The Contractual Relationships in a Letter of Credit Transaction: The Common Law Perspective

Commercial transactions are better regulated and explained by the law of contract. Contractual principles are used to settle disputes that arise in international sales transactions where the letter of credit is considered the life blood of commerce. To be able to ascertain and determine the liability of parties in the letter of credit transaction, it is germaine to determine contractual relationships that accrue therein. Thus, the importance of a letter of credit cannot be over emphasized; it is a payment instrument aimed at securing the international sales. It does not only provides a conditional guarantee of payment and a degree of financial certainty, it also guarantees that the required goods will be delivered. The letter of credit is a contract that creates different autonomous contracts; but there is a controversy as to whether the letter of credit is a contract having regards to the common law requirements of a valid contract. The offer, acceptance and consideration rules might be difficult to trace in a letter of credit in other to qualify it as a contract. Perhaps more compelling is to determine the type of contract a letter of credit portrays. This paper seeks to examine the elements of a valid contract in a letter of credit and the nature of the contractual relationships that are created by the letter of credit transaction.