The opinion of the court was delivered by
Schreiber, J.This case involves the effect of a written assurance given by defendant First State Bank of Hudson County to plaintiff New Jersey Bank to induce it to loan Joseph P. Palladino $50,000. The document stated that if Palladino did not repay the $50,000 debt, which was evidenced by a note, defendant bank would honor that commitment. The crucial question is whether that paper was an illegal guaranty or a valid letter of credit.
The facts are essentially undisputed. In July 1972, Joseph P. Palladino sought a $100,000 loan from plaintiff New Jersey Bank. Plaintiff’s Senior Vice-President and Senior Lending Officer, Everett B. Muh, after reviewing Palladino’s financial statement, indicated a willingness to advance the money for 90 days but wanted “some sort of collateral or support for the note.” In response Palladino obtained a letter from defendant bank signed by its President, Edward Dooley, which read as follows:
Dear Mr. Muh:
This letter will serve as a commitment to you that the First State Bank of Hudson County will assume the obligation arising from a note signed by Mr. Joseph P. Palladino on July 6, 1972, in the amount of $100,000.
We will honor this commitment, 90 days after the date of the note, upon notice to us that the loan has not been paid by Mr. Joseph P. Palladino.
Thereupon Palladino executed a 90-day note and plaintiff bank advanced $100,000.
Palladino deposited the $100,000 proceeds together with an additional $25,000 in his checking account with defend*37ant bank. Of these funds $5,790 were used to satisfy an overdraft on the account and $28,000 were applied to a reduction of Palladino’s personal loan of $60,000 from defendant bank. At the time, Palladino was an officer or party in interest of Surf Realty Company, which was also indebted to defendant bank. The sum of $23,850 was transferred from Palladino’s account to that of Surf Realty Company.
When Palladino did not repay the $100,000 loan, Mr. Muh in a letter dated October 6, 1972, called upon defendant bank to pay the $100,000 loan plus accrued interest of $2,020.80. President Dooley of defendant bank telephoned Mr. Muh and asked if plaintiff would accept a $50,000 reduction in the indebtedness and renew the note for the $50,000 balance. Mr. Muh accepted “with the understanding that Mr. Dooley would send me another letter covering the $50,000, and he agreed to do this.”
Defendant delivered a letter to plaintiff reading:
This letter will serve as a commitment to you that the First State Bank of Hudson County will assume the obligations arising from a note signed by Mr. Joseph P. Palladino on October 12, 1972 in the amount of $50,000.
We will honor this commitment six (6) months after the date of the note upon notice to us that the loan has not been paid by Mr. Joseph P. Palladino.
Relying upon the letter and the $50,000 reduction in the principal indebtedness, plaintiff renewed the loan upon Pal-ladino’s executing a new note for $50,000. The note contained provisions requiring the maker, in the event of default, to pay all costs and expenses of collection including attorney’s fees of 15% of the amount due.
When the loan was renewed in October 1972, defendant bank’s capital funds were $1,776,540. At that time, Palla-dino and Surf Realty Company owed defendant $32,000 and $125,000, respectively. Palbro Realty Co., in which Palla-dino had a substantial interest, was also indebted then to defendant in the amount of $130,162.
*38Palladino paid the interest due plaintiff each quarter on the $50,000 note until February 15, 1974, when the loan fell into default. None of the principal had been repaid. At the time of the trial on November 6, 1975, $7,762 of interest had accumulated.
Plaintiff New Jersey Bank sued both Palladino and defendant, First State Bank of Hudson County, which cross-claimed against Palladino. Palladino defaulted.
. The trial court found it difficult to accept defendant bank’s disclaimer of any liability when it gained the benefit from these loans “by the reduction of the outstanding loans shown on * * * [its] own records of Palladino and of Surf Eealty Company * * *. The purpose in getting that loan was to assist in the reduction of a problem line” of defendant bank. The trial court concluded that the $100,000 loaned by plaintiff in July 1972 had been deposited in Palladino’s account in defendant bank and that these funds had been used to cure an overdraft of $5,790, to reduce Palladino’s personal liability to the bank from $60,000 to $32,000, and to amortize the Surf Eealty Company’s indebtedness ,(an entity in which Palladino was an officer in interest) to defendant bank by $23,850. The trial court held that defendant’s letter dated October 11, 1972 was a letter of guaranty, that the guaranty was a binding contract, and that any violation of banking statutes or regulations could not shield the bank from its obligations to plaintiff, which had relied upon defendant’s affirmative contractual offer. Judgments were entered against defendant bank for $65,595 and on behalf of defendant bank against Palladino in the same amount.
