DOCUMENTARY LETTERS OF CREDIT
CONTENTS
1.0. Introduction.
2.0. Objective.
- Main
- Documentary Letters of Credit
- Types of L. C
- Opening of L. C
- Doctrine of Strict Compliance under L. C
4.0. Conclusion
5.0. Summary
6.0. Tutor Marked Assignments (TMA)
7.0. References/Further Readings.
INTRODUCTION
There are various ways of paying for goods in international commercial transactions especially in the contract of c.i.f and f.o.b. Although the traditional ways of payment is by cash or cheques, nowadays, the documentary letters of credit have superceded these methods.
Usually the bankers will open the letters of credit at the request of the buyer who would have given them a satisfactory security for the reimbursement of the amount paid by the bankers to the seller.
Letters of credit are employed in both c.i.f and f.o.b contracts and the principles of law governing letters of credit are the same for both types of contract.
OBJECTIVE
The main purpose of this unit is to discuss documentary letters of credit. Learners should be able to explain the main reason behind the issuance of letters of credit and to understand the safeguards afforded by a documentary credit, as a contractual promise by a bank.
MAIN OBJECT
Documentary Letters of Credit
The principle of documentary letter of credit is that the buyer of goods instructs a bank in his country (the issuing bank) to open a credit with a bank in the seller’s country (the advising bank), in favour of the seller, specifying the documents which the seller has to deliver to the bank if he wishes to be paid for his goods. The instructions also specify the date of expiry of the credit.
If the documents tendered by the seller are correct (bill of lading, insurance policy and invoice) and tendered before the credit are expired, the advising bank becomes obliged to make the payment to the seller. See Glencore International AG v. Bank of China (1996) 1 Lloyds Rep 135.
Types of Letters of Credit
There are various types of letters of credit and it is important for parties to state the type that will govern there transactions.
The following are the main types of Letters of Credit:
- The Revocable and Unconfirmed Letters of Credit
In this type of Letter of Credit neither the issuing nor the advising bank gives its commitment to the seller. However, the letter of credit may be revoked at any time.
2. The Irrevocable and unconfirmed Letter of Credit
The authority here is an irrevocable one and the issuing bank enters into an obligation to the seller to pay, and the obligation is also irrevocable. If the bank refuses to pay after the seller tenders correct documents, then he can sue the issuing bank at his headquarters or the seller’s country, if the issuing bank has a branch there.
3.The Irrevocable and Confirmed Letters of Credit
This is a situation where the issuing bank adds its own confirmation of the credit to the seller. If he delivers the correct documents at the stipulated time, then he will be obliged without any problem.
A confirmed letter of credit which has been notified to the seller cannot be cancelled by the bank on the buyer’s instruction. See Urquahat Lindsay and Co. v. Eastern Bank (1922) 1 K.B 318.
- The transferable Letter of credit
The parties to the contract of sale may agree that the credit shall be transferable, and the seller can use such credit to finance the supply transaction.
Opening of Letter of Credit
While the parties in the underlying sale contract must agree that payment is to be made by documentary letter of credit, it is important to emphasise that the documentary credit gives rise to separate contractual rights and obligations from those in the sale contract.
A letter of credit must be made available to the seller at the beginning of the shipment period. It must be made open at a reasonable time before shipment. Stach Ltd v. Baker Bosly Ltd (1958) 2 Q.B 130.
Although the furnishing of letters may be condition precedent for the obligation of delivery or shipment of goods, the terms of the contract may stipulate that the letter of credit will be opened upon the performance of a specified act by the seller. It is mandatory for the buyer to open the letter of credit on time and no excuse will exonerate him from his liability.
The Doctrine of Strict Compliance under Letter of Credit
The issuing bank which operates the documentary credit acts as agent for the buyer who is the principal. The bank which documents are presented must ensure that they comply with the terms of the credit. Banks must examine all documents stipulated in the credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the credit. If the banks exceed the instructions given to them by the buyer any have acted without authority, he is not bound to ratify there act, in that event the loss will fall on the bank.
In Equitable Trust Co. of New York v. Dawson Partners, the court held that there is no room for documents which are almost the same or which will do just as well.
Once there is discrepancy in the document no matter how insignificant, then the bank must not pay. The courts have however allowed banks to pay for trivial discrepancy. In Glencore International AG v. Bank of China (Supra) the word branch was used instead of brand but the court held this was a mere error and the word should be read as brand.
The court may refuse payment where there is compelling evidence of fraudulent presentation by the beneficiary or his agents.
CONCLUSION
In a contract where documentary letter of credit is used, there is room for more safeguards on the part of the buyer to the seller. The seller is more secured with his money in this regard. And also the type of letter of credit determines the extent of the safeguard offered to the seller by the buyer through its agent the bank. And it is also important to open a letter of credit to give it the value it requires for payment
SUMMARY
A documentary letter of credit enables the seller and the buyer to obtain important safeguards regarding payment under a sale contract. Those safeguards originate in contractual promises by a bank or banks that the money due will be paid, subject to certain conditions being fulfilled.
The bank is not bound by the sale contract, so if defective goods are delivered, the fact that the buyer has remedies against the seller does not mean a bank cannot enforce the payment obligation under the credit.
TUTOR MARKED ASSIGNMENT
- Discuss the strict compliance
- Explain the different types of documentary letter of credit, and explain the steps involved in opening a letter of Credit
REFERENCES/FURTHER READING
- Sale of Goods Act,
- Rawlings, Commercial Law, University of London Press,
- Okany, Nigeria Commercial Law, Africana-Fep Publisher, Limited, 1992.