PROPER PERFORMANCE UNDER THE OPERATIVE CREDIT

PROPER PERFORMANCE UNDER THE OPERATIVE CREDIT

Introduction to Part II

PII.01 The preceding part considered the incidents of issuance of letters of credit, particularly the scope of the parties’ mutual rights and liabilities when a letter of credit is not opened in accordance with the sales transaction or other contractual arrangement or the executed application form underlying the credit. This part proceeds on the footing that a conforming and operative or valid credit¹ has been issued to the beneficiary in the eye of the substantive principles of the applicable legal system of the concerned Anglo-American jurisdiction.

PII.02 A letter of credit may be conforming but expressed to become operative only upon the applicant’s receipt from the beneficiary of a standby credit or performance guarantee in a prescribed form securing the due and faithful performance by the beneficiary of his contractual obligations in the underlying contract.² In a situation of that type, the credit has doubtless been issued in compliance with the underlying contractual arrangements and is thus a conforming credit. However, it will in general take the beneficiary’s opening of the specified guarantee to activate the credit. Until the activation, the instrument lies dormant and receives no consideration in the rest of this work.

PII.03 With regard to a valid and available credit, a little comment is warranted. An effective credit means not to be free of imperfections. Its issuance may be a product of a fraudulent scheme or some other unauthorized act; but, for the purposes of the succeeding chapters, we shall assume the existence of the beneficiary’s or nominated bank’s right to rely on the credit, or the telex transmitting it as authentic or the authorized statement of the apparent issuer. In the Standard Chartered Bank of Australia Ltd v Bank of China