IssuingZConfirming Bank and Seller

2.10 The UCP 600 is the first version of the UCP to state that the issuer is irrevocably obliged from the time the credit is issued,^[161] to honour the credit in one of the three ways discussed above, and the confirmer is irrevocably obliged to honour or negotiate the credit from the moment it confirms.^[162] The time of issuance and confirmation are not defined but the preva­lent view appears to be that issuance occurs ‘when the credit leaves the operational control of the issuer’, and similar for confirmations.^[163] Before the UCP 600, the weight of older au­thority supported the view that the credit became binding once it was communicated to the seller.^[164] In other words, under the UCP 600 the credit becomes binding earlier than previ­ously thought as the dispatch of the credit logically precedes receipt by the seller.

2.11 The liability created by the letter of credit is superficially contractual, and it is generally la­belled as contractual,^[165] but a granular analysis suggests a problem with the requirements for the formation of a contract.

a going concern and need not worry about reputational damage. A recent case confirming that this issue remains alive, and still merits attention, is Taurus Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Republic of Iraq (Taurus Petroleum).^[166] Taurus sought to execute an arbitration award in its favour against the State Oil Marketing Company of Iraq (‘SOMO’) by attaching monies owed under a letter of credit to SOMO by a third party is­suer.

2.12

As discussed by Professor Peter Ellinger, attempts to demonstrate the contractual nature of the obligation between issuer/confirmer and seller broadly take one of three forms: one is to reason from first principles and suggest how the letter of credit can meet the requirements for contract formation; another is to characterise the letter of credit as an example of one of a number of existing contract types; and the third is to fall back on custom and usage to overcome any defects in the formation requirements.^[167] The second approach, termed the ‘classification’ approach by Professor Ellinger,^[168] apparently has prospects in civilian systems but is generally doomed in the common law since it begs the question whether there is a contract in the first place. It will, accordingly, be considered only in overview following a more detailed examination of the requirements for contract formation and how they op­erate in the letter of credit context. Before considering custom and usage, the contract al­ternatives of trust, deed, and estoppel will also be discussed, as well as possible recourse to legal fiction.

A.face="Times New Roman">                             The Letter of Credit and the Requirements for Contract Formation

2.13

Whether the letter of credit is a contract sui generis, as has been suggested,^[169] or it falls into a recognised contract type, it must meet the requirements for contract formation: offer and acceptance, consideration, certainty of terms, and an intention to enter into legal relations.

1.          Offer and Acceptance

2.14

In common law contract theory, a matching offer and acceptance are needed in order to bring a contract into being. This so-called mirror image approach requires the offer to be ac­cepted by the person to whom it is addressed. The acceptance must be communicated to the offeror unless it is a unilateral offer which is accepted by performance, thereby dispensing with the need for a communicated acceptance. The latter typically arises when the offer is made to a large group of people as happens in reward cases and competitions. Acceptance, whether communicated or taking the form of performance, must be in response to the offer—it cannot be a coincidence. The offer and acceptance model does not dictate which party makes the offer and who accepts it and, in the event of a dispute, it is left to a court to decide what role the parties assumed.

2.15 The issue of a letter of credit by a bank might instinctively be viewed as an offer—an offer to pay in certain circumstances. The problem is that the promise to pay is regarded as being binding either from the moment of issue under the UCP 600, and hence before the seller is aware of it, or from the time of communication to the seller who has yet to signal any ac­ceptance.^[172] One attempt around that problem is to view the seller's forbearance from selling the goods elsewhere as acceptance.

2.16 An alternative explanation views the credit as a unilateral offer by the issuer which is ac­cepted by the seller's performance, but it too struggles with the time at which the credit is considered to be irrevocable.^[173] Another attempt to deal with this timing problem is to characterise the seller as making an offer to the issuer, which is accepted by the issue of the credit.^[174] This offer, it is said, is made in the sale contract with the buyer. One might see the offer as a promise to supply goods to the buyer in return for payment from the issuer. The analysis is, however, unattractively artificial since it means the offer is made via the buyer, and it j ars with the autonomy principle that governs letters of credit, ie that the issuer's obli­gation to pay is independent of the underlying sale contract.^[175]

2.          Consideration

color=black face="Times New Roman">2.17 The second big challenge for viewing the letter of credit as a contract is the doctrine of con­sideration, a controversial doctrine of the common law which has generated much debate.^[176] This doctrine dictates that one-sided promises are not enforceable—it requires an exchange of value between the parties.

