permits an issuer to dishonor a facially conforming presentation if the issuer has a good faith belief that honoring the presentation “would facilitate a material fraud by the beneficiary on the issuer or applicant.” U.C.C. § 5-109(a)(2)

The UCP500 are silent on the issue of fraud

20 Article 5 defines “presentation” as “delivery of a document to an issuer or nominated person for honor or giving of value under a letter of credit.” U.C.C. § 5-102(12)

letter of credit, a beneficiary’s draft or demand for payment21) based on some infirmity in the beneficiary’s performance of its contract with the applicant22 or in the applicant’s performance of its contract with the issuer.23

21 See supra note 17.

22 See, e.g., Provident Bank of Md. v. Travelers Prop. Cas. Corp., 236 F.3d 138, 147 (4th Cir. 2000)

The rule of the independence of the letter of credit from the underlying transaction is based on two policy considerations. First, the issuing bank can assume no liability for the performance of the underlying contract because it has no control over making the underlying contract or over selection of the beneficiary. Second, the letter of credit would lose its commercial vitality if, before honoring drafts, the issuing bank were obliged to look beyond the terms of the letter of credit to the underlying contractual controversy between its customer and the beneficiary. Whatever the bank pays upon the letter of credit it can recover from its customer ordinarily. If the customer feels that the beneficiary was not entitled to that amount, then these parties can litigate under their contract. In fact, one of the main purposes of the letter of credit is to place the seller in this stronger position of having the funds while the parties litigate their underlying contract disputes.

Where the issuer of the letter of credit dishonors a proper demand for payment, … and therefore further presentation of documents is excused, it is consistent with the independence principle to regard … as beyond the purview of the bank’s inquiry rights … any proof that the beneficiary suffered a loss on the underlying agreement. If the documents called for by the letter of credit had been produced, the bank would have no right to inquire into plaintiff’s actual costs of production or profit margins. When the issuing bank breaches the credit promise, there is no reason to enlarge the bank’s entitlement to challenge the beneficiary. The way to make the beneficiary whole and provide it with the full benefit of the credit promise is to require the issuer to pay damages in the face amount of the credit balance. Any other interpretation as to damages would defeat the basic purpose of such a letter of credit of providing a means of assuring payment cheaply by eliminating the need for, or the power of, the issuer to police the underlying transaction. This approach preserves the efficacy of the letter of credit in commercial transactions to provide the seller with a means of obtaining prompt payment.

Ross Bicycles, Inc. v. Citibank, N.A., 613 N.Y.S.2d 538, 540-41 (N.Y. Sup. Ct. 1994) (citations and parentheticals omitted).

23 Thus, for example:

From the point of view of the beneficiaries, AMC and Liberty Mutual, the way that Bank One settled its accounts with Bergner was of no importance, either legal or practical. As soon as Bank One issued the irrevocable letters in favor of each beneficiary (for a fee, as Bergner reminds us), it assumed the obligation of paying upon a draft supported by

The issuer’s agreement to pay the beneficiary out of the issuer’s own funds – with or without the intervention of a confirming, negotiating, or paying bank24 – is the key to the letter of credit. Indeed, the letter of credit’s “effectiveness … as a commercial device depends upon prompt and inevitable honor of the beneficiary’s conforming

documents that conformed to the terms of the credit. Thus, when AMC presented its draft with conforming documents to Bank One on July 19, 1991, Bank One was required to pay AMC the full $31,207,000 that the letter of credit then provided, whether or not Bergner gave it a red cent. If Bergner did not comply with its own agreement with Bank One, under which it was required to give the bank the amount of the draw either before or at the time of the payment to the beneficiary, then Bank One would have had a perfectly good contract action against Bergner, but it would have had no defense against honoring the beneficiary’s demand.

In re P.A. Bergner & Co., 140 F.3d 1111, 1114-15 (7th Cir. 1998)

24 A letter of credit transaction may involve more parties and more undertakings than those described thus far. Article 5 also recognizes “advisers,” who “at the request of the issuer … notify the beneficiary that a letter of credit has been issued,” U.C.C. § 5-102(a)(1)

(i) designates or authorizes to pay, accept, negotiate, or otherwise give value under the letter of credit and

(ii) undertakes by agreement or custom and practice to reimburse,” U.C.C. § 5-102(a)(11)

A negotiating bank, often appointed simply to expedite payment, is authorized, at its option, to act as a confirming bank and is entitled to reimbursement plus a fee from the issuer when it does so….

A paying bank is a bank used as a conduit to get the issuing bank’s funds into the hands of the beneficiary. A paying bank may be designated by an issuer who wishes to honor the letter of credit but lacks the type or amount of currency that honoring the letter of credit requires…. The paying bank disburses the funds to the beneficiary, then diminishes the issuing bank’s account held with the paying bank accordingly.

George P. Graham, Note, International Commercial Letters of Credit and Choice of Law: So Whose Law Should Apply Anyway?, 47 WAYNE L. REV. 201, 209-10 (2001) (footnotes omitted). See U.C.C. § 5-102(a)(11) & cmt. 7

presentation.”25 So, what happens when an issuer derails the inevitability of prompt honor by clearly and unconditionally manifesting its intent not to honor, or its inability to honor, a conforming presentation or draft when and as promised?

I. The Conceptual Background

Part II of this article will explore how the doctrine of anticipatory repudiation applies to letters of credit. First, however, it may be helpful to review key aspects of the law of letters of credit and of the doctrine of anticipatory repudiation.26

A. Governing Law

Subject to an enforceable agreement to the contrary,27 Article 5 of the Uniform Commercial Code28 governs letters of credit issued in the United States,29 as well as, in many cases, letters of credit issued outside the United States in favor of a beneficiary who

25 1 DOLAN, supra note 11, at ¶ 9.02[1].

26 For more thorough discussions of letter of credit law, see, e.g., 1 & 2 DOLAN, supra note 11

CREDIT (3d ed. 2000 & Supp. 2002). For a more thorough discussion of the doctrine of anticipatory repudiation not restricted to the context of letters of credit, see Keith A. Rowley, A Brief History of Anticipatory Repudiation in American Contract Law, 69 U. CIN. L. REV. 565 (2001), and the sources cited therein.

27 See U.C.C. § 5-116(a) (1995) (“The liability of an issuer … is governed by the law of the jurisdiction chosen by an agreement … authenticated by the affected parties … or by a provision in the[ir] letter of credit, confirmation, or other undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction.”)

28 U.C.C. § 5-101 et seq.

29 See id. § 5-116(b) (“Unless [§ 5-116(a)] applies, the liability of an issuer … is governed by the law of the jurisdiction in which the [issuer] is located….”)

resides in the United States30 and letters of credit issued outside the United States in which the parties expressly choose to have their agreement governed by Article 5.31 The version of Article 5 currently in effect in every state except Wisconsin32 explicitly

30 For letters of credit issued outside of the United States in favor of American beneficiaries that are not subject to the Convention and in which the parties have not explicitly chosen their governing law, American courts have tended to apply the law of the issuer’s residence in cases in which the court has concluded that payment is excused and the law of the beneficiary’s residence – i.e., Article 5 – in cases in which the court has concluded that payment is not excused. See Graham, supra note 24, at 213-22, and cases cited therein.

31 See U.C.C. § 5-116(a).

The United Nations Convention on Independent Guarantees and Stand-By Letters of Credit, Dec. 11, 1995, 1995 U.N.Y.B. 1358, available at http://www.uncitral.org/english/texts/payments/guarantees.htm (last visited June 30, 2003) [“U.N. Convention”], takes a similar approach to the law governing international standby letters of credit. Subject to an enforceable agreement to the contrary, see id. arts. 1(1), 1(3) & 21(a), the Convention governs a letter of credit if the applicant’s, beneficiary’s, issuer’s, and confirming bank’s (if any) most “relevant” places of business or residences are in at least two different countries, see id. art. 4, and either the issuer is located in a country that is a party to the Convention, see id. art. 1(a), or “the rules of private international law” lead to applying the law of a country that is a party to the Convention, see id. art. 1(b). The Convention also governs a letter of credit if the parties, notwithstanding their residence, have expressly chosen the Convention to govern the undertaking. See id. arts. 1(2) & 21. See generally Richard F. Dole, Jr., The Essence of a Letter of Credit Under Revised U.C. C. Article 5: Permissible and Impermissible Nondocumentary Conditions Afecting Honor, 35 HOUS. L. REV. 1079, 1089-90 (1998). As of June 26, 2003, only Belarus, Ecuador, El Salvador, Kuwait, Panama, and Tunisia had ratified the Convention. See U.N. Commission on International Trade Law (UNCITRAL), Status of Conventions and Model Laws: United Nations Convention on Independent Guarantees and Stand-By Letters of Credit, available at http://www.uncitral.org/english/status/status-e.htm (last visited June 30, 2003). The United States has signed the Convention, but has not yet ratified it. See id. For an overview of the Convention, see Filip De Ly, The UN Convention on Independent Guarantees and Stand-By Letters of Credit, 33 INT’L LAW. 831 (1999).

32 ALA. CODE § 7-5-101 et seq. (1997)

recognizes the ability of letter of credit parties to expressly incorporate the current

Uniform Customs and Practice for Documentary Credits (“UCP”),33 promulgated by the

International Chamber of Commerce.34 If the parties expressly incorporate the UCP into

01 et seq. (1999)

Wisconsin’s Article 5 is still based on the 1962 version of uniform Article 5. See WIS. STAT. ANN. § 405.101 et seq. (West 1995)

33 UCP500, supra note 1. UCP500 replaced the 1983 revisions to the UCP. INTERNATIONAL CHAMBER OF COMMERCE, PUB. NO. 400, UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1983) [“UCP400”]. UCP400 replaced the 1974 revision. INTERNATIONAL CHAMBER OF COMMERCE, PUB. NO. 290, UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1974) [“UCP290”]. The ICC issued prior versions in 1962, 1951, and 1933. INTERNATIONAL CHAMBER OF COMMERCE, PUB. NO. 222, UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1962)

For an overview of the UCP500 and a discussion of their interaction with former Article 5 and Revised Article 5, see 6B WILLIAM D. HAWKLAND & FREDERICK H. MILLER, UNIFORM COMMERCIAL CODE SERIES [Rev.] § 5-103:3 (1999 & Supp. 2002)

34 See U.C.C. § 5-116(c) (1995)

While the version of Article 5 still in effect in Wisconsin does not explicitly address the UCP, it does recognize that Article 5 is not the exclusive source of rules governing letters of credit, see WIS. STAT. ANN. § 405.102(3), and that the parties may vary most provisions of Article 5 by agreement, see id.

their letter of credit (which most do35), then the UCP will govern the letter of credit to the extent the UCP and Article 5 conflict, except with respect to those Article 5 protections the parties may not agree to vary.36 Even if the parties do not explicitly incorporate the

§ 401.102(3). Decisions applying Wisconsin’s version of Article 5 suggest that courts consider the UCP to be a valid modification if incorporated into the letter of credit by reference. See, e.g., In re P.A. Bergner & Co., 140 F.3d 1111, 1114-15 (7th Cir. 1998) (holding that a irrevocable standby letter of credit that, inter alia, specified it was subject to UCP400 was “governed by” UCP400) (applying Wisconsin law)

Because the UCP do not contain a choice of law provision – other than Article 1, which states only that the UCP will apply if the parties expressly incorporate them into their letter of credit, see UCP500, supra note 1, art. 1 – parties cannot “opt out” of Article 5 by “opting in” to the UCP. See U.C.C. § 5-103 cmt. 2 (“Since incorporation of the UCP avoids only ‘conflicting’ Article 5 rules, parties who do not wish to be governed by the nonconflicting provisions of Article 5 must normally either adopt the law of a jurisdiction other than a State of the United States or state explicitly the rule that is to govern.”). See generally Graham, supra note 24, at 213.

