Published 14 December 2016
Letters of credit ('L/Cs') are a tool to increase commercial predictability, allowing for enhanced risk allocation and minimization, thereby lowering transaction costs. However, L/Cs developed through practice and the law merchant, making them often seem counter-intuitive to the lawyers and judges tasked with resolving L/C disputes. With inexperienced decision-makers applying an unfamiliar legal standard-one specifically deferring to L/C practice rather than a known quantity like contract law-come results inconsistent with party expectations, and it chips away at predictive value. This phenomenon is even more pronounced in jurisdictions lacking modern comprehensive L/C legislation.
It should seem obvious then that international commercial arbitration offers an attractive alternative to the use of judges and courts. That, however, has not been the case, partly due to the traditional resistance of large commercial banks to submit to arbitration. Yet, the staggering amounts of outstanding L/C obligations coupled with the major banks' role highlight a potential market deserving of consideration from the arbitration community.
To tackle these problems, it is recommended that a set of modern, specialized institutional arbitration rules be drafted, focused on party autonomy and the appointment of (often non- legal) industry-expert arbitrators. Specific care must be taken to address the issues inherent in a system inviting not just arbitration outsiders but non-legal adjudicators as well.
Likewise, potential problems unique to L/Cs must be addressed if the goals of improved L/C integrity and its value-added predictability are to be achieved, taking particular lessons from prior attempts at L/C-specific ADR mechanisms.
This paper will be part of the TDM Special Issue on "Non-Legal Adjudicators in National and International Disputes" - more information: www.transnational-dispute-management.com/news.asp?key=1626