One suggestion is that the seller's forbearance constitutes consideration.^[177] The forbearance might take the same form as that discussed under acceptance—the seller's forbearance after receiving the credit from selling the goods elsewhere. The forbearance might, alternatively, take the form of refraining from seeking payment from the buyer. Both of these versions of forbearance fail, however, to explain the time at which the credit becomes binding on the issuer, since the forbearance is logically after the issue or communication of the credit. Forbearance in seeking payment from the buyer also does not reflect the dynamics behind the issue of the letter of credit which is used precisely because the seller does not wish to rely on the buyer for payment—a far cry from forbearing to sue the buyer. Another possibility is that the seller provides consideration in the form of submitting the documents to the bank, which is a requirement under the credit. This possibility is not satisfactory either, because the seller does not promise to furnish any documents to the issuer, and if s/he does not, there is no breach as far as the issuer is concerned.

2.18

2.19

An additional difficulty in finding consideration in the letter of credit context is that the doctrine of consideration requires the seller's promise or performance to be given in exchange for the promise by the issuer, not merely in reliance on it.^[178] This require­ment means that the issuer must expressly or impliedly request the supply of the goods. In reality, the seller's shipping of the goods is done in performance of the sale contract, and the issuer does not request the supply.

2.20

The twentieth century saw two significant developments concerning the doctrine of consid­eration in the UK, although it seems that neither assists in the letter of credit context. The first is the recognition of practical benefit, which substantially modifies the requirement of fresh consideration for contract variations. Practical benefit was first recognised in an agreement to pay more for the same services—the benefit resided in securing the comple­tion of work that otherwise was in danger of not being done.^[180] Since then, the concept has been applied to agreements to accept less in settlement of a debt.^[181] Both decisions are Court of Appeal decisions in England and Wales, and the UK Supreme Court has yet to rule on the matter—the latter decision was taken to the Supreme Court which disposed of the appeal without ruling on the consideration aspect.^[182] Although the issuer may have an economic interest in the financial wellbeing of the buyer, there seems to be little prospect of arguing that the seller receives a practical benefit by securing the seller's supply of the goods to the buyer. The main problem with such an argument is that practical benefit has only been rec­ognised in the context of contract variations, and current authorities do not suggest that it can bring a wholly new contractual obligation into being.

2.21 The second notable development is the doctrine of promissory estoppel,^[183] which is an equitable estoppel that operates when a one-sided promise without consideration varies the terms of a contract. The promise cannot be broken if it would be inequitable to do so and provided other requirements are met: a clear and unequivocal promise that the promisee relied on. In the posited scenario, the requirement of reliance means the promise can only be relied on after it is communicated and acted on in some way, which does not explain why the issuer is bound on issue or communication of the credit. There is another problem—we are seeking to explain how the seller acquires the right to payment from the issuer, but the creation of new rights is beyond the orthodox scope of promissory estoppel, as captured by the maxim that it operates as a shield not a sword.name="_ftnref184" title="">^[184]

3.           Discussion

2.22 The fact that the letter of credit does not fit comfortably or perfectly into the offer and ac­ceptance model of contract does not necessarily scupper the view that the letter of credit creates a binding contract between the issuer and the seller. Lord Denning famously said in Gibson v Manchester City Council: ‘[i]t is a mistake to think that all contracts can be ana­lysed into the form of offer and acceptance’.^[185] On appeal, the House of Lords accepted that exceptionally, some contracts ‘do not fit easily into the normal analysis of a contract as being constituted by offer and acceptance’^[186] The case law also shows that binding agreements have been recognised despite the absence of offer and acceptance in the conventional sense. A good example for the present context is The Satanita.^[187] The owner of a yacht was held liable in damages to the owner of another yacht that had been sunk in a racing competition. There was no agreement between the two parties but they had each agreed with the competition organiser to be bound by certain rules and to be liable in damages for their breach. Lord Herschell said: ‘The effect of their entering for the race, and undertaking to be bound by these rules to the knowledge of each other, is sufficient, I think, where those rules indicate a liability on the part of the one to the other, to create a contractual obligation to discharge that liability.'^[188] The Court of Appeal in the same case indicated that the contract between the yacht owners was formed when they started sailing; another contract came into being be­tween each yacht owner and the race organisers when the competition form was signed.^[189] While it is only exceptionally that a contract will be recognised in the absence of an ac­cepted offer, it is plausible to claim that the letter of credit is such an exception.

