Appeal from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County,
the Hon. Francis T. Delaney, Judge, presiding.
MR. JUSTICE RYAN DELIVERED THE OPINION OF THE COURT:
Plaintiff, Louis Pastor, procured the issuance of an irrevocable letter of credit by defendant, National Republic Bank of Chicago, in favor of Summit Insurance Company of New York (Summit). Pastor is affiliated with Associated Surety Agents, Inc. (Associated), which is in the business of acting as insurance agent, and in that capacity sought to represent Summit. Pastor procured the issuance of the letter of credit as stated therein "to facilitate authorization of Associated Surety Agents, Inc. to act as agent for Summit * * *." The credit authorizes Summit to draw on the defendant bank by sight draft from time to time, up to an aggregate amount of $25,000, for the recovery of any deficit balance existing between Summit and Associated. On May 25, 1975, Summit was placed in liquidation by a court order in New York. The Superintendent of Insurance of the State of New York was appointed liquidator and vested with title to all property, contracts and rights of action of Summit. Thereafter, the liquidator drew a sight draft for $25,000 on the defendant bank under the irrevocable credit it issued to Summit. Pastor filed a suit against the bank in the circuit court of Cook County seeking to enjoin payment of the sight draft. A temporary restraining order and later a preliminary injunction were issued enjoining the payment of the draft drawn against the credit. Thomas A. Harnett, Superintendent of Insurance for the State of New York, petitioned the court for leave to intervene. On March 2, 1976, the circuit court of Cook County denied Harnett's petition, ordered the circuit court orders to remain in full force, and found that the denial of the motion to intervene was a final order and that there was no just reason to delay enforcement or appeal. The appellate court reversed and remanded. (56 Ill. App.3d 421.) We granted Pastor's petition for leave to appeal. The terms used with relation to letters of credit are those defined in section 5-103 of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 5-103).
The credit which the bank issued did not expressly state that it was transferable or assignable. Concerning the required documentary support for the sight drafts drawn against the credit it provided:
"All drafts drawn under this Letter of Credit must be accompanied by your official statement setting forth the amount of the loss, our agreement description and the amount of deficit, and your calculation * * * of the loss or deficit."
The sight draft for $25,000 was drawn in favor of "Summit Insurance Company of New York in Liquidation" and was accompanied by a letter signed by the Associate Special Deputy Superintendent of Insurance for the State of New York which stated that a deficit balance existed between Associated Surety Agents, Inc., and Summit in the amount of $612,655.98 as indicated on the enclosed calculation. The calculations enclosed covered a period of time "from inception to 6/30/75," and the calculation simply stated a "summary of income and outgo" for the period.
Section 5-116(1) of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 5-116(1)) provides:
"The right to draw under a credit can be transferred or assigned only when the credit is expressly designated as transferable or assignable."
Pastor contends that since the credit did not expressly provide that it was transferable or assignable, Summit alone was entitled to its benefits and to draw drafts against it and that this right could not be exercised by the liquidator, who, Pastor contends, is a transferee or assignee of the credit. Pastor also contends that the order of the New York court terminated the contractual relationship existing between Summit and Associated and thereafter the credit issued by the bank could not be drawn against it. Pastor also contends that the liquidator failed to comply with a condition of the credit in that he failed to furnish a proper accounting which reflected the amount of Summit's loss, but instead furnished only its own statement and calculation of the loss.
