ARTICLE 5

LETTERS OF CREDIT

Section

5-101. Short Title.

5-102. Scope.

5-103. Definitions.

5-104. Formal Requirements; Signing.

5-105. Consideration.

5-106. Time and Effect of Establishment of Credit.

5-107. Advice of Credit; Confirmation; Error in Statement of

Terms.

5-108. "Notation Credit"; Exhaustion of Credit.

5-109. Issuer's Obligation to Its Customer.

5-110. Availability of Credit in Portions; Presenter's

Reservation of Lien or Claim.

5-111. Warranties on Transfer and Presentment.

5-112. Time Allowed for Honor or Rejection; Withholding Honor

or Rejection by Consent; "Presenter".

5-113. Indemnities.

5-114. Issuer's Duty and Privilege to Honor; Right to

Reimbursement.

5-115. Remedy for Improper Dishonor or Anticipatory Repudiation.

5-116. Transfer and Assignment.

5-117. Insolvency of Bank Holding Funds for Documentary Credit.

ARTICLE 5

LETTERS OF CREDIT

5-101. Short Title.

This Article shall be known and may be cited as Uniform

Commercial Code -- Letters of Credit.

5-102. Scope.

(1) This Article applies

(a) to a credit issued by a bank if the credit requires a

documentary draft or a documentary demand for payment; and

(b) to a credit Issued by a person other than a bank if the

credit requires that the draft or demand for payment be

accompanied by a document of title; and

(c) to a credit issued by a bank or other person if the

credit is not within subparagraphs (a) or (b) but conspicuously

states that it is a letter of credit or is conspicuously so

entitled.

(2) Unless the engagement meets the requirements of

subsection (1), this Article does not apply to engagements to

make advances or to honor drafts or demands for payment, to

authorities to pay or purchase, to guarantees or to general

agreements

(3) This Article deals with some but not all of the rules

and concepts of letters of credit as such rules or concepts have

developed prior to this act or may hereafter develop. The fact

that this Article states a rule does not by itself require, imply

or negate application of the same or a converse rule to a

situation not provided for or to a person not specified by this

Article.

5-103. Definitions.

(1) In this Article unless the context otherwise requires

(a) "Credit" or "letter of credit" means an engagement by a

bank or other person made at the request of a customer and of a

kind within the scope of this Article (Section 5-102) that the

issuer will honor drafts or other demands for payment upon

compliance with the conditions specified in the credit. A credit

may be either revocable or irrevocable. The engagement may be

either an agreement to honor or a statement that the bank or

other person is authorized to honor.

(b) A "documentary draft" or a "documentary demand for

payment" is one honor of which is conditioned upon the

presentation of a document or documents. "Document" means any

paper including document of title, security, invoice,

certificate, notice of default and the like.

(c) An "issuer" is a bank or other person issuing a credit.

(d) A "beneficiary" of a credit is a person who is entitled

under its terms to draw or demand payment.

(e) An "advising bank" is a bank which gives notification

of the issuance of a credit by another bank.

(f) A "confirming bank" is a bank which engages either that

it will itself honor a credit already issued by another bank or

that such a credit will be honored by the issuer or a third bank.

(g) A "customer" is a buyer or other person who causes an

issuer to issue a credit. The term also includes a bank which

procures issuance or confirmation on behalf of that bank's

customer.

(2) Other definitions applying to this Article and the

sections in which they appear are:

"Notation Credit". Section 5-108.

"Presenter". Section 5-112(3).

(3) Definitions in other Articles applying to this Article

and the sections in which they appear are:

"Accept" or "Acceptance" Section 3-409.

"Contract for sale". Section 2-106.

"Draft". Section 3-104.

"Holder in due course". Section 3-302.

"Midnight deadline". Section 4-104.

"Security". Section 8-102.

(4) In addition, Article 1 contains general definitions and

principles of construction and interpretation applicable

throughout this Article.

5-104. Formal Requirements; Signing.

(1) Except as otherwise required in subsection (1)(c) of

Section 5-102 on scope, no particular form of phrasing is

required for a credit. A credit must be in writing and signed by

the issuer and a confirmation must be in writing and signed by

the confirming bank. A modification of the terms of a credit or

confirmation must be signed by the issuer or confirming bank.

