1. Since no one can be a confirmer unless that person is a nominated
person as defined in section 5-102(a)(11), those who agree to "confirm" without
the designation or authorization of the issuer are not confirmers under article
5. Nonetheless, the undertakings to the beneficiary of such persons may be
enforceable by the beneficiary as letters of credit issued by the "confirmer"
for its own account or as guarantees or contracts outside of article 5.
2. The definition of "document" contemplates and facilitates the growing
recognition of electronic and other nonpaper media as "documents", however,
for the time being, data in those media constitute documents only in certain
circumstances. For example, a facsimile received by an issuer would be a document
only if the letter of credit explicitly permitted it, if the standard practice
authorized it, and the letter did not prohibit it, or the agreement of the
issuer and beneficiary permitted it. The fact that data transmitted in a nonpaper
(unwritten) medium can be recorded on paper by a recipient's computer printer,
facsimile machine, or the like does not under current practice render the
data so transmitted a "document". A facsimile or SWIFT message received directly
by the issuer is in an electronic medium when it crosses the boundary of the
issuer's place of business. One wishing to make a presentation by facsimile
(an electronic medium) will have to procure the explicit agreement of the
issuer (assuming that the standard practice does not authorize it). Article
5 contemplates that electronic documents may be presented under a letter of
credit and the provisions of this article should be read to apply to electronic
documents as well as tangible documents. An electronic document of title is
delivered through the voluntary transfer of control. Article 1, section 1-201
(definition of "delivery"). See article 7, section 7-106 on control of an
electronic document. Where electronic transmissions are authorized neither
by the letter of credit nor by the practice, the beneficiary may transmit
the data electronically to its agent who may be able to put it in written
form and make a conforming presentation. Compare article 7, section 7-105,
on reissuing an electronic document in a tangible medium.
3. "Good faith" continues in revised article 5 to be defined as "honesty
in fact". "Observance of reasonable standards of fair dealing" has not been
added to the definition. The narrower definition of "honesty in fact" reinforces
the "independence" principle in the treatment of "fraud", "strict compliance",
"preclusion", and other tests affecting the performance of obligations that
are unique to letters of credit. This narrower definition — which does not
include "fair dealing" — is appropriate to the decision to honor or dishonor
a presentation of documents specified in a letter of credit. The narrower
definition is also appropriate for other parts of revised article 5 where
greater certainty of obligations is necessary and is consistent with the goals
of speed and low cost. It is important that United States letters of credit
have continuing vitality and competitiveness in international transactions.
For example, it would be inconsistent with the "independence" principle
if any of the following occurred: (i) The beneficiary's failure to adhere
to the standard of "fair dealing" in the underlying transaction or otherwise
in presenting documents were to provide applicants and issuers with an "unfairness"
defense to dishonor even when the documents complied with the terms of the
letter of credit; (ii) the issuer's obligation to honor in "strict compliance
in accordance with standard practice" were changed to "reasonable compliance"
by use of the "fair dealing" standard; or (iii) the preclusion against the
issuer (section 5-108(d)) were modified under the "fair dealing" standard
to enable the issuer later to raise additional deficiencies in the presentation.
The rights and obligations arising from presentation, honor, dishonor, and
reimbursement, are independent and strict, and thus "honesty in fact" is an
The contract between the applicant and beneficiary is not governed by
article 5, but by applicable contract law, such as article 2 or the general
law of contracts. "Good faith" in that contract is defined by other law, such
as section 2-103(1)(b) or Restatement of Contracts 2d, section 205, which
incorporate the principle of "fair dealing" in most cases, or a state's common
law or other statutory provisions that may apply to that contract.
The contract between the applicant and the issuer (sometimes called
the "reimbursement" agreement) is governed in part by this article (e.g.,
sections 5-103(c), 5-108(i), and 5-111(b)) and partly by other law (e.g.,
the general law of contracts). The definition of good faith in section 5-102(a)(7)
applies only to the extent that the reimbursement contract is governed by
provisions in this article; for other purposes good faith is defined by other
4. Payment and acceptance are familiar modes of honor. A third mode
of honor, incurring an unconditional obligation, has legal effects similar
to an acceptance of a time draft but does not technically constitute an acceptance.
The practice of making letters of credit available by "deferred payment undertaking"
as now provided in UCP 500 has grown up in other countries and spread to the
United States. The definition of "honor" will accommodate that practice.
5. The exclusion of consumers from the definition of "issuer" is to
keep creditors from using a letter of credit in consumer transactions in which
the consumer might be made the issuer and the creditor would be the beneficiary.
If that transaction were recognized under article 5, the effect would be to
leave the consumer without defenses against the creditor. That outcome would
violate the policy behind the Federal Trade Commission Rule in 16 C.F.R. part
433. In a consumer transaction, an individual cannot be an issuer where that
person would otherwise be either the principal debtor or a guarantor.
