TYH MPA, S.B. 85 76(R) BILL ANALYSIS
Office of House Bill AnalysisS.B. 85
By: Carona
Financial Institutions
3/19/1999
Engrossed
BACKGROUND AND PURPOSE
Letters of credit are used to assure the creditworthiness of the person
required to obtain them and are typically issued by a financial institution
at the request of a customer who pays a fee and engages to reimburse any
payments made by the issuer to a person to whom the customer is obligated
in an underlying transaction. There are two basic letters of credit,
commercial letters of credit, and standby letters of credit. Commercial
letters of credit are primarily utilized to finance the purchase of goods,
and anticipate paying a beneficiary in the underlying transaction by
drawing upon the letter of credit. Standby letters of credit, the most
common type, function when a beneficiary is expected to draw upon the
letter of credit only if the obligor in the underlying transaction
defaults.
Under the Independence Principle, a fundamental tenet of letter of credit
law, an issuer's rights and obligations with respect to a beneficiary are
independent of the arrangement that gave rise to the letter of credit.
Chapter 5 (Letters of Credit), Business & Commerce Code does not mention
the Independence Principle, yet Texas case law adheres to this principle.
S.B. 85 expressly codifies the principle and prohibits its waiver.
Additionally, Texas law currently requires that a letter of credit be in
writing. This bill permits a letter of credit to be issued electronically.
S.B. 85 makes other amendments to Chapter 5 as well, all of which were
recommended by the American Law Institute and the National Conference of
Commissioners on Uniform State Law.
RULEMAKING AUTHORITY
It is the opinion of the Office of House Bill Analysis that this bill does
not expressly delegate any additional rulemaking authority to a state
officer, department, agency, or institution.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Chapter 5, Business & Commerce Code, Section 5.102, as
follows:
Sec. 5.102. DEFINITIONS. (a) Defines:"adviser," "applicant,"
"beneficiary," "confirmer," "dishonor," "document," "good faith," "honor,"
"issuer," "letter of credit," "nominated person," "presentation,"
"presenter," "record," and "successor of a beneficiary,"
(b) Establishes that definitions in other chapters and corresponding
sections which apply in this chapter are as follows: "accept" or
"acceptance," Section 3.409 (Acceptance of Draft; Certified Checks);
"value," Sections 3.303 (Value and Consideration) and 4.211 (When Bank
Gives Value for Purposes of Holder in Due Course).
(c) Provides that Chapter 1 contains certain additional general
definitions, principles of construction and interpretation applicable to
this chapter are contained in Chapter 1.
Sec. 5.103. SCOPE. Establishes that this chapter applies to letters of
credit and certain rights and obligations arising out of letters of credit
transactions. Provides that a stated rule 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.
Authorizes the effects of this chapter to be varied by agreement or by a
provision stated or incorporated by reference in an undertaking, with the
exception of specified subsections. Specifies that a term excusing
liability or generally limiting remedies for failure to perform obligations
in an agreement or undertaking is not sufficient to vary obligations of
this chapter. Establishes that the rights and obligations of an issuer to
a beneficiary or nominated person under a letter of credit are independent
of the existence, performance, or nonperformance of a contract or
arrangement out of which the letter of credit arises or which underlies it,
including contracts or arrangements between the issuer and the applicant
and between the applicant and the beneficiary. Deletes previous
definitions and the scope of the chapter.
Sec. 5.104. New Title: FORMAL REQUIREMENTS. Authorizes a letter of
credit, confirmation, advice, transfer, amendment, or cancellation to be
issued in any form that is a record and is authenticated by a signature or
in accordance with the agreement of the parties or standard practices.
Deletes text requiring no form of phasing for a credit and certain
requirements for 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 Title: ISSUANCE, AMENDMENT, CANCELLATION, AND DURATION.
(a) Establishes that a letter of credit is issued and becomes enforceable
when the issuer sends or otherwise transmits it to the person requested to
advise or to the beneficiary, and is revocable only if it so provides.
(b) Establishes that 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.
(c) Establishes that if there is no stated expiration date or other
provision that determines its duration, a letter of credit expires one year
after its stated date of issuance or, if no date is stated, after the date
on which it is issued.
(d) Specifies that a letter of credit that states it is perpetual 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. CONFIRMER, NOMINATED PERSON, AND ADVISER. (a) 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.
(b) Provides that a nominated person who is not a confirmer is not
obligated to honor or otherwise give value for a presentation.
(c) Authorizes a person requested to advise may 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, and that an adviser has a duty
to accurately advise the issuer and beneficiary as to the terms of the
letter of credit.
(d) Provides that a person who notifies a transferee beneficiary of the
terms of a letter of credit, confirmation, amendment, or advice has the
rights and obligations of an adviser under Subsection (c). Authorizes the
notice to the transferee beneficiary to differ from the notice to the
transferor beneficiary.
Deletes text concerning advice of credit, the obligations of the
confirming bank, errors in the statement of terms of credit, obligations of
the confirming bank, errors in the statement of terms of a credit by the
advising bank, and the burden of error in any message relating to a credit.
