Procedural Posture

Defendant bank sought review of the decision of the Superior Court of San Diego County (California), which granted summary judgment in favor of plaintiff electric company in an action for wrongful dishonor of demand of payment on a letter of credit.

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Overview

Defendant bank issued a standby letter of credit on behalf of a customer that provided that plaintiff electric company could obtain payment upon demand. Plaintiff requested payment and defendant refused on the grounds that the letter of credit had expired and plaintiff did not mitigate damages. The court held that both the express terms of the letter of credit and California Uniform Commercial Code, Cal. Com. Code § 5114(1), mandated that the letter of credit was independent of the underlying contract. The court held that the mitigation defense was not available to defendant. The court held that defendant did not have the right to inquire into the contractual dispute between its customer and plaintiff when they considered whether or not to honor plaintiff’s demand for payment. The court affirmed and held that defendant had to honor plaintiff’s draft for payment.

Outcome

The grant of summary judgment in favor of plaintiff electric company was affirmed because defendant bank did not have a right to refuse plaintiff’s demand for payment of the standby letter of credit. Defendant did not have a right to inquire into the contractual dispute between its customer and plaintiff when they refused to honor the request for payment.