Alternatives for the Resolution of Letter of Credit Disputes - Part 5 Chapter 16 - The Practice of International Litigation - 2nd Edition
Lawrence W. Newman has been a partner in the New York office of Baker & McKenzie since 1971, when, together with the late Professor Henry deVries, he founded the litigation department in that office. He is the author/editor of 4 works on international litigation/arbitration.
Michael Burrows, Formerly, Of Counsel, Baker & McKenzie, New York.
This article compares two international regimes for the resolution of letter of credit disputes: that of the International Chamber of Commerce and the International Center for Letter of Credit Arbitration. After a brief discussion of the nature and classification of letters of credit, the article discusses and compares the procedural rules governing letter of credit dispute resolution under these two different organizations.
Letters of Credit: Salient Features
A letter of credit is a written engagement by a bank or other financial institution made on behalf of a customer (the applicant) to honor drafts or other demands for payment by a third party (the beneficiary) upon compliance with specific documentary conditions that are established in the letter of credit. Commercial letters of credit are used to effect payment in contracts for the sale of goods. Another type of letter of credit, known as a standby letter of credit, is used to support other types of obligations.
In a letter of credit transaction there are typically three separate parties and three independent contractual relationships. The parties are (i) the issuer of the letter of credit (usually a bank); (ii) the applicant, who requests that the letter of credit be issued; and (iii) the beneficiary of the letter of credit, who, upon submission of the necessary documentation to the issuer, is entitled to the funds. The three contractual relationships are (i) the underlying sales agreement between the beneficiary (seller) and the account party (buyer); (ii) the application and reimbursement agreement between the applicant and the issuer and (iii) the letter of credit itself, which constitutes the issuer's promise to pay the beneficiary upon presentment of the necessary documents.
The key element of this tri-partite arrangement is the independence of the letter of credit undertaking from all collateral or underlying contractual relationships. Thus, the obligation of the issuing bank to honor the letter of credit does not depend on a seller's obligation to the purchaser; instead it depends on the seller's ability to present to the issuing bank the documentation called for in the letter of credit. In effect, this independence allows the seller to exchange the creditworthiness of the issuing bank for that of the buyer. It is widely recognized that letters of credit have spurred international commerce by decreasing the risk to sellers that the purchaser will be unable or unwilling to pay.