(2) A telegram may, be a sufficient signed writing if it

identifies its sender by an authorized authentication. The

authentication may be in code and the authorized naming of the

issuer in an advice of credit is a sufficient signing.

5-105. Consideration.

No consideration is necessary to establish a credit or to

enlarge or otherwise modify its terms.

/* The UCC makes such provisions in many different places. This

does not mean that consideration is not required; only that for

business reasons persons from time to time change the terms of

credits and other similar business instruments for no other

reason than customer request.

5-106. Time and Effect of Establishment of Credit.

(1) Unless otherwise agreed a credit is established

(a) as regards the customer as soon as a letter of credit

is sent to him or the letter of credit or an authorized written

advice of its issuance is sent to the beneficiary; and

(b) as regards the beneficiary when he receives a letter of

credit or an authorized written advice of its issuance.

(2) Unless otherwise agreed once an irrevocable credit is

established as regards the customer it can be modified or revoked

only with the consent of the customer and once it is established

as regards the beneficiary it can be modified or revoked only

with his consent.

(3) Unless otherwise agreed after a revocable credit is

established it may be modified or revoked by the issuer without

notice to or consent from the customer or beneficiary.

(4) Notwithstanding any modification or revocation of a

revocable credit any person authorized to honor or negotiate

under the terms of the original credit is entitled to

reimbursement for or honor of any draft or demand for payment

duly honored or negotiated before receipt of notice of the

modification or revocation and the issuer in turn is entitled to

reimbursement from its customer.

5-107. Advice of Credit; Confirmation; Error in Statement of

Terms.

(1) Unless otherwise specified an advising bank by advising

a credit issued by another bank does not assume any obligation to

honor drafts drawn or demands for payment made under the credit

but it does assume obligation for the accuracy of its own

statement.

(2) A confirming bank by confirming a credit becomes

directly obligated on the credit to the extent of its

confirmation as though it were its issuer and acquires the rights

of an issuer.

(3) Even though an advising bank incorrectly advises the

terms of a credit it has been authorized to advise the credit is

established as against the issuer to the extent of its original

terms.

(4) Unless otherwise specified the customer bears as

against the issuer all risks of transmission and reasonable

translation or interpretation of any message relating to a

credit.

5-108. "Notation Credit"; Exhaustion of Credit,

(1) A credit which specifies that any person purchasing or

paying drafts drawn or demands for payment made under it must

note the amount of the draft or demand on the letter or advice of

credit is a "notation credit".

(2) Under a notation credit

(a) a person paying the beneficiary or purchasing a draft

or demand for payment from him acquires a right to honor only if

the appropriate notation is made and by transferring or

forwarding for honor the documents under the credit such a person

warrants to the issuer that the notation has been made; and

(b) unless the credit or a signed statement that an

appropriate notation has been made accompanies the draft or

demand for payment the issuer may delay honor until evidence of

notation has been procured which is satisfactory to it but its

obligation and that of its customer continue for a reasonable

time not exceeding thirty days to obtain such evidence.

(3) If the credit is not a notation credit

(a) the issuer may honor complying drafts or demands for

payment presented to it in the order in which they are presented

and is discharged pro tanto by honor of any such draft or demand;

(b) as between competing good faith purchasers of complying

drafts or demands the person first purchasing has priority over a

subsequent purchaser even though the later purchased draft or

demand has been first honored.

5-109. Issuer's Obligation to Its Customer.

(1) An issuer's obligation to its customer includes good

faith and observance of any general banking usage but unless

otherwise agreed does not include liability or responsibility

(a) for performance of the underlying contract for sale or

other transaction between the customer and the beneficiary; or

(b) for any act or omission of any person other than itself

or its own branch or for loss or destruction of a draft, demand

or document in transit or in the possession of others; or

(c) based on knowledge or lack of knowledge of any usage of

any particular trade.

(2) An issuer must examine documents with care so as to

ascertain that on their face they appear to comply with the terms

of the credit but unless otherwise agreed assumes no liability or

responsibility for the genuineness, falsification or effect of

any document which appears on such examination to be regular on

its face.

/* The only place in the UCC where an obligation to do something

with care (without the word reasonable being near by) is

mentioned. */

(3) A non-bank issuer is not bound by any banking usage of

which it has no knowledge.

