Letters of Credit: A Mechanism for Payment, Not Immunity From Liability to Pay The Price

Briefing

29 January 2026

9 MIN READ

2 AUTHORS

An HFW team led by William Gidman has secured a significant victory in the English High Court¹. Reinforcing commercial common sense, the Court granted summary judgment confirming that a buyer’s obligation to pay the price of goods (which the buyer has accepted) is not usually discharged by the mere issue of a letter of credit (LC) under the sale contract, and that a seller’s entitlement to demand the price directly from the buyer is not defeated if the LC fails for any reason (including seller default).

Moeve Trading S.A.U. (the Seller) and Mael Trading FZ LLC (the Buyer) entered into an FOB contract for the sale of gasoline and gasoil in April 2024, with title passing on shipment. The Seller retained the original bills of lading, but the cargo, save for a portion liened by the shipowner for unpaid demurrage, was discharged to the Buyer or its order. Consequently, the Buyer did not reject the cargo.

Under the contract, the Buyer was to make payment by means of LCs. The price was payable against presentation of shipping documents (including the original bills of lading) under LCs issued and confirmed in June 2024, or otherwise within 60 days of the bill of lading date.

When the Seller presented the documents, the issuing and confirming banks refused payment; the reasons for their refusal were neither evidenced nor in issue. The Buyer then rejected subsequent demands for payment.

The Seller therefore sought summary judgment for the purchase price under Section 49(1) of the Sale of Goods Act 1979 (the Act). The Buyer resisted, arguing that issuing the LCs discharged its obligation to pay and that the Seller could not bypass the LCs to claim directly for the price. In the alternative, in the event the Buyer was still liable to pay the price, the Buyer asserted that payment only fell due following tender of the shipping documents (which the Buyer argued meant the Buyer being in possession of them).

The two most important issues for the Court to determine were:

Whether the Buyer’s payment obligation was fully discharged by the issue and confirmation of the LCs, despite the banks’ non‑payment.
Whether the Buyer’s liability to pay arose only upon physical delivery of the shipping documents, or whether the Seller’s readiness to exchange those documents for payment was sufficient.

Letters of credit: conditional vs absolute payment

If the LCs constituted absolute payment, that would mean that the Seller could only look to the banks for payment. In no circumstances (including, for example, bank insolvency) could the Seller ever look to the Buyer for payment. The Seller’s only action would be against the banks.

However, if the LCs were conditional payment, then the Seller must look to the banks in the first instance, but if payment was not available under the LCs, then the Seller could look to the Buyer for payment.

The Court confirmed that an irrevocable LC ordinarily operates as conditional, not absolute, payment, unless the contract clearly provides otherwise. Without such wording, a buyer’s core obligation to pay the price is not discharged simply because the credit has been issued or confirmed.

On the facts of this case, the Buyer remained primarily responsible for paying the price within the agreed timeframe, with the LCs acting as a mechanism to facilitate that payment rather than to replace it. The LCs were required to “cover” the cargo value, but payment itself continued to operate on a documents-for-payment basis: the Seller would present the relevant contractual documents (or, if necessary, an LOI²) and the Buyer would pay against that presentation. Nothing in the contract suggested that the LCs were intended to shift the entire payment risk to the issuing bank or to relieve the Buyer of liability if the LCs failed.

Treating the LCs as absolute payment would produce a paradoxical outcome which the Court rejected: the Seller would be worse off if LCs were issued and dishonoured than if no LCs had been issued at all.

The Court found that where an LC functions as conditional payment and the buyer has accepted the goods and title has passed, then the reason for the LC’s failure is immaterial. The buyer must still pay for the goods.

Here, title passed on shipment and the Buyer took the goods. That was determinative. Whether the Seller’s presentations under the LCs were compliant was immaterial: the Buyer’s obligation to pay had crystallised and remained fully enforceable.

Tender of documents as a precondition to payment

The Court next addressed whether there had been a sufficient tender of documents to give rise to the Buyer’s liability to pay the price.

The Seller argued it need not actually deliver the contractual documents in advance to the Buyer, only be ready, willing, and able to exchange them against payment; the Buyer maintained liability to pay did not arise until physical delivery of the documents to them, notably of the original bills of lading.

The Court rejected the Buyer’s position. Read as a whole, the contract made document provision and payment concurrent, not sequential: payment was due against presentation of the documents (or an LOI), and “presentation” and “tender” bore their ordinary commercial meaning: an offer of documents for acceptance, not advance delivery. A clause permitting the Seller to retain documents until payment did not disturb that concurrency; it merely preserved the Seller’s security. Accordingly, the Seller having tendered (offered) the documents as required was entitled to maintain its claim for the price.

HFW Comment

This judgment is a win for commercial common sense and confirms with clarity that absent clear wording to the contrary, a LC is a conditional method of payment, meaning once title has passed and a buyer has taken the goods, the price is due despite LC or document‑transfer issues (even arising from the Seller’s fault). The Court rejected treating an LC as the exclusive source of payment without unequivocal contractual wording to that effect. Otherwise, a seller would be worse off when a credit is issued and dishonoured than when none is issued at all.

The judgment also makes clear that payment and presentation of shipping documents are concurrent: where payment is due against presentation (or an LOI), “presentation/tender” carries its ordinary commercial meaning, namely an offer of documents for acceptance, not prior delivery. Furthermore, the Court has reaffirmed that any right to retain documents preserves a seller’s security without disturbing that concurrency. This is important, because in cases such as this where there has been default of payment under the sales contract and delivery of cargo without production of the original bills of lading, the seller may wish to retain the original bills of lading to preserve an alternative claim for damages for the value of the cargo against the bill of lading carrier.

Sellers may opt to include short express provisions in their trading contracts, confirming that:

Where an LC is required, it is a conditional payment mechanism only rather than the absolute source of payment and once title has passed and the goods are accepted, a buyer remains liable for the price notwithstanding any LC failure.
Where payment falls due against presentation (or an LOI), “presentation” and “tender” mean the offer of documents for acceptance rather than prior physical delivery, and the seller may retain the documents until funds are received.

Full HFW team: Paolo Ghirardani, Miranda Stock, Leontine Rensen and Michail Sarantellis. Claire Blanchard KC and Sebastian Mellab were instructed as Counsel.

Please note that at the time this article is published, the decision may still be appealed.

Leontine Rensen, Trainee Solicitor, contributed to the writing of this article.

Footnotes