Conclusion

7.60size=1 face="Times New Roman"> Longmore LJ recently observed that ‘[t]he whole point of [letters of credit] is that benefi­ciaries should be paid without regard to the merits of any underlying dispute between the beneficiary and its contractor'.^[712] This commercial purpose of letters of credit would be ser­iously undermined if an importer who has arranged for a credit to be issued for the benefit of the exporter could prevent payment under the credit by obtaining a stop payment order against the issuing bank in its home country on the basis of a claim that the exporter has defaulted in his obligations under the underlying contract of sale.

7.61 Under the Convention, such orders continued to have very limited effect on claims by a confirming bank against the issuing bank, or by a nominated bank that is not a confirming bank but has honoured or negotiated a complying presentation. This is because, under art­icle 4(2), the law that governs the contract between the issuing bank and the claiming bank is the law of the claiming bank's country.

7.62 In the case of a claim by the beneficiary of an unconfirmed credit, where documents are to be presented to and payment made by a nominated bank, under the Convention, the courts relied on article 4(5) to displace the law of the issuing bank's country, as the law applicable to the contract between the issuing bank and the beneficiary under article 4(2), in favour of the law of the place of performance (usually the nominated bank's country). That practice prevented foreign stop payment orders against issuers from defeating beneficiaries' claims in England. Under the Regulation, it has been argued in this chapter that, based on the

jurisprudence of the ECJ, the contract between the issuing bank and beneficiary should be classified as one for the provision services within article 4(1)(b), that the issuing bank is the party providing the services and that therefore the prima facie applicable law is the law of the issuing bank's country. If article 4(1)(b) does not apply to this contract, then under article 4(2) the applicable law is the same. In either case, stop payment orders made in the issuing bank's country would defeat beneficiaries' claims against issuing banks in England and undermine the commercial purpose of letters of credit.

7.63

However, it has been argued that, under the Regulation, the law of the issuing bank's country is likely to be displaced in favour of the law of the place of performance and/or the law ap­plicable to another contract (in the chain of letter of credit transactions) with which the contract between the issuing bank and the beneficiary has a very close relationship. Whilst, under article 4(3), the threshold for displacing the law identified under article 4(1) or (2) is apparently higher than under article 4(5) of the Convention, nevertheless, in the context of letters of credit, the place of performance continues to carry considerable weight and, in many cases, it will satisfy the higher threshold in article 4(3). Displacing the law of the is­suing bank's country in this way would mean that a stop payment order made in the issuing bank's country would not constitute a defence to a claim in England in situations where they would not have been effective as a defence under the Convention. The Convention kept the door firmly shut on such orders. The Regulation has not opened that door. To do so would increase the likelihood that reliance on such orders would become commonplace, when under the Convention it has been rare.