Article

Note:In connection with a specific housing development project, PBK Bank issued a letter of credit for US$188,000 payable to the local court, Madison County Fiscal Court, in the event that the applicant/developer, VanMar, Inc., failed to complete the project in accordance with the approved development plans.

When one of the suppliers of rock for the project was not paid, it filed a lien on the properties and also filed an action to enforce it, naming Issuer as a codefendant. Subsequently, when the county government indicated that it would draw down the balance available on the LC, a motion was made to add Beneficiary as a defendant on the theory that the supplier was a third party beneficiary of the LC since the rock that it supplied was used to build the roads in the development pursuant to the development plans.

When the Madison Circuit Court (Kentucky), Adams, J., denied the supplier's motion on the ground that it was not a party to the LC, it appealed. The Court of Appeals of Kentucky, Buckingham, J., affirmed on this issue.

The appellate court based its decision on two grounds. First, it noted that under U.S. UCC § 5- 102(a)(3), a beneficiary to a letter of credit is "a person who under the terms of a letter of credit is entitled to have its complying presentation honored. The term includes a person to whom drawing rights have been transferred under a transferable letter of credit." The court found that the supplier did not meet the conditions of being a beneficiary and was not named as such under the terms of the letter of credit.

Second, the court noted that "[r]ights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent ... of a contract or arrangement out of which the letter of credit arises or which underlies it." The court ruled that the supplier should not be added as a beneficiary because to do so would force Issuer to "assume the risk of [Applicant's] nonperformance on an underlying contract with [the supplier]."

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