35 See Prefatory Note to U.C.C. Revised Article 5 (1995) (recognizing that the UCP are “used in most international letters of credit and in many domestic letters of credit” and that the UCP are “usually incorporated into letters of credit, particularly international letters of credit”)

36

Except as otherwise provided in this subsection, the liability of an issuer … is governed by any rules of custom or practice, such as the [UCP], to which the letter of credit … or other undertaking is expressly made subject. If (i) this chapter would govern the liability of an issuer … under [§ 5-116(a) or (b)], (ii) the relevant undertaking incorporates [the UCP], and (iii) there is conflict between [Article 5] and th[e UCP] as applied to that undertaking, … except to the extent of any conflict with [U.C.C. §§ 5-102(a)(9)-(10), 5-103(a), (c) & (d), 5-106(d), 5-114(d) & 5-117(d)].

U.C.C. § 5-116(c)

Courts should not assume a conflict between Revised Article 5 and the UCP in the absence of an express one. See U.C.C. § 5-103 cmt. 2.

For a discussion of Revised Article 5’s nonvariable provisions, see Sandra Stern, Varying Article 5 of the UCC by Agreement, 114 BANKING L.J. 516, 517-21 (1997).

UCP, courts will look to the UCP for evidence of custom and usage.37 And, where the issue presented is not resolved by applying Article 5 and the UCP (if the latter are incorporated by agreement of the parties), or by reference to the UCP (if they are not incorporated by agreement of the parties), courts will turn to common law.38

37 See, e.g., Mantua Manufacturing, 661 N.E.2d at 166 (stating that, even if the UCP were not expressly incorporated by the parties, the UCP are “a guide to trade usage in letter of credit transactions”).

Because the International Chamber of Commerce drafted the UCP500 primarily with commercial letters of credit in mind, and because some have perceived the UCP not to apply well to standby letters of credit, see, e.g., James E. Byrne, Why the ISP Should be Used for Standbys, DOCUMENTARY CREDIT WORLD, Jan. 2000, at 23, the Institute of International Banking Law and Practice, Inc. drafted, and the International Chamber of Commerce has endorsed, the 1998 International Standby Practices (“ISP98”). ISP98, supra note 10. For an authoritative analysis of ISP98, see JAMES E. BYRNE, THE OFFICIAL COMMENTARY ON THE INTERNATIONAL STANDBY PRACTICES (James G. Barnes ed. 1998). For a thoughtful critique of ISP98, see John F. Dolan, Analyzing Bank Drafted Standby Letter of Credit Rules: The International Standby Practice (ISP98), 45 WAYNE L. REV. 1865 (2000).

The 1995 version of Article 5, which predates ISP98 by three years, obviously makes no reference to it. Nor, less obviously, do the text or commentary accompanying any of the versions of Article 5 adopted by any of the states since 1998. Indeed, the only statutory reference to ISP98 as of the time of this writing appears in a Maine statute permitting an employer to post an irrevocable standby letter of credit as proof of solvency and ability to pay workers’ compensation claims. See ME. REV. STAT. ANN. tit. 39-A, § 403(3)(A) (West 2001) (“To the extent not inconsistent with state law, the letter of credit is subject to and governed by the International Standby Practices 1998 or successor practices governing standby letters of credit duly adopted by the International Chamber of Commerce.”). The ISP98 have been mentioned in only one case reported as of the time of this writing: Nissho Iwai Europe PLC v. Korea First Bank, 782 N.E.2d 55, 61 (N.Y. 2002) (citing ISP98 Rule 1.10[c][ii] for the proposition that the meaning of “revolving” in the letter of credit in question “should be derived from the context in which the term is used”). Nonetheless, subject to Article 5’s prohibitions on contractually varying certain terms, see supra note 36, parties should be able to incorporate the ISP98 into their standby letters of credit, see U.C.C. § 5-103(c) (permitting the parties to vary most provisions of Article 5 “by agreement or by a provision stated or incorporated by reference in an undertaking”), and have begun doing so at least in certain circles, see James E. Byrne, Overview of Letter of Credit Law & Practice in 2001, in 2002 ANNUAL SURVEY OF LETTER OF CREDIT LAW & PRACTICE 7-8 (James E. Byrne & Christopher S. Byrnes eds. 2002) (reporting anectodal evidence of widespread use of ISP98). And, where the parties have not explicitly incorporated ISP98 into their standbys, courts should recognize ISP98 as evidence of custom and usage in international standbys.

38 See, e.g., Hyosung Am., Inc. v. Sumagh Textile Co., 25 F. Supp. 2d 376, 385 & n.11 (S.D.N.Y. 1998) (recognizing an applicant’s common law right to assert a fraud claim against the beneficiary after the letter of credit had been drawn down and the applicant’s account had been debited, because such an exception did not conflict with the UCP, which the parties had chosen as governing law under former N.Y. U.C.C. § 5-102(4)), af’d, 189 F.3d 461 (2d Cir. 1999)

B. Commercial and Standby Letters of Credit

Letters of credit come in two basic varieties: commercial and standby. In a

typical commercial letter of credit transaction, a buyer (the applicant) induces its bank (the issuer) to irrevocably obligate itself to pay a seller (the beneficiary) a stated amount

of money, at a stated time, on receipt of stated documents – typically, the seller’s invoice and shipping documents.39 If the beneficiary presents conforming documents at or by the

stated time, the issuer must honor the letter of credit or answer to the beneficiary for the issuer’s wrongful dishonor.40 The issuer’s obligation to the beneficiary is not conditioned on the beneficiary’s performance of its underlying contract with the applicant.41 Nor is it conditioned on the applicant’s performance of its contract with the beneficiary.42

The issuer’s obligation to the beneficiary of a standby letter of credit, by contrast, is conditioned on the applicant’s performance of – or, more precisely, the applicant’s failure to perform or the beneficiary’s presentation of documents evidencing the

drafts the issuer had previously honored against letters of credit containing similar language and requirements as the ones at issue)

39 See, e.g., Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 817 (2d Cir. 1992) (“Alaska Textile Co. … is a New York-based textile company that exports fabric from India. Lloyd Williams Fashions, Inc., a manufacturer of women’s clothing, contracted with Alaska in early 1988 to buy several thousand yards of Indian silk … to be delivered to Lloyd’s facility in Hong Kong. To make payment, Lloyd arranged for … Chase Manhattan Bank to issue two letters of credit in favor of Alaska, for $82,500 and $47,141.25, respectively.”)

40 See U.C.C. § 5-108(a)

41 See supra note 22.

42 See State ex rel. Hwy. & Transp. Comm’n v. Morganstein, 703 S.W.2d 894, 898 (Mo. 1986) (“No default in performance of the underlying obligation by the [applicant] is necessary to trigger the obligation of the issuer to pay under the letter.”). See generally WUNNICKE ET AL., supra note 26, at § 2.06.

applicant’s failure to perform – its underlying contract with the beneficiary.43 In a typical standby letter of credit transaction, the applicant induces the issuer to irrevocably obligate itself to pay the beneficiary up to a stated amount of money, at or before a stated time, on receipt of documentation – sometimes simply a self-serving statement by the beneficiary44 – evidencing the applicant’s default on the underlying obligation.45 If (but only if) the applicant fails to pay as promised, the issuer must pay the beneficiary out of the issuer’s own funds.46

43 See Gabriel, supra note 39, at 709 (“In contrast to [commercial] letters of credit, the rights of a standby letter of credit beneficiary are activated only after the [applicant] has defaulted on the underlying contract.”). Thus,

[w]hile the applicant is performing, or preparing to perform, its obligation on the contract, the beneficiary, who awaits that performance, has the benefit of a separate promise (from the issuer) that if the applicant defaults, the issuer will pay the beneficiary an amount of money secured by the letter of credit.

Southern Energy Homes, Inc. v. AmSouth Bank of Ala., 709 So. 2d 1180, 1184 (Ala. 1998). For example:

The effect of standby letters of credit like these is to put the issuer (Bank One) itself behind the [applicant]’s (Bergner’s) promises to pay. As long as Bergner paid those with which it contracted, the standby letters of credit did not come into play. If, however, one of the events entitling a beneficiary to draw on a letter of credit occurred, then the beneficiary was entitled to go straight to Bank One to collect its money, without worrying about Bergner’s financial health. Bank One, in turn, promised to honor a demand from either beneficiary that conformed to the letters of credit, no matter what defenses Bergner may have had against either AMC’s or Liberty Mutual’s request for funds.

In re P.A. Bergner & Co., 140 F.3d 1111, 1115 (7th Cir. 1998).

44 See 1 DOLAN, supra note 11, at ¶ 1.07[2]

45 See, e.g., Bank One, Tex., N.A. v. Little, 978 S.W.2d 272, 277 n.8 (Tex. Ct. App. 1998) (observing that the standby letter of credit issued by NCNB at the request of Justin, a boot manufacturer, in favor of Mitco, a supplier of ostrich skins “did not actually represent payment for the skins. It merely represented that Mitco … would be paid by NCNB if Justin otherwise defaulted on the contract after the skins were sent.”). See generally WUNNICKE ET AL., supra note 26, at § 2.04.

As is true with commercial letters of credit, see supra note 17, standby letters of credit can be “clean” – meaning that the beneficiary can demand payment without any accompanying documentation. See 1 DOLAN, supra note 11, at ¶ 1.07[2], and cases cited therein.

46 See, e.g., P.A. Bergner, 140 F.3d at 1116 (“[O]n July 19, 1991, AMC submitted conforming documents [evidencing Bergner’s default] and drew $31,207,000 under the letter of credit.”).

C. Revocable and Irrevocable Letters of Credit

Letters of credit may be either revocable or irrevocable .47 While the issuer of a revocable letter of credit may unilaterally amend or cancel the credit at any time prior to the beneficiary’s presentation,48 once an issuer has established an irrevocable letter of credit, the issuer may not amend or cancel the credit without the beneficiary’s consent .49

Former Article 5 created no presumption one way or another as to a letter of credit’s revocability.50 Revised Article 5 explicitly states, “[a] letter of credit is revocable only if it so provides.”51 The current UCP52 and the ISP9853 both presume irrevocability.

47 See generally 1 DOLAN, supra note 11, at ¶ 1.10.

48 See U.C.C. § 5-106(b) (1995) (providing that a party’s rights and responsibilities under an issued letter of credit cannot be amended or cancelled without her consent “except to the extent the letter of credit provides that it is revocable”)

49 See U.C.C. § 5-106(b) (“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 the issuer may amend or cancel the letter of credit without that consent.”)

50 See U.C.C. § 5-103 cmt. 1 (1962) (“[T]he engagement may be either revocable or irrevocable …. Neither the definition [of “letter of credit” in former § 5-103(1)(a)] nor any other section of this Article deals with the issue of when a credit, not clearly labelled as either revocable or irrevocable within the one or the other category.”). See generally 1 DOLAN, supra note 11, at ¶ 1.10 & n.305 (also noting that two states – Florida and Louisiana – adopted non-uniform former Article 5 provisions creating a presumption of irrevocability). Thus, under former Article 5, “when a letter of credit … fail[ed] to specifically state whether it [wa]s revocable or irrevocable, … the question of revocability” was left to the court. 6B HAWKLAND & HOLLAND, supra note 33, at § 5:103-2

D. Anticipatory Repudiation: A Brief Review

Suppose that, on May 1, A agrees to purchase an automobile from B, and B

agrees to sell it to A, for $15,000. A and B further agree that A will pay B the full $15,000 purchase price on July 1, at which time B will transfer title to the automobile to A. While A is not obligated to perform until July 1, his May 1 promise creates immediate duties: A is required both to perform as promised on July 1 and to refrain from repudiating his promise to B at any time prior to July 1. If, at any time prior to July 1, A definitely and unconditionally manifests to B his inability to, or his intent not to, perform

5 seemed generally inclined to find a letter of credit that was facially silent on the issue to be irrevocable. See, e.g., Diskmakers, Inc., v. DeWitt Equip. Corp., 555 F.2d 1177, 1178 (3d Cir. 1977) (“[W]hen the contract spoke of a ‘letter of credit’ without designating it as revocable, the language must be construed as requiring an irrevocable instrument.”)

