Reconciling the Old Theory and the New Evidence: Comments on Ronald Mann’s ‘The Role of Letters of Credit in Payment Transactions’

Ronald Mann’s thorough research and rigorous analysis provide compelling evidence that the commercial letter of credit does not further the fundamental purpose traditionally associated with it. Equally persuasive are his hypotheses about the functions that letters of credit actually serve in the real world. The objective statistics are startling. An overwhelming majority of letter of credit seller-beneficiaries make at least initial presentations to issuing or correspondent banks that by the express terms of the letter of credit do not entitle the seller to payment. Without a waiver from its customer, the issuing bank is legally entitled to, and surely will demand, strict compliance with these terms. It is only the voluntary foregoing by the buyer-applicant of its own unambiguous formal power, which is essentially always forthcoming, that enables the seller to draw on the letter of credit. Thus, the normal course of a letter-of-credit transaction at least initially places the seller at the mercy of the buyer. Given these empirical findings, it is difficult to believe that the persistent use of letters of credit in commercial transactions has anything to do with their theoretical potential to ensure that the seller actually gets paid. It is difficult to believe, but not impossible. Mann recognizes that his evidence does not conclusively refute the traditional view that the principal function of the letter of credit is to assure payment. At least one plausible conceptual account of the letter of credit remains that is consistent both with the new, surprising empirics and the old idea that the commercial letter of credit is primarily an atomic element of the payment system. The traditional view does not depend on the legal enforceability of letters of credit because one does not need legal rights to feel assured of payment.