Okla. Stat. tit. 12A § 5-106
Okla. Stat. tit. 12A, § 5-106
Oklahoma Code Comment
1. Establishment. The time at which an LC becomes enforceable is significant for several reasons. An irrevocable credit, once established, may not be modified or canceled unilaterally by the issuer or the applicant. For all credits, whether revocable or not, establishment also determines when the LC is available for drawing (unless a later time is specified in the LC itself).
The establishment of an LC as an enforceable obligation was bifurcated under former Section 5-106 . The applicant was bound by the LC when (i) the LC, or an authorized written advice of its terms, was sent to the beneficiary, or (ii) the LC or a copy was "sent" to the applicant. Section 1-201(38) provides that an item is "sent" when it is deposited in the mail or delivered "for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed.... " The beneficiary did not have rights under the LC, however, until the LC, or an authorized written advice of its terms, had been received.
This rule created some interesting anomalies. It meant that neither the applicant nor the issuer could unilaterally cancel or amend the LC once it was sent to the beneficiary, even though the beneficiary had not yet received it and had no right to enforce it. If the issuer and the applicant agreed to cancel, they could do so by notifying the beneficiary, so long as the notice arrived before the LC. For example, if the LC were mailed to the beneficiary and then the applicant requested cancellation, then the issuer could refuse. If the issuer agreed and advised the beneficiary by telegram, then the credit presumably would be ineffective so long as the telegram arrived first.
This rule also was at odds with UCP 500, which provides that an LC is irrevocable from the time it is issued, unless otherwise specified in the LC itself. Because the terms of a letter of credit are not effective until it is established under Article 5, LCs that were governed by former Article 5 and also adopted UCP 500 suffered from a problem similar to renvoi. The LC subjected itself to the UCP, which provides that the LC is enforceable once it is issued, but under former Section 5-106, the provision subjecting the credit to the UCP became enforceable by the beneficiary only when the LC was received.
The former establishment rules also reinforced former Article 5's emphasis on paper transactions. A letter of credit became enforceable by the beneficiary under former Section 5-106 when the credit (which had to be in "writing") was received by the beneficiary or the beneficiary received "written" advice of issuance. The insistence on a "writing" for establishment presented the same problems as with issuance. In addition, while an LC could be "transmitted" to the beneficiary or applicant, the transmission had to be by "usual means of communication," an ambiguous phrase that could prevent the use of private or innovative communication channels.
Revised Article 5 eliminates the bifurcated establishment rule and harmonizes state law with the UCP on establishment. The LC is established when it is sent, or otherwise transmitted, to the beneficiary or a party requested to advise the credit. Until that time, it may be modified or canceled unilaterally by the applicant or issuer (and, of course, a revocable credit may be canceled or modified at any time). Once an irrevocable LC is sent or otherwise transmitted, notice to the beneficiary of a cancellation or modification is ineffective, even if it arrives first, unless the beneficiary consents.
Revised Article 5 eliminates all references to "writing." In addition, use of the phrase "sent or otherwise transmitted" signals that private or innovative methods of communication are acceptable. Revised Section 5-106 also drops the distinction between sending the LC itself and sending an "authorized written advice" of the LC, recognizing that under the formation rules in revised Section 5-104 , the distinction is largely meaningless.
2. Revocability. An LC should express whether or not it is revocable. But what if it fails to do so? Sub section 5-106(a) presumes irrevocability of a letter of credit if it is silent on whether it is revocable or irrevocable. The Official Comments to former sub section 5-103(1)(a) stated that when a letter of credit was not clearly labeled as either revocable or irrevocable, that issue was left to the courts for decision. The case law has shown a disposition to treat a letter of credit as irrevocable when the LC is silent on the point. These cases based their decisions on a rule of construction favoring reading an undertaking in a fashion that avoids rendering the undertaking illusory. Because the courts have viewed a revocable letter of credit as an illusory promise, they relied upon the rule of construction that construes letters of credit as irrevocable. See, e.g., Conoco, Inc. v. Norwest Bank Mason City, N.A., 767 F.2d 470 (8th Cir.1985); Housing Sec., Inc. v. Main Nat'l Bank, 391 A.2d 311 (Me.1978).
Article 6(c) of UCP 500 now provides that in the absence of an indication as to whether a letter of credit is revocable or irrevocable, the letter of credit shall be deemed irrevocable. Revised sub section 5-106(a) is consistent, and thus will reverse cases such as Beathard v. Chicago Football Club, Inc., 419 F.Supp. 1133 (N.D.Ill.1976), which held that a letter of credit that incorporated the UCP by reference, but did not designate the letter of credit as revocable or irrevocable, was deemed revocable.
3. Amendments. The rule in former sub sections 5-104(1) and 5-106(2) provided that an LC could not be modified or canceled without the issuer's and applicant's consent once the LC, or an authorized written advice, had been sent. The beneficiary's consent also was required once the LC had been received. This rule did not require the consent of a confirming bank, even though the confirmer had assumed the obligation to pay and might have legitimate grounds to object. The confirmer may have been protected by former sub section 5-107(2) , which granted it "the rights of an issuer," but the statute was ambiguous. There is no governing case law in Oklahoma.
Revised sub section 5-106(b) removes the ambiguity. It provides that an irrevocable LC, once established, may not be amended without the consent of the applicant, issuer, beneficiary or confirmer (if any).
4. Expiry. Sub section 5-106(c) provides that if a letter of credit has no stated expiration date, then the letter of credit expires one year after its stated date of issuance or, if no issue date is stated, then one year after the actual date on which it is issued. References to the underlying transaction or to nondocumentary facts serve poorly as expiration dates, however. The Comptroller of the Currency has issued a regulation that as a matter of sound banking practice, the bank's undertaking in a letter of credit should be limited in duration or permit termination. See 12 C.F.R. § 7.1016 . Oftentimes, issuers take security from their customers when issuing letters of credit on their behalf and, as such, need to know by what date they can release their security.
Prior Statutory Provisions:
15 Okla. Stat. § 401 (1910), which defined "letter of credit."
15 Okla. Stat. §§ 402-405, 407-409 (1910).