Informality as a Bilateral Assurance Mechanism: Comments on Ronald Mann’s ‘The Role of Letters of Credit in Payment Transactions’
Ronald Mann’s study of documentary defects in the presentation of commercial letters of credit is a valuable contribution to the commercial law literature in at least three respects. First, it offers a detailed and thorough empirical survey of an important though specialized aspect of commercial practice. Mann collected and coded a data sample of 500 randomly selected letter-of-credit transactions, personally evaluating each transaction to determine whether the documentary presentation by the beneficiary of the letter of credit (i.e., the seller) complied with the letter’s formal terms. Then, for each case in which he found one or more documentary defects, Mann went on to classify the defects and to evaluate their commercial and practical significance. He also measured how quickly and readily the issuing bank and the applicant (i.e., the buyer) responded to – and ultimately waived – the defects, in addition to collecting various other information about the transaction and the parties involved. The creation of this data set required significant time, effort, and both professional and scholarly judgment; and the result is a level and quality of information that goes substantially beyond the qualitative information gleaned from his interviews with bank officers, not to mention the anecdotal information that motivated the study in the first place. Second, Mann has not just produced a dry collection of business facts. Rather, in showing that the beneficiaries of letters of credit routinely fail to present documents that comply with the terms of the underlying letter and that the applicants and issuing banks just as routinely waive the resulting defects, he has convincingly documented an important and counterintuitive empirical regularity about commercial letters of credit – one that substantially undercuts the conventional teaching in the area that the purpose of the letter of credit is to provide the beneficiary with a guaranty of payment that is legally enforceable against the issuing bank. His findings are striking, provocative, and persuasive enough to demand explanation and, thus, to force a revision of the conventional scholarly wisdom in this area. Third, Mann has put forward a theoretical account of letters of credit, grounded in the modem economics of information and based on his prior work in other areas of commercial law, that is both more nuanced and conceptually more sophisticated than is the conventional scholarly view. His explanation is that the value of letters of credit in assuring beneficiaries of payment does not lie primarily in their legal significance, but rather in their practical significance. More specifically, the willingness of a bank to issue a letter of credit serves as a credible signal, enforced by an implicit reputational bond, of the issuer’s private information that the applicant is a reliable creditor; and this signal is more important to the beneficiary in practical terms than is any right to collect directly from the bank. To use Mann’s own terminology, the letter of credit is primarily a verification institution, not a guaranty institution.2 This explanation is creative, interesting, and as far as I know, original. It may be that Mann’s explanation, as he suggests at various points, will be regarded as old news by practicing commercial specialists in the letter-of-credit area. Even if this is so, however, and even if his explanation is incomplete or incorrect, he has significantly advanced the state of the scholarly literature on this topic.