Role of Letter of Credit

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  • Topic: Uniform Commercial Code, Trade finance, Bank
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UNIVERSITY OF MICHIGAN
T HE ROLE OF LETTERS OF CREDIT IN P AYMENT T RANSACTIONS
Ronald J. Mann UNIVERSITY OF MICHIGAN LAW SCHOOL

PAPER #00-002

This paper can be downloaded without charge at: The Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=214633

MLR R EVISED G ALLEYS1.DOC

05/03/00 12:36 PM

THE ROLE OF LETTERS OF CREDIT IN PAYMENT TRANSACTIONS
Ronald J. Mann* TABLE OF C ONTENTS I. THE BASIC L ETTER - OF-C REDIT TRANSACTION .....................................................0000 II. DISCREPANCIES IN LETTER - OF-C REDIT TRANSACTIONS.........................................0000 A. The Nature of the Discrepancies...............................................................0000 1. What Are the Discrepancies? ............................................................0000 2. When Do Discrepancies Appear? ......................................................0000 B. Waiving Discrepancies.............................................................................0000 III. W HY LETTERS OF C REDIT?..................................................................................0000 A. The Road Not Taken: Irrational Habit and Path Dependence ..................0000 B. The Classic Story : Assurance of Payment................................................0000 C. The Letter of Credit as a Verification Institution......................................0000 1. Verifying the Likelihood that the Buyer Will Pay ..............................0000 2. Verifying the Authenticity of the Transaction...................................0000 IV. C ONCLUSION ......................................................................................................0000 S TATISTICAL APPENDIX ....................................................................................................0000

* © 1999 by Ronald J. Mann. Professor of Law, The University of Michigan Law School. B.A. 1982, Rice; J.D. 1985, University of Texas. — Ed. I dedicate this article to Alexandra Zoë Mann. I thank the individuals who took time from their busy schedules to allow me to interview them about letter-of-credit practices; I am particularly grateful to the institutions that kindly allowed me to collect information from their letter-of-credit records. Because that information was col ected subject to a variety of confidentiality l requirements, I regret that I cannot thank either of those groups by name. I also thank Jim Barnes for his gracious efforts to help me arrange my site visits and Atsushi K inami for his similarly diligent efforts to arrange my i nterviews with Japanese bankers. I received useful comments from each of the commentators and several other participants at the February 2000 Michigan Law Review Symposium on Empirical Research in Commercial Transactions (for which this paper was prepared); I single out Douglas Baird for a particularly generous investment of time and intellectual engagement with the ideas presented in the paper. I also received useful comments on earlier drafts from Buddy Baker, Jim Barnes, Omri Ben-Shahar, Dan Keating, Rick Lempert, Vincent Maulella, Petr Oberding, Ariel Porat, Adam Pritchard, Bob Rasmussen, Mark West, and Jay Westbrook. David Murrel provided assistance with graphics, Chris Killen, Catherine Leggieri, and Paula Payton with transcription of the interviews, and Scott Nelson with a variety of research and logistics-related matters. Finally, I acknowledge with gratitude the generous research support of the Robert P. Tiernan Faculty Endowment Fund at the University of Michigan Law School. For convenience, all citations to provisions of the Uniform Commercial Code without indication of date refer to the current version (that is, taking account of revisions made in 1999). Similarly, I refer throughout to INTERNATIONAL CHAMBER OF COMMERCE, UNIFORM CUSTOMS AND P RACTICE FOR DOCUMENTARY CREDITS (1993) (ICC Publication No. 500) as the UCP.

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