CHAPTER 5. LETTERS OF CREDIT
BUSINESS AND COMMERCE CODE
TITLE 1. UNIFORM COMMERCIAL CODE
CHAPTER 5. LETTERS OF CREDIT
Sec. 5.101. SHORT TITLE. This chapter may be cited as Uniform
Commercial Code--Letters of Credit.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.102. DEFINITIONS. (a) in this chapter:
(1) "Adviser" means a person who, at the request of the issuer,
a confirmer, or another adviser, notifies or requests another
adviser to notify the beneficiary that a letter of credit has
been issued, confirmed, or amended.
(2) "Applicant" means a person at whose request or for whose
account a letter of credit is issued. The term includes a person
who requests an issuer to issue a letter of credit on behalf of
another if the person making the request undertakes an obligation
to reimburse the issuer.
(3) "Beneficiary" means a person who under the terms of a letter
of credit is entitled to have its complying presentation honored.
The term includes a person to whom drawing rights have been
transferred under a transferable letter of credit.
(4) "Confirmer" means a nominated person who undertakes, at the
request or with the consent of the issuer, to honor a
presentation under a letter of credit issued by another.
(5) "Dishonor" of a letter of credit means failure timely to
honor or to take an interim action, such as acceptance of a
draft, that may be required by the letter of credit.
(6) "Document" means a draft or other demand, document of title,
investment security, certificate, invoice, or other record,
statement, or representation of fact, law, right, or opinion (i)
that is presented in a written or other medium permitted by the
letter of credit or, unless prohibited by the letter of credit,
by the standard practice referred to in Section 5.108(e); and
(ii) that is capable of being examined for compliance with the
terms and conditions of the letter of credit. A document may not
be oral.
(7) "Good faith" means honesty in fact in the conduct or
transaction concerned.
(8) "Honor" of a letter of credit means performance of the
issuer's undertaking in the letter of credit to pay or deliver an
item of value. Unless the letter of credit otherwise provides,
"honor" occurs:
(A) upon payment;
(B) if the letter of credit provides for acceptance, upon
acceptance of a draft and, at maturity, its payment; or
(C) if the letter of credit provides for incurring a deferred
obligation, upon incurring the obligation and, at maturity, its
performance.
(9) "Issuer" means a bank or other person that issues a letter
of credit, but does not include an individual who makes an
engagement for personal, family, or household purposes.
(10) "Letter of credit" means a definite undertaking that
satisfies the requirements of Section 5.104 by an issuer to a
beneficiary at the request or for the account of an applicant or,
in the case of a financial institution, to itself or for its own
account, to honor a documentary presentation by payment or
delivery of an item of value.
(11) "Nominated person" means a person whom the issuer:
(A) designates or authorizes to pay, accept, negotiate, or
otherwise give value under a letter of credit; and
(B) undertakes by agreement or custom and practice to reimburse.
(12) "Presentation" means delivery of a document to an issuer or
nominated person for honor or giving of value under a letter of
credit.
(13) "Presenter" means a person making a presentation as or on
behalf of a beneficiary or nominated person.
(14) "Record" means information that is inscribed on a tangible
medium or that is stored in an electronic or other medium and is
retrievable in perceivable form.
(15) "Successor of a beneficiary" means a person who succeeds to
substantially all of the rights of a beneficiary by operation of
law, including a corporation with or into which the beneficiary
has been merged or consolidated, an administrator, an executor, a
personal representative, a trustee in bankruptcy, a debtor in
possession, a liquidator, and a receiver.
(b) Definitions in other chapters of this code applying to this
chapter and the sections in which they appear are:
"Accept" or "Acceptance".
Section 3.409.
"Value".
Sections 3.303 and 4.211.
(c) Chapter 1 contains certain additional general definitions
and principles of construction and interpretation applicable
throughout this chapter.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.103. SCOPE. (a) This chapter applies to letters of
credit and to certain rights and obligations arising out of
transactions involving letters of credit.
(b) The 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.
(c) With the exception of this subsection, Subsections (a) and
(d), Sections 5.102(a)(9) and (10), Section 5.106(d), Section
5.110(c), and Section 5.114(d) and except to the extent
prohibited in Sections 1.302 and 5.117(d), the effect of this
chapter may be varied by agreement or by a provision stated or
incorporated by reference in an undertaking. A term in an
agreement or undertaking generally excusing liability or
generally limiting remedies for failure to perform obligations is
not sufficient to vary obligations prescribed by this chapter.
(d) 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 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.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999; Acts 2003, 78th Leg., ch. 542, Sec. 17, eff. Sept. 1, 2003.
Sec. 5.104. FORMAL REQUIREMENTS. A letter of credit,
confirmation, advice, transfer, amendment, or cancellation may be
issued in any form that is a record and is authenticated:
(1) by a signature; or
(2) in accordance with the agreement of the parties or the
standard practice referred to in Section 5.108(e).
