Letter of credit
A letter from a bank guaranteeing that buyer's payment to seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Nature
The seller would prefer to be paid as early as possible and the buyer would wish to delay the payment. In practice, contracting parties use a letter of credit (documentary credit or banker’s credit or commercial credit). Under a documentary credit, the buyer (applicant) agrees to pay the seller (beneficiary) using a reliable paymaster- generally, a reputable bank in the seller’s country- who pays against the presentation of stipulated documents that comply with the terms of credit. Letter of credit advantages for the seller
The seller has the guarantee from the buyer's bank to pay for the shipped goods Reducing the risk of the buyer cancels or changes his order The seller is able to calculate the payment date for the goods The buyer cannot refuse to pay
Letter of credit advantages for the buyer
The bank will pay for the goods
The buyer can control the time period for shipping
By a letter of credit, the buyer demonstrates his solvency
The seller grants a credit to the buyer in the case of letter of credit Buyer can avoid or reduce pre-payment.
Characteristics of letters of credit
The autonomy of letters of credit
According to the principle of autonomy, the undertaking of the issuing bank or confirming bank to pay against the documents is seen as a primary obligation. The obligation of the banks (issuing bank and confirming bank) are in respect of the documents, not in respect of the goods. As long as the documents are in order, the banks cannot get out of their obligations by pointing to incidents such as shipment of defective goods. Buyers often seek an injunction to stop the bank from paying where goods do not match the contract description but court are unwilling to grant such injunction. Case: Discount Records v Barclays Bank (1975)
On delivery of the cargo, the buyer discovered that some of the boxes which should have contained records were empty or contained cassettes instead. The buyer wanted to stop the bank from paying the seller but was refused by the court. Held that the buyer obligation to pay under the credit was separate from the contract of sale, and the court could intervene only if a sufficient cause was shown.
Payment by the bank, however, does not affect the buyer’s rights under the contract of sale. The buyer can always sue the seller for breach of contract in the event of receiving no goods, or substandard goods. The principle of autonomy favours the banks and the seller. Banks are not responsible for ensuring the cargo match with the contract description. The principle of autonomy is affected in the event of illegality in the underlying transaction or fraud, which means that no oblications on a letter of credit is contrary to exchange regulations. Case: United City Merchants v Royal Bank of Canada (1983)
The seller quoted double the purchase price at the request of buyer with the intention to exchange its currency for US dollars using the contract of carriage and the documentary credit. The court held the transaction was unenforceable bcz it was contary to the exchange regulations in the buyer’s country. The doctrine of strict compliance
Acceptance or rejection of the documents is depends on whether the documents conform to terms of the credit. If , on their face, they are in strict conformity with the terms of the credit, the bank will accept the documents. If they are not, the bank will reject the documents. Case1: Moralice (London) v ED and f Man (1954)
The credit stipulated a bill of lading for 5000 bags. But the bank rejected the tendered bill, which referred to 4997 bags. The court held that the rejection is allowed....