Although former Article 5 made no presumption as to revocability, it did condition the application of its anticipatory repudiation provision on the subject letter of credit being irrevocable. See U.C.C. § 5-115 cmt. 3 (advising that, because “revocable credits may be modified or revoked without notice to the customer or the beneficiary, rights against the issuer like those here provided can hardly arise under them”). See generally 6B HAWKLAND & HOLLAND, supra note 33, at § 5-115:1.

51 See U.C.C. § 5-106(a) (1995). See generally 1 DOLAN, supra note 11, at ¶ 4.06[2][a].

52 See UCP500, supra note 1, art. 6(c) (providing that, in the absence of a clear indication whether the letter of credit is revocable or irrevocable, the letter of credit “shall be deemed to be irrevocable”). Prior to 1993, the UCP explicitly presumed revocability. See UCP400, supra note 33, art. 7(c) (providing that, in the absence of a clear indication whether the letter of credit is revocable or irrevocable, the letter of credit “shall be deemed to be revocable”). See generally 1 DOLAN, supra note 11, at ¶ 4.06[2]

53 See ISP98, supra note 10, Rule 1.06(a) (“A standby is an irrevocable, independent, documentary, and binding undertaking when issued and need not so state.”). Official Comment 3 to Rule 1.06 further states that ISP98 makes “no provision” for revocable standby letters of credit and “offers no insight into the particular questions relevant to a revocable undertaking.” BYRNE, supra note 37, at 25

The United Nations Convention on Independent Guarantees and Stand-By Letters of Credit, likewise, presumes irrevocability. See U.N. CONVENTION, supra note 31, art. 7(4) (“An undertaking is irrevocable upon issuance, unless it stipulates that it is revocable.”).

as and when promised, then A’s repudiation constitutes an anticipatory breach of the contract – despite the fact that B has no right to expect A to perform until July 1.54

A promisor may repudiate either by word or by action.55 If a promisor tells his promisee that he either cannot or will not perform the contract as and when promised, the promisor’s statement will generally operate as an anticipatory breach.56 Likewise, a promisor may anticipatorily breach if he commits some voluntary act that makes it impossible for him to perform the contract when and as promised.57 Absent a contractual or legal duty to speak or act,58 a promisor generally cannot anticipatorily repudiate by mere silence or inaction.59

54 See Rowley, supra note 26, at 566, and the cases cited therein.

55 See U.C.C. § 2-610 cmt. 1 (1989) (“[A]nticipatory repudiation centers upon an overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance.”).

56 See id. § 2-610 & cmt. 1

57 See, e.g., In re Okla. Trash Control, Inc., 258 B.R. 461, 465 (Bankr. N.D. Okla. 2001) (holding that the defendant anticipatorily repudiated when, after notifying the plaintiff that it had ceased operations and would no longer perform the terms of the contract, its sole employees moved out of the state)

58 See, e.g., Dade County v. Palmer & Baker Eng’rs, Inc., 318 F.2d 18, 22 (5th Cir. 1963) (holding that county commission’s failure to timely adopt certain resolutions that were essential to planning and

A promisee whose promisor has repudiated his obligation may (1) do nothing, subject to the promisee’s obligation to mitigate damages,60 and await the promisor’s performance at the appointed time,61 (2) seek assurances from the promisor that, his apparent repudiation notwithstanding, he will perform as and when promised,62 (3) cancel

funding a construction project was an anticipatory repudiation)

59 See, e.g., Sauer v. Xerox Corp., 938 F. Supp. 155, 165 (W.D.N.Y. 1996) (holding that a lessor could not infer from its lessee’s failure to pay rent for a renewal period that the lessee would, likewise, fail to pay rent for a second renewal period and fail to pay the fair market value to purchase the leased goods at the end of the renewal term).

One notable instance in which silence or inaction will constitute a repudiation is if the silence or inaction is in response to a proper demand for adequate assurances of performance. See infra note 62.

60 See, e.g., In re St. Mary Hosp., 101 B.R. 451, 458 (Bankr. E.D. Pa. 1989) (“[T]he repudiatee has the burden of mitigating its damages by taking reasonable measures to minimize its losses.”)

Article 5 imposes no such duty to mitigate on nonrepudiating beneficiaries. See infra notes 162-163 and accompanying text.

61 See U.C.C. § 2-610(a) (“When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may: (a) For a commercially reasonable time await performance by the repudiating party ….”)

62 See U.C.C. § 2-609(1) (“When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.”)

The promisee seeking assurances need only be reasonably uncertain that the promisor can perform, not absolutely certain that the promisor cannot perform. See, e.g., Clem Perrin Marine Towing,

the contract,63 or (4) bring suit against the promisor or otherwise act in reliance on the repudiation.64 A promisee who chooses to bring suit, to seek assurances, or to do nothing and await the promisor’s performance may urge the promisor to retract his repudiation and perform as and when promised.65 And, whether the promisee so urges, if the

Inc. v. Panama Canal Co., 730 F.2d 186, 191 (5th Cir. 1984) (holding that “[i]t was certainly not unreasonable” for the defendant to “become alarmed” about the plaintiff’s ability to perform after the defendant received a phone call from a third party – who “had played a major role in brokering the deal between” the plaintiff and defendant “and could reasonably have been considered to have good information about [the plaintiff]’s financial status” – informing the defendant that the plaintiff was not current on financial obligations integral to the business relationship between the plaintiff and defendant). Nor, for that matter, does the promisee have to be correct about the promisor’s apparent inability or unwillingness to perform, as long as the promisee’s suspicion was reasonable. See, e.g., Turntables, Inc. v. Gestetner, 382 N.Y.S.2d 798, 799 (N.Y. App. Div. 1976) (holding that the defendant properly invoked § 2-609 “even though his suspicion that plaintiff was insolvent may have been inaccurate,” as long as the defendant had “reasonable grounds for insecurity determined according to commercial standards, and of course good faith” (quotations and citation omitted)). Once a party receives a “justifiable” written demand for adequate assurances, he must “provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case.” U.C.C. § 2-609(4). A promisor failing to timely provide adequate assurances has, as a matter of law, anticipatorily repudiated, entitling the party who sought assurances to immediately bring suit. See id.

63 See U.C.C. §§ 2-610(b), 2-703(f) & 2-711(1) (collectively recognizing a seller’s and buyer’s respective rights to cancel in response to a wrongful repudiation)

64 See U.C.C. §§ 2-610(b), 2-703(c)-(e) & 2-711(1)-(2) (collectively recognizing a seller’s and buyer’s respective rights to immediately bring suit in response to a wrongful repudiation)

65 See U.C.C. § 2-610(b) (“When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved

promisee has not cancelled the contract, materially changed her position, brought suit upon the repudiation, or otherwise indicated that she considers the repudiation to be final, the promisor may retract or otherwise cure his repudiation,66 foreclosing the promisee’s

party may … (b) resort to any remedy for breach, even though he has notified the repudiating party that he would await the latter ‘s performance and has urged retraction.” (emphasis added))

66 See U.C.C. § 2-611(1) (“Until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.”)

A repudiating party may retract “by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform….” U.C.C. § 2-611(2)

ability to prevail on a claim for damages based on the promisor’s anticipatory breach. In any event, the promisor’s repudiation relieves the promisee from any further tender or performance that would otherwise be due under the contract.67

Not all repudiations give rise to an immediate cause of action. Courts generally refuse to apply the doctrine of anticipatory repudiation to unilateral contracts, including unilateral contracts to pay money.68 A number of leading commentators – including both

would have to do anything.’ … [T]hese equivocal statements did not convey Gelman’s unconditional intention to honor his bid, and were not sufficient to retract his earlier repudiation.”).

67 See U.C.C. § 2-610(c)

68 See, e.g., Cobb v. Pacific Mut. Life Ins. Co., 51 P.2d 84, 88 (Cal. 1935) (“There can be no anticipatory breach of a unilateral contract.”)

Likewise, courts generally hold that, once one party to a bilateral contract has fully performed, any repudiation by the party who has yet to perform will generally not support a claim of anticipatory breach. See, e.g., Minor v. Minor, 7 Cal. Rptr. 455, 457 (Cal. Ct. App. 1960) (“Since the bilateral contract had been fully performed by the wife, it congealed, so far as the husband was concerned, into a unilateral contract…. [T]he trial court’s ruling that the doctrine of anticipatory breach does not apply to a contract which has become unilateral because of the opposite party’s full performance finds uncontradicted support in California law.”)

Professor Corbin69 and Professor Williston,70 who otherwise disagreed on the advisability of permitting a promisee to sue for anticipatory breach prior to the time the promisor’s performance was due – and a slowly growing number of courts have questioned the logic behind excluding unilateral contracts (and bilateral contracts made unilateral by virtue of one party’s performance) from the doctrine’s reach.71 Thus far, however, theirs is clearly not the majority view.

promisee money in exchange for her as-yet-incomplete performance. See, e.g., Equitable Trust Co. of N.Y. v. Western Pac. Ry., 244 F. 485, 501 (S.D.N.Y. 1917) (“[I]f performance remains mutually executory, the doctrine still applies, even though the promise is only to pay money, because that is the situation in the ordinary contract of sale repudiated by the buyer.”), af’d, 250 F. 327 (2d Cir. 1918).

69 Professor Corbin argued that this exclusion was

based upon the erroneous idea that the reason for holding an anticipatory repudiation to be a breach of contract is that otherwise the injured party must himself continue to be ready to perform on his own part. It would follow from this that, if the injured party never had any performance to render on his part, or, having such a performance, has already fully performed it, it would not be necessary for his protection to give him an immediate action for damages for the anticipatory breach. . . . [T]he rule allowing an action for an anticipatory breach cannot properly be rested upon this reason. The reasons upon which it can actually be sustained are equally applicable to unilateral contracts. The harm caused to the plaintiff is equally great in either case

4 ARTHUR L. CORBIN, CORBIN ON CONTRACTS 864-65 (1951) (footnote omitted).

70 Professor Williston wrote that the reasons supporting the doctrine of anticipatory repudiation are

as applicable to unilateral obligations to pay money, for instance by promissory note, as to any other form of contract. Indeed, the right to the unimpeached efficacy of the obligation before its maturity is perhaps as desirable in the case of a promissory note as in any other case which can be put

SAMUEL WILLISTON, THE LAW OF CONTRACTS 2381 (1920). Thus, if one were to concede the viability of a right to sue before the performance date, Williston saw no rational basis for limiting that right to mutually executory bilateral contracts.

71 See Rowley, supra note 26, at 569-71 & 604, and the sources cited therein. Judge Posner recently added his voice to the growing chorus:

Why the doctrine of anticipatory repudiation should be so limited eludes our understanding. Announcement by the other party that he has no intention of paying should entitle the prospective victim of the payor’s breach to take immediate steps to

It is easy to imagine that the same courts which refuse to afford a claim for anticipatory repudiation to a promisee whose promisor’s sole (remaining) promise is to pay money would, likewise, refuse to afford a claim for anticipatory repudiation to a letter of credit beneficiary whose issuer’s sole promise is to pay money. And yet, reality is not always as we imagine it.

