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June 28, 2020

Letter of Credit, a Masked Contract

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

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Author: Andres Menendez LL.M

Abogado – Derecho Financiero- (Colombia) Profesional en cumplimiento normativo y manejo de riesgos legales para entidades financieras. Graduado con Maestría en derecho financiero de La Universidad Canadiense de York University. Especialista en prevención e investigación de lavado dinero.

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