Legislature(1997 - 1998)
03/14/1997 03:20 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 178 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT CHAIRMAN ROKEBERG indicated that the committee would address HB 178, "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." Number 103 ART PETERSON, Attorney, Uniform Law Commissioner, State of Alaska, came forward to testify on HB 178. He noted that another Law Commissioner was in attendance via teleconference in Anchorage. He wished to cover some general points of this legislation. Mr. Peterson continued that the National Conference of Commissioners in Uniform State Laws, the body that promulgated the original Uniform Commercial Code (UCC), including this Article 5 on Letters of Credit, is a 105 year organization. Alaska has adopted about 70 to 75 of the Uniform Acts promulgated by this group. The bill before the committee is the UCC's latest amendment of a substantial part of this Commercial Code. MR. PETERSON added that the organization takes many years to develop any revision, such as what's before the committee currently. One of the main points of this legislation, dealing with letters of credit, is that it brings the law current with practices and customs in international trade. Alaska is becoming more involved with international trade and they don't want to be lagging behind the rest of the country in this area. Fifteen states have already enacted this revision before the committee. Twelve states have introduced it in the 1997 session and it was only promulgated by the national conference in 1995. MR. PETERSON noted as a general matter, this legislation revises the law that was enacted and developed about 40 years ago. There has been no significant amendment of the law since then. In this revision the law is simplified and it resolves questions which have arisen, especially with regard to the developing use of computers and modern technology. It clarifies that the parties to a transaction can rely on the international standards of practice. It conforms to international law and practice. The letter of credit industry which is the main means of financing international credit is a two hundred billion dollar industry in the United States. This legislation helps to avoid litigation in a number of areas. Number 432 JERRY KURTZ, JR., Attorney, Uniform Law Commissioner, Alaska, testified via teleconference from Anchorage. Throughout the years he's represented financial institutions on a fairly steady basis. A typical attorney in Alaska has never seen a letter of credit. There are no reported Supreme Court, Alaska cases involving letters of credit. Letters of credit are rare in the litigation world. This is due in part to the Uniform Act. The big problem that's come up in the last twenty years with letters of credit has been the advent of computers. There have been some problems applying the forty year old statute to present commerce as it is being conducted. A lot of letters of credit are still hard paper documents between individuals and banks, businesses, etc. More and more of these types of transactions are being done by some type of electronic communication. MR. KURTZ stated that from the standpoint of Alaska he couldn't stress enough the importance of letters of credit in foreign commerce. They are best thought of as a bridge, a device whereby both a person in Japan and Korea, for example, can deal with an Alaskan company and do so without worrying whether they will be paid for the goods delivered and visa versa. The letters of credit are primarily used in international commerce to assure that a party in one country that is owed money for goods provided in another country will be paid for these goods. MR. KURTZ added that countries have language differences and different banking systems with lots of distance in-between, including a time lag based on what type of transport is involved and the risk of not being paid. A letter of credit is a device to help solve these problems. The practice of letters of credit in international trade has been used for many decades. He emphasized that Alaska is heavily involved in international trade and is becoming more and more so. Number 805 DOUGLAS LOTTRIDGE, Assistant Attorney General, Commercial Section, testified via teleconference from Anchorage on HB 178. He is the attorney assigned to review this legislation. In so doing, he has talked extensively with both the previous gentlemen who testified. He added that his review of the bill comports with what they have testified to. He stated that on behalf of the Department of Law, they have no legal problems with this bill and they support it. He reiterated the fact that because Alaska is so involved in international trade, it only makes sense for them to have a uniform law that other international attorneys and businesses can rely on as being consistent with the law they are familiar with. Number 917 REPRESENTATIVE JOHN COWDERY asked if this legislation would affect the state's AIDEA loan programs. MR. LOTTRIDGE stated that he had not specifically discussed this possibility with the Alaska Industrial Development & Export Authority (AIDEA), but certainly any international transaction using letters of credit would be affected by legislation, whether it's AIDEA or any other organization. Anyone using a letter of credit would be doing so with this law in place, which this law would certainly facilitate their dealings with other private enterprise