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.105. CONSIDERATION. Consideration is not required to
issue, amend, transfer, or cancel a letter of credit, advice, or
confirmation.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.106. ISSUANCE, AMENDMENT, CANCELLATION, AND DURATION.
(a) A letter of credit is issued and becomes enforceable
according to its terms against the issuer when the issuer sends
or otherwise transmits it to the person requested to advise or to
the beneficiary. A letter of credit is revocable only if it so
provides.
(b) 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) 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) A letter of credit that states that 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.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.107. CONFIRMER, NOMINATED PERSON, AND ADVISER. (a) 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. The confirmer also has rights against and
obligations to the issuer as if the issuer were an applicant and
the confirmer had issued the letter of credit at the request and
for the account of the issuer.
(b) A nominated person who is not a confirmer is not obligated
to honor or otherwise give value for a presentation.
(c) A person requested to advise may decline to act as an
adviser. An adviser that is not a confirmer is not obligated to
honor or give value for a presentation. An adviser undertakes to
the issuer and to the beneficiary accurately to advise the terms
of the letter of credit, confirmation, amendment, or advice
received by that person and undertakes to the beneficiary to
check the apparent authenticity of the request to advise. Even if
the advice is inaccurate, the letter of credit, confirmation, or
amendment is enforceable as issued.
(d) 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). The
terms in the notice to the transferee beneficiary may differ from
the terms in any notice to the transferor beneficiary to the
extent permitted by the letter of credit, confirmation,
amendment, or advice received by the person who so notifies.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.108. ISSUER'S RIGHTS AND OBLIGATIONS. (a) Except as
otherwise provided in Section 5.109, an issuer shall honor a
presentation that, as determined by the standard practice
referred to in Subsection (e), appears on its face strictly to
comply with the terms and conditions of the letter of credit.
Except as otherwise provided in Section 5.113 and unless
otherwise agreed with the applicant, an issuer shall dishonor a
presentation that does not appear so to comply.
(b) An issuer has a reasonable time after presentation, but not
beyond the end of the seventh business day of the issuer after
the date of its receipt of documents:
(1) to honor;
(2) if the letter of credit provides for honor to be completed
more than seven business days after presentation, to accept a
draft or incur a deferred obligation; or
(3) to give notice to the presenter of discrepancies in the
presentation.
(c) Except as otherwise provided in Subsection (d), an issuer is
precluded from asserting as a basis for dishonor any discrepancy
if timely notice is not given or any discrepancy not stated in
the notice if timely notice is given.
(d) Failure to give the notice specified in Subsection (b) or to
mention fraud, forgery, or expiration in the notice does not
preclude the issuer from asserting as a basis for dishonor fraud
or forgery as described in Section 5.109(a) or expiration of the
letter of credit before presentation.
(e) An issuer shall observe standard practice of financial
institutions that regularly issue letters of credit.
Determination of the issuer's observance of the standard practice
is a matter of interpretation for the court. The court shall
offer the parties a reasonable opportunity to present evidence of
the standard practice.
(f) An issuer is not responsible for:
(1) the performance or nonperformance of the underlying
contract, arrangement, or transaction;
(2) an act or omission of others; or
(3) observance or knowledge of the usage of a particular trade
other than the standard practice referred to in Subsection (e).
(g) If an undertaking constituting a letter of credit under
Section 5.102(a)(10) contains nondocumentary conditions, an
issuer shall disregard the nondocumentary conditions and treat
them as if they were not stated.
(h) An issuer that has dishonored a presentation shall return
the documents or hold them at the disposal of, and send advice to
that effect to, the presenter.
(i) An issuer that has honored a presentation as permitted or
required by this chapter:
(1) is entitled to be reimbursed by the applicant in immediately
available funds not later than the date of its payment of funds;
(2) takes the documents free of claims of the beneficiary or
presenter;
(3) is precluded from asserting a right of recourse on a draft
under Sections 3.414 and 3.415;
(4) except as otherwise provided in Sections 5.110 and 5.117, is
precluded from restitution of money paid or other value given by
mistake to the extent the mistake concerns discrepancies in the
documents or tender that are apparent on the face of the
presentation; and
(5) is discharged to the extent of its performance under the
letter of credit unless the issuer honored a presentation in
which a required signature of a beneficiary was forged.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.109. FRAUD AND FORGERY. (a) If a presentation is made
that appears on its face strictly to 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 on the
issuer or applicant:
(1) the issuer shall honor the presentation if honor is demanded
by:
(A) a nominated person who has given value in good faith and
without notice of forgery or material fraud;
(B) a confirmer who has honored its confirmation in good faith;
(C) a holder in due course of a draft drawn under the letter of
credit that was taken after acceptance by the issuer or nominated
person; or
(D) an assignee of the issuer's or nominated person's deferred
obligation that was taken for value and without notice of forgery
or material fraud after the obligation was incurred by the issuer
or nominated person; and
(2) the issuer, acting in good faith, may honor or dishonor the
presentation in any other case.
