Legislature(1999 - 2000)
03/03/1999 03:20 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 79 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT
Number 0005
CHAIRMAN ROKEBERG announced the committee's next order of business
would be HB 79, "An Act relating to letters of credit under the
Uniform Commercial Code; and providing for an effective date." He
stated the committee would continue the public hearing. He invited
Jerry Weaver forward.
JERRY WEAVER, Senior Vice President and Manager of Commercial
Lending, National Bank of Alaska (NBA); Secretary-Treasurer, Alaska
Bankers Association, came forward testify in strong support of HB
79 on behalf of both organizations. He indicated Mr. Art Peterson,
Alaska Uniform Law Commissioner, is much more knowledgeable
regarding the Uniform Commercial Code (UCC). Mr. Weaver indicated
the legislation is part of the regular UCC revisions which is an
ongoing process of the full commercial and consumer code through
the National Conference of Commissioners on Uniform State Laws
(NCCUSL), as Mr. Peterson will testify. These revisions and this
legislation affects a rather arcane group of letters of credit, a
small area of commercial law. Mr. Weaver noted there is another
well-known version called the "stand-by letter of credit." The
negotiable letters of credit primarily affect international trade.
Mr. Weaver indicated these negotiable letters of credit are
guarantees, usually by banks to banks or large commercial companies
with rated credits. These institutions can substitute their credit
for a small firm either unknown in the international market or
without the credit rating necessary to carry out the transaction.
These letters of credit are typically issued by banks, usually
through their international banking departments; the process is
done bank to bank. In Alaska, a letter of credit is needed in any
of the export and many of the import (indisc.) to guarantee that
payment will be forthcoming and to ensure that supplier's details
are met. Mr. Weaver said his knowledge concerns the practical
side; he does not deal with the close technical parts but he
indicated NBA has personnel who do. Mr. Weaver mentioned several
other banks had reviewed the legislation in detail and approved it.
He indicated the bill has been worked on for an extended period of
time.
Number 0118
MR. WEAVER gave the example of shipping lumber from Southeast
Alaska to a large firm in Tokyo, Japan, that wishes to buy this
lumber but ensure it receives exactly what it buys by grade,
quantity, et cetera, and ensure that the lumber is on the ship.
The firm goes to its bank - in this example the Industrial Bank of
Japan, Limited - to have the bank issue a letter of credit. While
the Japanese firm may or may not be known to the Southeast Alaska
timber supplier, the Industrial Bank of Japan, issuing a letter to
NBA, certainly is known because it is rated. What this credit
rating immediately says to the Southeast firm is that if it
delivers the lumber, it will be paid.
Number 0163
MR. WEAVER noted the letter of credit will primarily deal in
documents. The bankers will never see the timber but they will see
the documents stating it is there. The letter of credit and this
legislation speak about some of the documents that might or might
not be included: 1) a bill of lading showing the lumber got on the
ship, the shipping documents, an individual authorization issued by
the shipping company. He indicated these were the documents that
allow one to get the lumber off the ship when it reaches Japan as
well. 2) Some form of grading and rating of the lumber by an
authority independent of the transaction that states it put so many
thousand board feet of such and such grade and type on that ship.
3) Some insurance documents in case of loss at sea. The letter of
credit issued by the Industrial Bank of Japan would say that if
those documents are sent and are in proper order, it will pay on
those documents. At this point the ship is underway and the
buyer's bank would extend credit to the buyer for some short period
of time through whatever credit lines, et cetera, that had been set
up.