2.23 As international instruments, letters of credit have been influenced by various legal sys­tems including those of civilian systems that articulate the requirements for contract forma­tion differently. The promulgator of the UCP, the ICC, has arguably been influenced more by the civil law than the common law, and hence has shown less concern for the English doctrine of consideration.^[190] The doctrine insists on reciprocity before agreements will be enforced. Viewed in isolation there may be no direct reciprocity between the issuing bank and the seller. But viewed in its broader context, the arrangement does not lack reciprocity and no one disputes that letters of credit should be binding. In the US, the problem of an absence of consideration has been removed by the UCC which provides: ‘Consideration is not required to issue, amend, transfer, or cancel a letter of credit, advice, or confirmation.'^[191] Some support for a special approach for letters of credit in the common law can be found in Dexters Ltd v Schenker & Co in which Greer J considered, obiter, an argument of an absence of consideration to be without merit.^[192] Recent common law developments regarding prac­tical benefit also suggest an increasingly liberal view of the doctrine. Such a more expansive approach to consideration, it is submitted, should be able to recognise consideration in the unique circumstances of the letter of credit bearing in mind its place amongst a number of connected contracts.

B.                                      Fitting the Letter of Credit into an Existing Legal Category

2.24

It has been variously suggested that the letter of credit is an example of a guarantee, an assignment, a novation, or an agency,^Roman">[193] all being recognised sources of obligation of a contractual nature. Leaving aside the formidable point that any contract, irrespective of its classification, must satisfy the contractual requisites discussed above, an objection to many of the suggested classifications is that they fail to deal with the fact that the issuer/ confirmer's obligation is primary and independent of the contract between the buyer and the seller or the buyer and the issuer.^[194]

2.25

Guarantees, also sometimes termed suretyships,^[195] are secondary obligations and hence are inapposite to describe letters of credit which are primary obligations. Indeed, it is a key feature of the credit that the issuer's obligations are independent of the contract between the buyer and the seller. The alternative possibility, of categorising the letter of credit as an indemnity, ie a primary liability, encounters the main problem that crucial formation elements for a contract are missing, as discussed earlier. The assignment argument posits that the buyer assigns his/her rights in the contract with the issuer to the seller. One of the flaws with this suggestion is that it would render the seller vulnerable to any defences and equities which the issuer can raise against the buyer, which is incompatible with how let­ters of credit operate and does not reflect the intentions of the key actors. Alternatively, in a novation of parties, the buyer would drop out of the equation but that does not explain why the buyer remains secondarily liable to the seller if the issuer does not pay. The agency after the 1962 Revision, see E P Ellinger ‘The Uniform Customs-Their Nature and the 1983 Revision' [1984] LMCLQ 578; and E P Ellinger ‘The UCP-500: Considering a New Revision' [2004] LMCLQ 30.

classification treats the buyer as the seller's agent in procuring the credit, but it does not reflect the reality of the arrangement which is that issuer and seller deal with each other as principals. For similar reasons, viewing the issuer as an agent of the buyer when it is­sues the credit is unsatisfactory as the entire point of introducing the issuing bank into the equation is to give the seller an independent claim against a more trusted party.^[196]

2.26 It has also been argued that the promise of payment in the letter of credit constitutes an advance or anticipatory acceptance of any bill of exchange that will be drawn by the seller pursuant to the credit. This suggestion can, at most, explain letters of credit that utilise ne­gotiable instruments—and not all do—and it will not work where bills of exchange legisla­tion requires an acceptance to be written on the bill itself, as is typical in the common law world.^[197]9

