Part I Legal and Practical Challenges to Traditional Trade Finance, 3 Soft Clauses in Letters of Credit

Soft clauses in letters of credit make the issuing bank’s obligation conditional upon some event or certification that is in the control either of the applicant, or some agent, entity, or organisation in the applicant’s country. Such clauses make an apparently irrevocable letter of credit into what is, in essence, a conditional undertaking dependent on the applicant’s approval. Soft clauses are not always a vehicle for fraud—there may be genuine reasons for their inclusion—but they certainly make it easy for an applicant to ensure that the issuing bank does not pay the beneficiary. This chapter will consider the problems caused by the use of soft clauses, some possible solutions, and it will suggest alternatives, some of which look to the past (bills of exchange/time drafts), some to the present (open account and standby letters of credit), and some to the future (the advent of blockchain technology).