or other countries. Number 1044 REPRESENTATIVE JOE RYAN referred to the fact that a letter of credit requires seven days for the bank to honor it once all the contract conditions are met. When the person who's paying receives this letter of credit, the funds that are required are deposited in the bank where the letter is issued. The corresponding bank on the other side receives a wire transfer. At the maximum there's about three days that they need to fulfill federal requirements to handle this. Otherwise, they take the other four days and they put the money in a money market at three percent and they make money off of the other party's float. If a party wants to get this money sooner a discount note is signed which is commonly known as a banker's acceptance. The bank charges a fee for giving the money up front. Representative Ryan didn't see why a person has to pay a tribute to a bank to do the normal course of business if they chose that in three days period of time they wanted their money and met all the requirements. They should be able to be paid out if everything is as stated in a letter of credit. He said he didn't see anything in this legislation calling for a dispute resolution. Alaska has a great set of statutes on arbitration. He thought these should be referenced in this legislation. He noted the different types of letters of credit and it's become a practice lately in the market for people to try and get some unsuspecting person to send them a revolving letter of credit for purchases that are made on a continuing basis. Some people sell these revolving letters of credit on the market and leave the purchaser stuck having received nothing. A lot of due diligence is involved by the person issuing the letter of credit and with the institutions with which they're dealing. He stated that he's consulted with individuals regarding this legislation and was waiting for some responses. He wanted to make sure there were no loopholes to this legislation. REPRESENTATIVE ROKEBERG stated that he would also like answers to some of the questions Representative Ryan raised. He thought this was an important piece of legislation and something that should be considered properly. He then asked Mr. Kurtz to give an explanation of some of the concerns which Representative Ryan raised. Number 1295 MR. KURTZ noted Sec. 45.05.108, on page eight of the legislation dealing with the seven day float issue. He stated that this was a delicate issue. This gets into the area of forgeries which is an enormous problem in the banking world. He asked how long do they give a bank or somebody else that has issued a letter of credit to determine whether the documentation is adequate to require someone to pay. He said he was well aware of the problem of bankers making money on float. Not very many people like this practice, but on the other hand the problem of proper documentation and times cannot (indisc.) by looking at what's on the table in front of them. This section is a compromise in that seven business days is an outer limit. There was considerable discussion regarding the wording of this section. There should be a reasonable time after presentation of the documents to produce the money, but whether it's reasonable or not, someone doesn't have more than seven days to either do this or say they aren't going to pay, period. There is no answer to the problem which Representative Ryan has presented. Verifying documents before the letter of credit is honored, is a difficult thing to do, yet one of the advantages of a letter of credit is that they do in a rather expeditious manner, make money move. Three days or five days could be used but this could create a uniformity problem. If this language is out of phase with what the rest of the world is doing this makes it more difficult for a business man to operate under these parameters. Number 1479 MR. PETERSON added that he could make available to Representative Ryan the official Uniform Laws Conference commentary under this section. REPRESENTATIVE RYAN stated that one of the biggest things someone does when engaged in international trade is to exercise due diligence. If someone looses money on a deal because of fraud or some other problem and they've engaged in proper due diligence, well then, "shame on you." The nature of business being what it is, it behooves the person who's handling these things to do so. It's a common practice in the banking community that what they make on their overnight deposits is enough to pay the interest they pay out to the depositors. What they make on their loans, is in effect, a net profit other than taxes. They do quite well and some people would like to have this money invested. Number 1576 CHAIRMAN ROKEBERG clarified that this depends on whether banking institutions are buying or selling federal funds overnight in order to make money. He asked about the issue regarding the lack of any dispute resolution. MR. KURTZ said he would be glad to respond, but wanted to finish with his comments on the previous issue and pointed out that this legislation is a default act. "This is what goes unless it's varied by agreement." He stated that there's nothing wrong with someone negotiating with their banker along with the other parties involved to require that they pay interest for the period they loaned this money while they investigate. He suspects that this has been done at times. On the issue of arbitration. Agreements to arbitrate