/* IGNORANCE OF THE LAW IS AN EXCUSE..... */

5-110. Availability of Credit in Portions; Presenter's

Reservation of Lien or Claim.

(1) Unless otherwise specified a credit may be used in

portions in the discretion of the beneficiary.

(2) Unless otherwise specified a person by presenting a

documentary draft or demand for payment under a credit

relinquishes upon its honor all claims to the documents and a

person by transferring such draft or demand or causing such

presentment authorizes such relinquishment. An explicit

reservation of claim makes the draft or demand noncomplying.

5-111. Warranties on Transfer and Presentment.

(1) Unless otherwise agreed the beneficiary by transferring

or presenting a documentary draft or demand for payment warrants

to all interested parties that the necessary conditions of the

credit have been complied with. This is in addition to any

warranties arising under Articles 3, 4, 7 and 8.

(2) Unless otherwise agreed a negotiating, advising,

confirming, collecting or issuing bank presenting or transferring

a draft or demand for payment under a credit warrants only the

matters warranted by a collecting bank under Article 4 and any

such bank transferring a document warrants only the matters

warranted by an intermediary under Articles 7 and 8.

5-112. Time Allowed for Honor or Rejection; Withholding

Honor or Rejection by Consent; "Presenter".

(1) A bank to which a documentary draft or demand for

payment is presented under a credit may without dishonor of the

draft, demand or credit

(a) defer honor until the close of the third banking day

following receipt of the documents; and

(b) further defer honor if the presenter has expressly or

impliedly consented thereto.

Failure to honor within the time here specified constitutes

dishonor of the draft or demand and of the credit [except as

otherwise provided in subsection (4) of Section 5-114 on

conditional payment].

Note: The bracketed language in the last sentence of subsection

(1) should be included only if the optional provisions of section

5-114(4) and (5) are included.

(2) Upon dishonor the bank may unless otherwise instructed

fulfill its duty to return the draft or demand and the documents

by holding them at the disposal of the presenter and sending him

an advice to that effect.

(3) "Presenter" means any person presenting a draft or

demand for payment for honor under a credit even though that

person is a confirming bank or other correspondent which is

acting under an issuer's authorization.

5-113. Indemnities.

(1) A bank seeking to obtain (whether for itself or

another) honor, negotiation or reimbursement under a credit may

give an indemnity to induce such honor, negotiation or

reimbursement.

(2) An indemnity agreement inducing honor, negotiation or

reimbursement

(a) unless otherwise explicitly agreed applies to defects

in the documents but not in the goods; and

(b) unless a longer time is explicitly agreed expires at

the end of ten business days following receipt of the documents

by the ultimate customer unless notice of objection is sent

before such expiration date. The ultimate customer may send

notice of objection to the person from whom he received the

documents and any bank receiving such notice is under a duty to

send notice to its transferor before its midnight deadline.

5-114. Issuer's Duty and Privilege to Honor; Right to

Reimbursement.

(1) An issuer must honor a draft or demand for payment

which complies with the terms of the relevant credit regardless

of whether the goods or documents conform to the underlying

contract for sale or other contract between the customer and the

beneficiary. The issuer is not excused from honor of such a draft

or demand by reason of an additional general term that all

documents must be satisfactory to the issuer, but an issuer may

require that specified documents must be satisfactory to it.

(2) Unless otherwise agreed when documents appear on their

face to comply with the terms of a credit but a required document

does not in fact conform to the warranties made on negotiation or

transfer of a document of title (Section 7-507) or of a

certificated security (Section 5-306) or is forged or fraudulent

or there is fraud in the transaction:

(a) the issuer must honor the draft or demand for payment

if honor is demanded by a negotiating bank or other holder of the

draft or demand which has taken the draft or demand under the

credit and under circumstances which would make it a holder in

due course (Section 3-302) and in an appropriate case would make

it a person to whom a document of title has been duly negotiated

(Section 7-502) or a bona fide purchaser of a certificated

security (Section 8-302); and

(b) in all other cases as against its customer, an issuer

acting in good faith may honor the draft or demand for payment

despite notification from the customer of fraud, forgery or other

defect not apparent on the face of the documents but a court of

appropriate jurisdiction may enjoin such honor.

