{"id":2250,"date":"2025-04-17T10:00:35","date_gmt":"2025-04-17T10:00:35","guid":{"rendered":"https:\/\/kuonilaw.ch\/letter-of-credit-l-c-what-are-the-sellers-remedies-if-a-buyer-fails-to-open-an-l-c-under-the-cisg\/"},"modified":"2025-04-22T11:19:22","modified_gmt":"2025-04-22T11:19:22","slug":"letter-of-credit-l-c-what-are-the-sellers-remedies-if-a-buyer-fails-to-open-an-l-c-under-the-cisg","status":"publish","type":"post","link":"https:\/\/kuonilaw.ch\/en\/letter-of-credit-l-c-what-are-the-sellers-remedies-if-a-buyer-fails-to-open-an-l-c-under-the-cisg\/","title":{"rendered":"Letter of Credit (L\/C) \u2013 What are the seller\u2019s remedies if a buyer fails to open an L\/C under the CISG?"},"content":{"rendered":"

[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”4.16″ custom_padding=”0px|||||” global_colors_info=”{}” theme_builder_area=”post_content”][et_pb_row column_structure=”3_5,2_5″ admin_label=”row” _builder_version=”4.21.0″ width=”100%” custom_margin=”|||-3px|false|false” locked=”off” global_colors_info=”{}” theme_builder_area=”post_content”][et_pb_column type=”3_5″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||” theme_builder_area=”post_content”][et_pb_text admin_label=”Text” _builder_version=”4.21.0″ header_font=”|700|||||||” header_4_font=”|700|||||||” header_4_text_color=”#0C71C3″ width=”100%” min_height=”500px” custom_margin=”|0px|||false|false” custom_padding=”|0px||||” global_colors_info=”{}” theme_builder_area=”post_content”]<\/p>\n

I. INTRODUCTION<\/strong><\/h4>\n

In<\/span> international<\/span> trade,<\/span> offering<\/span> extended<\/span> payment <\/span>terms can be extremely attractive to new foreign <\/span>buyers and ultimately lead to<\/span> winning<\/span> more export <\/span>sales. However, in order to offer such benefits, a <\/span>seller needs to check the foreign buyer’s credit which <\/span>is not always easy to find. If the seller is unable to <\/span>obtain reliable credit information, the L\/C<\/span> may<\/span> be <\/span>available<\/span> to<\/span> the<\/span> exporter<\/span> as<\/span> a<\/span> trade <\/span>financing <\/span>instrument.<\/span><\/span><\/p>\n

A<\/span>n<\/span> L\/C<\/span> is basically an undertaking by a bank to make <\/span>payment to a beneficiary (usually the seller) within a <\/span>specified time, against the presentation of documents <\/span>which<\/span> must be<\/span> strictly in compliance with the terms of <\/span>the<\/span> L\/C<\/span>.<\/span> L\/Cs are very popular in <\/span>international<\/span> trade <\/span>and<\/span> describe<\/span>d<\/span> as<\/span> \u201cthe<\/span> life<\/span> blood<\/span> of<\/span> international <\/span>commerce\u201d<\/span>.<\/span><\/span><\/p>\n

This fact<\/span>sheet highlights the remedies available to a <\/span>seller<\/span> u<\/span>nder the<\/span> United Nations Convention on Con<\/span>tracts for the International Sale of Goods<\/span>, Vienna <\/span>1980<\/span> (<\/span>CISG<\/span>)<\/span> if a buyer fails to open a<\/span>n<\/span> L\/C<\/span>.
<\/span><\/span>\u00a0<\/p>\n

II. WHEN DOES THE<\/span> CISG<\/span> APPLY?<\/span><\/h4>\n

The<\/span> CISG<\/span> is arguably the most widely accepted legal <\/span>framework for international sale<\/span>s<\/span> contracts. With har<\/span>moni<\/span>z<\/span>ation as its central aim, the CISG offers a set of <\/span>uniform rules that govern cross<\/span>–<\/span>border sales, en<\/span>hancing predictability and reducing legal barriers in<\/span>
international commerce<\/span> and, as a result, reducing <\/span>transaction costs.<\/span><\/p>\n