Number 0220
MR. WEAVER referred to some discussion at the previous hearing
regarding time delays. He noted "float" and similar things were
not issues because money had not been exchanged in this
transaction; they are simply speaking of guarantees. Mr. Weaver
commented the other side is time for delays. In a large commercial
project such as this, there will typically be minor discrepancies
in the contract. "'Gee, we don't have as much hemlock as these
guys want, is it okay if we send them spruce?'" The bank needs
time to wire the other bank and ask whether a substitution is
acceptable. Another issue could be a dramatic price change in the
commodity with the seller requesting a possible small change in
price. Those wires go back and forth between the two banks'
international banking departments, they agree on firm detail, and
then the transaction is concluded. The material is on its way, the
letter of credit is presented for payment, that bank wires funds to
the seller's bank who in turn credits its customer. Mr. Weaver
indicated that described the practical workings of these letters of
credit.
CHAIRMAN ROKEBERG stated he thinks Mr. Weaver's description helps
explain the practical application of the legislation on a
fundamental basis.
Number 0282
REPRESENTATIVE MURKOWSKI agreed Mr. Weaver's description was very
well-put. She commented that NBA issued the letter of credit for
a fee.
MR. WEAVER agreed that is correct when NBA is issuing one. In his
example, the Industrial Bank of Japan, as the issuer, would receive
the initial fee. There would be also be some small fees on the
other bank's side assessed for handling.
REPRESENTATIVE MURKOWSKI said she asked because she noticed
consideration is not required in the legislation. She questioned
why this requirement had been deleted, noting she had always
assumed fees were a part of letters of credit.
Number 0317
MR. WEAVER answered that cases where fees were not drawn had come
up somewhere in the revision. He indicated sometimes the size of
the parties involved might determine this, commenting that a
company like Exxon Corporation could probably negotiate its way out
of a fee. This allows that room. Mr. Weaver indicated HB 79 is
simply the revision of a 30-year old law that works very, very
well. This somewhat arcane thing affects about 5 percent of the
banking business and, for the most part, the UCC revisions are just
refinements. The UCC commissioners asked the bankers worldwide
who deal in these for suggestions. He confirmed to Representative
Murkowski, however, that in most cases there is a fee.
REPRESENTATIVE HALCRO referred to the initial bill hearing on
February 26, 1999, and asked if the seven day time period for
denial is adequate for letters of credit.
MR. WEAVER responded he doesn't deal with letters of credit daily,
but the international bankers and specialists present last week say
it is adequate. He noted NBA has numerous customers in Alaska that
use this as a vehicle and it seems to work well.
Number 0440
ART PETERSON, Alaska Uniform Law Commissioner, National Conference
of Commissioners on Uniform State Laws, came forward to testify.
Mr. Peterson stated he was an attorney in private practice with the
law firm Dillon and Findley, P.C., in Juneau, and was present in
his capacity as a uniform law commissioner for the state. He
commented on Mr. Weaver's excellent capsule description of how
letters of credit are used. Noting it has been 40 years since this
was originally drafted, Mr. Peterson commented a number of issues
have arisen since then and a number of technologic developments
have occurred. The legislation is mainly aimed at: 1) addressing
and solving issues that have arisen, and avoiding litigation; 2)
recognizing the existence of computers. He exhorted the committee
to also keep in mind that although letters of credit may be a small
part of this entire commercial area, it is a $200 billion a year
industry. Half of exports from the United States are financed by
letters of credit.
Number 0525
MR. PETERSON stated the UCC, including Article 5, has been adopted
in all 50 states, the District of Columbia, Guam, Puerto Rico, et
cetera. It serves as something of an international model; in
practice it somewhat governs many transactions. A corresponding
body of material has developed in the area of letters of credit,
the Uniform Customs and Practices for Documentary Credits (UCP 500)
promulgated by the International Chamber of Commerce. Mr. Peterson
indicated in response to the chairman's question that the uniform
law had been revised from the previous year. Mr. Peterson stated
approximately 30 states had enacted this, including Illinois and
California, two of the major financial centers. He explained New
York usually lags a year or so behind on UCC enactments and
revisions because of an elaborate procedure with the bar. For the
chairman, Mr. Peterson said that Washington, Idaho, California,
Hawaii, et cetera, have already adopted this.
