Document Type

Conference Proceeding

Publication Date



I. Mitigation in Letter of Credit Transactions Assume a Buyer has procured a letter of credit to pay for contracted goods but no longer wants the goods. The Buyer and the Issuer would like to force the Beneficiary to mitigate. Assume that both the Issuer and Applicant repudiate their obligation or that the Applicant has failed and the Issuer repudiates its obligation to pay under the letter of credit. At the moment of repudiation the price for a gallon of the underlying oil that is the subject of the letter of credit is $.75 and that the letter of credit provides for payment at $1.00 per gallon. Seller off loads the oil, presents the proper documents and the documents are dishonored when the oil is worth $.75. The oil continues to decline in value to $.40 and the Beneficiary sues the Issuer and asks for the full amount of its draw. (Assume that to be $1 per gallon times 1 million gallons or a $1 million claim.) Can the Issuer reduce the Beneficiary's claim by the amount that could have been saved by the Beneficiary's mitigation--namely the difference between $.75 per gallon (the value of the oil at the time of repudiation) and $.40 per gallon (the value of the oil at the time of buyer's later disposition)? The answer is no. One sentence in Section 5-11l(a) reads as follows: "The claimant is not obligated to take action to avoid damages that might be due from the issuer under this section."