Brief Fact Summary. A letter of credit was extended to a lessor to assure the lessee would perform on the lease contract. When the defendant bank failed to pay on the letter of credit this suit ensued. The district court ruled that the instrument was letter of credit the laws as they apply to letters of credit should be applied. Synopsis of Rule of Law. A letter of credit must not stray “too far from the basic purpose of letters of credit, namely, providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract.”
If the letter of credit concept is to have value in new situations, the instrument must be tightly drawn to strictly and clearly limit the responsibility of the issuer.View Full Point of Law
Issue. Was the district court correct in holding that the instrument was a letter of credit?
Held. No. The Court of Appeal did not agree with the district court that the instrument sued upon is a letter of credit even though it is labeled as such. The Court held that “the instrument is a guaranty contract, obliging the defendant to pay whatever the lessee owned on the underlying lease, up to the face amount of the guaranty. Since the underlying lease clearly contemplated the payment of $250,000 in the case of default, and since this provision appears to be a valid liquidated damages clause, the judgment below must be modified to award the plaintiff $250,000 plus interest.” The instrument was determined not to be a letter of credit because it “strays too far from the basic purpose of letters of credit, namely, providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract.” The instrument does not give evidence of an intent that payment was to be made merely upon presentation on a draft nor does is specify what docum ents are required for termination or payment. The instrument instead requires the occurrence of certain conditions and an affidavit of notice before payment may be received.
Discussion. The instrument is called “Letter of Credit” and the court stated that it should give credit to the intent of the parties, however, “relevant intent is manifested by the terms of the agreement, not by its label.” The court held that if the instrument in question was interpreted as an actual “letter of credit” it would blur the distinction between a letter of credit and an ordinary guaranty contracted. It would “hamper rather than advance the extension of the letter of credit concept to new situations if an instrument such as this were held to be a letter of credit.”