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KANSAS COMMENT, 1996

Article 5 was completely revised by the National Conference of Commissioners on Uniform State Laws in 1995, and those amendments were adopted by the Kansas Legislature in 1996. The Kansas provisions are generally identical to the 1995 Official Text.

The major revisions resolve many of the conflicts which arose under the former provisions, which were originally approved by the National Conference of Commissioners on Uniform State Laws in 1951. The revisions also are consistent with the Uniform Customs and Practice (UCP). They also acknowledge the increasing use of electronic and other media. The "independence principal" contained in 84-5-103(d), 84-5-102(a)(10) and 84-5-108(e), (f) and (g) was strengthened, requiring reliance only on the documentation and not on compliance with the underlying obligation. In a related revision, strict compliance is mandated, but the issuer is precluded from objecting to any discrepancy not specified in its timely notice of dishonor. 84-5-108. Letters of credit are irrevocable, unless expressly made revocable. 84-5-106. Damages have been expanded to include fees and costs, but consequential and punitive damages have been restricted. 84-5-111.

The letter of credit is a highly specialized device for transmission of moneys. The vital characteristic is the obligation of the issuer, stated in the letter, to honor drafts drawn upon it if all the accompanying documents conform to the requirements of the letter. The issuer's undertaking adds the credit of a bank or other institution of known financial standing to the obligation of the customer of the issuer, the applicant, in the transaction underlying the letter of credit. The letter encourages the beneficiary (usually a seller or creditor) to enter the deal.

A number of detailed rules governing use of letters of credit have long been stated in the "Uniform Customs and Practice for Documentary Credits" codified by the International Chamber of Commerce. There are few reported Kansas decisions dealing with letters of credit under Kansas law.

Article 5 is not intended to be a comprehensive body of statutory law. Instead, it attempts to state basic principles, leaving to custom and agreement many details.

There are essentially two types of letters of credit. The first is the "commercial" letter of credit, facilitating the documentary sale of goods and protecting a third party against the customer's default in an underlying obligation. The buyer arranges for a bank to issue a letter of credit for the benefit of the seller. The buyer is the "applicant," the seller is the "beneficiary," and the bank is the "issuer." The letter is an undertaking by the bank to honor all drafts drawn upon it by the seller for the purchase price, so long as the drafts are accompanied by the documents required in the letter, such as an invoice, a bill of lading, or an inspection certificate. The risk of buyer insolvency is shifted to the bank as is the risk of the buyer trying to renege on the agreement. The seller gets the benefit of the bank's undertaking upon the seller's complying with the documentary requirements.

The second is the "standby" letter of credit. The standby letter guarantees that the bank will honor its customer's performance of obligations in a variety of situations. For example, instead of a performance bond from a surety, an owner of real estate may require the contractor to procure a letter of credit obligating its bank to pay the owner upon presentment of a certificate of default accompanied by a draft demanding payment.

For general reference works on letters of credit under Article 5 of the Uniform Commercial Code, see White and Summers, Uniform Commercial Code, Practitioner Treatise Series (4 th Ed. 1995). White and Summers also have a short introductory chapter on the new provisions for letters of credit in The Uniform Commercial Code (4 th ed., Hornbook Series, 1995). Anderson, Anderson on the Uniform Commercial Code (3 rd Ed., 1995) is also very useful. Clark, The Law of Bank Deposits, Collections and Credit Cards (1995, supplemented regularly) and Dolan, The Law of Letters of Credit (1996) are also very useful.

Revisor's Note:

Former section 84-5-101 was repealed by L. 1996, ch. 202, § 91 and the number reassigned to the current text.

CASE ANNOTATIONS

1. Bank had the right to dishonor letter of credit based on beneficiary's fraud. Prairie State Bank v. Universal Bonding Ins. Co., 24 Kan. App. 2d 740, 743, 953 P.2d 1047 (1998).