The law governing letters of credit was developed "when those devices were used primarily as a financial adjunct to a contract for the sale of goods. Today letters of credit are being used as a financial adjunct to a range of contracts that is as wide as the requirements of a sophisticated and developing economy." (Harfield, Code, Customs and Conscience In Letter-of-Credit Law, 4 U.C.C.L.J. 7, 9 (1971).) The traditional letter of credit used in connection with a contract for the sale of goods customarily was issued by a bank or other financially responsible entity (issuer) at the request of a buyer (customer) addressed to the seller of the goods (beneficiary) stating that the beneficiary could draw on the issuer for a specified amount upon compliance with conditions set forth in the body of the letter. The conditions usually were the presentation of a sight draft accompanied by certain documentation, usually including a bill of lading. The issuer, upon payment of the draft, then had a claim against the buyer (customer), who, upon payment to the issuer, received the documents which enabled him to procure the goods. The function of the traditional or commercial letter of credit was to finance the movement of goods in commerce and to insure the seller that he would be paid. See generally 2 W. Hawkland, A Transactional Guide to the Uniform Commercial Code sec. 2.37 et seq. (1964); Harfield, Code Treatment of Letters of Credit, 48 Cornell L.Q. 92 (1962); Mentschicoff, How to Handle Letters of Credit, 19 Bus. Law. 107 (1963); Annot., 35 A.L.R.3d 1404 (1971).
In recent years, another distinct use of the letter of credit has emerged, accomplishing results previously obtained by the use of such devices as performance bonds, escrow agreements, and various forms of guaranty arrangements. (Verkuil, Bank Solvency and Guaranty Letters of Credit, 25 Stan. L. Rev. 716, 721 (1973).) The use of the letter of credit in this capacity is referred to as a "guaranty" or "stand-by" letter of credit. Unlike the sales or traditional letter of credit, which obligates the issuer to pay in the ordinary course of a business transaction, the guaranty or stand-by letter of credit obligates the issuer to pay in the event of a default by one who procured its issuance. (Jarvis, Standby Letters of Credit Issuers' Subrogation and Assignment of Rights Part I, 9 U.C.C.L.J. 356, 359 (1977); Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking L.J. 816 (1977); see generally Campbell, Guaranties and the Suretyship Phases of Letters of Credit, 85 U. Pa. L. Rev. 175 (1936).) Although the use of letters of credit is often referred to as being in the nature of a guaranty or a suretyship arrangement, it does not assume the legal significance of either. Under the letter of credit the issuer is bound in the first instance to pay the beneficiary. It is an individual undertaking of the issuer to pay the beneficiary, and the obligation is not subject to the various defenses available to a guaranty or a surety undertaking. J. White & R. Summers, Uniform Commercial Code sec. 18-2 (1972).
Article 5 of the Uniform Commercial Code (Ill. Rev. Stat. 1975, ch. 26, par. 5-101 et seq.) is not limited in its applicability to any specific type or use of a letter of credit. The language used clearly indicates the intention of the drafters that its terms apply to "guaranty" or "stand-by" credits, as well as to traditional or sales credits. Whatever the nature of the credit, section 5-114(1) of the Code (Ill. Rev. Stat. 1975, ch. 26, par. 5-114(1)) makes it clear that the issuer of the credit has no right to refuse to honor a complying draft or demand. The obligation of the credit is without reference to the compliance of the buyer (customer) or the seller (beneficiary) with the underlying contract. The issuer deals only with documents which must comply with the terms of the credit. Once compliance is determined, the issuer is not concerned with the quality of the goods shipped or the accuracy of the documents if they are regular on their face. It is therefore apparent that the buyer (customer), the one who has procured the issuance of the credit, places substantial reliance upon the integrity or character of the seller (beneficiary). "Any procedure which extends the risk which the buyer incurs by opening the credit for example, an assignment of the credit by the seller should not be permitted without adequate safeguards for the buyer." (Ufford, Transfer and Assignment of Letters of Credit Under the Uniform Commercial Code, 7 Wayne L. Rev. 263, 264-65 (1960).) Another author states:
"If the letter of credit is in such form that no one except the person upon whose honesty the buyer is depending can give such performance as the credit requires, the buyer has an excellent chance of receiving what the credit is intended to pay for. If the credit were assignable to such an extent that performance could be delegated to another, the seller-beneficiary might unwittingly assign it to someone who might, because he is placed in a position enabling him to do so, misuse the credit or ship trash instead of merchandise. * * *
We see here perhaps the best reason there is for the present rule of non-assignability of credits which do not contain express words of assignability. The buyer is willing to be responsible for the acts of a named seller, and he should not be placed in a position such that someone else's acts may cause him loss or trouble." McGowan, ...