MR. PETERSON indicated this legislation recognizes the UCP 500 and
also specifically recognizes international customs and practices
that have developed over the years outside of that formal material.
The bill recognizes that various entities involved in letters of
credit are in positions to negotiate to avoid fees. He has not
heard anything to suggest the lack of consideration would be a
problem. Mr. Peterson offered to make the formal published UCC
revision with the official commentary by the NCCUSL available to
the committee. Mr. Peterson indicated the revisions anticipate a
number of problems, solve a number of old issues and generally
update the approximately 40-year old law; it is necessary for
Alaska to keep up-to-date.
Number 0760
CHAIRMAN ROKEBERG asked for an citation within the bill which could
be used as an example of a needed update.
MR. PETERSON referred to the UCP 500. The use of computers has
been recognized in those customs and practices.
CHAIRMAN ROKEBERG asked if those were being adopted by reference or
if the concepts were basically embodied.
MR. PETERSON replied it was essentially adopting by reference. The
material he provided to the committee notes that UCC Article 5
recognizes the UCP 500, which is used in most international letters
of credit, providing operational rules and standards that have
international acceptance. They could not have that international
acceptance unless they were recognizing modern practices and
technology.
CHAIRMAN ROKEBERG asked if the UCP 500 was periodically revised via
additions.
MR. PETERSON indicated it might be contained in the commentary from
the NCCUSL, but said he hadn't reviewed that material in a long
time.
Number 0863
CHAIRMAN ROKEBERG referred to the "Northern Lights case et al,"
stating adopting things by reference becomes problematic in Alaska
statutory construction. He asked Mr. Peterson for further
information regarding that question.
MR. PETERSON said wording to the effect of "is hereby adopted by
reference" now had to be used.
CHAIRMAN ROKEBERG noted, "The problem is we have a supreme court
case (indisc.) the UBC (ph) as it relates to adoption by
reference." Chairman Rokeberg commented he thought one way to get
around that was adoption by reference of a dated addition because
that, therefore, is then revised.
Number 0914
MR. PETERSON stated that has long been the rule in the regulations.
Any adoption in the regulations had to be by specific edition with
the adopting agency named, and, at least in the footnote,
information provided on where it can be obtained. The statutes
have been somewhat looser. When the state had an income tax, it
adopted the federal income tax by reference. However, every time
the federal law was amended it did not have to be updated in the
Alaska Statutes.
CHAIRMAN ROKEBERG referred to the "OSG case" [State of Alaska v.
OSG Bulk Ships, Inc.] the previous year which was about adopting
parts of the United States tax code. The chairman noted there is
a lot of precedent in the statutes to withhold that; it is an issue
that would probably come up in the House Judiciary Standing
Committee. The chairman referred to the sectional analysis, page
9, of Section 18, Sec. 45.05.116(c), [Theresa Bannister,
Legislative Counsel, 2/17/99]. This portion of the sectional
analysis reads:
"AS 45.05.116(c). States that, except as provided
otherwise in this subsection, the liability of certain
listed persons is governed by rules of custom or practice
that the parties expressly select for the letter of
credit or confirmation, or undertaking. Gives as an
example the Uniform Customs and Practices for Documentary
Credits. States that if both this chapter and the rules
of custom or practice apply to the liability, the rules
govern, unless they conflict with a provision of this
chapter that cannot be changed (see AS 45.05.103(c))."
CHAIRMAN ROKEBERG commented it appears there would be an agreement
within the credit documents to be bound by those, unless overcome
by superior statutory right.
MR. PETERSON agreed, noting the default position is stated and the
parties can overcome that by their agreement.
Number 1055
REPRESENTATIVE MURKOWSKI referred to the mention of standard
practice in Section 10, page 7, indicating she did not see how
standard practice was incorporated into the text of the statute
because subsection (e) says that it will be determined by court.
She questioned how one knows what the standard of practice is,
wondering whether it was possibly the UCP 500 - a separate document
known within the industry.