The Appellate Division’s reversal was grounded on the finding that the letter was a guaranty and was therefore illegal under N. J. S. A. 17:9A-213.1, which prohibits banks from guaranteeing obligations of others. 146 N. J. Super. 6, 13 (App. Div. 1976). The Appellate Division also held that the defendant bank’s letters were not letters of credit within the contemnlation of the Uniform Commercial Code, N. J. *39S. A. 12A:5-101 et seq., or of the Banking Act, N. J. S. A. 17:9A-25 (3). 146' N. J. Super, at 12. It also reasoned that even if the letter of October 11, 1972 were a letter of credit, it would have violated the requirement in N. J. S. A. 17:9A-25(3) that the duration of such guaranties be limited to one year. However, it found that defendant had obtained a benefit to the extent of $8,790 (that part of the proceeds loaned by plaintiff bank which was used to reduce Palladino’s personal indebtedness to defendant) and modified the judgment accordingly. 146 N. J. Super, at 13-14. We granted plaintiff’s petition for certification. 74 N. J. 286 (1977).
Although state banks1 generally do not have the power to guarantee the obligations of others, the prohibition is not an absolute one.2 Section 213.1 of the Banking Act of 1948 reads:
Except as in this act or othenvise hy law provided, no bank or savings bank shall have power to guarantee the obligations of others; * * *. [N. J. S. A. 17:9A-213.1 (emphasis supplied)]
An exception is found in that provision of the Banking Act which expressly endows banks with the power, whether or not specifically set forth in their certificates of incorporation,
to issue letters of credit authorizing holders thereof to draw drafts upon it or upon its correspondents at sight or on time not exceeding one year; to guarantee, for a period not exceeding one year from the date of such guarantee, the payment by its customers of amounts due or to become due upon the purchase by such customers of real or personal property. [N. J. S. A. 17:9A-25(3)]
*40Chapter 5 of the Uniform Commercial Code is devoted to letters of credit. N. J. S. A. 12A :5-101 et seq. As stated therein, the chapter applies “to a credit issued by a bank if the credit requires a documentary draft or a documentary demand for payment.” N. J. S. A. 12A:5-102,(1) (a). A letter of credit is defined as “an engagement by a bank or other person made at the request of a customer * * * that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irrevocable. The engagement may be either an agreement to honor or a statement that the bank or other person is authorized to honor.” N. J. S. A. 12A:5-103(1) (a). A documentary demand for payment is one “honor of which is conditioned upon the presentation of a document or documents.” Document means “any paper including * * * notice of default and the like.” N. J. S. A. 12A:5-103 (1) ,(b).
These sections make it clear that generally a bank’s agreement to honor written demands for payment at the request of another upon compliance with specified conditions constitutes a letter of credit. That such was the intent of the drafters of the Code is apparent from the official comments which state that “whenever the promise [of a bank] to honor is conditioned on presentation of any piece of paper, the transaction is within [Article 5].” N. J. S. A. 12A:5-102, U. C. C. Comment, ¶ 1. The comments also note that the definitional provisions of a letter of credit “[set] forth the requirement that the engagement of the bank or other person to honor drafts or other demands for payment be at the request of another and involve a transaction falling within the scope of this Article.” N. J. S. A. 12A:5-103, U. C. C. Comment, ¶ 1. The comments continue by stating that the “engagement” may be by “way of agreement, that is, a promise to honor, or by way of an authority to honor, thus including within the definition of letter of credit, papers called 'authorities to purchase or pay.’” Id. The letter of *41credit is a contract under which the bank promises to pay someone on demand upon presentation of whatever documents may be required by the letter. N. J. S. A. 12A:5-114(1); Second Nat'l Bank v. Columbia Trust Co., 288 F. 17, 20 (3d Cir. 1923).
Historically, the letter of credit was developed to facilitate the sale of goods between distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to a seller, would at the instance lof the buyer agree to pay drafts drawn on it by the seller, provided that certain documents, such as a bill of lading, accompanied the draft. See, e. g., Comment, “Recent Extensions in the Hse of Commercial Letters of Credit,” 66 Yale L. J. 902, 903 (1957).
