LETTER OF CREDIT

Pages 21-30
By: Leona Paula R. Santicruz
Letters of credit distinguished from other
accessory contracts
Engagement of the issuing bank to pay the seller once the draft and the
required shipping documents are presented to it.

Independence principle- the bank determines compliance with the

letter of credit only by examining the shipping documents presented.
It is precluded from determining whether the main contract is actually
accomplished or not.
Article 17 of the U.C.P
"Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents,
or for the general and/or particular conditions stipulated in the
documents or super- imposed thereon; nor do they assume any
liability or responsibility for die description, quantity, weight quality,
condition, packing, delivery, value or existence of the
goods represented by any documents, or for die good faith or acts
and/or omissions, solvency, performance or standing of the consignor
die carriers, or the insurers of the goods, or any other person
whomsoever”
Parties to a letter of credit
1. Buyer-who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the documents of title.
2. Bank issuing the letter of credit/opening bank- undertakes to pay
the seller upon receipt of the draft and proper documents of titles
and to surrender the documents to the buyer upon reimbursement.
3. Seller/ beneficiary- one who ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to
recover payment
Other parties
• advising (notifying) bank-
• confirming bank
• Opening bank/issuing bank
• Paying
• Negotiated bank
confirmed commercial credit

Confirmed commercial credit Unconfirmed commercial credit

the “Confirming Bank”, usually located When a Letter of Credit is issued,
in the same country that the Exporter is
located, will add its “confirmation” to the risk of payment rests with the
the Letter of Credit. By adding its bank that has issued the Letter of
confirmation, the Confirming Bank
undertakes to honour the Exporter’s Credit
claim under the Letter of Credit,
provided all terms and conditions of the
Letter of Credit are met. The risk of
payment is now assumed by the
Confirming Bank, as well as the Issuing
Bank, thereby providing more
protection for the Exporter.
Death of national law-governing letters of
credit.
• Being a product of international commerce, the impact of this
commercial instrument transcends national boundaries
• The rules were later developed into what is now known as the
Uniform Customs and Practice for Documentary Credits ("U.C.P.")
issued by the International Chamber of Commerce.
• This current version has the blessing of the United Nations
Commission on International Trade Law (UNCITRAL). The Uniform
Customs and Practices are not 'law' because of the act of any
legislature or court, but because they have been explicitly and
implicitly made part of the contract of letters of credit.
Banks assume no liability or responsibility for the consequences arising
out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the
transmission of any telecommunication .As advising bank, Bank of
America is bound only to check the 'apparent authenticity' of the letter
Right of recourse of negotiating bank against
issuing bank and seller
Discounting Arrangement-the issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon.
Unless drafts drawn in pursuance of the credit are indicated to be
without recourse therefore, the negotiating bank has the ordinary right
of recourse against the seller in the event of dishonor by the issuing
bank.
Involved banks deal only with documents.

The involved banks deal only with documents and not on goods
described in those documents
“A key principle underlying Letters of Credit is that banks deal only in documents and not in goods. The
decision to pay under a Letter of Credit is entirely on whether the documents presented to the bank appear on
their face to be in accordance with the terms and conditions of the Letter of Credit. It would be prohibitive for
the banks to physically check all merchandise shipped under Letters of Credit to ensure merchandise has been
shipped exactly as per each Letter of Credit. Accordingly, the integrity of both the Exporter and Importer are
very important in a Letter of Credit transaction. The appropriate due diligence should be exercised by both
parties.”
Advantages and Disadvantages of Letter of
Credit to the Importer
Advantages
• Importer is assured that the
Exporter will be paid only if all
terms andconditions of the
Letter of Credit have been met.
• Importer is able to negotiate
more favourable trade terms
with the Exporterwhen payment
by Letter of Credit is offered.
Disadvantages
• A Letter of Credit does not offer
protection to the Importer
against the Exporter shipping
inferior quality goods and/or a
lesser quantity of goods.
• It is necessary for the Importer
to have a line of credit with a
bank before the bank is able to
issue a Letter of Credit.
Advantages and Disadvantages of Letter of
Credit to the Exporter
Advantages
• The risk of payment relies upon the
creditworthiness of the Issuing Bank and
the political risk of the Issuing Bank’s
domicile, and not the creditworthiness of
the Importer.
• Exporter agrees in advance to all
requirements for payment under the
Letter of Credit. If the Letter of Credit is
not issued as agreed, the Exporter is not
obligated to ship against it.
• Exporter can further reduce foreign
political and bank credit risk by
requesting confirmation of the Letter of
Credit by a Canadian bank.
Disadvantages
• Documents must be prepared
and presented in strict
compliance with the
requirements stipulated in the
Letter of Credit.
• Some Importers may not be able
to open Letters of Credit due to
the lack of credit facilities with
their bank which consequently
inhibits export growth.