HARVARD LAW REVIEW VOL. XXXII NOVEMBER, 1918 No. 1 LETTERS OF CREDIT ΤΗ never played much part in the operations of trade and finance. My aim is not to deal immediately with this form of letter but rather to discuss the legal difficulties growing out of the various forms of so-called "commercial letters of credit" used in financing over-seas trade. This method of trade financing has not been much used by us in our domestic operations, and has come into common use in our foreign trade only since the war. On this account, in spite of the enormous volume of business in which these letters now figure, they show a great lack of uniformity in form and content, and some lack of certainty in their practical construction and their legal scope and meaning. Commercial letters of credit, while in use for a long time in our business world, have attained no standardization either of kind, form1 or legal construction. They may be mere informal advices, or more or less formal authorizations from a purchaser to draw on certain bankers here or abroad, or directions to given bankers to accept vendor drafts on certain conditions, or sometimes they are merely requests to negotiate the sale of such drafts. Ordinarily a Plea for Standard 1 J. P. Beal, "Utility of Letters of Credit in Export Trade Forms," 95 BANKERS' MAGAZINE (N. Y. 1917), 271. “It is interesting to note the many different forms used by various banks; they all seem to be different in some respects. Some banks merely write an explanatory letter on their regular letter heads, while others have forms set up on which to record the various points in relation to terms of the credit." where a bank confirms to the addressee the issuance of a letter, commercial usage regards this as a "confirmed letter of credit," entitling those to whom it is confirmed, upon compliance with its conditions, to look to the confirming bank for payment, without recourse. The lay mind, not without judicial authority, seems to regard this as a sort of contract of guaranty. Great importance is attached to the use of the words "confirmed" and "irrevocable" in such letters even though what is said to be "confirmed" and "irrevocable," and is so regarded in practice, may not in some cases be so at all in legal fact.3 The conditions and provisions of these letters vary with the exigencies of each case, and no very definite or uniform rules of construction, either in practice or in our courts, seem yet to have been attained. This is due to the fact that before the present war our general foreign business was for the most part financed in other ways. When we suddenly became the world's great selling market, confronted with new and strange buyers, and new business and exchange difficulties, our exporters found it expedient in many cases to demand either cash with the order or confirmed New York credits; with the result that this letter of credit device, which for many years has worked well on occasion here and which was in familiar use abroad, came quickly into extensive use. Whether it will be much used after the war remains to be seen. The provincial desire of the average American exporter to sell for cash or its equivalent with his order, the possible decline of the London discount market, changes in international trade and banking, commercial instability abroad, new and experimental markets and the like, may well tend to a more extensive use of these letters of credit and procure for them an established place in the law merchant. But in any event, their increased use during the last 2 "Commercial letters of credit are issued at thirty, sixty, ninety days', four or six months' sight, sometimes at other usage. A bank which issues such a letter of credit virtually agrees with the party in whose favor it is issued, although not always in so many words, that his drafts, drawn under and in conformity with and within the amount of the credit, shall be duly honored on presentation, provided that he complies with the text of the credit. This is usually regarded as practically equivalent to a guaranty of payment to the holder." B. OLNEY HOUGH, PRACTICAL EXPORTING, 546. 3 See authorities cited post. Business houses seem to regard a letter "confirmed" eo nomine as irrevocable before expiration date named therein, while a letter not so "confirmed" is revocable at will. See Beal, supra. four years is bound presently to bring to our courts a variety of perplexing problems. A study of the English and American decisions bearing on the subject discloses much uncertainty and ambiguity of construction and interpretation. The familiar circular letter of credit is an offer addressed to given addressees, or to the world in general, agreeing to be bound by their acceptance of the offer within its terms and provisions. So we shall find this theory of offer and acceptance made the ratio decidendi in cases where other elements clearly should be considered. Other decisions give these letters the attributes and characteristics of negotiable instruments, and so reach conclusions not justified by the law or the facts. Others treat them as contracts of guaranty or of money held to the use of another, or money had and received. Others treat them as contracts between two parties for the use and benefit of a third. Others grant relief on the basis of estoppel or by upholding the customary commercial practice and interpretation of the parties as part of the substantive law merchant. Obviously it is important, both commercially and juristically, to determine if possible a sound legal theory applicable to these cases. This is so, not only in order to avoid confusion where confusion is unnecessary, but to enable the commercial world to deal with more confidence and safety with this instrument of trade and finance which it has devised. A variety of practical questions of far reaching import to the commerical world impend upon the