II. Anticipatory Repudiation of Letters of Credit

Now, suppose that, before agreeing to sell an automobile to A for $15,000, B insists that A obtain an irrevocable letter of credit in B’s favor to insure A’s promise to pay B the purchase price on July 1. Suppose, further, that A arranges to have Issuing National Bank issue an irrevocable standby letter of credit in B’s favor in the amount of $15,000, payable at any time within 30 days after July 1, upon B’s presentation of the certificate of title to the automobile and a sworn affidavit evidencing A’s failure to pay B as promised. While INB is not obligated to honor the letter of credit until at least July 2, and then only if A defaults on his payment obligation to B, must INB (as was true for A in the earlier hypothetical) refrain from repudiating, at any time prior to B’s presentation, its promise to honor B’s conforming presentation?

protect his interest, as by suing. Against this it has been argued that the doctrine of anticipatory repudiation “will not intercede to rescue the promisee from the consequences of the absence of an acceleration clause.” That gets it backwards…. Acceleration clauses are a standard contract provision for protecting the payee against the consequences of a breach by the other party

Central States, S.E. & S.W. Areas Pension Fund v. Basic Am. Indus., Inc., 252 F.3d 911, 915-16 (7th Cir. 2001) (quoting Rosenfeld v. City Paper Co., 527 So. 2d 704, 706 (Ala. 1988)) (citations omitted).

Article 5 of the Uniform Commercial Code72 and common law73 both recognize that the issuer of an irrevocable74 letter of credit has the power to anticipatorily repudiate

72 See U.C.C. § 5-111(a) (1995) (“If an issuer … repudiates its obligation to pay money under a letter of credit before presentation, the beneficiary, successor, or nominated person … may recover from the issuer the amount that is the subject of the … repudiation….”)

The corresponding provision in each state’s (and the District of Columbia’s) statutes is as follows: ALA. CODE § 7-5-111(a) (1997)

73 See, e.g., Décor by Nikkei Int’l, Inc. v. Federal Republic of Nigeria, 497 F. Supp. 893, 906 (S.D.N.Y. 1980), af’d, 647 F.2d 300 (2d Cir. 1981)

Common law recognition was very important in New York, prior to its adoption of Revised Article 5 in 2000, because New York’s version of former Article 5 contained a non-uniform provision to the effect that, if the parties to a letter of credit expressly or impliedly agreed that the letter of credit would be governed by the applicable UCP, see supra note 33, then Article 5 did not apply to the letter of credit. See N.Y. U.C.C. § 5-102(4) (McKinney 1993) (“Unless otherwise agreed, this Article 5 does not apply to a letter of credit … if by its terms or by agreement, course of dealings or usage of trade such letter of credit … is subject in whole or in part to the Uniform Customs and Practice for Commercial Documentary Credits ….”)

New York U.C.C. and the remedies contained therein do not apply to these actions.”). Because the UCP were – and remain – silent on the issue of anticipatory repudiation, New York courts looked to pre-Code New York common law to decide claims of anticipatory repudiation of a letter of credit prior to New York’s adoption of Revised Article 5. See, e.g., De Smeth v. Bank of N.Y., 879 F. Supp. 13, 15 n.1 (S.D.N.Y. 1995) (“Defendant maintains that plaintiff cannot bring an action for anticipatory repudiation of the letter of credit … since the UCP provides an exclusive remedy for plaintiff. This argument is rejected. Since the UCP is silent on the issue of anticipatory repudiation, I must look to New York state law to determine if plaintiff may recover damages. A claim for anticipatory repudiation is clearly permissible in letter of credit cases under New York law ….” (citations omitted))

The volume and consistency of cases finding a cause of action for anticipatory repudiation of a letter of credit in New York common law is remarkable, given the widespread refusal to recognize a comparable cause of action for anticipatory repudiation of other unilateral or unilaterally executory obligations. See supra note 68 and accompanying text.

Alabama, Arizona, and Missouri added similar non-uniform provisions to their enactments of former Article 5. See ALA. CODE § 7-5-102(4) (1975)

Revised section 5-116(c), as adopted in Alabama, Arizona, Missouri, and New York, replaces former ALA. CODE § 7-5-102(4), ARIZ. REV. STAT. ANN. § 47-5102(D), MO. ANN. STAT. § 400.5-102(4), and N.Y. U.C.C. § 5-102(4), and provides that the UCP “trump” Revised Article 5 only if the letter of credit expressly incorporates the UCP, and the UCP and Revised Article 5 conflict when applied to the letter of credit. ALA. CODE § 7-5-116(c) (1997)

its payment obligation to the beneficiary of the letter of credit before the latter presents a draft or demand for payment.75 In this respect, letters of credit are unique among the payment devices and mechanisms governed by the Code. By comparison, Articles 3 (Negotiable Instruments) and 4 (Bank Deposits and Collections) are silent on the subject of anticipatory repudiation.76

Because the UCP is silent on the issue of anticipatory repudiation, section 5-111(a) governs even if the parties have expressly agreed that their letter of credit is subject to the UCP.

74 As a practical matter, issuers can only anticipatorily repudiate irrevocable letters of credit, because “[r]evocable letters of credit may be modified or revoked without notice to the … beneficiary.” 6B HAWKLAND & MILLER, supra note 33, [Rev.] § 5-111.1. See supra notes 47-53 and accompanying text.

75 An issuer may also repudiate its obligation to the applicant who induced it to issue the letter of credit. Revised section 5-111 does not explicitly grant the applicant a cause of action for anticipatory repudiation by the issuer, but one leading commentator argues that courts should see that as a “drafting error…. not to be regarded as a prohibition of the omitted action, and therefore … not displac[ing] the non-Code law under which the concept of liability for anticipatory repudiation of a contract has long been firmly established.” 7A LARY LAWRENCE, LAWRENCE’S ANDERSON ON THE UNIFORM COMMERCIAL CODE § [Rev] 5-111:16 (3d ed. 2001) (footnotes omitted). For a discussion of the non-Article 5 law of anticipatory repudiation, see Rowley, supra note 26.

Because the UCP500, see supra note 1, and the ISP98, see supra note 10, are both silent on the issue of anticipatory repudiation, unless the parties have expressly chosen the law of a jurisdiction that has not adopted Article 5, a court considering a claim or defense of anticipatory repudiation of a letter of credit should apply revised section 5-111, even if the parties have expressly incorporated the UCP or the ISP98. The U.N. Convention, see supra note 31, is, likewise, silent on the topic of anticipatory repudiation.

76 See 6 WILLIAM D. HAWKLAND & LARY LAWRENCE, UNIFORM COMMERCIAL CODE SERIES

[Rev.] § 3-118:6 (1999) (“There is no doctrine of anticipatory repudiation on an instrument. Despite a maker’s or acceptor’s proclamation that he will not pay the instrument when due, the holder must wait until the day after maturity to commence an action.”)

Payment is unlikely where the maker or acceptor has repudiated the obligation to pay the instrument …. Presentment in these situations would be an idle gesture…. Rather than requiring the party to undergo the futile and time-consuming act of presentment, presentment is excused. Notice of dishonor is not excused because the indorser may be unaware of the … repudiation.

6 HAWKLAND & LAWRENCE, supra, [Rev.] § 3-504:6 (footnotes omitted).

Article 3 does recognize the concept of “renunciation,” U.C.C. § 3-604(a) (1990) (“A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party’s

signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed writing.”) (replacing former § 3-605(1)(b) (1952)), but its contours are unlike those of anticipatory repudiation under Articles 2, 2A, and 5. Under Article 3, renunciation is an act by a person entitled to enforce an instrument that waives its rights against another party. See U.C.C. § 3-604(a). See generally LARY LAWRENCE, AN INTRODUCTION TO PAYMENT SYSTEMS 125 (1997). The party whose rights are affected by the holder’s renunciation is not injured by the renunciation, and thus has no need of an avenue to redress like that provided by Sections 2-610, 2A-402, former 5-115(2), and revised 5-111(a) to parties who are injured by another’s repudiation of, respectively, a goods sales contract, a goods lease contract, or a letter of credit.

Article 3 also recognizes a holder’s right to accelerate the payment due date of an instrument otherwise payable at a definite time, see U.C.C. § 3-108(b)(ii) (“A promise or order is ‘payable at a definite time’ if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of … (ii) acceleration …”), or to demand additional collateral, see id. § 3-104(a)(3)(i) (“‘[N]egotiable instrument’ means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: … (3) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment ….”), if the holder “deems himself insecure,” or otherwise “in good faith believes that the prospect of payment … is impaired,” U.C.C. § 1-208 (1999)

An instrument may require that the obligor furnish additional collateral…. at the will of the holder or at the option of the holder whenever he feels insecure…. [I]n the event of the obligor’s failure to furnish the additional security [if requested], the holder may accelerate the balance of the principal due. If the right to require additional security is at the will of the holder or at the option of the holder whenever he deems himself insecure, the holder may not exercise the right unless he believes in good faith that the prospect of payment or performance is impaired.

6 HAWKLAND & LAWRENCE, supra, [Rev.] § 3-104:12 (footnotes omitted)). Numerous courts have similarly recognized an Article 9 secured creditor’s right to accelerate a secured indebtedness or to demand additional collateral if the secured creditor, in good faith, deems himself insecure as to either the indebtedness or the collateral. See, e.g., Van Bibber v. Norris, 419 N.E.2d 115, 124 (Ind. 1981)

Whether the holder’s good faith belief that the prospect of payment is impaired should be judged objectively or subjectively is the source of a sharp split of authority, though all courts agree that the holder must, at least, honestly believe that the prospect of payment is impaired. Compare, e.g., Sheppard Fed. Credit Union v. Palmer, 408 F.2d 1369, 1371 (5th Cir. 1969) (applying Texas law)

First Nat’l Bank v. Ruda, 552 N.E.2d 775, 779-81 (Ill. 1990)

The holder of a negotiable instrument payable on demand (or payable at a fixed date or on demand) may demand payment at a date earlier than anticipated without even a good faith belief that the prospect of future payment is impaired. See U.C.C. § 1-208 cmt.

THOMAS D. CRANDALL, MICHAEL J. HERBERT & LARY LAWRENCE, UNIFORM COMMERCIAL CODE

§ 14.13.3 (1993 & Supp. 2002). Similarly, where the instrument authorizes acceleration upon the obligor’s default, the Code does not require the accelerating holder to have a good faith belief that the prospect of future payment is impaired. See, e.g., Bowen v. Danna, 637 S.W.2d 560, 562 (Ark. 1982)

This right to accelerate – at least to the extent that it is based on the holder’s good faith insecurity – is somewhat akin to the right of a promisee under Article 2 or Article 2A to demand adequate assurances from its promisor if the promisee has “reasonable grounds for insecurity … with respect to the [promisor’s] performance.” U.C.C. § 2-609(1) (1989)

To succeed on a claim for anticipatory repudiation of a letter of credit, a beneficiary must prove77 that the issuer clearly and unconditionally demonstrated its intent not to perform or its inability to perform as and when promised.78 The beneficiary may also have to prove that she was ready, willing, and able to perform or to tender performance as and when promised. This does not mean that the beneficiary must

77 The beneficiary alleging anticipatory repudiation bears the burden of proof. See, e.g., Occidental Fire & Cas. Co. v. Continental Bank, N.A., 725 F. Supp. 383, 388 (N.D. Ill. 1989), af’d, 918 F.2d 1312 (7th Cir. 1990)

In Occidental Fire & Casualty, the district court found that the beneficiary (Occidental) failed to prove, by a preponderance of the evidence, that the issuer (Continental) had reduced the face value of the letter of credit without Occidental’s consent. See 725 F. Supp. at 388-89. On appeal, the Seventh Circuit freely admitted that, had the burden of proof been on Continental, rather than Occidental, Continental likely could not have proved by a preponderance of the evidence that it had Occidental’s consent to reduce the face value of the letter of credit. See 918 F.2d at 1323.

