Okla. Stat. tit. 12A § 5-110
Okla. Stat. tit. 12A, § 5-110
Oklahoma Code Comment
Warranties are a darling of the UCC. Every Article has them, and Article 5 is no exception. Under former sub section 5-111(1) , the beneficiary made a "letter compliance" warranty at the time of presentment. And under former sub section 5-111(2) , intermediate transferees of presentment documents made a "good faith and authority" warranty.
Nevertheless, lawyers and the courts seem to have made less than full use of the warranties of former Section 5-111 . This is perhaps understandable because these warranties posed some puzzling questions. Consider what exactly the beneficiary warranted under former sub section 5-111(1) . By seeking payment under the LC, the beneficiary warrants that the "necessary conditions of the credit" have been complied with. Does the beneficiary warrant that all the "conditions" of the beneficiary's own performance have been met in the underlying contract with the applicant? Even assuming former sub section 5- 111(1) referred only to the "conditions" (requirements) of the LC itself, those "conditions" spell out requirements for the documents the beneficiary must present. The issuer's examination is confined to the face of those documents without attempting to discover "hidden" defects not facially apparent. Under former sub section 5-111(1) , then, is the beneficiary deemed to warrant that the presented documents were not forged, fraudulent or otherwise tainted by fraud? And because the beneficiary's good faith is a "condition" of every letter, is the beneficiary deemed to warrant the beneficiary's own honesty, as well?
Even when a document is fraud-free, its factual contents still can be false. Apart from fraud, then, does the beneficiary warrant the truth of what the presented documents actually say? Whether yes or no, does the beneficiary warrant under former sub section 5-111(1) that the presented documents do not contain any "facial" discrepancies, even when the issuer has mistakenly honored over discrepancies or untruths that the issuer reasonably could have discovered upon examining the face of presented documents with due care?
Whatever its contours, most importantly, does the warranty of former section 5- 111(1) give the issuer a defense to the beneficiary's claim of wrongful dishonor? Or is the warranty remedy available only as a post-honor remedy? And to whom do the warranties run? Former Section 5-111 says to "interested parties," but who are all these parties? With questions like these, it seems little wonder that the warranties of former Section 5-111 have remained virtually dormant in the statute.
Revised sub section 5-110(a) answers these questions, thus eliminating the doubts that have evolved over the years. As a threshold matter, the warranties of revised sub section 5-110(a) give the issuer and the applicant only a post-honor remedy; the warranties can never be used as a defense to justify dishonor. Thus, if the presenter is met with dishonor, there are no warranties given under revised sub section 5-110(a) . This makes sense. A warranty on documents should be available only to one who has paid for those documents. While a "fraud" exception under revised Section 5-109 or non-compliance under revised Section 5-108 may prevent honor, a mere breach of the revised Section 5-110 warranties would not. Only if honor has voluntarily occurred may the applicant or issuer "club" the beneficiary with warranty breach. As a post-honor remedy, the presentment warranties of revised Section 5-110 should relieve the natural tension between the independence principle and the "fraud" exception of revised Section 5-109 . By giving the applicant a post-honor claim for breach of warranty, the statute may relieve the applicant's passion to press a pre-honor claim for injunctive relief, particularly now that the latter claim is even more difficult to press.
Turning to the warranties themselves, revised sub section 5-110(a) says that the beneficiary is the warrantor and the warranties run to two sets of parties: under subsection (a)(1), to the applicant, to the issuer, and to any other person to whom presentment is made; and under subsection (a)(2), just to the applicant.
To the person who receives the presentment, the beneficiary warrants that there is no forgery and no material fraud. To the applicant, the beneficiary warrants that there is no forgery, no material fraud, and the beneficiary's drawing does not violate any agreement between the applicant and the beneficiary or any other agreement intended by them to be augmented (in other words, secured) by the LC.
In essence, the warranties of revised sub section 5-110(a) codify a "wrongful draw" claim that some cases have recognized in post-honor settings. This should be useful to the issuer who has honored a forged or materially fraudulent presentment and whose reimbursement prospects are dim due to the applicant's bankruptcy or other financial inability to reimburse. Absent the sub section 5-110(a)(1) warranties, the issuer would have to invoke less clear principles of equitable restitution or the like.
The warranty of revised sub section 5-110(a)(2) should give the applicant a clear shot whenever the beneficiary's drawing is wrongful under the applicant-beneficiary agreement that underlies the LC or under any other agreement for which the LC was intended as back-up. Official Comment 2 explains that the sub section 5-110(a)(2) warranty to the applicant is not a warranty that the statements in the presented documents are all truthful (such statements could be fraud-free but still untruthful) or that the documents strictly comply under revised sub section 5-108(a) . Rather, "[i]t is a warranty that the beneficiary has performed all the acts expressly and implicitly necessary under any underlying agreement to entitle the beneficiary to honor."
As a practical matter, however, if the documents required for a draw are crafted carefully, then they will contain statements that will not be truthful at the time of presentment if the beneficiary has not actually performed all the prerequisites for a draw as specified in the underlying agreements. Even so, Official Comment 2 goes to great length to point out that the breach of warranty would arise not because the statements in the presented documents are untrue, but because the beneficiary's drawing violated some express or implied obligation in the underlying transaction.
The damages for breach of warranty under revised Section 5-110 are not specified under revised Section 5-111 on remedies. Courts are directed to analogies in UCC Section 2-714 and Articles 3 and 4. Damages for breach of the Section 5-110 warranties will not automatically be the amount of the wrongful draw (as in the case of a wrongful dishonor). See Official Comment 3.
Two other points should be noted. First, the beneficiary's breach of the sub section 5-110(a) warranties cannot excuse the applicant's duty to reimburse. See Official Comment 1. Second, the sub section 5-110(a)(2) warranty about the beneficiary's drawing not violating any underlying agreement runs only to the applicant, not to the issuer. Thus, such warranty assumes that payment under the LC is final.
Revised sub section 5-110(b) is a housekeeping measure. It provides that the warranties of subsection (a) are in addition to the warranties arising under Articles 3, 4, 7 and 8, because of the presentation or transfer of documents covered by any of those articles.