Factual Summary: To pay for the purchase and sale of coffee, the applicant, with the assistance of its banker, obtained a transferable letter of credit through another bank. Shortly thereafter, the beneficiary transferred the credit to a supplier. The transferee beneficiary then asked that the terms of the credit to be amended to require half of the purchase price to be paid up front and the remainder to be paid upon receipt of the goods. The applicant refused to accept this proposed amendment and asked its bank to request cancellation of the credit. The original beneficiary refused to provide such consent until a new credit was issued under mutually agreeable terms. Neither the applicant's bank nor the original beneficiary communicated again at this stage.

After several weeks, the applicant inquired regarding the status of its request for cancellation. The applicant's bank did not pass this message on to the issuer or original beneficiary. The following week, the original beneficiary notified the bank that it did not consent to cancellation. The original beneficiary subsequently brought suit against the applicant's bank claiming damages incurred as a result of the unilateral cancellation of the credit pursuant to UCP500 Article 9(d)(i). The goods were never shipped and the credit expired with no presentation ever having been made.

Legal Analysis:

1. Repudiation: "Clear and Unequivocal":The applicant's bank claimed that any purported repudiation of the letter of credit "must be clear and unequivocal- for the other party merely to give rise to serious doubts as to whether he will perform in due course is not sufficient." The court agreed that this standard should be applied when determining whether repudiation had occurred. A telex from the applicant's bank stating "[a]t the applicant's request we herewith cancel ... credit ... Please urgently obtain beneficiaries agreement with cancellation of the credit and confirm this agreement to us by tested telex" was not deemed to be sufficiently "clear and unequivocal" as to indicate repudiation. The court stated that ambiguous statements of repudiation "will not do ... nor ... will a statement which merely casts doubt, even grave doubt, on the party's willingness to perform".

2. Repudiation: Plaintiff Must Accept Repudiation if Claiming Damages:The court noted that "it is necessary for the [beneficiary] to accept a repudiation as discharging the contract in order to entitle them to recover damages for its breach." "There is a wealth of authority to support the proposition that if the innocent party wishes to exercise his right to treat the contract as discharged, he must communicate his decision to the other party in clear terms." The court stated that a letter of credit was merely a "bundle of contractual rights." Therefore, the beneficiary may either "treat the contract as discharged immediately" or "bide his time and wait to see whether the contract is performed."

It was argued by the beneficiary that it had accepted the repudiation in one of two ways-either by silence and inactivity (i.e. not performing the underlying contract of sale), or by its letter to the applicant's bank which stated "[w]e hereby confirm that we do not agree to cancel this credit ..." The applicant's bank argued that since it would not be immediately aware of whether or not goods were shipped under the terms of the underlying contract, a failure to do so would not constitute a clear communication by the beneficiary that it considered the letter of credit to be repudiated. Furthermore, the letter from the beneficiary did not clearly indicate that it regarded the LC as repudiated." The court agreed with the argument of the applicant's bank. The court indicated its satisfaction that "silence or inactivity was not sufficient in this case."


1. It is unclear why the applicant's bank is the defendant in this case since it neither issued, confirmed, or advised the letter of credit nor was it a party to the underlying contract of sale. The case draws on contract law to reach a principle that could be better appreciated under LC law: regardless of the actions of the applicant or its bank, the LC is the irrevocable undertaking of the issuer. Only its repudiation matters. Perhaps the omission is not surprising since the court treats the LC as a mere contract without, apparently asking between whom, what consideration supports it, and whether there is mutuality.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.