Letter Of Credit In International Transactions Law Commercial Essay

02 Nov 2017

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An International trade transaction begins with the buyer and seller identifying each other and contracting as to the goods to be sold, quantity, unit price, place, time of delivery, mode of payment and warranty period. [1] 

Here when a prospective buyer and seller of two different localities connect, the problem of financing the sale arises [2] . Also, the seller before manufacturing, procuring or shipping the goods wishes to be certain that the buyer will take and pay for them. The buyer, on the other hand, wishes to be certain that the goods have been shipped according to instructions and he does not desire to pay before they have been received and marketed. Payment can be made, according to the pre decided terms of contract, through letter of credit being one of the means [3] .

Thus in cases when supplier will insist on a security for payment of his bills by the firm promptly, the buyer may ask a Banker to extend such a security to the seller [4] . Such a demand will be almost made especially when the supplier is overseas. Commercially, such a security of a banker is called a Documentary Letter of Credit. [5] 

A letter of credit can be defined as a business letter requesting a person to pay money, or make his credit available, to a third person, on the credit of the writer or against payment by him [6] . In form, it is nothing more than a letter from a financial institution promising to pay a stated sum of money upon the receipt of specified documents. [7] Hence a letter of credit is an independent engagement by an issuer to honor demands for payment on the presentation of stipulated documents, provided that the terms and conditions of the letter of credit are met. [8] It is thus a commitment to make a payment which however creates a unique creditor-debtor relationship [9] .


Documentary letters of credit were developed at the beginning of the 19th century from ‘open ‘or ‘travellers letters of credit [10] . This earlier version of letters of credit which probably originated in Italy during the 12th and the 13th century, were referred to as the letter of payment and was either in formal notarial or formal holographic form and was a four party transaction. The parties were the remitter, the maker, the payer to whom the instrument was addressed and the payee to whom it was sent by the remitter [11] .

In the 17th century when the bill of exchange had begun to attain its formal status as a negotiable instrument in England and on the European continent, it was common to find other instruments referred to as "letters of credit" [12] .

Prior to 19th Century, the system used to effect payment was the attachment of the bill of lading for the goods to a bill of exchange drawn on the purchaser. This ‘documentary bill’ was negotiated through banking channels and presented to the purchaser of the goods for acceptance which was later released to the purchaser against his acceptance of the bill of exchange. If the seller doubted about the purchaser’s standing, the documents were remitted on ‘document on purchase’ basis, wherein the bill of lading was delivered to the purchaser only after the bill of exchange was honoured by payment. This method gave the seller some security, a pledge over or a property in the goods [13] .

However, this system had one serious shortcoming i.e. the goods were shipped solely in reliance on the purchaser’s promise to accept and pay the bill of exchange. If the purchaser failed, or changed his mind about the transaction, the seller had no option but to resell the goods at the best price obtainable in the foreign country to which they had been shipped [14] .

Thus, in the early history letters of credit and bills of exchange were very similar, such that it became difficult to distinguish between them [15] . However, a business letter requesting a person to pay money, or make his credit available, to a third person, on the credit of the writer or against payment by him, is a letter of credit [16] .

By the middle of the nineteenth century the distinction between the two types of facility became well understood as seen from the evidence of an expert witness in a contemporary case [17] . By about the quarter of the nineteenth century, banks started to issue their letter of credit through correspondents operating in the seller’s place. The correspondent could be asked to act as an ‘advising bank’, in which case his role was confined to the communication of letter of credit to the seller and to his making payment against regular documents as the issuing bank’s agent [18] .

From about the beginning of the twentieth century, a correspondent ‘confirmed’ the documentary credit. In such a case, the correspondent-described as a ‘confirming bank’-added his own payment undertaking to that of the issuing banker so that the seller obtained the joint undertakings of the two banks. In this way, the documentary credit became a facility involving the participation of two banks and of commercial parties residing in different countries [19] .

To avoid conflict of law problems it became necessary to harmonise the applicable practice adopted by the bank all over the world. International Chamber of Commerce promulgated the first international version of the Uniform Customs and Practices for Documentary Credits (UCP) in 1933. The current, 2007 Revision (UCP600), which like its predecessor, the 1933 Revision (UCP 500) manifests the influence of co-operation of UNCITRAL, has a universal scope of application.UCP defines most of the rights and obligations of the parties to a transaction financed by means of a documentary credit [20] .