78 See, e.g., De Smeth v. Bank of N.Y., 879 F. Supp. 13, 15 (S.D.N.Y. 1995) (“To succeed on a claim for anticipatory repudiation of a letter of credit, plaintiff must be able to show that defendant clearly demonstrated its intent not to continue with performance ….”)

This is the same standard Article 2 applies to plaintiffs who allege that the defendant anticipatorily repudiated a contract for the sale of goods. See supra note 55. Because Article 5 does not define “repudiation,” see 2 THOMAS M. QUINN, QUINN’S UNIFORM COMMERCIAL CODE COMMENTARY & LAW DIGEST § 5-115[A][3] (2d ed. 2001), courts must look elsewhere for guidance on what types of words and actions constitute anticipatory repudiation. Section 2-610 is a logical place to look, given that former section 5-115(2) gave the beneficiary whose issuer had repudiated or cancelled prior to presentment “the rights of a seller after anticipatory repudiation by the buyer under Section 2-610,” U.C.C. § 5-115(2) (1962), and that, at least in the context of a commercial letter of credit, the beneficiary is a seller of goods. See 7A LAWRENCE, supra note 75, at § 5-115:6 (“The refusal of the issuer to make payment under the [commercial letter of] credit is, for all practical purposes, the same as the buyer refusing to make payment. As a result, the damages that the beneficiary/seller will suffer by a[n issuer’s repudiation] of a commercial letter of credit are the same as that of a seller of goods.”). While revised section 5-111(a) lacks the explicit reference to section 2-610, there is no reason to expect courts to change their practice of referring to section 2-610 and the body of case law that has developed around it to decide whether an issuer has anticipatorily repudiated. And, in any event, the vast majority of courts apply essentially the same standard to common law anticipatory repudiation claims. See, e.g., Wolgin v. Atlas United Fin. Corp., 397 F. Supp. 1003, 1014 (E.D. Pa. 1975) (“An anticipatory breach of a contract occurs whenever there has been a definite and unconditional repudiation of a contract by one party communicated to another.”), af’d, 530 F.2d 963 (3d Cir. 1976)

present a conforming draft or demand as a precondition for bringing suit over the issuer’s anticipatory repudiation.79 Nor does it mean that the beneficiary must perform or tender

79 See U.C.C. § 5-111(a) (1995) (“…. In the case of repudiation the claimant need not present any document.”)

Thus, in Engel Industries, Inc. v. First American Bank, N.A., 798 F. Supp. 9 (D.D.C. 1992), the court made quick work of the repudiating issuer’s argument that it was excused from performing under the letter of credit because the beneficiary never made the requisite presentment:

First American repudiated the letter of credit before it expired, indicating to Engel that any presentation would be futile. Moreover, when Engel sought to preserve its rights and tried to perform its obligations under the letter of credit, First American prevented Engel from making presentation until the letter of credit expired. There is undisputed evidence that Engel was prepared to make presentation, that it had delivered the goods FOB its warehouse, and that presentation was not made only because First American’s agent, the advising bank, would not accept presentment.

[B]eneficiaries of letters of credit cannot be allowed to collect without first meeting all of their obligations…. [B]ut to honor First American’s defense would be to carry the concept of strict compliance to an extreme. In this case, Engel has complied with its obligations including the preparation of necessary documents …. First American cannot now prevail by claiming that Engel failed to do something First American specifically blocked Engel from doing….

Id. at 14-15

ISP98 may alter this rule with regard to standby letters of credit that are subject to ISP98 – at least in cases like Procter & Gamble Cellulose and Ross Bicycles where wrongful dishonor by the issuer of one or more conforming drafts was deemed a repudiation, under Article 5, of the issuer’s obligation to honor future conforming drafts. See ISP98, supra note 10, Rule 3.07(b) (“Wrongful dishonour of a complying presentation does not constitute dishonour of any other presentation under a standby or repudiation of the standby.”). See generally WUNNICKE ET AL., supra note 26, at § 6.04[B] (discussing Rule 3.07(b) and concluding that its drafters appear to have intended to overturn the general rule that a beneficiary is not required to present documents if, prior to presentation, the issuer unambiguously repudiates its obligation to honor them). ISP98 rules only apply to letters of credit that specifically incorporate them by reference. See id. at § 6.01.

performance of the underlying obligation if the issuer’s repudiation has made it clear that any such performance or tender would not induce the issuer to perform under the letter of credit.80 The issuer’s repudiation notwithstanding, however, a beneficiary who could not have presented a conforming draft or demand may be unable to recover for the issuer’s anticipatory repudiation.81 This is true even if the issuer had previously accepted

80 See, e.g., Ernesto Foglino & Co. v. Webster, 216 N.Y.S. 225, 238 (N.Y. App. Div. 1926) (holding that the defendant’s repudiation of the letter of credit relieved the plaintiff of any obligation to purchase the coal it had contracted to purchase from a third party and then resell to the defendant).

81 See U.C.C. § 5-111 cmt. 1 (“[I]f a beneficiary could never have obtained documents necessary for a presentation conforming to the letter of credit, the beneficiary cannot recover for anticipatory repudiation of the letter of credit.”)

In Ross Bicycles, Inc. v. Citibank, N.A., 606 N.Y.S.2d 192, 193 (N.Y. App. Div. 1994), the Appellate Division stated that the plaintiff must show its readiness, willingness, and ability to perform, but cited as its sole authority a case – United Bank Ltd. v. Cambridge Sporting Goods Corp., 360 N.E.2d 943 (N.Y. 1976) – which nowhere discusses whether the plaintiff was ready, willing, and able to perform notwithstanding the defendant’s repudiation. On remand, the trial court found that the “[p]laintiff clearly established that it could easily have … satisf[ied] the terms of the letter of credit” – and was, therefore, entitled to recover the face value of the letter of credit where the defendant had repudiated before the plaintiff made any draws against the letter. See Ross Bicycles, 613 N.Y.S.2d at 539-40.

Former section 5-115 has no counterpart to the passage quoted above from Official Comment 1 to revised section 5-111. See U.C.C. § 5-115 cmts. 1-3 (1962). Despite this fact, and despite the conflicting authority cited above, Professors White and Summers appear to take it as given that “when beneficiary learns of the repudiation before procuring the required documents, it need not follow through with a complying presentation, but beneficiary must nevertheless show that it was ‘ready, willing, and able’ to do so. If beneficiary cannot show this, it will have no damage claim against issuer under 5-115.” 3 JAMES J.

WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE: PRACTITIONER TREATISE SERIES 208 (4th

ed. 1995) (emphasis added and footnote omitted). It is interesting to note that Professors White and Summers include Atari in the footnote wherein they cite the authorities purportedly supporting this obligation – despite the fact that the Atari court found no such obligation in former section 5-115(2), as discussed supra. Professors Crandall, Herbert, and Lawrence address the issue more circumspectly: “Some courts have added the requirement that the beneficiary show that she could have performed the contract in order to recover from an issuer that anticipatorily repudiated a credit.” 3 CRANDALL ET AL., supra note 76, at § 21.8.3.

nonconforming documents82 or if routine practice permitted payment despite the nonconformity.83

A. Repudiatory Words or Conduct

What sort of behavior clearly and unconditionally demonstrates an issuer’s intent not to perform or its inability to perform as and when promised? While the cases applying former section 5-115(2) or current section 5-111(a) are certainly not legion, some patterns emerge.

1. Cancellation or Renunciation

As is true more generally under common law84 and under the more frequently litigated provisions of the Code dealing with anticipatory repudiation of contracts for the sale of goods,85 an issuer who cancels or otherwise renounces its obligations under a letter of credit anticipatorily repudiates the letter of credit.86

82 See De Smeth, 879 F. Supp. at 14-15.

83 See id. at 15.

84 See, e.g., City of Fairfax v. Washington Metro. Area Transit Auth., 582 F.2d 1321, 1325 (4th Cir. 1978) (“[I]f one party to a contract declares in advance that he will not perform at the time set for his performance, the other party may bring an immediate action for total breach of the contract.”)

85 See supra note 56.

86 See, e.g., Procter & Gamble Cellulose Co. v. Investbanka Beograd, No. 98 Civ. 2359 (JGK), 2000 U.S. Dist. LEXIS 5636, at *12 (S.D.N.Y. May 1, 2000) (holding that the issuing bank, which refused to honor two conforming drafts and then recalled the letters of credit from advising bank prior to their expiration, had anticipatorily repudiated because “it was clear that [the issuing bank] would not pay under the letters of credit”), af’d, No. 00-7461, 2001 U.S. App. LEXIS 2434 (2d Cir. Feb. 15, 2001)

For example, in Atari, Inc. v. Harris Trust & Savings Bank,87 Atari sold consumer electronics to S-W Distributors on open account, secured by a $400,000 irrevocable standby letter of credit issued by Harris on March 9, 1982 in Atari’s favor.88 In order to draw against the letter of credit, Atari had to present documents stating, inter alia, that the amount Atari sought to draw was in excess of the $500,000 open account Atari had established for S-W.89 On November 2, 1982, Harris unilaterally amended the letter of credit to raise the “floor” below which Atari could not draw against the letter from $500,000 to $1,000,000.90 On December 22, 1983,91 Harris notified Atari that, as of December 10, 1983, the letter of credit “should be considered null and void.”92 Atari informed Harris five days later that, because the letter of credit was irrevocable, Atari expected Harris to honor any proper demand for payment. On January 31, 1984, Atari attempted to draw $395,391.68, and submitted to Harris documentation including

bank that it would not pay under any circumstances)

87 599 F. Supp. 592 (N.D. Ill. 1984), af’d in part and rev’d in part, 785 F.2d 312 (7th Cir. 1986).

88 See id. at 594.

89 See id. at 595.

90 See id. While this act, by itself, was an anticipatory repudiation of the irrevocable letter of credit, see infra notes 117-132 and accompanying text, the Atari court focused its analysis on the December 22, 1983 letter from Harris to Atari declaring the letter of credit “null and void,” see infra notes 95-109 and accompanying text.

91 The court at one point refers to Harris having written this letter to Atari on December 27. See Atari, 599 F. Supp. at 595. This appears to be a typographical error in the court’s opinion, as everywhere else it indicates that Harris wrote Atari on December 22. See id. at 599, 600 n.4 & 601.

invoices totaling $2,120,679.93 Harris refused to honor Atari’s draft due to alleged nonconformities in the documents Atari presented.94 Atari sued Harris for anticipatory repudiation. The Atari court found that Harris anticipatorily repudiated the letter of credit when it sent the December 22 letter informing Atari that the letter of credit “should be considered null and void.”

While admitting that it had made an irrevocable promise to pay,95 Harris argued that (1) the UCP, incorporated by the letter of credit, governed its transaction with Atari rather than former section 5-115(2)

92 Id. at 595.

93 See id.

94 See id.

Harris’s refusal to honor Atari’s draft, standing alone, might have supported a claim for wrongful dishonor under former section 5-115. U.C.C. § 5-115(1) (1962). However, while the extent and consequence of nonconformities in Atari’s documents were hotly disputed by both parties, see Atari, 599 F. Supp. at 595-99, Harris did not dispute any of the facts supporting Atari’s claim that Harris’s December 1983 letter constituted an anticipatory repudiation (though it did dispute the legal consequence of those facts), see id. at 599 & n.2. Rather, Harris rested its defense of Atari’s anticipatory repudiation claim on the bases discussed in the text accompanying infra notes 96-100.

