Let's go back a minute to the example in which Daisy Buchanan posted a letter of credit to secure her obligation to make contributions to Gatsby's oil exploration venture. There are really three relationships involved here.
The bank (the issuer) has an obligation to partnership (the beneficiary) to pay it the money upon the presentation of the proper documents. This is the most obvious relationship, but there are others.
Ms. Buchanan (the applicant) has an obligation to the bank (the issuer). Typically this will be governed by the application which she executes as a prerequisite to the establishment of the letter of credit. In the application, which is typically a contract, she will agree to repay any sums the bank advances under the letter of credit. Often, she will give security for the obligation.
The most complex relationship is that between Ms. Buchanan and the partnership. She has a number of obligations as a partner, the most obvious being to make the capital contributions that are the reason for the letter of credit. But in addition, the partnership has a number of responsibilities to her, such as the partnership's responsibility to carry out the agreed plan of exploration.
The independence principle is basically very simple and it is fundamental to the usefulness of letters of credit. It is what makes a letter of credit useful where an ordinary contractual obligation would not be. The independence principle states that the issuer's obligation to the beneficiary is entirely independent of the beneficiary's obligation to the applicant or the applicant's obligation to the issuer.
Suppose that Gatsby, on behalf of the partnership, saunters in to the Princeton Bank & Trust Company and presents the letter of credit accompanied by the required documents stating that Ms. Buchanan is in default in her obligation to make capital contributions to the partnership. In fact, however, it is the partnership which is in default because it has not been carrying out the oil exploration venture as promised in the prospectus. If the bank is aware of this, can the bank refuse to honor the partnership's presentation? (See U.C.C. Section 5-103(d).)