CHAPTER 5. LETTERS OF CREDIT

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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

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.

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.

(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.

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.

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.

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;

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.

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.

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.

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.

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.

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).

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.

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