Factual Summary: To assure completion of improvements in two residential developments, Developer/Applicant obtained three standby letters of credit issued by Issuer in favor of the municipal government for a total amount of US$228,930.

The standbys provided:

Available against drafts drawn at sight on [Issuer], Edina, Minnesota bearing the clause: "Drawn under standby letter of credit number 06-713-DD of [Issuer]," accompanied by the following document:

A certificate purportedly signed by the city administrator of the [Beneficiary] stating: " We are drawing under your standby letter of credit No.06-713-DD as [Applicant] has failed to install and pay for the petitioned items in to the approval of the plat relating to The Preserve at Rush Creek. The petitioned items are listed in Exhibit "B" under of the Developer's Agreement between the [Beneficiary] and [Applicant]. The [Beneficiary] is entitled to the unreleased portion of this standby letter of credit which the [Beneficiary] will hold until all installation of street and utility improvements relating to plat known as "The Preserve at Rush Creek", have been installed, paid for, submitted to the [Beneficiary] and approved. . . .

When Developer/Applicant relinquished its interest in the developments without completing the improvements, Beneficiary notified Issuer that it was planning to draw on the standbys due to their pending expiration, but also gave the Issuer the option of extending the deadline. Issuer refused to extend the standbys, Beneficiary drew, and Issuer dishonoured the demands.

When Beneficiary sued Issuer for wrongful dishonor, Issuer claimed that the documents that it issued were not letters of credit and that the Beneficiary had engaged in fraud. On Beneficiary's motion for summary judgment, the trial court granted summary judgment in favor of the Beneficiary and awarded attorney's fees. On appeal, summary judgment was affirmed, but remanded for further factual findings regarding attorney's fees.

Legal Analysis:

1. Nature of Undertaking; "Letter of Credit"; U.S. Rev. UCC § 5-102(a)(10). Issuer argued that the trial court erred in ruling that its undertaking was a "letter of credit". The appellate court noted that the trial court had relied on a decision based on the interpretation of the definition of "letter of credit" in Prior UCC Article 5.

Considering the definition of "letter of credit" in U.S. Rev. UCC § 5-102(a)(10), the court noted that "...if a document purporting to be a letter of credit requires the issuer to determine whether an event or other condition outside the conforming presentation has occurred, then the document is not truly a letter of credit. Rather, it may be some other form of surety, such as a guaranty." Issuer argued that the LC could not be triggered unless certain events had occurred. Noting that the conditions appeared in the agreement between the Beneficiary and Applicant and not in the terms of the letter of credit, the appellate court characterized the Issuer's arguments as "irrelevant".

The appellate court noted that,

Here, each document is labeled a "letter of credit" and unambiguously provides that, to draw funds, [Beneficiary] need only present to [Issuer] a signed certificate stating that [Applicant] has failed to install and pay for certain items designated in the developer's agreements. According to the documents, whether [Applicant] has failed to meet the requirements is to be determined by [Beneficiary], not [Issuer]. The documents do not provide for [Issuer's] making any determination of an extrinsic fact before [Beneficiary] can draw on [Issuer's] obligation to pay.

2. Construction and Interpretation. The appellate court noted that general contract principles are to be applied, when construing the terms of the letter of credit which is a matter for the court. It also noted that unambiguous terms are to be given their "plain and ordinary" meaning, but that when they are ambiguous, "resort may be had to extrinsic evidence, and construction then becomes a question of fact."

3. Attorney's Fees; U.S. Rev. UCC § 5-111(e). Noting that under U.S Rev. UCC § 5-111(e) (Remedies) the Issuer is liable for reasonable attorney's fees, the appellate court remanded the award of attorney's fees for findings of fact regarding the reasonableness of the fees related to counterclaims that were incident to the LCs.


This otherwise unremarkable opinion contains some odd dicta regarding construction and interpretation of a letter of credit. When courts fall back on principles of construction derived from bilateral contract law interpret letters of credit, there is always the possibility of confusion. Of particular concern is the court's statement that "...matters extrinsic to a letter of credit may only be considered if the terms of the letter of credit are ambiguous." In context, the court was referring to the issue of whether an undertaking is a letter of credit. In that context, the rule makes sense, namely that an undertaking that on its face appears to be a letter of credit should be so treated. Where its principal condition is non-documentary, it may not be an LC, but that determination would be made based on the text of the purported LC itself. It is difficult to imagine a situation where evidence extrinsic to the purported LC would be relevant.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.