Sec. 5.108. ISSUER'S RIGHTS AND OBLIGATIONS. (a) Requires an issuer to
honor a presentation that appears on its face to 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 otherwise provided in Section 5.113 and unless otherwise
agreed with the applicant.
(b) Provides that an issuer has a reasonable time after presentation, but
no more than seven business days after receipt of documents, to honor; to
accept a draft or incur a deferred obligation if the letter of credit
provides for honor to be completed more than seven business days after
presentation; or notify the presenter of discrepancies in the presentation.
(c) 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 if such is given, except as otherwise provided in Subsection
(d).
(d) Provides that failure to give the notice outlined in Subsection (b) or
to mention fraud, forgery (Section 5.109(a)), or expiration in the notice
does not preclude the issuer from asserting the same as a basis for
dishonor.
(e) Requires an issuer to observe the standard practice of financial
institutions that regularly issue letters of credit. Provides that the
court must offer the parties a reasonable opportunity to present evidence
of the standard practice.
(f) Provides that an issuer is not responsible for the performance or
nonperformance of the underlying contract, arrangement, or transaction; an
act or omission by others; or observance or knowledge of the usage of a
particular trade other than the standard practice referred to in Subsection
(e).
(g) Requires an issuer of a letter of credit to disregard nondocumentary
conditions and treat them as if they were not stated.
(h) Requires an issuer who has dishonored a presentation to return the
documents or hold them at the disposal of, and advise the presenter.
(i) Establishes certain rights, obligations, and prohibitions for an issuer
that has honored a presentation.
Sec. 5.109. FRAUD AND FORGERY. (a) Provides for certain actions by the
issuer if upon presentation the letter of credit appears to be valid, but a
required document is forged or materially fraudulent, or honor of the
presentation would facilitate a material fraud by the beneficiary on the
issuer or applicant.
(b) Authorizes a court of competent jurisdiction to temporarily or
permanently enjoin the issuer from honoring a presentation or grant similar
relief against the issuer or other persons, 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 Title: WARRANTIES. Sets forth certain warranties to be
made by the beneficiary if the presentation is honored. Provides that the
warranties, which do not arise until the issuer honors the letter of
credit, are in addition to warranties arising under this code.
Sec. 5.111. REMEDIES. (a) Authorizes the beneficiary, successor, or
nominated person presenting on its own behalf to recover from the issuer
the amount that is the subject of the dishonor or repudiation, if an issuer
wrongfully dishonors or repudiates its obligation to pay money under a
letter of credit before presentation. Authorizes the claimant to obtain
specific performance or, at the claimant's election, recover an amount
equal to the value of performance from the issuer if the issuer's
obligation under the letter of credit is not for the payment of money.
Authorizes a claimant to also recover incidental, but not consequential
damages. Provides that the claimant is not obligated to take action to
avoid damages that might be due from the issuer under this subsection, but
if claimant does so, the recovery from the issuer must be reduced by the
amount of damages avoided. Provides that the issuer has the burden of
proving the amount of damages avoided. Provides that claimants do not have
to present any documents in the case of repudiation.
(b) Authorizes the applicant to recover damages, including incidental but
not consequential damages, less any amount saved as a result of the breach,
if an issuer wrongfully dishonors a draft or demand presented under a
letter of credit or honors a draft or demand in breach of its obligation to
the applicant.
(c) Authorizes a person to whom the obligation is owed to recover damages
resulting from the breach if an adviser or nominated person breaches an
obligation. Provides that a confirmer, to the extent of confirmation, has
liability of an issuer.
(d) Requires an issuer, nominated person, or adviser who is found liable
to pay interest on the amount owed from the date of wrongful dishonor or
other appropriate date.
(e) Authorizes the prevailing party in an action in which a remedy is
sought to be awarded reasonable attorney's fees and other expenses of
litigation.
(f) Authorizes liquidation of damages by agreement, but only using a
reasonable formula relative to the anticipated harm.
Deletes existing Section 5.112 regarding time limits and procedures for
honor or rejection of draft or demand for payment. 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 exiting
Section 5.115 regarding a remedy for an improper dishonor or anticipatory
repudiation. Deletes Section 5.113. Indemnities.
Sec. 5.112. New Title: TRANSFER OF LETTER OF CREDIT. (a) Prohibits a
beneficiary's right to draw or otherwise demand performance under a letter
of credit from being transferred except as otherwise provided in Section
5.113, unless a letter of credit provides that it is transferable.
Redesignates Section 5.116.
(b)Authorizes the issuer to refuse to recognize or carry out a transfer,
even if a letter of credit provides that it is transferable, if it would
violate applicable law or the transferor or transferee has failed to comply
with any requirement relating to transfer imposed by the issuer which is
within the standard practice referred to in Section 5.108(e).
Sec. 5.113. TRANSFER BY OPERATION OF LAW. (a) 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.
