Commercial Banking

Bryan Robson, located in country B, has contracted with Footwear Pty Ltd, located in country F, to purchase 50 crates of football boot, which he will pay for by an irrevocable letter of credit from his bank, located in country B. The beneficiary of the LOC is Footwear Pty Ltd. To collect payment, the letter of credit, naming the bank as consignee, requires the following: – a)    From country F –     A clean bill of lading. Export documentation. b)    From country B –    Import Tax clearance Export documentation We are advised that all of the above documentation has been obtained.

However, upon inspection, Bryan Robson has discovered that the goods supplied do not comply with those contracted, in that only fifty percent were football boots. The remaining fifty percent comprised of silk slippers. Resulting from this discovery, Robson informed Footwear that it does not accept delivery, and informed its bank not to honor the letter of credit. Footwear is demanding payment from the bank. We have been asked by Bryan Robson to advise whether he has the right to compel his bank to refuse payment and what obligations he has in respect of what he perceives to be the contract breach. Relevant laws.

There are two issues of legislative relevance here. Firstly, the contract itself and, secondly, the issues surrounding the irrevocable letters of credit. As the buyer and seller are in different countries, we are assuming that the contract comes under the auspices of the Vienna Convention CISG (1986). The important factor here relates to whether the goods are compatible with the contract. Article 35 (2)(a)  of the Act states that the goods delivered must agree and conform with those identified within the contract, both in respect of quality and quantity, and in all other respects as laid down under article.

In other words, they must be of a quality that would reasonably expected of such goods and are fit for the purpose for which they were intended. In the event of a breach, and when considering possible action, one has to ascertain the level of breach, whether it is fundamental or not (Dawson-Waldron et. al. 2006) A breach is considered to be fundamental if it “substantially denies him [the buyer] of what he was entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person… would not have foreseen such a result.

”  In such an event, the buyer can “avoid” the contract. “Irrevocable letters of credit and bank guarantees … have been said to be the life-blood of commerce” (Roeland Bertams 2003). A letter of credit is the prime payment mode for a transaction, in this case a CISG contract. However, such a letter is also regarding in law as being separate to the said contract (Update 1998). The regulations regarding such an instrument are dealt with comprehensively under UCP  (2006).

Irrevocable means that the terms and conditions of the Letter of credit cannot be changed without the agreement of three parties, the beneficiary (the seller), the issuing bank and the receiving bank (Ron Borcky 2006). In addition, once the necessary documents have been presented to the issuing bank, payment is guaranteed. A bank cannot be held responsible for incorrectly honoring an irrevocable letter of credit, providing all of the documents appear correct (Commercial Banking Co of Sydney Ltd 1973). The only instance, in which such letters of credit may not be paid, is in cases of fraud (Update 1998).