Expansion in the use of the letter of credit was a natural development in commercial banking. Elasticity in its use was made possible by the broad concept expressed in Article 5 of the Uniform Commercial Code, N. J. S. A. 12A:5-101 et seq., so that the letter was readily adaptable to embrace a new commercial banking practice which utilizes what is known as a standby letter of credit.3 See Jackson and Peters, “Quest for Hncertainty: A Proposal for Flexible Resolution of Inherent Conflicts Between Article 2 and Article 9 of the Uniform Commercial Code,” 87 Yale L. J. 907, 908 (1978). This usage of a letter of credit is akin to a guaranty, for the bank’s sole function is to act as surety for its customer’s failure to pay. See Verkuil, “Bank Solvency and Guaranty Letters of Credit,” 25 Stan. L. Rev. 716, 725 (1973); Arnold and Bransilver, “The Standby Letter of Credit — The Controversy Continues,” 10 U. C. C. L. J. 272, 278 (1978).
*42The standby letter of credit remains a primary obligation triggered by presentation of documentation as a precondition to payment. The bank which has issued the letter needs only to determine whether the document presented appears on its face to be in accordance with the terms and conditions of the credit. N. J. S. A. 12A:5-114. Its responsibility to honor the credit exists independently of the underlying obligation, even though the responsibility may be conditioned on notice of a breach of that underlying obligation. Chase Manhattan Bank v. Equibank, 550 F. 2d 882 (3d Cir. 1977). See Barclays Bank D. C. O. v. Mercantile Nat'l Bank, 481 F. 2d 1224 (5th Cir. 1973), cert. den. 414 U. S. 1139, 94 S. Ct. 888, 39 L. Ed. 2d 96 (1974) (letter of credit to assure a lender of repayment of applicant’s indebtedness); Prudential Ins. Co. v. Marquette Nat’l Bank, 419 F. Supp. 734 (D. Minn. 1976) (letter of credit to assure lender of a commitment standby fee). See also Arnold and Bransilver, supra, 10 U. C. C. L. J. at 279-280; Verkuil, supra, 25 Stan. L. Rev. at 725. It is now well established that the issuance of a “standby letter of credit is a legitimate use by a bank of its credit, and not an unauthorized excursion by banks into the business of suretyship.” Arnold and Bransilver, supra, 10 U. C. C. L. J. at 282.
The Department of Banking has formally acknowledged the propriety of standby letters of credit in its regulations.4 N. J. A. C. 3 :11-9.1 defines a standby letter of credit as follows:
*43(a) A standby letter of credit is any letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer:
1. To repay money borrowed by or advanced to or for the account of the account party; or
2. To make payment on account of any indebtedness undertaken by the account party; or
3. To make payment on account of any default by the account party in the performance of an obligation.
(b) As defined in subsection (a) of this section, the term “standby letter of credit” does not include commercial or traveler’s letter of credit issued pursuant to section 25(3) of the Banking Act of 1948, such as:
1. Letter of credit used to facilitate the purchase and sale of goods;
2. Where the issuing bank has obtained, or will obtain, documents of title covering the goods; or
3. Where the credit is reasonably related to the actual value of the goods at the time of purchase and sale.
Substantial authority exists for holding that commitments constituting standby letters of icredit are valid under the Uniform Commercial Code. In Chase Manhattan Bank v. Equibank, supra, defendant bank issued a letter of credit in favor of the plaintiff bank, which had agreed to finance construction of a motel by Air-North Associates. The letter of credit provided that the defendant bank would make payment upon “certification from [plaintiff] that Air-North Associates has defaulted and which default has not been cured * * 550 F. 2d at 884. The document was held to be a valid letter of credit under Article 5 of the Uniform Commercial Code.
In Brummer v. Bankers Trust of South Carolina, 231 S. E. 2d 298 (Sup. Ct. S. C. 1977), defendant bank wrote a letter of credit covering a standby fee required before the plaintiff would oommit itself to loan funds to the Phillips Development Corporation. The letter stated that “[t]he amount of this credit [referring to the standby fee of $17,500] is available to you against presentation of your signed statement that you incurred liability due to the failure of Phillips Development Corporation to deliver in *44accordance with * * * the contract * * Id. at 299, n. 1. Holding that upon demand for payment the defendant incurred a legal obligation to honor the demand, the South Carolina Supreme Court concluded the document constituted a valid letter lof credit under the Code. Id. at -299-300.
