SRC-PNG S.B. 85 76(R) BILL ANALYSIS
Senate Research Center S.B. 85
76R2236 LJR-DBy: Carona
Economic Development
2/8/1999
As Filed
DIGEST
Currently, in Texas, Chapter 5 of the Business & Commerce Code follows
Article 5 of the Uniform Commercial Code (UCC), stating the rights and
obligations created by a letter of credit. The official sponsors of the
UCC have proposed a series of amendments to Article 5 in order to enhance
the commercial acceptability of letter of credit. The recommendations both
clarify the legal obligation of issuers to pay promptly and harmonize
Article 5 with modern commercial practices with respect to letters of
credit, including the increasing use of electronic communication. This
bill revises the Texas enactment of Article 5.
PURPOSE
As proposed, S.B. 85 revises the Business & Commerce Code concerning
letters of credit.
RULEMAKING AUTHORITY
This bill does not grant any additional rulemaking authority to a state
officer, institution, or agency.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Chapter 5, Business & Commerce Code, as follows:
CHAPTER 5. LETTERS OF CREDIT
Sec. 5.102. New heading: DEFINITIONS. Defines "adviser," "applicant,"
"beneficiary," "confirmer," "dishonor," "document," "good faith," "honor,"
"issuer," "letter of credit," "nominated person," "presentation,"
"presenter," "record," and "successor of a beneficiary." Provides
locations of other definitions defined in other chapters of this code
applicable to this chapter. Establishes that Chapter 1 contains
additional applicable definitions and principles.
Sec. 5.103. SCOPE. Establishes that this chapter applies to letters of
credit and to certain rights and obligations arising out of transactions
involving letters of credit. Provides that a statement of a rule in this
chapter does not by itself require, imply, or negate application of the
same or a different rule to a situation not provided for, or to a person
not specified, in this chapter. Establishes that the effect of this
chapter may be varied by agreement or by a provision stated or
incorporated by reference in an undertaking, except for certain sections
and subsections. Prohibits a term, in an agreement or undertaking excusing
liability or limiting remedies for failure to perform obligations, from
varying obligations prescribed by this chapter. Establishes that the
rights and obligations of an issuer to a beneficiary or a nominated person
under a letter of credit are independent of the existence, performance, or
nonperformance of a contract out of which a letter of credit arises,
including certain specific contracts or arrangements. Deletes previous
definitions and the scope of the chapter.
Sec. 5.104. New heading: FORMAL REQUIREMENTS. Authorizes the issuance
of a letter of credit, confirmation, advice, transfer, amendment, or
cancellation in any form that is a record and is authenticated by certain
means. Deletes text requiring no form of phrasing for a credit and
certain requirements for a credit or a modification of a credit. Deletes
certain specifications for authentication.
Sec. 5.105. CONSIDERATION. Establishes that consideration is not
required to issue, amend, transfer, or cancel a letter of credit, advice,
or confirmation. Deletes text stating that no consideration is necessary
for only establishing or modifying a credit.
Sec. 5.106. New heading: ISSUANCE, AMENDMENT, CANCELLATION, AND
DURATION. Establishes that a letter of credit is issued and enforceable
when the issuer sends or otherwise transmits it to the person requested to
advise or to the beneficiary. Provides that a letter of credit is
revocable only if it so provides. Provides that after a letter of credit
is issued, all rights and obligations arising from that letter of credit
are not affected by amendment or cancellation to which that person has not
consented except to the extent the letter of credit is revocable or that
letter of credit provides that the issuer may amend or cancel the letter
of credit without consent. Provides that a letter of credit expires one
year after its stated date of issuance or, if no date is stated, after the
date on which it was issued, if there is no stated expiration date.
Provides that a perpetual letter of credit expires five years after its
stated date of issuance or, if no date is stated, after the date on which
it is issued. Deletes text concerning the time and effect of the
establishment of credit.
Sec. 5.107. New heading: CONFIRMER, NOMINATED PERSON, AND ADVISER.
Provides that a confirmer is directly obligated on a letter of credit and
has the rights and obligations of an issuer to the extent of its
confirmation. Provides that a confirmer has rights against and
obligations to the issuer as if the issuer were an applicant and the
confirmer had issued the letter of credit for the issuer. Provides that a
nominated person who is not a confirmer is not obligated to honor or
otherwise give value for a presentation. Authorizes a person requested to
give advice to decline to act as an adviser. Provides that an adviser that
is not a confirmer is not obligated to honor or give value for a
presentation. Provides for the duties and responsibilities of an adviser.