(b) Authorizes a successor of beneficiary to consent to amendments, sign
and present documents, and receive payment or other items of value without
disclosing its status as a successor of the beneficiary. Requires an
issuer to recognize a disclosed successor of a beneficiary as beneficiary
in full substitution for its predecessor upon compliance with certain
requirements
(c) Provides that an issuer is not obligated to determine whether a
successor or the successor's signature is genuine or authorized.
(d) Establishes that the honor of a purported successor's apparent
compliant presentation pursuant to Subsection (a) or (b) has the
consequences outlined in Section 5.108 (i). Provides that certain documents
are forged documents for the purposes of Section 5.109.
(e) 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).
(f) Establishes that a beneficiary whose name 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. (a) Defines "proceeds of a letter of
credit."
(b) Authorizes a beneficiary to assign its right to part or all of the
proceeds of a letter of credit.
(c) Provides that an issuer or nominated person need not recognize such an
assignment until consenting to the assignment.
(d) Provides that an issuer or nominated person has no obligation to give
or withhold its consent to an assignment of proceeds of a letter of credit,
but consent may not be unreasonably withheld if the assignee possesses and
exhibits the letter of credit and presentation of the letter of credit is a
condition to honor.
(e) 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.
(f) Provides that neither the rights recognized by this section between an
assignee and an issuer, transferee beneficiary, or nominated person nor the
issuer's or nominated person's payment of the proceeds to an assignee or a
third person affect the rights between the assignee and any 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, as well as the rights and
obligations arising because of this creation to be enforced against persons
other than the issuer, transferee beneficiary, or nominated person, is
governed by Chapter 9 (Secured Transactions; Sales of Accounts and Chattel
Paper) or other law.
Sec. 5.115. STATUTE OF LIMITATIONS. Requires that a cause of action must
be commenced within one year after the expiration date of the letter of
credit or one year after the date of the breach, whichever occurs later,
and accrues when a breach occurs, regardless of the aggrieved party's lack
of knowledge of the breach.
Sec. 5.116. CHOICE OF LAW AND FORUM. (a) 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 certain agreements.
(b) Provides that, unless Subsection (a) applies, the liability of the
previously mentioned persons for action or omission is governed by the law
of the jurisdiction in which the person is located, which is indicated at
the address given in the person's undertaking. If more than one address is
indicated, the person is considered to be located at the one from which the
person's undertaking was issued. Provides that for purposes 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 jurisdictional entities, and a bank is considered to be
located at the place where its relevant branch is considered to be located
under this subsection.
(c) Provides that, except as otherwise provided in this subsection, the
liability of the persons referenced above is governed by any rules of
custom or practice, such as the Uniform Customs and Practice for
Documentary Credits, to which the letter of credit, confirmation, or other
undertaking is expressly made subject. Provides that if this chapter would
govern the liability of the above referenced persons under Subsection (a)
or (b), the relevant undertaking incorporates rules of custom or practice,
and there is conflict between this chapter and those rules as applied to
that undertaking, those rules govern except to the extent of any conflict
with the nonvariable provisions specified in Section 5.103(c).
(d) Provides that this chapter governs if there are any conflicts between
this chapter and other chapters in this code.
(e) Provides that the forum for dispute settlement based on an undertaking
may be chosen by the same manner as choice of law in 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. (a) Establishes that an issuer that honors a beneficiary's
presentation is subrogated to the rights of the beneficiary to a certain
extent.
(b) 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.
(c) 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.
(d) Establishes that notwithstanding any agreement or term to the contrary,
the rights of subrogation stated 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 and until that time, the issuer, nominated person,
and the applicant do not have present or prospective rights forming the
basis of a claim, defense, or excuse.
Deletes text regarding insolvency of a bank holding funds for documentary
credit.
SECTION 2. Amends Section 1.105(b), Business & Commerce Code, to provide
that letters of credit are the subject of Section 5.116.
SECTION 3. Amends Section 2.512(a), Business & Commerce Code, to make
nonsubstantive and conforming changes.
SECTION 4. Amends Section 9.103(a), Business & Commerce Code, to include
"letters of credit" in the list in this subsection. Includes "rights to
proceeds of written letters of credit" as one of the types of to documents
to which this section applies. Makes a nonsubstantive change.
SECTION 5. Amends Section 9.104, Business & Commerce Code, to provide
that this chapter does not apply to a 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, by adding
"letter of credit," Section 5.102 and "proceeds of a letter of credit,"
Section 5.114, to the list of definitions in other chapters that apply to
this chapter.
SECTION 7. Amends Section 9.106, Business & Commerce Code, by including
"rights to proceeds of written letters of credit" in the list of personal
property that is not classified as a general intangible.
SECTION 8. Amends Section 9.304 and 9.305, Business & Commerce Code, as
follows:
Sec. 9.304. New Title: 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. Deletes letters of credit and advices of credit (Section
5.116(b)(1)) from the list of instruments which may be perfected by the
secured party's taking possession. Makes a conforming change.
SECTION 9. Effective date: September 1, 1999.
SECTION 10. Makes application of this Act prospective.
SECTION 11. Emergency clause.