(b) If an 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, a court of competent jurisdiction may temporarily or
permanently enjoin the issuer from honoring a presentation or
grant similar relief against the issuer or other persons only if
the court finds that:
(1) the relief is not prohibited under the law applicable to an
accepted draft or deferred obligation incurred by the issuer;
(2) a beneficiary, issuer, or nominated person who may be
adversely affected is adequately protected against loss that it
may suffer because the relief is granted;
(3) all of the conditions to entitle a person to the relief
under the law of this state have been met; and
(4) on the basis of the information submitted to the court, the
applicant is more likely than not to succeed under its claim of
forgery or material fraud and the person demanding honor does not
qualify for protection under Subsection (a)(1).
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.110. WARRANTIES. (a) If its presentation is honored,
the beneficiary warrants:
(1) to the issuer, any other person to whom presentation is
made, and the applicant that there is no fraud or forgery of the
kind described in Section 5.109(a); and
(2) to the applicant that the drawing does not violate any
agreement between the applicant and beneficiary or any other
agreement intended by them to be augmented by the letter of
credit.
(b) The warranties in Subsection (a) 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.
(c) Notwithstanding any agreement or term to the contrary, the
warranties in Subsection (a) do not arise until the issuer honors
the letter of credit.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.111. REMEDIES. (a) If an issuer wrongfully dishonors or
repudiates its obligation to pay money under a letter of credit
before presentation, the beneficiary, successor, or nominated
person presenting on its own behalf may recover from the issuer
the amount that is the subject of the dishonor or repudiation. If
the issuer's obligation under the letter of credit is not for the
payment of money, the claimant may obtain specific performance
or, at the claimant's election, recover an amount equal to the
value of performance from the issuer. In either case, the
claimant may also recover incidental but not consequential
damages. The claimant is not obligated to take action to avoid
damages that might be due from the issuer under this subsection.
If, although not obligated to do so, the claimant avoids damages,
the claimant's recovery from the issuer must be reduced by the
amount of damages avoided. The issuer has the burden of proving
the amount of damages avoided. In the case of repudiation the
claimant need not present any document.
(b) 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, the applicant may
recover damages resulting from the breach, including incidental
but not consequential damages, less any amount saved as a result
of the breach.
(c) If an adviser or nominated person other than a confirmer
breaches an obligation under this chapter or an issuer breaches
an obligation not covered in Subsection (a) or (b), a person to
whom the obligation is owed may recover damages resulting from
the breach, including incidental but not consequential damages,
less any amount saved as a result of the breach. To the extent of
the confirmation, a confirmer has the liability of an issuer
specified in this subsection and Subsections (a) and (b).
(d) An issuer, nominated person, or adviser who is found liable
under Subsection (a), (b), or (c) shall pay interest on the
amount owed thereunder from the date of wrongful dishonor or
other appropriate date.
(e) Reasonable attorney's fees and other expenses of litigation
may be awarded to the prevailing party in an action in which a
remedy is sought under this chapter.
(f) Damages that would otherwise be payable by a party for
breach of an obligation under this chapter may be liquidated by
agreement or undertaking, but only in an amount or by a formula
that is reasonable in light of the harm anticipated.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.112. TRANSFER OF LETTER OF CREDIT. (a) Except as
otherwise provided in Section 5.113, unless a letter of credit
provides that it is transferable, the right of a beneficiary to
draw or otherwise demand performance under a letter of credit may
not be transferred.
(b) Even if a letter of credit provides that it is transferable,
the issuer may refuse to recognize or carry out a transfer if:
(1) the transfer would violate applicable law; or
(2) the transferor or transferee has failed to comply with any
requirement stated in the letter of credit or any other
requirement relating to transfer imposed by the issuer which is
within the standard practice referred to in Section 5.108(e) or
is otherwise reasonable under the circumstances.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.113. TRANSFER BY OPERATION OF LAW. (a) A successor of a
beneficiary may 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) A successor of a beneficiary may 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. Except as otherwise provided in Subsection (e), an
issuer shall recognize a disclosed successor of a beneficiary as
beneficiary in full substitution for its predecessor upon
compliance with the requirements for recognition by the issuer of
a transfer of drawing rights by operation of law under the
standard practice referred to in Section 5.108(e) or, in the
absence of such a practice, compliance with other reasonable
procedures sufficient to protect the issuer.
(c) An issuer is not obliged to determine whether a purported
successor is a successor of a beneficiary or whether the
signature of a purported successor is genuine or authorized.