Provides that even if the advice is inaccurate, the letter of credit,
confirmation, or amendment is enforceable. Provides for the rights and
obligations of a person who notifies a transferee beneficiary of the terms
of a letter of credit, confirmation, amendment, or advice. Authorizes the
terms of the notice to the transferee beneficiary to differ from the terms
in any notice to the transferor beneficiary. Deletes text concerning
advice of credit, the obligations of a confirming bank, errors in the
statement of terms of a credit by an advising bank, and the burden of
error in any message relating to a credit.
Sec. 5.108. New heading: ISSUER'S RIGHTS AND OBLIGATIONS. Requires an
issuer to honor a presentation that, as determined by the standard
practice, appears to strictly comply with the terms and conditions of the
letter of credit, except as provided in Section 5.109. Requires an issuer
to dishonor a presentation that does not appear to comply, except as
provided in Section 5.113. Provides that an issuer has until the seventh
day after receipt of presentation documents to take certain actions.
Prohibits an issuer from asserting as a basis for dishonor any discrepancy
if timely notice is not given or any discrepancy not stated in the notice,
except as provided in Subsection (d). Establishes that failure to give the
notice in Subsection (b) or to mention fraud, forgery, or expiration in
the notice does not preclude the issuer from asserting fraud or forgery or
expiration of the letter of credit as a basis for dishonor. Requires an
issuer to observe the standard practice of financial institutions that
regularly issue letters of credit. Establishes that the determination of
an issuer's observance of the standard practice is a matter of
interpretation by the court. Requires the court to offer the parties an
opportunity to present evidence of the standard practice. Establishes that
an issuer is not responsible for certain actions. Requires an issuer to
disregard nondocumentary conditions in a letter of credit. Requires an
issuer that has dishonored a presentation to return the documents or hold
them at the disposal of, and send advice to that effect to, the presenter.
Establishes certain rights, obligations, and prohibitions for an issuer
that has honored a presentation.
Sec. 5.109. FRAUD AND FORGERY. Provides for certain actions by the
issuer if a presentation is made which appears to strictly comply with the
terms and conditions of the letter of credit, but a required document is
forged or materially fraudulent, or honor of the presentation would
facilitate a material fraud by the beneficiary of the issuer or applicant.
Authorizes a court to temporarily or permanently enjoin an issuer from
honoring a presentation, if the applicant claims that a required document
is forged or materially fraudulent or that honor of the presentation would
facilitate a material fraud by the beneficiary on the issuer or applicant,
only if the court makes certain findings. Deletes existing Sections 5.109
and 5.110 regarding "notation credit," the exhaustion of credit, and the
issuer's obligation to its customer.
Sec. 5.110. New heading: WARRANTIES. Sets forth certain warranties to
be made by the beneficiary if the presentation is honored. Provides that
those warranties are in addition to warranties arising under Chapters 3,
4, 7, and 8 because of the presentation or transfer of documents covered
by any of those chapters. Provides that the warranties in Subsection (a)
do not arise until the issuer honors the letter of credit, notwithstanding
any agreement or term to the contrary.
Sec. 5.111. REMEDIES. Authorizes a beneficiary, successor, or nominated
person presenting on its own behalf to recover from the issuer an amount
wrongfully dishonored or repudiated. Authorizes the claimant to obtain
specific performance or, at the claimant's election, recover an amount
equal to the value of performance if the issuer's obligation is not for
the payment of money. Authorizes the claimant to also receive incidental
but not consequential damages. Provides that the claimant is not
obligated to avoid damages that might be due from the issuer. Requires
the claimant's recovery from the issuer to be reduced by the avoided
damages, if a claimant does avoid damages. Establishes that the issuer has
the burden of proof as to the amount of avoided damages. Provides that the
claimant need not present any document in the case of repudiation.