2.27 Another possibility that must be mentioned is the letter of credit as a contract for the benefit of a third party. The argument would be that the contract between the buyer and the issuer is for the benefit of the seller. At one time, third parties had limited scope to claim rights from a contract in the common law. This position has now changed with similar legislation found, for example, in the UK,^[198] Singapore,^[199] and Hong Kong.^[200] The UK legislation pro­vides that a third party can enforce a contract where it expressly provides for third party enforcement or, which is more likely, where it purports to confer a benefit on the third party. This requirement is designed to distinguish between intended and incidental benefits. The third party must be identified or identifiable from the contract and, importantly, the statute states that the failure of the third party to provide consideration is not a bar to her/his claim. While in theory the seller could utilise this legislation to enforce the promise of payment made by the issuer to the buyer, for a number of reasons it may not assist: the provisions of the legislation can be excluded, and such exclusion is boilerplate in bank documentation— notably the UCP says that a seller cannot claim under the contract between the buyer and the issuer.^[201] The Hong Kong Ordinance providing for third party rights of enforcement specifically excludes letters of credit from its ambit.^[202] The privity legislation also does not explain the common law position which is that a seller enforces its right to payment as prin­cipal and not as a third party—if the seller is enforcing a right in the contract between the buyer and the issuer, the letter of credit is superfluous.

name=bookmark554>C.   Contract Alternatives

2.28 This section discusses non-contractual bases on which the issuing bank's liability to the seller under the letter of credit can be placed. The three possibilities that will be considered are that the letter of credit constitutes a trust, a deed,^[203] or that it gives rise to an estoppel.

1.   The Letter of Credit as a Trust

The agreement between the buyer and the issuing bank for the credit to be issued arguably 2.29 creates a trust with the buyer as the settlor, the bank as the trustee, and the seller as the beneficiary.^[204] The trust explanation is, however, unpersuasive: there must be an intention to create a trust,^[205] a requirement which is almost certainly missing in the letter of credit con­text, and a trust requires certainty of property,^[206] yet such property is frequently absent as the issuing bank typically pays the seller from its own funds and recoups from the buyer in due course. Yet another problem is that a seller enforcing its rights under a credit sues as a party to the credit and not as a beneficiary of a trust created between the buyer and the bank.

2.    The Letter of Credit as a Deed

Deeds have been said to be ‘the most solemn act that a person can perform with respect to a 2.30 particular piece of property or other right.^[207] They were historically divided into two types: indentures and deeds poll, a distinction which was based on the physical differences be­tween the two, a difference that is no longer particularly significant.^[208] As regards function, indentures are agreements between two or more parties and are used when a binding com­mitment is desired but a contractual element is missing, typically consideration. Deeds poll are used for one-sided announcements, and are today synonymous with name changes.^[209] Deeds, even when not legally required, have also been used out of habit and caution. As a matter of practice, they are/have been used for a variety of purposes, including to: create a trust over property,^[210] grant a power of attorney,^[211] effect bank guarantees,^[212] convey land,^[213] and effect name changes.

In the present context, the question is whether the letter of credit can be cast as a deed. 2.31 A problem with casting the letter of credit as an indenture between the seller and the issuing bank is similar to one of the problems seen with the contractual analysis—an indenture is essentially an agreement, yet the problem we are trying to solve is that in a letter of credit there is no assent from the seller by the time the credit is regarded as binding. Thus, while casting the credit as a deed by way of indenture can avoid the problem of consideration, the absence of a consensus remains. Since the letter of credit is a one-sided act when viewed in isolation, the deed poll may be a better fit than the indenture. One-sided declarations can be binding if contained in a deed, thus avoiding both the requirements of offer and acceptance, and consideration. Although particularly associated with name changes, the deed poll can be used to make other important declarations. For example, in Hong Kong it is used to par­tition land,^{lang=EN-US style='font-size:9.0pt;font-family: "Times New Roman",serif;color:black'>[214]} in England it is apparently used by clergy to renounce their ordination,^[215] and in Australia it has been used by an insurance company to assume liabilities under certain policies issued by another insurance company.^[216]