95 See Atari, 599 F. Supp. at 599.

96 See id.

97 See id. at 599 n.2.

98 See id. at 600 n.4.

99 See id. at 600.

100 See id.

The court found for Atari on all points.101 First, the court found that former section 5-115(2) applied, notwithstanding Harris’s authority to the contrary, because Harris cited only New York cases applying a non-uniform statutory provision102 for which Illinois had no counterpart, and because prior Illinois cases had applied Article 5 even when the letter of credit explicitly incorporated the UCP.103 Second, the court found that Harris’s statement that Atari should consider the letter of credit “null and void” was “a clear statement by a promisor to its promisee that it will not perform” – and, therefore, a repudiation.104 Third, applying section 2-610 by analogy,105 the court held that Atari’s

101 The court, for its own purposes, also considered and rejected the argument that Harris had somehow retracted its prior repudiation when it considered, and then dishonored as nonconforming, Atari’s January 31 draw.

If proper, Harris’ dishonor of Atari’s attempted draw, citing nonconformities with the terms of the credit, would amount to … a retraction of its prior repudiation….

But Atari maintains that Harris’ reliance upon the credit terms was merely a pretext. Atari contends that Harris’ dishonor was actually based on Harris’ position that the credit was no longer effective. Accepting Atari’s argument necessarily leads to the conclusion that whenever an issuer has repudiated a letter of credit and its subsequent dishonor is ultimately determined to be wrongful by a court, the issuer is subject to liability under a theory of anticipatory breach as well as for the wrongful dishonor. Although this result provides a disappointed beneficiary with duplicate causes of action, this is exactly the result contemplated by the Official Comments to the UCC…. Nor does this result do violence to those decisions requiring a beneficiary to meet the requirements of the credit should it attempt to draw on the credit after a repudiation. Only a wrongful dishonor, which necessarily includes a conforming draw, should be viewed as a continued repudiation. Should the issuer properly dishonor an attempted draw made subsequent to its repudiation, it has performed under the credit and retracted its repudiation….

Id. at 601 (footnote and citations omitted).

102 N.Y. U.C.C. § 5-102(4) (McKinney 1993), superseded by N.Y. U.C.C. § 5-116(c) (McKinney 2001) (effective Nov. 1, 2000)

103 See Atari, 599 F. Supp. at 600.

104 See id. at 599 n.2.

105 Section 2-610, which governs anticipatory repudiation of contracts for the sale of goods, allows a non-repudiating party to, without waiving his right to immediately pursue any remedy afforded by section 2-610, “notif[y] the repudiating party that he would await the latter’s performance and … urge[] retraction.” U.C.C. § 2-610(b) (1989)

reply to Harris’s December 22 letter, demanding that Harris honor the letter of credit, did not waive Atari’s right to sue Harris for anticipatory repudiation. 106 Fourth, the court held that Atari’s presentment on January 31, 1984 was “no more than a further urging that Harris retract its repudiation and perform” as promised – and, again, did not waive Atari’s right to sue Harris for anticipatorily repudiating the letter of credit.107 And, fifth, the court, without conceding that former section 5-115(2) actually required a non¬repudiating beneficiary to show that it was ready, willing, and able to perform in order to recover for an issuer’s repudiation,108 held that Atari clearly was ready, willing, and able to perform, as evidenced by its January 31 presentation of conforming documents supporting a draw of $395,391.68 against the letter of credit.109

the adoption of the Code. See RESTATEMENT (SECOND), supra note 84, § 257 (“The injured party does not change the effect of a repudiation by urging the repudiator to perform in spite of his repudiation or to retract his repudiation.”)

106 See Atari, 599 F. Supp. at 600 n.4.

107 See id. at 601.

108

[U]nder Article Five of the UCC, it is not clear that Atari is required to show that it was ready, willing and able to perform. Section 5-115(2) expressly contemplates a situation where the beneficiary may sue the issuer for repudiation and still “avoid procurement of the required documents.” In other words, there is no requirement that the beneficiary demonstrate that it could present a conforming draw.

Id. at 600. The Atari court then cited two New York cases – Reprosystem, B. V. v. SCM Corp., 522 F. Supp. 1257 (S.D.N.Y. 1981), rev’d on other grounds, 727 F.2d 257 (2d Cir. 1983), and Décor by Nikkei International, Inc. v. Federal Republic of Nigeria, 497 F. Supp. 893 (S.D.N.Y. 1980), af’d, 647 F.2d 300 (2d Cir. 1981) – as contrary authority. However, as the Atari court had earlier observed, New York had at the time a non-uniform provision in its version of Article 5 stating that, where the parties expressly incorporated the UCP in their letter of credit, the UCP displaced former Article 5. Therefore, the New York cases cited by the Atari court did not find a “ready, willing, and able” requirement in Article 5, they found it in New York pre-Code common law. See supra note 73.

109 See Atari, 599 F. Supp. at 600.

In Colorado National Bank of Denver v. Board of Commissioners of Routt County,110 CNB issued three irrevocable letters of credit in favor of Routt County to secure an obligation by Woodmoor to perform or pay for certain road improvements called for in a series of subdivision improvement agreements.111 When Woodmoor failed to make any improvements, the county made demand on CNB under the letter of credit. CNB dishonored all of the county’s drafts, and the county sued for wrongful dishonor.112 The county also sued CNB on the theory of anticipatory repudiation, alleging that CNB had imposed a precondition – that the county have actually incurred or committed to incur any expenses for which it sought reimbursement before it could draw against the letters of credit – that was not part of the terms under which the letters were issued.113

In contrast to Atari’s clear and unconditional “null and void” language, the only evidence the county presented at trial of CNB’s repudiation was CNB’s sworn answer to an interrogatory that, prior to the expiration date of the letters of credit, CNB had notified the county that CNB “should make payments under the letters of credit … only as the [county] incurred or committed to incur expenses for the particular improvements called for in the Subdivision Improvement Agreements.”114 Far from being an “overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance,”115 the Colorado

110 634 P.2d 32 (Colo. 1981) (en banc).

111 See id. at 34.

112 See id. at 34-35.

113 See id. at 41 n.3.

114 Id .

115 Id. (quoting COLO. REV. STAT. § 4-2-610 cmt. 1).

Supreme Court found insufficient evidence of anticipatory repudiation in the foregoing statement:

We cannot conclude … that the Bank anticipatorily repudiated its obligation to honor drafts under letter of credit numbers 1156 and 1157. The Bank merely indicated that it should not be required to honor drafts unless the County had incurred or committed to incur expenses to complete the road improvements not that it would not honor the County’s drafts unless this condition had been met.116

2. Imposing or Insisting Upon New or Modified Terms

As is also true more generally under common law117 and under the more frequently litigated provisions of the Code dealing with anticipatory repudiation of contracts for the sale of goods,118 an issuer who unilaterally amends the terms of a letter

116 Id. (emphases in original).

While the court could have helped us by explaining a bit more clearly why CNB’s statement could not be a repudiation, it seems as if there are at least two possible “spins” to put on CNB’s “should.” CNB could have been saying “If life was fair, we should only have to pay you if you actually incurred or committed to incur the expenses

117 See RESTATEMENT (SECOND), supra note 84, § 250 cmt. b (“[L]anguage that under a fair

reading ‘amounts to a statement of intention not to perform except on conditions which go beyond the contract’ constitutes a repudiation.” (quoting U.C.C. § 2-610 cmt. 2 (1989))

118 See U.C.C. § 2-610 cmt. 2 (“[A] demand by one or both parties for more than the contract calls for in the way of counter-performance is not in itself a repudiation …. However, when under a fair reading

of credit, or who insists, as a precondition to performance, on different terms than those set forth in the letter of credit, anticipatorily repudiates the letter of credit.119

In National Bank & Trust Co. v. J.L.M. International, Inc.,120 the Federal Republic of Nigeria contracted, on March 1, 1975, to buy 240,000 metric tons of concrete from JLM for a total contract price of $14,400,000, plus shipping and demurrage (delay) charges.121 Pursuant to the contract’s terms, Nigeria arranged in early April 1975 for Morgan to open an irrevocable, transferable letter of credit in JLM’s favor, and Morgan notified JLM of the arrangement.122 On September 30, 1975, while the letter of credit remained in force, Morgan notified JLM’s assignee, Interexporte, that Nigeria had

it amounts to a statement of intention not to perform except on conditions which go beyond the contract, it becomes a repudiation.”)

119 See, e.g., Décor by Nikkei Int’l, Inc. v. Federal Republic of Nigeria, 497 F. Supp. 893, 899-900, 906 (S.D.N.Y. 1980), af’d, 647 F.2d 300 (2d Cir. 1981)

This is consistent with former section 5-106(2) and revised section 5-106(b), both of which provide that post-issuance amendments of irrevocable letters of credit are ineffective unless and until consented to by all parties. See U.C.C. § 5-106(b) (1995) (“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.”)

120 421 F. Supp. 1269 (S.D.N.Y. 1976).

121 See id. at 1270.

122 See id.

unilaterally amended the letter of credit to require prior approval for all demurrage charges.123 Prior to the September 30 amendment, Interexporte entered into a charter party agreement with Macia, whereby Macia agreed to provide transport for 180,000 metric tons of concrete, with an option for the other 60,000 tons. In order to secure the necessary vessels, Macia entered into a joint venture with Natbank to finance use of the vessels Macia needed to satisfy its contract with Interexporte.124 When Natbank learned of Nigeria’s amendment, it sued. The court held, inter alia, that Nigeria’s unilateral amendment to the letter of credit, imposed without JLM’s or Interexporte’s consent, anticipatorily repudiated the irrevocable letter of credit.125

In Savarin Corp. v. National Bank of Pakistan,126 Savarin agreed to sell 6,000 tons of wheat to Sharbatly – 3,000 tons each to be delivered to Jeddah and Dammam, Saudi Arabia – pursuant to which Sharbatly arranged to have letters of credit issued in Savarin’s favor by NBP.127 After receiving the letters of credit, Savarin wrote NBP on October 21, advising that Savarin wanted to ship all 3,000 tons bound for Dammam on a single vessel, rather than on three separate vessels as appeared to be called for in the letters of credit,128 and asked NBP to confirm that it would accept a draft supported by shipping

123 See id. at 1271.

124 See id.

125 See id. at 1272-73.

126 447 F.2d 727 (2d Cir. 1971).

127 See id. at 728.

128 The Second Circuit raised, and then ducked, the question of which of two sets of letters of credit actually governed the transaction. The first set, which proclaimed themselves to be irrevocable, said nothing about the number of lots in which Savarin was required to ship the wheat. See id. at 729-30. The second set, which claimed to be “confirming” the first, contained the language requiring multiple shipments. See id. at 730. The Second Circuit ultimately found that NBP’s insistence on a three-lot shipment repudiated its acquiescence to a single-lot shipment in response to Savarin’s October 21 cable.

documents from a single lot rather than three lots.129 On October 28, NBP indicated by cable that it would honor such a draft. 130 However, three days later, NBP notified Savarin that it would only honor Savarin’s draft if the shipment arrived on three separate ships.131 The Second Circuit held that NBP’s October 31 refusal to honor any draft from Savarin that did not indicate shipment on three separate vessels was an anticipatory repudiation, because NBP had already agreed to amend the letter of credit to permit shipment on a

single vessel. 132

On the other hand, refusing to amend a letter of credit to conform to the desires of the parties to the underlying obligation, and then dishonoring drafts that do not conform to the unamended letter, is not an anticipatory repudiation of the letter of credit.