Authorizes an applicant to recover certain damages if an issuer wrongfully
dishonors a draft or demand presented or honors a draft or demand in
breach of its obligation to the applicant. Provides that if an adviser or
nominated person other than a confirmer breaches an obligation not covered
in Subsection (a) or (b), a person to whom the obligation is owed may
recover certain damages. Provides that a confirmer has the liability of
an issuer specified in this subsection and Subsections (a) and (b) to the
extent of the confirmation. Requires an issuer, nominated person, or
adviser who is found liable under Subsections (a), (b), or (c) to pay
interest on the amount owed from the date of wrongful dishonor or other
appropriate date. Authorizes reasonable attorney's fees and other
litigation expenses to be awarded. Authorizes damages that would otherwise
be payable for a breach of an obligation under this chapter to be
liquidated by agreement or undertaking, but only for a reasonable amount
in light of the anticipated harm. Deletes text of existing Section 5.111
regarding warranties on transfer and presentment. Deletes existing
Section 5.112 regarding the time allowed for honor or rejection, the
withholding of honor, or rejection by consent, and the definition of
"presenter." Deletes existing Section 5.113 regarding indemnities.
Deletes existing Section 5.114 regarding an issuer's duty and privilege to
honor a draft or demand for payment, and an issuer's right to
reimbursement. Deletes existing Section 5.115 regarding a remedy for an
improper dishonor or anticipatory repudiation.
Sec. 5.112. New heading: TRANSFER OF LETTER OF CREDIT. Prohibits the
transference of the right of a beneficiary to draw or otherwise demand
performance under a letter of credit, unless a letter of credit provides
that it is transferable, except as provided in Section 5.113. Authorizes
an issuer to refuse to recognize or carry out a transfer, even if the
letter of credit states it is transferable, under certain conditions.
Deletes text regarding the assignment of a right to draw under a credit.
Sec. 5.113. TRANSFER BY OPERATION OF LAW. Authorizes a successor of a
beneficiary to consent to amendments, sign and present documents, and
receive payment or other items of value in the name of the beneficiary
without disclosing its status as a successor. Authorizes a successor of a
beneficiary to consent to amendments, sign and present documents, and
receive payment or other items of value in its own name as the disclosed
successor of the beneficiary. Requires an issuer to recognize a disclosed
successor of a beneficiary as a full substitution upon compliance with
certain requirements. Provides that an issuer is not obliged to determine
whether a purported successor is a successor of a beneficiary or whether
the signature of the purported successor is genuine or authorized.
Establishes that the honor of a purported successor's apparently complying
presentation under Subsection (a) or (b) has the consequences specified in
Section 5.108(i) even if the purported successor is not the successor of a
beneficiary. Provides that certain documents are forged documents for the
purposes of Section 5.109. Authorizes an issuer whose rights of
reimbursement are not covered by Subsection (d) or substantially similar
law and any confirmer or nominated person to decline to recognize a
presentation under Subsection (b). Establishes that a beneficiary whose
name is changed after the issuance of a letter of credit has the same
rights and obligations as a successor of a beneficiary under this section.
Sec. 5.114. ASSIGNMENT OF PROCEEDS. Defines "proceeds of a letter of
credit." Authorizes a beneficiary to assign its right to all or part of
the proceeds of a letter of credit. Authorizes a beneficiary to assign its
right before presentation as a present assignment of its right to receive
proceeds contingent upon its compliance with the terms and conditions of
the letter of credit. Provides that an issuer or nominated person need
not recognize an assignment of proceeds of a letter of credit until it
consents to the assignment. Establishes that an issuer or a nominated
person has no obligation to give or withhold its consent to an assignment,
but consent may not be unreasonably held if the assignee possesses and
exhibits the letter of credit and presentation is a condition to honor.
Provides that the rights of a transferee beneficiary or nominated person
are independent of the beneficiary's assignment of the proceeds of a
letter of credit and are superior to the assignee's right to the proceeds.
Establishes that neither the rights recognized by this section nor the
issuer's or nominated person's payment of proceeds to an assignee or a
third person affect the rights between the assignee and any other person
other than the issuer, transferee beneficiary, or nominated person.
Provides that the mode of creating and perfecting a security interest in or
granting an assignment of a beneficiary's rights to proceeds is governed
by Chapter 9 or other law. Provides that the rights and obligations
arising upon the creation of a security interest or other assignment of a
beneficiary's right to proceeds and its perfection, against persons other
than the issuer, transferee beneficiary, or nominated person, are governed
by Chapter 9 or other law.
Sec. 5.115. STATUTE OF LIMITATIONS. Requires an action to enforce a
right or obligation arising under this chapter to be commenced within one
year after the expiration date of the relevant letter of credit or one
year after the cause of action accrues, whichever is later. Establishes
when a cause of action accrues.
