Journal of International Business and Law


Under American and Chinese law, the duty of the non-breaching party to mitigate damages is a core principle of general contract law. In the United States, an exception is found in letters of credit law where the beneficiary party has no such duty when an issuing bank (issuer) wrongfully dishonors payment under a letter of credit (LC). The beneficiary may recover the face amount dishonored plus any other losses recoverable under applicable law. The rationale for not applying the general duty of mitigation to letters of credit (LCs) is the independence principle, which asserts that the LC transaction is independent of the underlying transaction for which it serves. Thus, any real-world developments such as fraud in the transaction or failure to mitigate is irrelevant to the duty to pay under the LC. There is an exception to the ‘no mitigation principle’ where the issuer has evidence that the beneficiary has in fact avoided losses (beneficiary has resold the documents to a thirdparty or recovered damages, or obtained benefits, against the account party under the underlying contract). A deduction for benefits received does not jeopardize the fundamental principle of independence and the realization of the commercial objective of LCs to guarantee payment or performance with certainty. The issuer, however, cannot contest the reasonableness of the beneficiary’s mitigation measures. Currently, Chinese law is underdeveloped in this area. The issue to be addressed in this article is whether Chinese law should be reformed by adopting the no mitigation rule for LCs or whether a limited form of mitigation should be required.

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