(3) Unless otherwise agreed an issuer which has duly

honored a draft or demand for payment is entitled to immediate

reimbursement of any payment made under the credit and to be put

in effectively available funds not later than the day before

maturity of any acceptance made under the credit.

[(4) When a credit provides for payment by the issuer on

receipt of notice that the required documents are in the

possession of a correspondent or other agent of the issuer

(a) any payment made on receipt of such notice is

conditional; and

(b) the issuer may reject documents which do not comply

with the credit if it does so within three banking days following

its receipt of the documents; and

(c) in the event of such rejection, the issuer is entitled

by charge back or otherwise to return of the payment made.]

[(5) In the case covered by subsection (4) failure to reject

documents within the time specified in sub-paragraph (b)

constitutes acceptance of the documents and makes the payment

final in favor of the beneficiary.]

Note: Subsections (4) and (5) are bracketed as optional. If they

are included the bracketed language in the last sentence of

Section 5-112(1) should also be included.

5-115. Remedy for Improper Dishonor or Anticipatory

Repudiation.

(1) When an issuer wrongfully dishonors a draft or demand

for payment presented under a credit the person entitled to honor

has with respect to any documents the rights of a person in the

position of a seller (Section 2-707) and may recover from the

issuer the face amount of the draft or demand together with

incidental damages under Section 2-710 on seller's incidental

damages and interest but less any amount realized by resale or

other use or disposition of the subject matter of the

transaction. In the event no resale or other utilization is made

the documents, goods or other subject matter involved in the

transaction must be turned over to the issuer on payment of

judgment.

(2) When an issuer wrongfully cancels or otherwise

repudiates a credit before presentment of a draft or demand for

payment drawn under it the beneficiary has the rights of a seller

after anticipatory repudiation by the buyer under Section 2-610

if he learns of the repudiation in time reasonably to avoid

procurement of the required documents. Otherwise the beneficiary

has an immediate right of action for wrongful dishonor.

5-116. Transfer and Assignment.

(1) The right to draw under a credit can be transferred or

assigned only when the credit is expressly designated as

transferable or assignable.

(2) Even though the credit specifically states that it is

nontransferable or nonassignable the beneficiary may before

performance of the conditions of the credit assign his right to

proceeds. Such an assignment is an assignment of an account under

Article 9 on Secured Transactions and is governed by that Article

except that

(a) the assignment is ineffective until the letter of

credit or advice of credit is delivered to the assignee which

delivery constitutes perfection of the security interest under

Article 9; and

(b) the issuer may honor drafts or demands for payment

drawn under the credit until it receives a notification of the

assignment signed by the beneficiary which reasonably identifies

the credit involved in the assignment and contains a request to

pay the assignee; and

(c) after what reasonably appears to be such a notification

has been received the issuer may without dishonor refuse to

accept or pay even to a person otherwise entitled to honor until

the letter of credit or advice of credit is exhibited to the

issuer.

(3) Except where the beneficiary has effectively assigned

his right to draw or his right to proceeds, nothing in this

section limits his right to transfer or negotiate drafts or

demands drawn under the credit.

5-117. Insolvency of Bank Holding Funds for Documentary

Credit.

(1) Where an issuer or an advising or confirming bank or a

bank which has for a customer procured issuance of a credit by

another bank becomes insolvent before final payment under the

credit and the credit is one to which this Article is made

applicable by paragraphs (a) or (b) of Section 5-102(1) on scope,

the receipt or allocation of funds or collateral to secure or

meet obligations under the credit shall have the following

results:

(a) to the extent of any funds or collateral turned over

after or before the insolvency as indemnity against or

specifically for the purpose of payment of drafts or demands for

payment drawn under the designated credit, the drafts or demands

are entitled to payment in preference over depositors or other

general creditors of the issuer or bank; and

(b) on expiration of the credit or surrender of the

beneficiary's rights under it unused any person who has given

such funds or collateral is similarly entitled to return thereof;

and

(c) a charge to a general or current account with a bank if

specifically consented to for the purpose of indemnity against or

payment of drafts or demands for payment drawn under the

designated credit falls under the same rules as if the funds had

been drawn out in cash and then turned over with specific

instructions.

(2) After honor or reimbursement under this section the

customer or other person for whose account the insolvent bank has

acted is entitled to receive the documents involved.