Opening a letter of credit on time. Condition or innominate term?

Is the buyer’s obligation to open a letter of credit by a specified time a condition or an innominate term? The tribunal in London Arbitration 12/18 found that it was an innominate term. The sale contract of 6 September had stipulated that a letter of credit be opened within two banking days from the dated of the contract. On 8 September no letter of credit had been opened and the sellers on 9 September terminated the contract and made arrangements to return the deposit. They claimed that the buyers had repudiated the contract by failing to open a letter of credit on time.

The tribunal held that a contractual requirement for the provision of a letter of credit did not always have to be read as a condition. Although the provision of a letter of credit would frequently be a condition precedent to performing obligations under a contract, for example to load a ship (Kronos Worldwide Ltd v Sempra Oil Trading SARL [2004] 1 Lloyd’s Rep 260), that was not to be equated with a condition of a contract. A term was only to be categorised as a condition if any assumed breach of it would deprive the innocent party of substantially the whole benefit of the contract.

In the present case, where the obligation to provide a letter of credit was related to the contract date and where the first shipment date was three or more weeks later, the tribunal was not able to conclude that the obligation should be treated as a condition rather than as an innominate term.

The breach by the buyers of the innominate term could not be regarded as depriving the sellers of substantially the whole benefit of the contract. Until a letter of credit would have been issued a few days later, it deprived them of security, but the substantial benefit of the contract was the sale and the profit the sellers anticipated making.

Accordingly, it was the sellers who had been in breach by terminating the contract on 9 September.

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