Harbottle v National Westminster Bank Ltd (1978)

Harbottle v National Westminster Bank Ltd (1978): A Pillar of International

Trade Finance

Background:

Letters of Credit (LCs) are crucial instruments in international trade, acting as a

guarantee of payment for sellers. Prior to Harbottle, there was some uncertainty
about the absolute nature of a bank's obligation under an irrevocable LC. This case
provided much-needed clarity.

Facts:

 RD Harbottle (Mercantile) Ltd (Harbottle) applied for a letter of credit from

National Westminster Bank Ltd (the Bank) to finance a shipment of goods.
 The letter of credit was irrevocable, meaning the Bank was obligated to pay
the seller regardless of any disputes between Harbottle and the seller.
 A dispute arose between Harbottle and the seller after the letter of credit was
issued. Harbottle tried to stop the Bank from making payment.

Issue:

 Can a court intervene and prevent a bank from honoring an irrevocable letter
of credit, even if there is a dispute between the buyer and seller?

Significance:
This case is a landmark decision in the world of international trade finance. Letters
of credit are essential tools for facilitating trade because they provide a guarantee
of payment to sellers. A court's ability to easily overturn these guarantees could
disrupt international commerce.

Held:

 The court ruled in favor of the Bank. They established that courts will
generally not interfere with irrevocable letters of credit, even if there are
disputes between the buyer and seller.
 The only exceptions are for cases of "fraud" where the bank has knowledge
of it, or if it can be "clearly established" that the beneficiary (seller) is not
entitled to payment.

This decision emphasizes the importance of the independence and autonomy of

letters of credit in international trade. It promotes certainty and reliability in these
transactions.