Whether a sales contract is subject to the CISG is decided according to Article 1 CISG. First of all, the parties\u2019 places of business must be in different states. If both are in contracting states, the contract is subject to the CISG (Article 1(1)(a) CISG).<\/span><\/p>\n

According to Article 1(1)(b) CISG, the CISG also applies to contracts for the sale of goods between parties not domiciled in\u00a0 contracting states if the rules of private international law lead to the application of the law of a contracting state.<\/span><\/p>\n

However, according to Article 6 CISG, the principle of freedom of contract applies. The parties are therefore free to choose the applicable law. If they do so, the applicable law must be determined according to their choice.<\/span><\/p>\n

If the parties have chosen a law (e.g. Swiss law) without mentioning the CISG, then the question arises as to whether the CISG applies because such clauses do not expressly state whether they exclude the CISG.<\/span><\/p>\n

The prevailing doctrine and case law agrees that the choice of the law of a contracting state is presumably not an implicit exclusion of the CISG as the CISG is part of each contracting state\u2019s national law. Rather, it is clear from the parties’ choice of law that the\u00a0 CISG applies, but for any potential gap in the CISG, the chosen national law is used to fill the gap. The assumption of an implicit exclusion of the CISG would require further indications in the contract.<\/span><\/p>\n

In cases where the CISG applies, it takes precedence over ordinary national law (e.g. Swiss Code of Obligations).<\/span><\/p>\n

In general, Swiss law excluding the CISG is not necessarily more advantageous to a contracting party than the CISG, but the parties should be clear about what they are agreeing to by excluding or not excluding the application of the CISG.<\/span>\u00a0<\/p>\n

\u00a0<\/h4>\n

III. REMEDIES FOR BREACH OF A PARTY\u2019S <\/span>DUTY TO OPEN A<\/span>N<\/span> L\/C<\/span><\/h4>\n

The CISG offers an effective legal framework for the <\/span>enforcement of a buyer\u2019s obligation to have a bank <\/span>open an L\/C under a contract for the international <\/span>sale of goods.<\/span><\/p>\n

According to Article 53 CISG, the buyer must pay the price for the goods and take delivery of them as required by the contract and the CISG. The provisions regarding payment of price can be found in Article 54 et seq. CISG.<\/span><\/p>\n

Regarding the time of payment, Article 58 CISG is decisive. If the buyer is not bound to pay the price at any other specific time, the buyer must pay it when the seller places either the goods or documents controlling their disposition at the buyer\u2019s disposal (Article 58(1) CISG).<\/span><\/p>\n

As Article 59 CISG expressly states, the buyer must pay the price on the date fixed or determinable from the contract without the need for any request or compliance with any formality on the part of the seller.<\/span><\/p>\n

The buyer will, therefore, be in breach of its obligation to pay the price without any notice needed from the seller.<\/span><\/p>\n

In case the buyer does not open an L\/C in due time, the buyer is in breach of its obligation to pay the price and the seller is entitled to the remedies according to Articles 61 et seq. CISG. These remedies include (i) a claim for specific performance, (ii) avoidance (termination) of the contract of sale and (iii) damages.<\/span><\/p>\n

Request specific performance of an obligation to open an L\/C<\/span><\/strong><\/span><\/p>\n

Under the CISG, a party has the right to require the other party to perform its obligations, unless the requesting party has chosen another remedy that is incompatible with specific performance (e.g., avoidance of the sales contract). Possible breaches giving<\/span><\/p>\n

rise to the remedy of avoidance include non-payment of the price and other obligations assumed under the contract, such as the opening of an L\/C by the buyer. If the terms of an L\/C differ from the agreed specifications, the seller may require the buyer to have a bank amend the nonconforming terms or issue a substitute L\/C.<\/span><\/span><\/p>\n

The buyer may be released from its obligation to open an L\/C if there is an impediment beyond the control of the buyer or the bank and which was not foreseeable and unavoidable for either the buyer or the bank (force majeur \/ hardship).<\/span><\/span><\/p>\n

Fixing an additional period of time to open a<\/span>n <\/span>L\/C<\/span><\/span><\/strong><\/p>\n

