Cengage Advantage Books: Essentials of Business Law 5th Edition by Jeffrey Beatty,Susan Samuelson

Exercise 7

YOU BE THE JUDGE WRITING PROBLEM Continental Illinois National Bank issued an irrevocable letter of credit on behalf of Bill's Coal Co. for $805,000, with the Allied Fidelity Insurance Co. as beneficiary. Bill's Coal Co. then went bankrupt. Allied then presented to Continental documents that were complete and conformed to the letter of credit. Continental refused to pay. Since Bill's Coal was bankrupt, there was no way Continental would collect once it had paid on the letter. Allied filed suit. Who should win Argument for Allied Fidelity: An irrevocable letter of credit serves one purpose: to assure the seller that it will be paid if it performs the contract. Allied has met its obligation. The company furnished documents demonstrating compliance with the agreement. Continental must pay. Continental's duty to pay is an independent obligation, unrelated to the status of Bill's Coal. The bank issued this letter knowing the rules of the game and expecting to make a profit. It is time for Continental to honor its word. Argument for Continental Bank: In this transaction, the bank was merely a middleman, helping to facilitate payment of a contract. Allied has fulfilled its obligations under the contract, and we understand the company's desire to be paid. Regrettably, Bill's Coal is bankrupt. No one is going to be paid on this deal. Allied should have researched Bill's financial status more thoroughly before entering into the agreement. While we sympathize with Allied's dilemma, it has only itself to blame and cannot expect the bank to act as some sort of insurance company for a deal gone awry.