In B.E.I. International, Inc. v. Thai Military Bank,133 BEI agreed to produce “hydra” rocket systems and sell them to the Royal Thai Army (RTA). To secure the RTA’s obligation to pay the $2,370,084 contract price, Thai Military Bank (TMB) issued an irrevocable letter of credit in BEI’s favor. TMB also issued a “counterguarantee” in favor of RTA, in the amount of $237,008.40, payable in the event that BEI failed to perform. BEI arranged for Worthen to issue an irrevocable standby letter of credit in the

See id. at 731. However, it also suggested that the “confirming” letters of credit may have, themselves, been repudiations of the original irrevocable letters of credit they purported to “confirm.” See id. at 729, 731.

129 See id. at 731.

130 See id.

131 See id.

132 See id.

133 978 F.2d 440 (8th Cir. 1992).

same amount in favor of TMB.134 Before Worthen’s letter of credit expired on November 23, 1988, Worthen agreed to extend its effective date until April 23, 1989, due to delays BEI was experiencing in obtaining the necessary U.S. export license.135 On March 23, 1989, TMB made a timely demand for payment against the Worthen letter, but then sent instructions eight days later asking Worthen to hold the demand “pending further instructions.”136 April 23 came and went with no more word from TMB. On April 26, BEI notified Worthen that the letter of credit had lapsed, and requested release of its collateral. On May 3, 1989, Worthen notified TMB that the letter of credit had lapsed and that Worthen believed that TMB’s March 23 demand had expired with it.137 In November 1989, BEI brought suit against Worthen and TMB to have the letter of credit declared expired and to regain the collateral it had given to Worthen. Worthen, in turn, urged TMB to acknowledge that its rights under the standby letter of credit had expired. Instead, TMB wrote Worthen on February 28, 1990 asking Worthen to extend the standby letter of credit until September 30, 1990. Worthen did not respond to this request,138 nor did TMB renew its prior demand or make any other attempt to draw against the letter of credit.

134 See id. at 440.

135 See id. at 441.

136 See id.

137 See id.

138 See id.

On appeal of the trial court judgment declaring, inter alia, TMB’s rights under the standby letter of credit to have expired,139 TMB argued that Worthen had anticipatorily repudiated its obligations under the standby letter of credit when it wrote TMB in May 1989 and January 1990 declaring the letter of credit and TMB’s March 23 demand expired.140 The Eighth Circuit disagreed:

Prior to expiration, TMB by written notice invoked the extension clause and extended the credit to April 23, 1989. When TMB failed to give notice of a further extension prior to April 23, 1989, the letter of credit expired. After expiration, TMB had no unilateral right to revive Worthen’s time-specific letter of credit commitment. Even if the parties to the underlying contract intended that Worthen’s letter of credit should remain open for the life of TMB’s counterguarantee to RTA, the plain language of the letter of credit document is controlling.

Because the letter of credit expired on April 23, 1989, the contentions TMB raises on appeal are without merit. TMB claims that Worthen repudiated the letter of credit in communications that came after April 23, 1989. Obviously, there can be no anticipatory repudiation of a contract that has already expired….141

B. Readiness, Willingness, and Ability to Perform

To the extent that a beneficiary must prove that she was ready, willing, and able to perform or to tender performance, but for the issuer’s repudiation, how may she prove the requisite readiness, willingness, and ability? In Décor by Nikkei International, Inc. v.

139 The district court held that TMB’s February 28 letter unilaterally extended the expiration date of the standby letter of credit until September 30, 1990. See id. at 442. However, because TMB did nothing else before September 30, 1990, the district court held that the letter then expired. See id. The court of appeals disagreed that TMB’s letter had the effect the trial court attributed to it, holding, instead, that it had expired on April 23, 1989 – the extended expiration date to which Worthen had previously agreed. See id. at 443. Either way, the standby letter had expired without a timely conforming demand by TMB.

140 See id. at 442.

141 Id. at 443.

Federal Republic of Nigeria,142 the plaintiffs established they had the necessary arrangements in place to procure and deliver the concrete that was the subject of the underlying contract on or before the date on which delivery was due.143 In Ross Bicycles, Inc. v. Citibank, N.A.,144 the plaintiff established that, but for the issuer’s repudiation, “it would have been in a position to ship goods … and present drafts for the amount of the balance of the letter of credit.”145

By contrast, in Clement v. FDIC,146 the beneficiary (Clement) was unable to establish that it could make a conforming draft against the standby letter of credit because, at the time the issuer’s successor-in-interest (FDIC) repudiated, there was, as yet, no breach of the underlying obligation entitling Clement to draw against the standby letter of credit.147

Likewise, in De Smeth v. Bank of New York,148 De Smeth’s predecessor-in-interest (Dikarpa) contracted to sell leather garments to Samsung for $890,448. Samsung opened an irrevocable letter of credit with the Bank of New York to pay for the garments. The letter of credit established shipping deadlines of January 20 and February 20, 1990 for

142 497 F. Supp. 893 (S.D.N.Y. 1980), af’d, 647 F.2d 300 (2d Cir. 1981).

143 See id. at 907-09.

144 613 N.Y.S.2d 538 (N.Y. Sup. Ct. 1994).

145 Id. at 539

146 2 UCC Rep. Serv. 2d 1017 (W.D. Okla. 1986).

147 See id. at 1023-24.

148 879 F. Supp. 13 (S.D.N.Y. 1995).

different styles of garments. By its terms, the letter of credit expired on March 11, 1990.149 Dikarpa failed to make any conforming shipments by the agreed deadlines, and submitted two drafts after the letter of credit expired on March 11.150 The bank refused to honor a total of six drafts, citing Dikarpa’s late shipment as the reason for rejecting the first four drafts and Dikarpa’s failure to submit drafts before the letter of credit expired as the reason for rejecting the final two drafts.151

While agreeing with De Smeth that the transaction was subject to the anticipatory repudiation provisions of Article 5 despite the letter of credit being expressly subject to the UCP,152 the court found that the plaintiff had no claim for anticipatorily repudiation because the six drafts that Dikarpa presented to the bank “were discrepant and any additional drafts that would have been presented would have been similarly discrepant since the letter of credit had expired.”153 Citing Ross Bicycles154 for the former’s discussion of the independence principle,155 the De Smeth court went on to say that Dikarpa’s readiness, willingness, and ability to perform the underlying obligation was insufficient grounds to find that it was ready, willing, and able to perform the letter of credit:

149 See id. at 14.

150 See id.

151 See id.

152 See id. at 15 n.1.

153 Id. at 15.

154 Ross Bicycles, Inc. v. Citibank, N.A., 613 N.Y.S.2d 538 (N.Y. Sup. Ct. 1994)

155 See supra note 22.

Plaintiff’s argument that it need only show its ability to fulfill its obligations on the underlying contract is rejected. The only contract governing the relationship between the parties to this action is the letter of credit, and it would be incorrect to look to the underlying contract, entered into by different parties, in analyzing plaintiff’s anticipatory repudiation

claim. 156

The final part of the court’s statement risks overbreadth. In many letter of credit anticipatory repudiation cases – including Ross Bicycles, the very case the court cites in support of its proposition – a beneficiary’s claim (or an issuer’s defense) may well rest on the performance of one or more parties to the underlying contract or on their readiness, willingness, and ability to perform the underlying contract.157 However, where, as in De Smeth, the issues are non-conforming documents and expiration (rather than cancellation or modification) of the letter of credit, performance of, or readiness, willingness, and ability to perform, the underlying contract is (or may be) a necessary, but not sufficient, condition for a beneficiary seeking to recover under the theory of anticipatory repudiation.

C. The Beneficiary’s Recourse

Assuming that the issuer repudiated and that the beneficiary was (if it needed to be) ready, willing, and able to perform any condition precedent to its right to payment under the repudiated letter of credit, what recourse is available to a beneficiary so wronged?

156 De Smeth, 879 F. Supp. at 15.

157 See, e.g., Décor by Nikkei Int’l, Inc. v. Federal Republic of Nigeria, 497 F. Supp. 893, 907-09 (S.D.N.Y. 1980) (discussed supra text accompanying notes 142-143), af’d, 647 F.2d 300 (2d Cir. 1981)

The version of Article 5 currently in effect in forty-nine states and the District of Columbia,158 provides that a beneficiary whose issuer, before presentation, repudiates its obligation to pay the beneficiary under the letter of credit before presentation may “recover from the issuer the amount that is the subject of the … repudiation,” plus incidental damages, interest “from the date of wrongful dishonor or other appropriate date,” and reasonable attorneys’ fees and other expenses of litigation incurred by the beneficiary in enforcing its rights against the repudiating issuer.159 If, before presentation, the issuer repudiates an obligation other than to pay money, the beneficiary may obtain specific performance, or at the beneficiary’s option, may recover the value of the issuer’s performance

158 See supra note 32.

159 See U.C.C. § 5-111(a), (d) & (e) (1995)

Former section 5-115(2) did not permit a beneficiary to recover attorneys’ fees and litigation expenses unless its letter of credit with the issuer so provided. See 1 DOLAN, supra note 11, at ¶ 9.02[5][c] & n.147

Because the UCP500, the ISP98, and the U.N. Convention are all silent with respect to remedies for anticipatory repudiation (and, for that matter, remedies for wrongful dishonor), Article 5 governs the beneficiary’s remedies for anticipatory repudiation notwithstanding the parties’ incorporation of one or more of the foregoing into their letter of credit. See U.C.C. § 5-116(c)

160 U.C.C. § 5-111(a). See generally 7A LAWRENCE, supra note 75, [Rev.] § 5-111:14.

beneficiary is not entitled to recover consequential, exemplary, or punitive damages.161 Nor is the beneficiary obligated to mitigate its damages caused by the issuer’s repudiation.162 However, if the beneficiary undertakes to avoid some or all of its damages, any damages it avoids will reduce the beneficiary’s recovery from the repudiating issuer.163

Former section 5-115 – still the law of Wisconsin164 – afforded a nonrepudiating beneficiary who learned of the issuer’s repudiation “in time to reasonably avoid procurement of the required documents,” the “rights of a seller after anticipatory

161 See U.C.C. § 5-111(a) (“[T]he claimant may also recover incidental but not consequential damages.”)

A beneficiary may recover consequential damages, not withstanding the general prohibition in section 5-111, if the letter of credit specifically provides for them. See generally 6B HAWKLAND & MILLER, supra note 33, at [Rev.] § 5-111:1.

162 U.C.C. § 5-111(a)

163 U.C.C. § 5-111(a). See generally 1 DOLAN, supra note 11, at ¶ 9.02[5][a]

164 See supra note 32.

repudiation by the buyer under Section 2-610.”165 Applying section 2-610 would lead a beneficiary who chose to respond to the issuer’s repudiation by doing something other than suspending its own performance and urging retraction to section 2-703.166 Section 2-703, in turn, would entitle the nonrepudiating beneficiary to (1) sue the repudiating issuer for the face value of the repudiated draft or letter – Article 5’s surrogate for the contract price – plus incidental damages and interest

165 See U.C.C. § 5-115(2) (1962). See generally 6B HAWKLAND & HOLLAND, supra note 33, at § 5-115:1

Treating the beneficiary as a seller whose buyer has repudiated poses a challenge when dealing with a standby letter of credit for which the underlying obligation is a promissory note or similar arrangement obligating, rather than a contract for the sale of goods or services.

Section 5-115 unfortunately was drafted with only commercial letters of credit in mind

3 CRANDALL ET AL., supra note 76, at § 21.8.3. While the foregoing overgeneralizes by failing to recognize that the contracts underlying some standby letters of credit are for the purchase and sale of goods or services, see supra note 12, it does point out one of the reasons the drafters of Revised Article 5 may have chosen to remove the reference to section 2-610 when they crafted section 5-111(a) to replace former section 5-115(2).

