Guarantee

Payment by a third party to a creditor under legal compulsion on account of a debt owed by a debtor would automatically discharge the debtor’s debt. That was the case even if the legal compulsion arose out of a contractual obligation voluntarily assumed by the third party. Where a case was one of payment under compulsion, questions of agency, authority and ratification did not arise. The obligation of an issuing bank under a letter of credit was to honour the credit on presentation of compliant documents, as specified in the letter of credit itself.

The general view was that the seller looked to the letter of credit for payment of the price. Thus, when an issuing bank honoured a letter of credit, its payment would discharge the obligation that had given rise to the need for the letter of credit, but it was important to be clear about the scope of the autonomy principle, which did not preclude looking at the terms