in the event of dispute on letters of credit are allowed, but generally this is not normally done. Arbitration is a concept unheard of in many places. Alaska has the Uniform Arbitration Act and it's worked very well, but not all states have this Act and other countries probably have something similar. In terms of something that will be readily understood, most other countries have some idea how the United States court system works and visa-versa. MR. KURTZ continued that international commerce looks very strongly for certainty of what laws will govern. In arbitration, it's never known how the arbitrators got where they got. He stated that he was a strong fan of arbitration, but inserting anything like this into the present arbitration would do a disservice to Alaskan business people because if someone from another state or country who doesn't have an effective arbitration system encountered this, they would be very reluctant to go ahead without getting attorneys involved and then spending more money and delay. He thought this was a good concept but didn't feel Alaska was in the position to lead this movement. Number 1717 CHAIRMAN ROKEBERG asked how someone would find themselves in a dispute that would require resolution. He asked if a letter of credit denominated in a monetary amount might be disputed regarding currency rates or asked for an example of any other dispute that might be raised. MR. KURTZ responded that a typical dispute arises when the issuer of the letter of credit refuses to pay out the money they agreed to pay under this document because they feel they have not been given the documentation in genuine form, say for example, if it's fraudulent. It is required to be given before the money is released. This relates to the forged document concept which is a cause of a certain number of these disputes. If it turns out that the documentation is alright and the bank held the money for twenty days, which it's not suppose to do under this bill version unless a party says specifically they will not pay after the seventh day, there have been problems with banks saying, "well, this looks awfully fishy to us. We really don't want to pay you, but we don't want to reject it yet...so we'll just take a few more days." Number 1816 CHAIRMAN ROKEBERG stated that, "so the forgery or somebody presenting themselves or misrepresenting themselves as an authorized party when in fact they weren't and then the institution issuing the draft, if you will, of money to that person as a form of forgery or embezzlement or something." MR. KURTZ responded yes and pointed out a good example of what happens is that suppose a party buys oil from Saudi Arabia, that party relies on a letter of credit from a Saudi bank that is getting help in dealing with the transaction from a New York bank and a question arises as to whether some of the documentation from Saudi Arabia has been properly notarized. This sounds like a simple thing, but there are a lot of false acknowledgments in the world. Number 1880 CHAIRMAN ROKEBERG clarified that the form available for any conflict would be the typical judicial system. MR. KURTZ responded that this was correct. Number 1905 REPRESENTATIVE RYAN stated that he had participated in some of these trades and offered to give an example. He pointed out cargo ships on the ocean with valuable cargo such as wheat, oats, etc. In the process of delivery a party cancels on the deal. He then proceeded to outline in detail the makeup of a transaction such as this with contracts outlining how and when the goods will be delivered. Along with any contracts for sale, a clause might be added that if a dispute arises, it would spell out what laws would govern. He made a point of stating that terms of dispute resolution are written specifically into related contracts. He pointed out that he didn't see anything in the bill before the committee which specifies how disputes would be resolved. MR. PETERSON noted that one of the points that's significant with revisions to Article 5 is the reliance on the body of material regarding the "customs and practices, this international body of material that's developed by the International Chamber of Commerce used in all countries." He added that it's now referred to in this Article as a fall back position, but he would imagine within this body of materials there are such provisions dealing with such things as the forum, the procedures for dispute resolution, etc. He thought this bill adequately takes care of this point. MR. PETERSON stated that this legislation related to proposed Section 45.05.108 and this is the National Conference of Commissioners on Uniform State Laws (NCCUSL) official comment pertaining to this section. As mentioned previously, this is a comment in single space that runs more pages than the section itself. He noted that this was an indication of how much thought went into this legislation. Number 2183 CHAIRMAN ROKEBERG stated that he wished to appoint a subcommittee to review this legislation to be led by Representative Ryan and to include Representatives Cowdery and Kubina. He suggested that a subcommittee could be convened if there was a compelling reason to do so, but if Representative Ryan wished to do some further research and report back to the Chair, they could determine if a subcommittee meeting is necessary. REPRESENTATIVE COWDERY asked the subcommittee Chair to address the problem of a bank being recognized by other banks.