Failing to provide a letter of credit – breach or no breach?

In London Arbitration 12/18 the Tribunal had to consider whether the sellers’ failure to provide a letter of credit (“l/c”) was a repudiatory breach of contract entitling buyers to accept and terminate the sale contract.

The sale contract provided for the l/c to be opened by the buyers within 2 banking days of the date of the contract.  The contract also provided it was to be effective when signed by both parties. The buyers sent the contract to the sellers for signature.  The sellers made some minor amendments to the contract, signed and added the date of 6 September. The buyers signed and returned the contract the following day, 7 September.  Exchanges ensued between the parties on the subject of the l/c, the buyers indicating that providing the l/c would take “a little longer than you wish….”  Following that message and during the day of 9 September, the sellers held the buyers in breach and accepted the failure to provide the l/c as a repudiatory breach and claimed loss of profit.

The issues were:

  1. When was the contract effective; and
  2. Was failure to open the l/c breach of condition or an innominate term?

As regards the first, the sellers contended that the date of the contract was 6 September as appeared in several places in the contract.  The buyers however said it was 7 September as that was the date they signed the contract and until that time the contract was not, on its own terms, effective.  The Tribunal found that the sellers’ amendments, although minor,  were a counter offer. Acceptance of that counter offer took place only when the buyers signed and returned the contract.  Accordingly the buyers’ obligation was to provide an l/c within 9 September, being 2 banking days after the contract became effective. Therefore the sellers’ termination of the contract before close of business that day was itself a breach of contract.

The Tribunal then had to consider whether a failure to open the l/c would be a breach that went to the root of the contract, namely whether the obligation to do so was a condition or an innominate term of the contract.

A term should only be considered a condition if a breach would deprive the innocent party of substantially the whole benefit of the contract.  Precedent did not lead the Tribunal to conclude that provision of an l/c was ALWAYS a condition.  Providing an l/c may be a condition precedent to the sellers‘ performance under the contract but that did not make it a condition of the contract.  Failure to provide the l/c within 2 two days may lead to a short delay in providing the sellers with security, but it would not deprive the sellers of substantially the whole benefit of the contract, namely the profit they expected to make.

The obligation to provide an l/c within 2 days was not a condition and even if the buyers’ were in breach it would not have entitled sellers to terminate. The buyers succeeded in full.

Great care must always be taken when alleging repudiatory breach of contract and getting it wrong can mean the “innocent” party are in fact in repudiation themselves.