In Dovenmuehle, Inc. v. East Bank, 563 P. 2d 24 (Ct. App. Col. 1977), defendant bank on behalf of two individuals seeking a construction loan issued a letter of credit in favor of plaintiff lender. The Colorado Court of Appeals held the document was an effective letter of credit under the code. In doing so, it pointed out that
the commercial utility of letters of credit lies precisely in their independence from the contract between the customer and the beneficiary. The beneficiary is assured of prompt payment of the debt and business transactions are accordingly facilitated. Thus, the purpose of the letter of credit requires that this unique feature be preserved by courts. [Id. at 28]
See also Victory Carriers, Inc. v. United States, 467 F. 2d 1334, 199 Ct. Cl. 410 (1972) (letter of credit for up to $50,000 issued in lieu of performance bond); Fidelity Bank v. Lutheran Mutual Life Ins. Co., 465 F. 2d 211 (10 Cir. 1972) (letter of credit for $10,500 issued to serve as standby deposit to guarantee consummation of real property loan); Fair Pavilions, Inc. v. First National City Bank, 19 N. Y. 2d 512, 281 N. Y. S. 2d 23, 227 N. E. 2d 839 (Ct. App. 1967) (letter of credit for up to $2,030,000 to guarantee installment payments under a construction contract).
These authorities recognize that the letter of credit is a highly useful device for insuring performance of an obligation to pay money and that its validity should not “depend upon the nature of the transaction in which it is used.” Harfield, “Code, Customs and Conscience in Letter-of-Credit Law,” 4 U. C. C. L. J. 7, 9 (1971). Harfield, a leading commentator in the field, also observed that
*45[a] commitment to honor a draft accompanied by a bill of lading reciting receipt on board of cases said to contain hog bristles is of no more legal stature than a commitment to honor a draft accompanied by a promissory note said to be in default as to payment of principal or interest. Its traditional sale-of-goods setting certainly does not imbue a letter of credit issued to finance the importation of cigarette tobacco with any greater social or economic utility than a letter of credit issued to ensure the faithful performance of a contract to construct a cancer clinic. The expanded and expanding use of letters of credit is both logical and useful. [Id.]
The Banking Act of 1948 and Article 5 of the Uniform Commercial Code, Letters of Credit, should be read in harmony with each other. The Appellate Division quite properly addressed itself to an interpretation of that section of the Banking Act of 1948 which entrusted banks with the authority
to issue letters of credit authorizing holders thereof to draw drafts upon it or upon its correspondence at sight or on time not exceeding one year * *' *. [27. J. S. A. 17 :9A-25(3)]
The one-year limitation, however, does not restrict the duration of a letter of credit, but is addressed to the time period during which a draft may be drawn on the letter. It only qualifies “drafts” rather than the more remote “letters of credit.” If the Legislature had intended otherwise, it would have inserted a comma after the word “time.” See Gudgeon v. County of Ocean, 135 N. J. Super. 13, 17 (App. Div. 1975). That letters of credit are not subject to the one-year limitation is confirmed by the action of the Commissioner of Banking, whose regulations on standby letters of credit do not contain a one-year limitation period. N. J. A. C. 3:11-9.3. When considering the same issue in National Surety Corp. v. Midland Bank, 551 F. 2d 21 (3d Cir. 1977), Judge Garth in a careful analysis of the statute also concluded that our statute “has not restricted the duration of letters of credit issued by [state] banks to a one-year period.” Id. at 35. We agree.
*46The October 11, 1972 letter of defendant First State Bank of Hudson County fulfilled all the requirements of a standby letter of credit. It advised plaintiff of a commitment to assume the obligation arising from a note signed by Joseph Palladino on October 12, 1972 in the amount of $50,000. It agreed to honor that commitment six months after the date of the note upon notice that the loan had not been paid. Here, then, defendant bank agreed to honor a demand for payment upon notice of nonpayment of the Palladino note.
Although the letter did not expressly direct that the notice must be written, the statute, N. J. S. A. 12A:5-103, requires a notice of default to be on paper. Undoubtedly, both parties to this commercial transaction, who were sophisticated businessmen and bankers, knew that a default notice must be written. It is common knowledge in the banking field that written records are made on all aspects of the banking operation. See N. J. S. A. 17 ¡9A-247. Terms will be implied in a contract where the parties must have intended them because they are necessary to give business efficacy to the contract as written. Renee Cleaners, Inc. v. Good Deal Super Markets of N. J., Inc., 89 N. J. Super. 186, 190 (App. Div. 1964). There is the strongest reason for interpreting a business agreement in the sense which will give it legal support. Silverstein v. Keane, 19 N. J. 1, 11 (1955). With these principles in mind we find that the parties must have intended that the notice be in writing. Such a construction accords also with the proposition that when the terms of an agreement have more than one possible interpretation, by one of which the agreement would be valid and by the other void or illegal, the former will be preferred. 3 Corbin, Contracts, § 546 at 170 (1960); Kelly v. Guarantee Trust Co., 114 N. J. Eq. 110, 115 (E. & A. 1933); G. Loewus & Co. v. Vischia, 2 N. J. 54, 58 (1949). Furthermore, we note in passing that defendant bank has never contended that the letter of credit was invalid because *47it did not expressly require that the notice of default be in writing.
