ICC Digital Library Forum

T.O.,

My initial personal reaction to your assertion that a credit (and by extension, demand guarantee) is not a contract is:

1. Ultimately, I do not see that it is that important whether or not the credit is classified as being a ‘contract’. What surely counts is the legal effect given to a credit by law? Therefore, to me the debate is no more than academic.

2. You seem to regard the fact that one of the parties to a credit, the beneficiary, is not obliged to present documents means that the credit cannot be a contract. This simply suggests to me that what you (and others?) consider to be the definition of a contract is too restrictive.

3. You also seem to regard the fact that the beneficiary does not (normally) negotiate the terms of the credit with the issuing bank means that the credit cannot be a contract. However, it is quite common for parties to make contract offers that another party simply accepts or rejects, without any negotiation. For example, the sale of goods in a shop. Therefore, I cannot see how this absence of negotiation is relevant.

4. I appreciate you have already expressed your opinion on the views of legal professionals, but would nonetheless quote the following:

(Prof.) Roy Goode, ‘Commercial Law’, 2nd Edition (1995):

“Like most propositions of English law, the rule that a contract must be supported by consideration is not absolute. An important exception is the abstract payment undertaking …… Prime examples are the documentary credit …… Yet it is clear these too are bargain based and are not gift-promises …..”. (page 77)

“Various ingenious theories have been advanced designed to accommodate the binding nature of the bank’s undertaking within the framework of traditional contract law. All of these fall to the ground …… The defects in these various theories show the undesirability of trying to force all commercial instruments and devices into a strait-jacket of traditional rules of law.” (page 987)

(Judge) Raymond Jack, (barristers) Ali Malek QC & David Quest, ‘Documentary Credits’, 3rd edition (2001):

“Although contract is the jurisprudential foundation for the obligations contained in the various legal relationships, it is difficult to analyse them satisfactorily without recognising that documentary credits are to some extent of a special nature.” (page 8)

“…… it is plainly established in English law that the opening of an irrevocable credit establishes a contract between the bank and the beneficiary ……It is suggested that the true position is that irrevocable letters of credit which are governed by English law constitute an exception to the rule of English law as to consideration. 1

1 That an irrevocable credit is a clear exception to the doctrine of consideration is stated in Chitty on Contracts (28th edn) para 2-075.” (page 97)

Henry Harfield, ‘Bank Credits and Acceptances’, 5th edition (1974):

“…… the banker’s letter of credit is a legally enforceable instrument rooted in the law merchant and contractual in its nature. There is neither need nor utility to employ Procrustean* techniques to establish its validity.” (quoted on page 30 of Gutteridge & Megrah,‘The Law of Bankers’ Commercial Credits, 7th edition (1984))

* Seeking to enforce uniformity by violent methods; from the Greek ‘Prokroustes’, the name of a legendary robber who fitted victims to his bed by stretching them or cutting off parts of them. (Charming!)

Overall, I take it from the above that (s)he who tries to apply conventional contract theory, in its entirety, to a credit etc is asking for trouble.

Regards, Jeremy

[edited 2/28/02 3:52:56 PM]

Jeremy,

you will see from my posting under the title "Release of discrepant documents", that I generally agree with your assessment. I would modify my earlier statement by suggesting that contract law is the "best fit" option to DCs.

However, I would dispute Prof. Roy Goode's inference that an abstract payment is not consideration. For example, an avalised draft is commonly traded as part of DC or non-DC transactions. I suggest that the reason why the word "consideration" is used instead of "payment", is to allow for terms of credit to be set, countertrade, etc and the means to exercise such options.

(Prof.) Laurence

Laurence,

I do not believe Prof. Roy Goode is implying “an abstract payment is not consideration”. What he is saying, I believe, is that an abstract payment UNDERTAKING, such as a credit, does not involve the giving of consideration (at least until documents are presented, see later), which is supported by Judge Raymond Jack etc (among others). My understanding is that under English law consideration must flow from the promissee (the beneficiary here) to the promissor (the issuing bank here). Where the beneficiary does not pay the issuing bank’s charges (as is the case in the vast majority of transactions) there would never appear to be any consideration throughout the whole life of the transaction, i.e. not even post-presentation.

I must confess that I am -with respect- struggling to see the relevance of avalised bills (a rare event in my experience anyway, normally their simply accepted) and their trading to the question of consideration. Perhaps its because I haven’t a degree, let alone a professorship?

(dismal ‘A’ levels) Jeremy

Jeremy,

Thanks for doing your homework. We are quite relieved to see you quoting the opinions of different law experts and learned scholars to point out the fact that the DC cannot be treated or explained as if it were a simple contract. That is exactly what we are trying to convey.

As a self-employed, we have limited time spent on the Discussion Forum, and there is one urgent DC case needing us to handle, so we cannot have the luxury of searching our DC library and give you some of the quotations from our side to reciprocate your goodwill work. We have to fly to Hong Kong next Tuesday 5th March for workshops and that is a second reason why we cannot do the search.

Thanks for your good work. It is from those opinions that we come to realize that the DC is a strange animal, not easily tamed by the law doctrines.

"Consideration" is a very abstract notion invented by the legal experts trying to legalize things. There is limitation for use of this very abstract thing. For example, in the Civil Law, there is no need to have consideration as a condition precedent to contract making.

But the DC must work out in both the Common Law (where there is consideration in contract) and the Civil Law (where consideration may not be necessary).

