Opinion ID: 1659249
Heading Depth: 1
Heading Rank: 2

Heading: The law of letters of credit

Text: The letter of credit and the surety contract are both commercial devices, and they share a common purpose. Both insure against the obligor's nonperformance. They function, however, in distinctly different ways. The letter of credit is somewhat akin to a performance bond in that: In place of a performance bond from a true surety, ... (customer) gets his bank (issuer) to write ... (beneficiary) a standby letter of credit. In this letter, issuer engages to pay beneficiary-owner against presentment of two documents: 1) a written demand (typically a sight draft) which calls for payment of the letter's stipulated amount, plus 2) a written statement certifying that customerbuilder has failed to perform the agreed construction work. Another difference between the standby letter of credit and the surety contract is that the standby credit beneficiary has different expectations. In the surety contract situation, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor's nonperformance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the account party has in fact performed and that the beneficiary's presentation of those documents is not rightful. In that case, the account party may sue the beneficiary in tort, in contract, or in breach of warranty; but during the litigation to determine whether the account party has in fact breached his obligation to perform, the beneficiary, not the account party, holds the money. J. Dolan, The Law of Letters of Credit, ¶ 1.05[1] at 1-18, 1-19 (2d ed. 1991). See also, Rose Developments, Inc. v. Pearson Properties, 38 Ark.App. 215, 832 S.W.2d 286 (1992). Because the obligations and expectations of the issuer and the beneficiary differ from the traditional surety situation it follows that once an irrevocable letter of credit is established, the credit engagement may not be altered in any way without the consent of the parties. Dolan, supra, ¶ 5.02[1] at 5-12. LeaseAmerica Corp. v. Norwest Bank Duluth, N.A., 940 F.2d 345 (8th Cir.1991). Banco's letter of credit stated on its face that it was issued pursuant to The Uniform Customs and Practice for Documentary Credits (UCP), a body of rules established more than 60 years ago and adopted by credit issuers throughout the world in 1963. Article 10(d) of the UCP (1983 version) provides: Such undertakings can be neither amended nor cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. Partial acceptance of amendments contained in one and the same advice of amendments is not effective without the agreement of all the above-named parties. Clearly the agreement between the account party (Sugarloaf) and the beneficiary (PC & E) cannot alter the terms of the credit, which specified coverage of the original permit, without the consent of the issuer. Equally clearly, Banco may not be held to have consented, by its agreement to the terms of an existing permit, to changes which had not occurred and would not occur until execution of a different permit on a later date.