T<\/span>he seller may, pursuant to Article 63(1) CISG, set <\/span>the buyer an additional period of time for the perfor<\/span>mance of<\/span> its<\/span> obligations.<\/span> This provision also applies <\/span>in the case of a contractual obligation to<\/span> open<\/span> a con<\/span>forming<\/span> L\/C<\/span>.<\/span> If<\/span> a conforming<\/span> L\/C is not op<\/span>ened<\/span> within <\/span>the additional period set by the seller<\/span>, the se<\/span>ller<\/span> is<\/span> en<\/span>title<\/span>d<\/span> to declare the contract avoided under Article <\/span>64(1)(b) CISG.<\/span><\/p>\n

\n
T<\/span>he grace period<\/span> set<\/span> for<\/span> the buyer<\/span> to issue a new<\/span> L\/C <\/span>must be of reasonable length, depending on the cir<\/span>cumstances<\/span> of the specific case<\/span> taking<\/span> into account <\/span>the banking practices<\/span> at<\/span> the buyer’s domicile, national <\/span>holiday, the nature of the agreed<\/span> L\/C<\/span> and<\/span> the<\/span> pay<\/span>ment structure<\/span> (<\/span>unconfirmed or confirmed<\/span> L\/C<\/span>)<\/span>.<\/span> T<\/span>he <\/span>issuance of a confirmed<\/span> L\/C<\/span> may require a longer ad<\/span>ditional period<\/span> of time<\/span> than an unconfirmed<\/span> L\/C<\/span> (<\/span>con<\/span>firming bank at the seller’s place of business<\/span> involved <\/span>and approval from the issuing bank required<\/span>)<\/span>.<\/span><\/span><\/div>\n
\u00a0<\/span><\/span><\/div>\n
Avoidance of the<\/span> sales<\/span> c<\/span>ontract
<\/span><\/span><\/strong>
Under Article 64(1)<\/span>(a)<\/span> CISG, the seller may declare <\/span>the<\/span> sales<\/span> contract avoided if the buyer’s failure to per<\/span>form an obligation\u00a0 constitutes a fundamental breach. <\/span>Under Article 25 CISG, a breach is fundamental if it <\/span>results in such a detriment to the suffering party that <\/span>it is substantially deprived of what it was enti<\/span>tled to <\/span>expect under the contract and this result was or ought <\/span>to have been foreseeable by the breaching party. The <\/span>seller may also avoid the contract if the buyer fails to <\/span>perform<\/span> its<\/span> obligatio<\/span>n to pay the price within the addi<\/span>tional period of time<\/span> granted<\/span> by the seller under Arti<\/span>cle 63(1)<\/span>(b)<\/span> CISG<\/span> (see previous subsection)<\/span>.<\/span><\/div>\n
\u00a0<\/div>\n
In general<\/span>,<\/span> t<\/span>he question of whether the seller has the <\/span>right to<\/span> avoid<\/span> the contract<\/span> for fundamental breach of <\/span>contract (Article<\/span> 2<\/span>5 CISG)<\/span> must be assessed on a <\/span>case<\/span>–<\/span>by<\/span>–<\/span>case basis<\/span> and should<\/span> depend on the objec<\/span>tive importance of the buyer\u2019s<\/span> obligation<\/span> to open a <\/span>workable<\/span> L\/C<\/span> in time.

F<\/span>ailure to open a workable<\/span> L\/C<\/span> in time will most likely <\/span>always constitute a fundamental breach.<\/span> A<\/span> delay may <\/span>affect the seller’s main expectation under a sales <\/span>contract. This may be the case, for example, if the <\/span>CISG contract provides that the seller has an imme<\/span>diate right to terminate the contract if the buyer fails <\/span>to open the agreed<\/span> L\/C<\/span> in time.<\/span> The<\/span> nature of the con<\/span>tract<\/span> also<\/span> may make the timely opening of a<\/span> workable <\/span>L\/C<\/span> an essential<\/span> element<\/span>. For example, if the<\/span> L\/C<\/span> is <\/span>linked to the seller’s obligation t<\/span>o load the goods onto <\/span>the ship, its proper and timely opening is<\/span> essential, <\/span>and the seller is entitled to avoid the contract for a <\/span>minor delay or mistake in the<\/span> L\/C<\/span>.<\/span><\/span><\/span><\/div>\n
\n