MR. PETERSON said, "I've never seen it myself, but it is a
substantial body of material."
REPRESENTATIVE MURKOWSKI commented, "But it is something that
someone can refer to -- look at it and say, 'Ah, that's what it
is.'" She confirmed Mr. Peterson agreed. Representative Murkowski
asked if this legislation is the same language received from the
"National Commission on Uniform Code" or if it was adapted for
Alaska.
Number 1140
MR. PETERSON said it adheres very closely to the official version,
with minor stylistic changes made by the Legislative Affairs
Agency, and there should not be any substantive change.
REPRESENTATIVE MURKOWSKI noted she had some technical questions
-like could one waive being an adviser? - she felt comfortable not
addressing if Mr. Peterson could assure her that Alaska's law would
be consistent with the recommendations of the national
commissioners and what had been accepted in 38 other states.
MR. PETERSON assured her this was correct. He did not know what
changes other states might have made, but he is not aware of any
particular issue causing some states to opt in one direction and
other states to opt differently. In some uniform acts produced by
the national conference a provision a state could accept or reject
is placed in brackets. Mr. Peterson did not offhand recall any
such options, especially any of major importance, in this.
Number 1288
CHAIRMAN ROKEBERG suggested Representative Murkowski contact Mr.
Peterson for the answers she desired before the legislation is
heard in the House Judiciary Committee.
REPRESENTATIVE HALCRO asked for clarification on page 2, lines 20
through 22, "... 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."
Number 1357
MR. PETERSON replied they were speaking of a dollar amount
transaction. In the example of lumber sold to a Japanese buyer who
had the bank issue the letter of credit, if that applicant had
planned to sell the lumber to another party but lost the benefit of
that contract, that would be consequential damages and are avoided
by this provision. Incidental damages might be the applicant's
expenses involved in shipping the product over there; those would
be incidental to the basic transaction and it could collect that
somehow if the deal went wrong. Thirdly, he addressed the
language, "less any amount saved as a result of the breach". If,
for example, the price has gone wrong and therefore the applicant
has saved money by the failure of this contract, or hasn't lost the
full dollar value of the original contract, that would be
subtracted from any damages the applicant could recover.
CHAIRMAN ROKEBERG noted this could be currency fluctuations and he
would also suspect it to be a duty of mitigation. He asked if
there isn't normally a duty to mitigate.
MR. PETERSON said that assuming there is the possibility to
mitigate or one makes reasonable efforts.
CHAIRMAN ROKEBERG said, "Right, and (indisc.) brokering or the cost
of securing a new buyer (indisc.) product.
MR. PETERSON answered probably.
Number 1490
REPRESENTATIVE MURKOWSKI noted she thought there was no duty to
mitigate, but if you did then you could...
MR. PETERSON note he did not remember the no duty to mitigate
provision, questioning if it is in the same section, Sec.
45.05.111.
CHAIRMAN ROKEBERG commented he thought there would be a duty to
mitigate.
Number 1530
REPRESENTATIVE MURKOWSKI noted Section 13, lines 12 through 16,
which read:
Sec. 45.05.111. Remedies. (a) ... 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 is reduced by the
amount of damages avoided. The issuer has the burden of
proving the amount of damages avoided. ...
MR. PETERSON stated he believed there is discussion of that
provision in the official commentary he has provided.
Number 1598
CHAIRMAN ROKEBERG indicated the legislation had had a thorough
hearing the previous session. Chairman Rokeberg confirmed there
were no further questions for Mr. Peterson. He asked Mr. Peterson
to give the chairman's regards to Mr. Kurtz, and thanked them both
for their work on behalf of the state as uniform law commissioners.
Confirming no one else wished to testify, he stated the public
hearing on HB 79 is closed.
Number 1715
REPRESENTATIVE HALCRO made a motion to move HB 79 out of committee
with the attached zero fiscal note and individual recommendations.
There being no objection, HB 79 moved out of the House Labor and
Commerce Standing Committee.
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