6. The label on a document is not conclusive; certain documents labeled
"guarantees" in accordance with European (and occasionally, American) practice
are letters of credit. On the other hand, even documents that are labeled
"letter of credit" may not constitute letters of credit under the definition
in section 5-102(a). When a document labeled a letter of credit requires the
issuer to pay not upon the presentation of documents, but upon the determination
of an extrinsic fact such as applicant's failure to perform a construction
contract, and where that condition appears on its face to be fundamental and
would, if ignored, leave no obligation to the issuer under the document labeled
letter of credit, the issuer's undertaking is not a letter of credit. It is
probably some form of suretyship or other contractual arrangement and may
be enforceable as such. See sections 5-102(a)(10) and 5-103(d). Therefor,
undertakings whose fundamental term requires an issuer to look beyond documents
and beyond conventional reference to the clock, calendar, and practices concerning
the form of various documents are not governed by article 5. Although section
5-108(g) recognizes that certain nondocumentary conditions can be included
in a letter of credit without denying the undertaking the status of letter
of credit, that section does not apply to cases where the nondocumentary condition
is fundamental to the issuer's obligation. The rules in sections 5-102(a)(10),
5-103(d), and 5-108(g) approve the conclusion in Wichita Eagle & Beacon
Publishing Co. v. Pacific Nat. Bank, 493 F.2d 1285 (9th Cir. 1974).
The adjective "definite" is taken from the UCP. It approves cases that
deny letter of credit status to documents that are unduly vague or incomplete.
See, e.g., Transparent Products Corp. v. Paysaver Credit Union, 864 F.2d 60
(7th Cir. 1988). Note, however, that no particular phrase or label is necessary
to establish a letter of credit. It is sufficient if the undertaking of the
issuer shows that it is intended to be a letter of credit. In most cases the
parties' intention will be indicated by a label on the undertaking itself
indicating that it is a "letter of credit", but no such language is necessary.
A financial institution may be both the issuer and the applicant or
the issuer and the beneficiary. Such letters are sometimes issued by a bank
in support of the bank's own lease obligations or on behalf of one of its
divisions as an applicant or to one of its divisions as beneficiary, such
as an overseas branch. Because wide use of letters of credit in which the
issuer and the applicant or the issuer and the beneficiary are the same would
endanger the unique status of letters of credit, only financial institutions
are authorized to issue them.
In almost all cases the ultimate performance of the issuer under a letter
of credit is the payment of money. In rare cases the issuer's obligation is
to deliver stock certificates or the like. The definition of letter of credit
in section 5-102(a)(10) contemplates those cases.
7. Under the UCP any bank is a nominated bank where the letter of credit
is "freely negotiable". A letter of credit might also nominate by the following:
"We hereby engage with the drawer, indorsers, and bona fide holders of drafts
drawn under and in compliance with the terms of this credit that the same
will be duly honored on due presentation" or "available with any bank by negotiation".
A restricted negotiation credit might be "available with X bank by negotiation"
or the like.
Several legal consequences may attach to the status of nominated person.
First, when the issuer nominates a person, it is authorizing that person to
pay or give value and is authorizing the beneficiary to make presentation
to that person. Unless the letter of credit provides otherwise, the beneficiary
need not present the documents to the issuer before the letter of credit expires;
it need only present those documents to the nominated person. Secondly, a
nominated person that gives value in good faith has a right to payment from
the issuer despite fraud. Section 5-109(a)(1).
8. A "record" must be in or capable of being converted to a perceivable
form. For example, an electronic message recorded in a computer memory that
could be printed from that memory could constitute a record. Similarly, a
tape recording of an oral conversation could be a record.
9. Absent a specific agreement to the contrary, documents of a beneficiary
delivered to an issuer or nominated person are considered to be presented
under the letter of credit to which they refer, and any payment or value given
for them is considered to be made under that letter of credit. As the court
held in Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813, 820
(2d Cir. 1992), it takes a "significant showing" to make the presentation
of a beneficiary's documents for "collection only" or otherwise outside letter
of credit law and practice.
10. Although a successor of a beneficiary is one who succeeds "by operation
of law", some of the successions contemplated by section 5-102(a)(15) will
have resulted from voluntary action of the beneficiary such as merger of a
corporation. Any merger makes the successor corporation the "successor of
a beneficiary" even though the transfer occurs partly by operation of law
and partly by the voluntary action of the parties. The definition excludes
certain transfers, where no part of the transfer is "by operation of law" —
such as the sale of assets by one company to another.
11. "Draft" in article 5 does not have the same meaning it has in article
3. For example, a document may be a draft under article 5 even though it would
not be a negotiable instrument, and therefor would not qualify as a draft
under section 3-104(e).