High Court Finds Buyer Remains Liable To Pay Seller Directly Where Issuing Bank Refuses Payment Under Documentary Letters Of Credit

In the recent decision of Moeve Trading SAU v Mael Trading FZ LLC [2026] EWHC 17 (Comm), the High Court confirmed that the Documentary Letters of Credit (LoCs) issued were conditional forms of payment and the buyer did not discharge its primary obligation to pay the seller for goods by merely arranging for the issuance of the LoCs. 

In reaching its decision, on a summary judgment application, the court considered whether the incorporation of industry standard terms (providing that payment should be by LoC unless "agreed otherwise"), meant that the LoCs were absolute forms of payment and the buyer's payment obligation was satisfied once it had arranged for the LoCs to be issued. The court found that the contract between the buyer and seller requiring the buyer to pay within 60 days of the date of the bills of lading constituted "an agreement otherwise". This meant that the LoCs constituted conditional payment for the cargo – and the condition was not satisfied because the issuing bank refused to make payment under the LoCs. The seller therefore had recourse directly to the buyer.

The court noted that the reasons for the issuing bank's refusal to make payment were not known, and were irrelevant in this case, because title to the goods had already passed to the buyer. It is worth noting that where payment by LoC is conditional and title has not passed, the outcome will depend on whether the seller is responsible for the issuing bank's failure or refusal to pay (for example, by not presenting the documents in time or by failing to present compliant documents). 

This decision provides some clarity to parties in relation to their obligations under widely used LoCs and illustrates the importance of ensuring that clear drafting is used if the intention is for the LoC to constitute absolute payment.

We consider this decision further below.

Background

In April 2024, the parties entered into a contract for the sale of petroleum. The cargo was to be shipped from Spain to Sierra Leone, with the contract providing that title in the cargo would pass to the buyer upon shipment. The contract also required the buyer to arrange for the issue of an irrevocable LoC for the benefit of the seller. 

Prior to the shipment, the buyer arranged for the issuance of two LoCs pursuant to the contract. The cargo was subsequently shipped on 12 July 2024, the seller issued bills of lading on the same date and the cargo arrived in Sierra Leone a week later. Under the terms of the contract, which provided that the buyer must pay within 60 days of the date of the bill of lading, payment was due on 10 September 2024. 

The contract incorporated the Cepsa Trading 2021 General Terms and Conditions (the T&Cs). The T&Cs provided that "unless otherwise agreed to by the Seller and the Buyer in the Sales Contract, payment shall be made by means of an irrevocable Documentary Letter of Credit" and that payment was to be made against presentation of various documents, including the bills of lading. However, when the seller presented the bank which had issued the LoCs with the documents required for payment, the issuing bank refused to pay. Given it was not a matter in dispute, the court did not consider whether the issuing bank was right in its refusal.

The seller therefore issued proceedings against the buyer for the purchase price under s.49(1) of the Sale of Goods Act 1979 (the SGA) and applied for summary judgment under CPR 24.3. The two requirements for a successful claim under a sale contract pursuant to s.49(1) SGA are: (i) that property in the goods has passed to the buyer; and (ii) the buyer has wrongfully failed to pay in accordance with the terms of the sale contract. In its defence, the buyer argued that it had discharged its payment obligations by arranging for the issue of the LoCs. Alternatively, it argued that it was not liable for the purchase price because the seller had not handed it the stipulated shipping documents, including original copies of the bills of lading (this argument is not considered further in this blog post). 

Decision

The court considered whether the LoCs constituted absolute or conditional payment for the price of the cargo. If they were absolute payment, the seller accepted it would only be able to seek payment from the issuing bank. If they were conditional payment, the seller would need to seek payment from the issuing bank in the first instance, but would have recourse to the buyer if the issuing bank did not pay. 

The court reviewed the authorities on the question of whether LoCs are conditional or absolute forms of payment and highlighted the following key principles: 

• LoCs usually constitute conditional payment. LoCs will normally operate as conditional payment unless the relevant contract contains terms (whether express or implied) which clearly have the effect of making them absolute (as per Newman Industries v Indo-British Industries  [1956] 2 Lloyd's Rep 219). The court concluded that the LoCs in this case were conditional forms of payment. It noted that the buyer was primarily responsible for payment of the purchase price under the sale contract, while also being obliged to arrange for the issue of LoCs to "cover" such payment. Although the contract incorporated the T&Cs which provided for payment by LoC "unless otherwise agreed", the court found that this did not alter the buyer's primary payment obligation as set out in the sale contract (ie it did not have the effect of making the LoCs operate as an absolute form of payment). The court commented that, to the extent that the sale contract and the T&Cs were at odds, the buyer's obligation to pay in the sale contract constituted "an agreement otherwise".
• Effect of conditional payment (where title has passed to buyer). Where payment by LoC is conditional and title to the goods has passed to the buyer, then the condition is not satisfied if the LoC does not result in payment and the seller is entitled to be paid the price of the goods by the buyer (as per WJ Alan & Company Ltd v El Nasr Export & Import Co [1972] EWCA Civ 12). The court commented that the reasons for the issuing bank's refusal to pay - including whether either party was at fault - are irrelevant to the seller's entitlement to be paid in this scenario. As long as title in the goods has passed to a buyer and a buyer has accepted the goods, a seller is entitled to receive the purchase price (as per Newman Industries). In this case, the contract stipulated that title in the goods passed to the buyer upon shipment, and the buyer accepted the cargo on arrival. The buyer's failure to pay was therefore wrongful (regardless of whether or not the seller was at fault in not obtaining payment under the LoCs).
• Effect of conditional payment (where title has not passed to buyer).  Where the LoC operates as a conditional payment but title to the goods has not passed to the buyer, the outcome will depend on whether the seller is responsible for the issuing bank's failure or refusal to pay (for example, by not presenting the documents in time or by failing to present compliant documents). The seller should seek payment in the first instance from the issuing bank, but if the bank does not meet its obligations, then the seller can have recourse to the buyer only if the seller bears no responsibility for the issuing bank's failure to pay.
• Effect of absolute payment. If the LoCs had operated as absolute forms of payment, once issued they would have become the exclusive source of payment and the buyer's liability for the purchase price would have been discharged. 

In the court's judgment, the seller was entitled to the purchase price directly from the buyer in accordance with s.49 of the SGA. Accordingly, the buyer had no real prospect of successfully arguing that it had discharged its payment obligations by arranging for the issue of the LoCs. The court therefore granted the seller's summary judgment application.

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