legal theory applied to the construction and interpretation of these letters. For instance, if we are to proceed on the theory of offer, the question of revocability must be determined differently than if we proceed on the theory of money had to use. If such letters are to be construed, for example, as guaranties, their practical feasibility under our law is much hampered. So that on the legal theory applied by the courts, whatever it may be, will depend not only the standard form these letters should take, but also the ultimate disposition of such practical questions, constantly arising and sure to be litigated as, assignability; revocation; construction of the terms of the contract as to sale and delivery; the relation of the letter to the contract of sale and the extent to which such contract of sale, expressly or by implication, should be or is part of the letter; failure of complete performance of the contract of sale giving rise to the letter, and controversies as to breach of such contract; rights of issuer and other parties in case of a notice to stop payment; rights in case of failure to perform the sale contract because of force majeure, government embargoes, commandeered ships, etc.; insolvency of parties; attempts at rescission by holder or issuer; effect of changes made or of dealings had between purchaser and vendor after issuance of letters; procurement of the credit by fraud or unauthorized use of the letter. And on the legal theory applied may also depend the solution of the question, now apparently somewhat ignored, as to how a bank's outstanding letters of credit are to be treated in its accounting or under the national banking law. I In trying to arrive at any sound theory of law applicable to these letters, one naturally turns first to their place of origin. The letter of credit is an old institution of continental commercial law, well understood as far back as the seventeenth century. When, through trade with Europe, the institution became known to us, our courts turned naturally, in our period of absorption of the law merchant, to the continental books for guidance in construing it and copious citations from these books appear in our earliest letter of credit cases. The subject had a simple theoretical development on the continent which gave effect to the mercantile idea that a promise made in course of business is enforceable. In AngloAmerican law, on the other hand, in the generation following Lord Mansfield, it became definitely settled that a merchant's promise in writing made in a business transaction did not suffice of itself to create legal obligation, hence the continental theory could not be adopted. Other reasons, partly economic, prevented letters of credit from assuming much importance in our commerce and as a result there does not seem to have been sufficient litigation over them to compel the working out of a consistent legal theory. When the outbreak of the war required new credit devices in our foreign trade, it was natural that the commercial letter of credit, somewhat dormant with us, but in common use abroad, should be employed to fill the gap without much consideration being given to its legal character and implications. Coolidge v. Payson, 2 Wheat. (U. S.) 66 (1817); Russell v. Wiggin, 2 Story (U. S.) 213 (1842); note to Mandeville v. Riddle, 1 Cranch (U. S.) 290, 298, 366 (1803). The letter of credit discussed in the continental treatises on commercial law 5 is of the sort most familiar to us as the conventional traveler's letter, addressed to a particular correspondent, a group of correspondents or to the world at large (in the latter case called a circular letter of credit), requesting the addressee or addressees to pay money or give credit to the holder up to a certain amount within a time limited and agreeing to become responsible therefor to the addressee or to accept the addressee's bill therefor. The importance to us of continental law as to letters of credit is twofold. In the first place, as has been said, we got this idea from the continental books and practice, and it has had its fullest theoretical development in their commercial law; and in the second place it has always been legitimate in any discussion of our law merchant, which in its formative period drew so largely on continental sources, to refer to the civil law by way of analogy. Moreover in the present connection it happens that the commercial law of continental Europe is able to furnish us two fruitful suggestions: one, the idea of treating a commercial promise as being enforceable as such; the other, the practice of treating such a letter as an ouverture de crédit and as conclusive evidence of money had and received and held for the use of the addressee. According to the French books, the letter of credit has two aspects, depending on whether it is looked at as between the issuer of the letter and the correspondent or as between the issuer of the letter and the holder. In the former aspect — as between issuer and correspondent the French treat the letter of credit as a species of mandate. By mandate the Romanist means a transaction whereby one party known as the mandans gives to another, known as the mandatary, a commission to do something, whereby the mandatary having done the thing in question, is entitled to be 5 4 LYON-CAEN Et Renault, TraiTÉ DE DROIT COMMERCIAL, 4 ed., §§ 736–48; 2 BÉDARRIDE, De La Lettre dE CHANGE, 2 ed., §§ 633-41; 2 PARDESSUS, COURS DE DROIT COMMERCIAL, § 585; POTHIER, TRAITÉ DU CONTRAT DE CHANGE, § 236; CoSACK, LEHRBUCH DES HANDELSRECHTS, 2 ed., § 188. For the history of the letter of credit see GOLDSCHMIDT, UNIVERSALGESCHICHTE DES HANDELSRECHTS, 397 ff. 64 LYON-CAEN ET RENAULT, § 736, note 3. 'This is usual. 4 LYON-CAEN ET RENAULT, § 736. But it may also be unlimited. 8 4 LYON-CAEN ET RENAULT, § 738; 2 BÉDARRIDE, De la LetTRE DE CHANGE, 2 ed., § 633. |