Defendant bank further contends that its contingent liability of $50,000 on the standby letter of credit would result in a violation of N. J. S. A. 17:9A-62A, which provides that the “total liabilities” of any person shall not exceed 10% of the capital funds of the bank. It was undisputed that in October 1972', the bank’s capital funds were $1,776,540 and, therefore, its loans to Palladino could not exceed $177,654. Palladino was personally indebted to defendant for $32,000. The bank also iclaims that in computing Palladino’s liabilities those of corporations in which he held a controlling interest must be included. N. J. S. A. 17:9A-60(7). It seeks to add a $125,000 indebtedness of Surf Realty Company and a $130,162 debt of Palbro Realty Co. However, the record does not support the conclusion that he held a controlling interest in either corporation at that time. But even if he did, contingent liabilities which might arise out of a letter of credit were not includable as a liability in the computation.5 This treatment accorded with the established practice that letters of credit were considered contingent liabilities which were not reflected in a bank’s balance sheet. Verbuil, supra, 25 Stan. L. Rev. at 727. 6 It is important to recognize that defendant *48bank’s obligation to pay plaintiff arose out of its independent contractual undertaking with plaintiff and that this obligation did not mature until presentation of a written notice that Palladino had not paid the note. See Prudential Insurance Co. v. Marquette National Bank, 419 F. Supp. 734 (D. Minn. 1976).
Defendant First State Bank of Hudson County intentionally induced plaintiff to make the loan to Palladino by inviting reliance on the defendant’s assurance. For defendant now to refuse to honor its commitment is disingenuous. Enforcement of that obligation in accordance with the terms of the standby letter of credit is fully warranted. The judgments of the Appellate Division are modified and those of the trial court reinstated.
Our reference to banks is to those state institutions defined as such in the Banking Act of 1948. N. J. S. A. 17 :9A-1 and -2.
There are several exceptions to the prohibition in the Banking Act of 1948, such as N. J. S. A. 17:9A-24(2) and N. J. S. A. 17:9A-25.5(7). One court has recently construed the bank’s right to exercise incidental powers to include a bank’s liability arising out of guaranties of leasing agreements which the bank had sold. Federal Deposit Ins. Corp. v. Pioneer State Bank, 155 N. J. Super. 381 (Haw Div. 1977).
H. Harfield has written that Article 5 “would stimulate the domestic use of the letter of credit and, like other potent fertilizers, bring it to instant luxuriance and fruition.” Harfield, “The Increasing Domestic Use of the Letter of Credit,” 4 U. C. C. L. J. 251 (1972).
Regulation H of the Federal Reserve System defines a standby letter of credit as “an obligation to the beneficiary on the part of the issuer (i) to repay money borrowed by or advanced to or for the account of the account party or (ii) to make payment on account of any evidence of indebtedness undertaken by the account party, or (iii) to make payment on account of any default by the account party in the performance of an obligation.” (footnote omitted). 12 C. F. R. § 208.8(d)(1) (1977) (footnote omitted). The Comptroller of the Currency and the F. D. I. C. have similar definitions. See 12 C. F. R. § 7.1160(a) (1977) and 12 C. F. R. § 337.2(a) (1977), respectively.
The New Jersey Department of Banking has recently adopted a regulation which requires that the contingent liability of a standby letter of credit be included in the computation of the lending limit. N. J. A. G. 3:11-9.2 (adopted July 20, 1977).
Interpretive Ruling No. 7.1160 of the U. S. Comptroller of the Currency in effect in 1972 provided:
An agreement to lend to a customer or to pay others for its account, under irrevocable sight letters of credit or otherwise, does not result in an obligation subject to the lending limit until the bank is required to make the advance or payment.
This ruling was modified in August 1974 to state that a standby letter of credit is includable in computing the lending limit to a customer. 12 C. F. R. § 7.1160 (1977).