NOTE

For those who join us at a later stage and do not know what we have expressed earlier on, please refer to our previous postings made under another query named "Release of Discrepant Documents" where this query is an extension thereof.

www.tolee.com

[edited 2/28/02 7:15:04 PM]

Jeremy,

Since you have ventured into the world of law by reading so many publications on DC, which may not be necessary as a DC technician (as you claim to be one in previous postings). Then why not also go into the world of transport and cargo insurance? This would make your life more rewarding by determining discrepancies more confidently and accurately.

What do you think?

www.tolee.com
[edited 2/28/02 7:16:10 PM]

This is what I have on the subject from "Letters of Credit" by Burton V. McCullough, Esq. Copyright 1993 Chapter 4.03(1) b.

"A LETTER OF CREDIT IS NOT A CONTRACT.
====================================

A letter of credit is not a bilateral contract. A bilateral contract requires consideration, a bargained-for exchange of promises, and a meeting of the minds. A letter of credit fails on all three gournds to qualify as a bilateral contract. First, it does not require consideration. Second, the issuing bank and the beneficiary seldom, if ever, negotiate the terms and conditions of the credit. Third, the issuing bank and the beneficiary are generally unknown to each other until the customer applies for the credit. Thus, there is no brgained-for exchange of promises and no meeting of the minds between the issuing bank and the beneficiary.

Nor is the letter of credit a unilatral contract. A unilateral contract consists of a promise by one party in return of actual performance by another party, and is not binding on the parties until performance. By contrast, the issuer's promise to pay under an irrevocable letter of credit is binding even before the beneficiary performs. The issuer's promise to pay pursuant to the terms and conditions of the credit becomes binding upon the beneficiary's receipt of the credit.

Nor is the letter of credit a third-party beneficiary contract. If the beneficiary of a letter of credit were a beneficiary of the contract between the issuer and the account party, the issure could assert against the beneficiary any defense it could assert against the account party, including defenses arising after the formation of the contract, such as fraud or illegality. However, once an irrevocable letter of credit has been established as regards the beneficiary, the issuer must pay pursuant to the terms of the credit regardless of any defense it may have against the account party arising out of the agreement between the two of them.

Nor is the beneficiary of a letter of credit an assignee of the contract right formerly held by the account party. The account party cannot draw drafts under the credit. The beneficiary is the only party entitled to draw drafts. In addition, if the beneficiary were an assignee, the obligor/issuer could assert against the assignee/beneficiary any defenses it had against assignor / account party. Not so with a letter of credit. The issuer cannot assert against the beneficiary any defense it has against the account party."

regards
Abdulkder

Abdulkader,

Interesting and thank you. I would merely comment that:

1. Ultimately, the question seems academic, provided the courts give credits etc their intended effect.

2. The English courts, at least, undoubtedly regard a credit etc as being a contract. Therefore, being based within the jurisdiction, I shall go along with them (not that it would make any difference if I did not).

T.O.,

In order to be able to discharge his/her role effectively, I believe a “DC technician” must understand the legal context in which the credit (or demand guarantee) instrument operates and have a good understanding of the law of the jurisdiction in which (s)he operates, as it applies to such instruments. On the other hand, at least in England, not only do I not believe a “DC technician” needs to have a detailed knowledge of the world of transport and cargo insurance, but also that one would be precluded from applying it anyway to enable determination of facial compliance (unless such knowledge were acquired by virtue of the bank’s day-to-day operations). Hence I shall continue to leave you, “the Prof” and others to battle out cargo and insurance matters (your ‘units’ discussions refer) without intervention from myself.

Regards, Jeremy

Thanks to Abdulkader for doing the quotation of the authorities, a work we have no time to do. We are also glad that we are not alone here, at least we have a companion who agrees that the DC is not a contract.

For Jeremy we always expect you to disagree with us. That is not a bad thing. In a debate we need a strong opponent to disagree with us in order to be able to generate the sparks.

Having said that, a man is his own enemy. Shall we rephrase our question as: "If you have given the time and opportunity to learn more about the trade practices of other trades, would you like to do it?"

To make it easy for you, how about "Would you like to play golf with carriers and insurers other than bankers?"

We may expect the shrewd answer "T. O., unfortunately, I do not play golf!"

As an Englishman (correct me if I am wrong) perhaps you would appreciate some humour here to add interest to an otherwise dry academic topic.

www.tolee.com

[edited 3/1/02 2:05:45 PM]

Laurence,

OFFER CANNOT BE WITHDRAWN ONCE IT HAS REACHED THE OTHER PARTY

For a simple contract, according to Common Law, the one who makes an offer cannot withdraw it once it has been received by the other party. If the offer is by mail, then the post office box would be deemed to be the agent of the other party. Once the offer is dropped into the post office box, it cannot be withdrawn. However, in Civil Law, an offer may be withdrawn provided the other party has not yet received it.

Based on above understanding, if a REVOCABLE credit were a simple contract, then how can the issuing bank cancel it unilaterally after the credit has been advised through the advising bank?

Please elaborate further your basis of argument as we do not quite follow your logic.

Thanks

www.tolee.com

[edited 3/1/02 2:28:31 PM]

T.O.,

I consider myself an Anglicised Welshman! And I'm all in favour of some humour. Finally, I don't play golf, but I do play badminton (very badly). If any employees of carriers or insurers wish to come to Birmingham for a game, please contact me. (Next week we've got the All England Badminton Championships. There's exciting for you.)

Jeremy

[edited 3/1/02 3:32:17 PM]
[edited 3/1/02 3:34:21 PM]