2.32 The problem with viewing letters of credit as deeds poll or indentures, is non-compliance with the formalities needed for a deed. Historically deeds were required to be signed, sealed, and delivered,^[217] although these formalities have been altered by statute in different jurisdic­tions. The requirement of signature is probably unproblematic as letters of credit are always in writing and will be signed in some way by the issuer/confirmer. The requirement of a seal, traditionally a red disk of paper or wax, has been watered down in many jurisdictions,^[218] and is practically or legally no longer a requirement in many circumstances.^[219] For corpor­ates, it has been replaced by the signatures of designated office-holders in the company. For example, the UK's Companies Act 2006 does away with a seal if the document is executed by a director and the secretary, two directors, or a single director in the presence of an at­testing witness.^[220] In Singapore, the Companies Act was similarly amended in 2017 but also requires the document to be described as, or expressed to be, a deed.^[221] In letter of credit practice, these requirements are almost certainly not met.

2.33 Delivery remains a requirement for a deed, for example, in England and Singapore but it does not require parting with possession of the deed in the ordinary sense. Xenos v Wickham shows, rather, that the requirement of delivery for a deed is some act that confirms the ser­iousness of the commitment being undertaken.^[222] One way of doing this is to exhibit or publicise the deed in some way, for example by distributing copies to those who have an interest in its contents. The requirement of delivery is potentially also problematic if we seek to characterise the letter of credit as a deed since the letter of credit under the UCP 600 is considered binding from the moment of issue. If issue occurs on leaving the control of the issuer, at that point there may not yet be an act that can satisfy the requirement of delivery. In summary, the formalities for the creation of a deed at common law or as modified by statute are probably not met by letters of credit since the requirements of a seal or signature by designated bank officers, and delivery may not be satisfied.

3.           The Letter of Credit as an Estoppel

2.34 Estoppel is another possibility that might explain why the letter of credit binds the issuer. There are different species of estoppel, two of which will be considered here. Equitable promissory estoppel, mentioned earlier, does not assist a seller seeking to enforce a bank's promise of payment since the doctrine is generally seen as operating defensively and not allowing the acquisition or creation of new rights—it acts as a shield and not a sword.^[223] Another option is estoppel by representation. This common law estoppel requires a state­ment of past or present fact, and reliance by the recipient to her/his detriment.^[224] A point to note about this estoppel is that it does not uphold promises about the future, such as a promise to pay on the presentation of conforming documents. As such, it is ill-suited to the current context, and the requirement of reliance faces similar problems as in promissory estoppel, which was discussed earlier.

D.   Legal Fiction

New Roman">A different argument is that the existence of a contract between the issuer and seller is based 2.35 on a fiction that the requisite requirements for contract formation are met. Legal fictions are not unfamiliar in banking law. It is well-established, for example, that the true owner of a converted bill of exchange can sue in conversion for the face value of the bill, notwith­standing that the piece of paper that is converted has only nominal value, and the bill's real value derives from it being a chose in action which, to this day, cannot be converted.^[225] The right to sue for the face value of the instrument is an acknowledged fiction.^[226] There are nu­merous other examples of legal fiction in common law systems, including the fiction of lost modern grant for property rights acquired by prescription;^[227] the fiction of a licence to avoid the legal consequences of trespass in some circumstances;^[228] the fiction that an insurance broker has paid an insurance premium to an underwriter;^[229] the fiction that unborn chil­dren are treated as born to enable them to take a benefit they would have if born;^[230] the fic­tion that judicial acts, notably judgments, are considered effective from the start of the day on which they occur;^[231] and the fiction that transitory acts committed abroad can be treated as local for the purposes of giving a domestic court jurisdiction.^[232]

In the English case of Clarke v Bradlaugh, Denman J in the Divisional Court stated that 2.36 fictions exist in order to do justice.^[233] That rationale would hold in the letter of credit con­text since it is universally accepted that the issuer should be bound by the promise made in the credit, and should not escape on the grounds of a technicality. On the other hand, legal fictions should be a last resort in a legal system as their use can undermine established legal doctrine and hence the certainty of the law. For this reason, fictions cannot simply be concocted to sidestep legal doctrine and, while the binding obligation on the issuer to pay the seller could be explained as another legal fiction, there is little or no judicial support for such an explanation.