A<\/span> fundamental breach of contract exists<\/span> in any case <\/span>if the buyer definitively refuses to open the<\/span> agreed <\/span>L\/C<\/span>.<\/span><\/span><\/span><\/span><\/p>\n

If an L\/C was<\/span> opened on time<\/span>, but not in accordance <\/span>with the<\/span> sales<\/span> contract in other respects<\/span> (e.g., the L\/C <\/span>does not provide for\u00a0 certain conditions agreed in the <\/span>sales contract and the buyer refuses to have the L\/C <\/span>amended accordingly)<\/span>, this may also constitute a fun<\/span>damental breach of contract<\/span>.<\/span><\/p>\n<\/div>\n

\n
\u00a0<\/div>\n<\/div>\n
\n

Damages<\/span><\/strong><\/span><\/span><\/p>\n

In general, if a buyer fails to perform any of its obligations under the contract or the CISG, the seller may claim damages. The breach does not have to be \u201cfundamental\u201d within the meaning of Article 25 CISG. The breach of any obligation by one of the parties, including the obligation to open an L\/C, entitles the other party to claim damages which, according to the principle of full\u00a0 compensation, correspond to the financial loss suffered by the other party as a result of the breach. The recoverable damages include damages for non-performance, incidental and consequential damages resulting from the breach of the obligation to open an L\/C.\u00a0 For example, if the delivery of the goods is dependent on the issuance of an L\/C by the buyer’s bank, the seller can claim as damages any additional storage costs resulting from a delay in delivery of the goods because the buyer did not open the L\/C in time.<\/p>\n<\/div>\n

\n

\u00a0\u00a0<\/span><\/p>\n<\/div>\n

\u00a0<\/div>\n<\/div>\n

IV. RIGHT TO SUSPEND PERFORMANCE<\/h4>\n

Pursuant to Article 7<\/span>1(1)<\/span> CISG, a party may suspend <\/span>the performance of its obligations if, after<\/span> the<\/span> conclu<\/span>sion of the sales contract, it becomes apparent that <\/span>the other party will not perform a substantial part of <\/span>its<\/span> obligations<\/span>.<\/span><\/span><\/p>\n

It is generally accepted that the buyer’s failure to <\/span>open a<\/span>n<\/span> L\/C<\/span> in a timely manner is grounds for sus<\/span>pending the seller’s obligation to deliver the goods or <\/span>related documents.<\/span><\/span><\/p>\n

A party\u2019s failure must<\/span>, however,<\/span> relate to a \u201csubstan<\/span>tial\u201d part of that party\u2019s obligations.<\/span> What may be con<\/span>sidered a substantial part of a party\u2019s obligation has <\/span>to be determined on a case<\/span>–<\/span>by<\/span>–<\/span>case basis.<\/span> For exam<\/span>ple, an ICC arbitration tribunal ruled that the suspen<\/span>sion of the claimant’s obligation to open a<\/span> L\/C<\/span> due to <\/span>the seller’s demand to increase the price of the last <\/span>orders by 10 or 15 percent was inadmissible because <\/span>it was \u201cexcessive and disproportionate\u201d.<\/span> The<\/span> arbitral <\/span>tribunal<\/span> stated that the refusal to open a<\/span>n<\/span> L\/C<\/span> is <\/span>equivalent<\/span> to a complete refusal to pay the purchase <\/span>price and that since the disagreement only related to <\/span>10 or 15 percent of the price, the buyer could have at <\/span>least advanced the undisputed amount.\u00a0<\/span><\/span><\/p>\n

The buyer is entitled to suspend its obligation to open an L\/C if the seller has already failed to perform a related counter-obligation set out in the contract (for example, the obligation to send a notice of shipment in a CISG contract subject to certain Incoterms, by
which the seller notifies the buyer that the agreed goods are available for transportation).<\/span><\/span><\/p>\n