Sec. 5.116. CHOICE OF LAW AND FORUM. Establishes that the liability of
an issuer, nominated person, or adviser for action or omission is governed
by the law of the jurisdiction chosen by a certain agreement, or by a
provision in the person's letter of credit, confirmation, or other
undertaking. Provides that the chosen jurisdiction need not bear any
relation to the transaction. Provides that, unless Subsection (a)
applies, the liability of an issuer, nominated person, or adviser for
action or omission is governed by the law of the jurisdiction in which the
person is located. Establishes how a person's address is determined.
Provides that for the purpose of jurisdiction, choice of law, and
recognition of interbranch letters of credit, but not enforcement of a
judgment, all branches of a bank are considered separate judicial
entities, and a bank is located at the place where its relevant branch is
considered to be located under this subsection. Establishes that the
liability of an issuer, nominated person, or adviser is governed by any
rules of custom or practice to which the letter of credit, confirmation,
or other undertaking is expressly made subject. Establishes that under
certain conditions, the rules of custom and practice would govern over
this chapter, except to the extent of any conflict with the nonvariable
provisions in Section 5.103(c). Provides that if there is a conflict
between this chapter and Chapter 3, 4, 4A, or 9, this chapter governs.
Authorizes a forum for settling disputes arising out of an undertaking
within this chapter to be chosen in the manner and with the binding effect
that governing law may be chosen under Subsection (a). Deletes text
concerning a beneficiary's assignment of right to proceeds.
Sec. 5.117. New heading: SUBROGATION OF ISSUER, APPLICANT, AND NOMINATED
PERSON. Establishes that an issuer that honors a beneficiary's
presentation is subrogated to the rights of the beneficiary to a certain
extent. Establishes that an applicant that reimburses an issuer is
subrogated to the rights of the issuer against any beneficiary, presenter,
or nominated person to a certain extent. Provides that a nominated person
who pays or gives value against a draft or demand presented under a letter
of credit is subrogated to the rights of certain individuals. Establishes
that the rights of subrogation set forth in Subsections (a) and (b) do not
arise until the issuer honors the letter of credit or otherwise pays, and
the rights in Subsection (c) do not arise until the nominated person pays
or otherwise gives value, notwithstanding any agreement or term to the
contrary. Provides that until that point, the issuer, the nominated
person, and the applicant do not derive under this section any rights
forming the basis of a claim, defense, or excuse. Deletes existing Section
5.117 concerning the insolvency of bank holding funds for documentary
credit.
SECTION 2. Amends Section 1.105(b), Business & Commerce Code, to include
the provision for letters of credit, as specified in Section 5.116, as the
governing provision.
SECTION 3. Amends Section 2.512(a), Business & Commerce Code, to make
conforming and nonsubstantive changes.
SECTION 4. Amends Section 9.103(a), Business & Commerce Code, to include
letters of credit among the instruments covered by the section, regarding
the perfection of security interest in multiple state transactions.
SECTION 5. Amends Section 9.104, Business & Commerce Code, to include in
the transactions to which this chapter does not apply, the transfer of an
interest in a letter of credit other than the rights to proceeds of a
written letter of credit.
SECTION 6. Amends Section 9.105(c), Business & Commerce Code, to include
among the definitions in other chapters applicable to this chapter, "letter
of credit," Section 5.102; and "proceeds of a letter of credit," Section
5.114.
SECTION 7. Amends Section 9.106, Business & Commerce Code, to include the
rights to proceeds of written letters of credit among those items excluded
from the definition of "general intangibles."
SECTION 8. Amends Sections 9.304 and 9.305, Business & Commerce Code, as
follows:
Sec. 9.304. New heading: PERFECTION OF SECURITY INTEREST IN INSTRUMENTS,
DOCUMENTS, PROCEEDS OF A WRITTEN LETTER OF CREDIT, AND GOODS COVERED BY
DOCUMENTS; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION WITHOUT
FILING OR TRANSFER OF POSSESSION. Provides that a security interest in
the rights to proceeds of a written letter of credit can be perfected only
by the secured party's taking possession of the letter of credit.
Sec. 9.305. WHEN POSSESSION BY SECURED PARTY PERFECTS SECURITY INTEREST
WITHOUT FILING. Deletes text specifying the type of security interest
covered in this section. Authorizes a security interest in the right to
proceeds of a written letter of credit to be perfected by the secured
party's taking possession of the letter of credit.
SECTION 9. Effective date: September 1, 1999.
SECTION 10. Makes application of this Act prospective.
SECTION 11. Emergency clause.