E.   Custom and Usage

2.37 The final option that will be considered is that that the issuer's obligation to the seller is based on mercantile custom. This argument is another attempt to show that the relation­ship is contractual. Custom and usage is more typically used to imply terms into an ex­tant contract or to shed light on the construction of an extant contract, so in the current context it would be operating in a more fundamental way to create a contractual obliga- tion.¹0⁶ The major obstacle to such an expansive application of usage is that modern usage (eg that an issuer/confirmer incurs a binding obligation to the seller) cannot be used to contradict established law (the contract formation requirements).^{[234] [235]} There is an exception for so-called ancient mercantile usage but the usage associated with letters of credit is con­sidered modern.^[236] Although this restriction is at first blush problematic, Professor Ellinger points out that it depends on how one interprets the restriction.^[237] A fundamentalist inter­pretation would not allow modern usage ever to operate contrary to the common law, but a more compromising interpretation allows for modern usage to depart from the norm so long as the common law has not previously nullified it. Since the common law has not previ­ously nullified the custom that the letter of credit gives rise to a binding obligation between the issuer and the seller, it has done quite the contrary, the conclusion is that there is no re­striction on recourse to modern usage.

2.38size=1 face="Times New Roman"> There is strong support for this approach in the related context of negotiable instruments which have also developed from established modern usage. Although now codified in many countries,^[238] the law governing negotiable instruments was once governed by the common law. Negotiable instruments flouted the common law in numerous ways: by recognising past consideration as being good consideration,^[239] by allowing for the trans­mission of the right to payment contained in the bill,^[240] and for giving a better title to the transferee in some situations.^[241] The case of Goodwin v Robarts is instructive. In the

Exchequer Chamber, Cockburn CJ rejected the argument that only instruments recog­nised by the ancient law merchant could be negotiable by usage.^[242] He stated that courts recognise the usages that attach to trade, such that what was once mere usage, becomes ‘engrafted upon, or incorporated into, the common law, and may thus be said to form part of it’.^[243] In the same case, in the House of Lords, Lord Cairns said that instruments would be treated as negotiable upon proof of such a usage by banks, money dealers, and stock exchanges for over fifty years.^[244] The letter of credit is an instrument developed by the usage of banks and traders for about two centuries to meet the needs of international trade,^[245] such that the binding nature of the issuer’s promise to the seller is surely estab­lished by such usage.

2.39

In his last discussion of the issue, Professor Ellinger stated that the letter of credit as a binding obligation is ‘supported by “mercantile usage” all over the world,’ and that it is so regarded by the courts.^[246] Samples of that judicial support include the following cases. First, International Banking Corporation v Barclays Bank Ltd, where Atkin LJ said:^[247]

I think it may be said that the law relating to such transactions is not at the present moment crystallized that it is not dependent upon proof of custom. In any case it is clear that it is emphatically the kind of transaction where commercial usage when proved will eventually govern the legal rights between the parties...

2.40

Secondly, Hamzeh Malas & Sons v British Imex Industries Ltd, where Jenkins LJ said:^[248]

[T]he opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay.... An elaborate commercial system has been built up on the footing that bankers’ confirmed credits are of that character, and... it would be wrong for this court... to interfere with that established practice.

2.41

Thirdly, in relation to performance bonds,^[249] Simic v New South Wales Land and Housing Corporation, Gageler, Nettle, and Gordon JJ in the High Court of Australia said:^[250]

They are contracts, although of a specific kind. When and how a contractual promise to pay, not under seal, in favour of a named principal establishes a binding contract has been the subject of debate and discussion since at least the first half of the 20th century. For present purposes, however, that debate and discussion may be put to one side. Consistent with established banking practice, no party contended that the Undertakings were to be construed otherwise than in accordance with ordinary principles of contract construction.

2.42 To the extent that the requirement of offer and acceptance, and consideration are not met in an attenuated sense, as argued earlier, it is submitted that custom and usage remedies the deficiency such that the issuer's promise to the seller is indeed contractual.

IV.