• International Commerce and Information Review
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• v.16 no.2
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• pp.89-109
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• 2014

The purpose of price escalation clauses has the effect of increasing the L/C value subject to external pricing mechanisms. This will be found inter alia in metals and oil products transactions. Such a clause gives rise to a question. That is, whether it is enforceable or whether it constitutes a letter of credit. The problem is what to reference to a source outside the context of a letter of credit constitutes a non-documentary condition rendering the undertaking something other than a letter of credit. Reference to an objective and readily available index is not something that renders the undertaking obscure and is not "non-documentary in the sense that it is possible to make an objective verification of the data. The possible solution is that not every non-documentary condition will be disregarded. For example, an index specified in the credit will not be disregarded as stipulated in ISP98 and URDG758. If a non-documentary is "central and fundamental", it seems that the parties intended a dependent payment obligations. The most common means of overcoming this conflicts of interests is to issue an instrument incorporatingan escalation clause, but capping the bank's maximum payment obligation.