166 See U.C.C. § 2-610(b) (1989).

167 See id. §§ 2-709 & 2-710

for the difference between the contract price promised by the applicant – whose promise to pay the issuer repudiated – and the price at which the beneficiary resold, plus incidental damages and interest, less expenses saved as a consequence of the issuer’s repudiation

interest, less any amount the beneficiaries have received from third parties as a consequence of being released from their obligation to the applicant).

168 See U.C.C. §§ 2-706 & 2-710

169 See U.C.C. §§ 2-708(1) & 2-710.

170 See U.C.C. §§ 2-708(2) & 2-710

171 See U.C.C. § 2-703(f).

applicant based on the issuer’s repudiation, unless the contract between the beneficiary and the applicant so provided. If the beneficiary had already procured the required documents, former section 5-115 entitled it to recover the “face amount” of the repudiated draft or letter, together with incidental damages and interest – the same remedy afforded to beneficiaries whose presentations had been wrongfully dishonored.172

There is no indication in either the prefatory note or the official comments to Revised Article 5 that its drafters intended, in any way, to reduce the remedial options available to a beneficiary whose issuer anticipatorily repudiates. Indeed, the prefatory note describes section 5-111 as “expand[ing]” the remedies available to beneficiaries.173 And, yet, section 5-111 only explicitly affords a beneficiary a single measure of compensatory damages: “the amount that is the subject of the … repudiation,”174 which is comparable to former section 5-115(2)’s granting a beneficiary the functional equivalent of an action for price.175 Section 5-111 makes no explicit provision for a beneficiary

172 See U.C.C. § 5-115(1) & (2) (1962)

173 Prefatory Note to U.C.C. Revised Article 5 (1995) (“The damages provided are expanded and clarified. They include attorneys fees and expenses of litigation and payment of the full amount of the wrongfully dishonored or repudiated demand, with interest, without an obligation of the beneficiary to mitigate damages.”)

174 U.C.C. § 5-111(a) (1995).

175 See supra text accompanying note 167.

recovering the difference between the contract price of its goods or services and their resale price,176 the difference between the contract price of its goods or services and their market value at the time and place of tender,177 or the profits lost by the beneficiary as a result of the issuer’s repudiation.178 Nor have the leading commentators opined on the effect of these omissions.179

The text of and comments to Revised Article 5 are also silent about whether a beneficiary may demand adequate assurances from an issuer who has given the beneficiary reasonable grounds for insecurity (or, for that matter, whether a repudiating issuer may retract its repudiation before the nonrepudiating beneficiary materially changes position or otherwise treats the repudiation as final).

Former section 5-115(2) was arguably silent on these issues, too, providing only that the nonrepudiating beneficiary who learned of the issuer’s repudiation prior to procuring the documents required to make a conforming presentation had “the rights of a seller after anticipatory repudiation by the buyer under Section 2-610.”180 A seller’s right to demand adequate assurances of performance arises under section 2-609, not section 2-610.181 Thus, a strict reading of the text of former section 5-115(2) could lead one to the conclusion that, while a nonrepudiating beneficiary was entitled, following a repudiation

176 See supra text accompanying note 168.

177 See supra text accompanying note 169.

178 See supra text accompanying note 170.

179 See 3 CRANDALL ET AL., supra note 76, at § 21.8.3

180 U.C.C. § 5-115(2) (1962)

181 See U.C.C. § 2-609 (1989)

by the issuer that would substantially impair the value of the letter of credit to the beneficiary, to wait a commercially reasonable time for the issuer to perform, urge the issuer to retract its repudiation, sue the issuer for breach, and, in any event, suspend his own performance – all rights granted under section 2-610182 – the nonrepudiating beneficiary was not entitled to demand that the issuer provide adequate assurances of performance before the beneficiary resorted to section 2-610. Surely such a strict reading, however, would have missed the drafters’ intent. The official comments to section 2-610, read along with the text of and official comments to sections 2-609 and 2-611, clearly contemplate section 2-610 to be part of a tri-partite whole made up of sections 2-609, 2-610, and 2-611.183 Isolating section 2-610 from section 2-609, to the

182 See U.C.C. § 2-610

183 See U.C.C. § 2-609(1) (providing that “[a] contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired” – an obligation that would clearly be breached by anticipatory repudiation under section 2-610)

end of denying a nonrepudiating beneficiary the right to seek assurances from a repudiating issuer in the same manner and under the same constraints as Article 2 allows a nonrepudiating seller the right to seek assurances from a repudiating buyer, gives the nonrepudiating beneficiary fewer rights than Article 2 gives the nonrepudiating seller. Similarly, isolating section 2-610 from section 2-611 – an even more difficult task given the explicit reference in the text of section 2-610(b) to “urg[ing] retraction”184 – to the end of denying a repudiating issuer the right to retract its repudiation before the nonrepudiating beneficiary materially changes its position or otherwise indicates that it considers the issuer’s repudiation to be final in the same manner and under the same constraints as Article 2 allows a repudiating buyer the right to retract its repudiation before the nonrepudiating seller materially changes its position or otherwise indicates that it considers the buyer’s repudiation to be final, gives the repudiating issuer fewer rights than Article 2 gives the repudiating buyer. Such outcomes seem inconsistent with distinguishing anticipatory repudiation from wrongful dishonor as the drafters of former Article 5 chose to do by setting former section 5-115(2) apart from former section 5-115(1) and as the drafters of Revised Article 5 chose to do by recognizing a beneficiary’s right to remedy when “an issuer … repudiates its obligation to pay money under a letter of credit before presentation” as a basis for relief separate from a beneficiary’s right to remedy when “an issuer wrongfully dishonors.”185

unambiguous expression of retraction, a reasonable time for the assurance to be worked out should be allowed by the aggrieved party before cancellation.” (emphases added)).

184 U.C.C. § 2-610(b).

185 U.C.C. § 5-111(a) (1995)

Reported case law on whether a beneficiary has the right to demand adequate assurances from an issuer – and the more important corollary right to treat an issuer’s failure to provide adequate assurances following a justified demand – is virtually nonexistent. What little exists suggests that, at least under former Article 5, a beneficiary had the right to demand assurances.186 Likewise, there is limited authority supporting the beneficiary’s right to urge the repudiating issuer to retract – and the issuer’s much more important corollary right to retract prior to any act by the beneficiary cutting off the issuer’s right to retract.187 The leading commentators are generally silent on the issues of adequate assurances and retraction under both former section 5-115(2) and revised section 5-111.188

186 Cf. Monter Joint Stock Co. v. Udruzena Beogradska Banka, 684 N.Y.S.2d 214, 215 (N.Y. App. Div. 1999) (“Plaintiff’s present claim of anticipatory breach based on the banks’ failure to offer to honor the letter of credit once sanctions are lifted in the future is improperly raised for the first time on appeal, and, in any event, is without merit absent allegations or proof that plaintiff ever made the requisite demand for assurances of future performance.” (citing Norcon Power Partners v. Niagara Mohawk Power Corp., 705 N.E.2d 656 (N.Y. 1998)).

187 See Atari, Inc. v. Harris Trust & Sav. Bank, 599 F. Supp. 592, 601 (N.D. Ill. 1984) (holding that the beneficiary’s presentation following the issuer’s repudiation was “no more than a further urging that [the issuer] retract its repudiation and perform under the credit” and that, had the issuer at that point properly dishonored the beneficiary’s draft as nonconforming, the dishonor “would amount to … a retraction of its prior repudiation” because “[s]hould the issuer properly dishonor an attempted draw made subsequent to its repudiation, it has performed under the credit and retracted its repudiation”), af’d in part and rev’d in part, 785 F.2d 312 (7th Cir. 1986).

188 See 3 CRANDALL ET AL., supra note 76, at § 21.8.3

Professor Quinn offers the following comment without any further illumination:

Neither 5-115, nor its Official Comment suggests … how the anticipatory repudiation rules of the sales act that involve[] a two-party relationship between seller and buyer are intended to apply to the three-party relationship between seller-issuer-buyer, save to say that this “states the rights of the beneficiary upon repudiation of the credit, both against the issuer and with respect to any goods.”

2 QUINN, supra note 78, at § 5-115[A][3] (quoting U.C.C. § 5-115 cmt. 2).

III. Conclusion

The letter of credit is a useful tool that can facilitate a commercial transaction by providing either a payment or financing mechanism or by guaranteeing satisfactory performance….

….

In a sale of goods context, the seller/beneficiary can use the letter of credit as collateral to finance production. Once the goods are shipped, the seller is assured prompt payment upon presentation of complying documents. Consequently, the seller avoids delays incurred in billing and collection of the purchase price. The buyer/customer, on the other hand, avoids prepaying the entire amount of the purchase prior to its shipment without any assurance of satisfactory performance. Because the letter of credit mechanism permits the buyer to specify that certain documents accompany the draft for payment, the buyer can be reasonably assured that complying documents will signify adequate performance.

In a standby letter of credit, the beneficiary knows that a creditworthy party will pay upon presentment of documents that substantiate the claim of default or nonperformance. The customer or “guaranteed” party benefits by not having to escrow the funds or otherwise restrict the use of funds.189

These advantages do not come without corresponding risks. Introducing a third party – the letter of credit issuer – to the transaction may allow an applicant to enjoy the benefits of some transaction that it would otherwise have to forego because of the erstwhile beneficiary’s unwillingness to extend credit to the applicant or to accept payment in a form, at a time, or at a place that is less convenient to the beneficiary than promised by the letter of credit. On the other hand, a third party who has no vested interest in the underlying transaction may be more inclined than an interested party would be to repudiate its obligation.

189 Leon, supra note 2, at 462-63.

An issuer’s repudiation, at the very least, deprives the beneficiary of the full benefit of her bargain, in that it forces her to rely on the creditworthiness of an applicant who she deemed insufficiently creditworthy in the first place, thus her decision to require the letter of credit. And, if the beneficiary’s initial estimation of the applicant bears out, the beneficiary will suffer a real loss. 190

For these reasons, Article 5 affords relief to a beneficiary whose issuer clearly and unconditionally manifests its intent not to honor, or its inability to honor, her conforming presentation when and as promised. However, given the widespread adoption of Revised Article 5 and its less explicit anticipatory repudiation provision, it is unclear whether such a beneficiary any longer has the choice of remedies she was granted by former Article 5 .191 Moreover, her right to justifiably demand adequate assurances of performance and her issuer’s right to retract its repudiation at any time prior to her detrimentally relying on it, both of which are express in Article 2 and were impliedly incorporated by former section 5-115(2), seem even more tenuous than they were under former Article 5.192 Taken at face value, Revised Article 5 could be read to afford a beneficiary whose issuer repudiates prior to the time its honor is due little more (though no less) than a beneficiary whose issuer wrongfully dishonors at or after the time its honor is due – no more than the right not to have to prepare for and make a conforming presentation, only to have it

190 If the issuer’s repudiation comes before the beneficiary has fully performed, or gives the beneficiary reasonable grounds to feel insecure about the applicant’s ability to perform, then the applicant, too, will be injured by the issuer’s repudiation. Revised Article 5 affords the applicant a remedy against the issuer in such a case. See U.C.C. § 5-111(b). However, a discussion of the applicant-issuer relationship is beyond the scope of this article.

191 See supra text accompanying notes 159-179.

192 See supra text accompanying notes 180-188.

rejected by the issuer. If the drafters of Revised Article 5 intended otherwise, or the courts who must apply Revised Article 5 think otherwise, the time is ripe for more definitive guidance.