(d) 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. Documents signed in the name
of the beneficiary or of a disclosed successor by a person who is
neither the beneficiary nor the successor of the beneficiary are
forged documents for the purposes of Section 5.109.
(e) An issuer whose rights of reimbursement are not covered by
Subsection (d) or substantially similar law and any confirmer or
nominated person may decline to recognize a presentation under
Subsection (b).
(f) 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.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.114. ASSIGNMENT OF PROCEEDS. (a) In this section,
"proceeds of a letter of credit" means the cash, check, accepted
draft, or other item of value paid or delivered upon honor or
giving of value by the issuer or any nominated person under the
letter of credit. The term does not include a beneficiary's
drawing rights or documents presented by the beneficiary.
(b) A beneficiary may assign its right to part or all of the
proceeds of a letter of credit. The beneficiary may do so 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.
(c) An issuer or nominated person need not recognize an
assignment of proceeds of a letter of credit until it consents to
the assignment.
(d) 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) 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) 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 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. 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. Against persons other than the issuer, transferee
beneficiary, or nominated person, 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 are governed by Chapter 9 or other law.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.115. STATUTE OF LIMITATIONS. An action to enforce a
right or obligation arising under this chapter must 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 occurs later. A cause of action accrues when the breach
occurs, regardless of the aggrieved party's lack of knowledge of
the breach.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.116. CHOICE OF LAW AND FORUM. (a) The liability of an
issuer, nominated person, or adviser for action or omission is
governed by the law of the jurisdiction chosen by an agreement in
the form of a record signed or otherwise authenticated by the
affected parties in the manner provided in Section 5.104 or by a
provision in the person's letter of credit, confirmation, or
other undertaking. The jurisdiction whose law is chosen need not
bear any relation to the transaction.
(b) 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.
The person is considered to be located at the address indicated
in the person's undertaking. If more than one address is
indicated, the person is considered to be located at the address
from which the person's undertaking was issued. 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 juridical 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) Except as otherwise provided in this subsection, the
liability of an issuer, nominated person, or adviser 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. If (i) this chapter would govern the liability of an
issuer, nominated person, or adviser under Subsection (a) or (b),
(ii) the relevant undertaking incorporates rules of custom or
practice, and (iii) 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) If there is conflict between this chapter and Chapter 3, 4,
4A, or 9, this chapter governs.
(e) The forum for settling disputes arising out of an
undertaking within this chapter may be chosen in the manner and
with the binding effect that governing law may be chosen in
accordance with Subsection (a).
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.117. SUBROGATION OF ISSUER, APPLICANT, AND NOMINATED
PERSON. (a) An issuer that honors a beneficiary's presentation
is subrogated to the rights of the beneficiary to the same extent
as if the issuer were a secondary obligor of the underlying
obligation owed to the beneficiary and of the applicant to the
same extent as if the issuer were the secondary obligor of the
underlying obligation owed to the applicant.
(b) An applicant that reimburses an issuer is subrogated to the
rights of the issuer against any beneficiary, presenter, or
nominated person to the same extent as if the applicant were the
secondary obligor of the obligations owed to the issuer and has
the rights of subrogation of the issuer to the rights of the
beneficiary stated in Subsection (a).
(c) 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:
(1) the issuer against the applicant to the same extent as if
the nominated person were a secondary obligor of the obligation
owed to the issuer by the applicant;
(2) the beneficiary to the same extent as if the nominated
person were a secondary obligor of the underlying obligation owed
to the beneficiary; and
(3) the applicant to the same extent as if the nominated person
were a secondary obligor of the underlying obligation owed to the
applicant.
(d) 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. Until then, the
issuer, the nominated person, and the applicant do not derive
under this section present or prospective rights forming the
basis of a claim, defense, or excuse.
Amended by Acts 1999, 76th Leg., ch. 4, Sec. 1, eff. Sept. 1,
1999.
Sec. 5.118. SECURITY INTEREST OF ISSUER OR NOMINATED PERSON.
(a) An issuer or nominated person has a security interest in a
document presented under a letter of credit to the extent that
the issuer or nominated person honors or gives value for the
presentation.
(b) So long as and to the extent that an issuer or nominated
person has not been reimbursed or has not otherwise recovered the
value given with respect to a security interest in a document
under Subsection (a), the security interest continues and is
subject to Chapter 9, but:
(1) a security agreement is not necessary to make the security
interest enforceable under Section 9.203(b)(3);
(2) if the document is presented in a medium other than a
written or other tangible medium, the security interest is
perfected; and
(3) if the document is presented in a written or other tangible
medium and is not a certificated security, chattel paper, a
document of title, an instrument, or a letter of credit, the
security interest is perfected and has priority over a
conflicting security interest in the document so long as the
debtor does not have possession of the document.
Added by Acts 1999, 76th Leg., ch. 414, Sec. 2.24, eff. July 1,
2001.