Letter of Credit, its Relation with Stipulation for the Benefit of a Third Party

Abstract:     
For some authors “letters of credit” are not contracts; there is the perception that the obligation is unique in its characteristics and no principles of contract law apply to “letters of credit”. Some attempts to support a contractual link between the issuing bank and the parties involved in the “letter of credit” transaction have emerged; however, none of the legal systems have succeeded in defining a contractual scheme for “letters of credit”. The theory of the stipulation for the benefit of a third party has been one of the approaches that has been considered in establishing a contractual link to “letters of credit”. The most obvious approach to relate “letters of credit” with the theory of the stipulation for the benefit of a third party is to place the purchaser of goods as the stipulator, the bank as the promisor, and the seller as the beneficiary. However, several conflicting factors emerged from this arrangement. Another less obvious approach could be to consider the buyer as the third party beneficiary of the proposed contractual relationship between the banker and the seller. This point of view is viable if one considers the civil law theory of “cause” proposed by Jean Domat, which states that "In business contracts, the cause of the engagement of one of the parties is what the other party gives him, or engages to give him.” This paper evaluates the feasibility of linking “letters of credit” with the contractual theory of the stipulation for the benefit of a third party under the point of view that the buyer is the third party beneficiary.

Number of Pages in PDF File: 26

Keywords: letters of credit

working papers series