 <\/p>\n

V. SUMMARY<\/h4>\n

The CISG offers an effective legal framework for the <\/span>enforcement of a buyer\u2019s obligation to open a<\/span>n L\/C <\/span>under a contract for the international sale of goods.<\/span>
A<\/span> buyer\u2019s failure to have the agreed<\/span> L\/C opened by a <\/span>bank constitutes a breach of contract. Accordingly, <\/span>the seller may be entitled to some of the remedies <\/span>provided by the CISG. These remedies include a re<\/span>quest for specific performance, the avoidance of the <\/span>sales contract and damages. In most cases, failure to <\/span>open an L\/C in a workable form or in a timely manner <\/span>constitutes a fundamental breach of the sales con<\/span>tract and allows the seller to avoid the contract with<\/span>out granting the buyer a grace period. In the case of <\/span>commodity sales contracts, which are often subject <\/span>to strong price fluctuations and are negotiated by way <\/span>of chain transactions, the timeliness of the document <\/span>delivery is typically of particular importance.\u00a0<\/span><\/p>\n

Finally, it is generally accepted that the buyer’s failure <\/span>to open an L\/C in a timely manner is grounds for sus<\/span>pending the seller’s obligation to deliver the goods or <\/span>related documents.<\/span><\/p>\n

 <\/p>\n

VI.<\/span> OUR SERVICES<\/span><\/h4>\n

We advise and assist<\/span> clients<\/span> (especially commodity <\/span>trading<\/span> companies)<\/span> in<\/span> cross-border<\/span> transactions <\/span>involving L\/Cs. In particular, we represent clients in <\/span>L\/C dispute proceedings before courts and arbitral <\/span>tribunals.<\/span><\/p>\n

Should you have any questions, please do not hesi<\/span>tate to contact us.<\/span><\/p>\n

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Authors<\/strong><\/h2>\n

[\/et_pb_text][et_pb_team_member name=”Dr. iur. Wolfram Kuoni” image_url=”https:\/\/kuonilaw.ch\/wp-content\/uploads\/2024\/03\/kuoni.png” _builder_version=”4.21.0″ _module_preset=”default” header_text_align=”left” body_text_align=”left” body_text_color=”#9b9b9b” position_text_align=”left” text_orientation=”center” max_width=”300px” module_alignment=”left” custom_margin=”0px|0px|0px|0px|false|false” custom_padding=”0px|0px|40px|0px|false|false” border_style_all_image=”dashed” global_colors_info=”{}” theme_builder_area=”post_content”]<\/p>\n

Founding Partner
Attorney at Law
MBA INSEAD
wolfram.kuoni@kuonilaw.ch<\/p>\n

[\/et_pb_team_member][et_pb_team_member name=”MLaw Amelia Perucchi” image_url=”https:\/\/kuonilaw.ch\/wp-content\/uploads\/2024\/03\/perucchi.png” _builder_version=”4.21.0″ _module_preset=”default” body_text_color=”#9b9b9b” position_text_align=”left” text_orientation=”left” max_width=”300px” module_alignment=”left” custom_margin=”|0px||0px|false|false” custom_padding=”|0px||0px|false|false” border_style_all_image=”dashed” global_colors_info=”{}” theme_builder_area=”post_content”]<\/p>\n

Partner
Attorney at Law
amelia.perucchi@kuonilaw.ch<\/p>\n

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Andere Factsheets<\/strong><\/h2>\n

[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"

In international trade, offering extended payment terms can be extremely attractive to new foreign buyers and ultimately lead to winning more export sales. However, in order to offer such benefits, a seller needs to check the foreign buyer’s credit which is not always easy to find. If the seller is unable to obtain reliable credit information, the L\/C may be
\navailable to the exporter as a trade financing instrument.<\/p>\n","protected":false},"author":8,"featured_media":1522,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false},"categories":[34,26],"tags":[],"_links":{"self":[{"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/posts\/2250"}],"collection":[{"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/comments?post=2250"}],"version-history":[{"count":17,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/posts\/2250\/revisions"}],"predecessor-version":[{"id":2268,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/posts\/2250\/revisions\/2268"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/media\/1522"}],"wp:attachment":[{"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/media?parent=2250"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/categories?post=2250"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kuonilaw.ch\/en\/wp-json\/wp\/v2\/tags?post=2250"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}