Documentary Credits

A documentary credit is, in essence a banker’s assurance of payment against presentment of specified documents. It is defined by Article 2 [21] of the UCP [22] .

In case of a Documentary Credit being opened pursuant to a contract of sale, the buyer will be the applicant for the credit and the seller will be the beneficiary. The credit may take one of the three forms.

It may entitle seller to collect payment on presentation of documents

To present with documents a draft for acceptance and payment at maturity

Negotiate a draft and/or documents to an authorized bank which then becomes beneficiary in place of seller [23] .

Steps involved in Documentary Credits

In case of payment under a letter of credit the following steps can be distinguished generally:

Contract of Sale between the parties

The exporter .and the overseas buyer agrees in the contract of sale that payment shall be made under a letter of credit [24] .

Application for a letter of credit

The overseas buyer (applicant) instructs a bank at his place of business (issuing bank) to open a letter of Credit for the exporter (beneficiary) on the terms specified by the buyer in his instructions to the issuing bank [25] . The issuing bank will usually ask the buyer to fill the standards form [26] .

Issuance of Letter of Credit

The issuing bank issues the letter of credit and sends it to the advising bank. This is in the form of an arrangement with the bank at the locality of the exporter (advising bank) to pay upon delivery of documents by seller. If the issuing bank agrees to issue letter of credit, the application form will form the basis of the contract between the buyer and the issuing bank [27] .

Advising and verification of Letter of Credit

The seller needs to be advised of the letters of credit. This may be done directly by the issuing bank [28] . It is at this stage that the exporter needs to carefully scrutinise the letter of credit to ensure that it complies with the terms and conditions of the contract of sale agreed to, prior to the issue of the letter of credit. Any deviations should be corrected by seeking necessary amendment(s) to the letter of credit from the buyer, through the issuing bank, prior to the exporter making arrangements for the movement of the goods in question [29] .

Shipment of Goods

The seller after verification ships the goods in accordance with the terms of the contract.

Presentation of documents by the seller

In order to be paid, the seller will tender the documents stipulated in the credit, at the place stipulated in the documentary credit, prior to the expiry of the credit. The issuing or confirming bank then checks that the documents conform with those stipulated in the credit and within five banking days makes a decision to accept or reject the documents. If the documents are rejected, the seller may then re-tender valid documents as long as the credit had not expired. It is also possible for the bank to waive certain discrepancies [30] .

Verification of Documents against the Letter of Credit

The exporter presents all the required documents to his bank. If the documents comply, payment will take place at the appropriate time period specified on the letter of credit. Compliance must be to the satisfaction of the bank, and this has been the subject of some tension between exporters and issuing banks [31] 

If the documents are accepted, the seller will be paid:

In Cash

Electric funds transfer

By the bank’s acceptance of bills of exchange

In case of an uncontrolled letter of credit, the issuing bank will make payment to the beneficiary. Where there is confirmation, the confirming bank will make payment at the first instance. It will then tender the documents to the issuing bank for reimbursement. The issuing bank will reimburse the confirming bank if the documents are in conformity.

Finally the issuing bank will tender the documents to the buyer and seek reimbursement. The buyer will then check the documents, to see if they conform, and if they do, will reimburse the issuing bank. Armed with the documents, the buyer can then seek deliver of the goods from the carrier or sell the goods on to a sub-buyer [32] .

Fundamental Principles of Letters of Credit

The autonomy of Credit

The doctrine of autonomy is a cardinal principle in letters of credit transaction wherein the bank’s duty to pay is found exclusively in the terms of the letter of credit irrespective of performance by seller [33] . It is reflected in Article 4(a) [34] of UCP 600 [35] which provides that a credit by its nature is a separate transaction from the sale or other contract on which it may be based [36] . It is the primary nature of the letter of credit is to create an abstract payment obligation [37] for the bank to pay the beneficiary independent of the underlying contract between the beneficiary and the applicant [38] even if an issuing bank knows that defective goods have been shipped [39] in cases where the goods are shipped later than the specified time [40] or that the preconditions as specified in the terms of the contract have not been met [41] . e.g. by shipment of goods which fail to correspond to the contract description, are of unsatisfactory quality or fall short of the contract quantity, does not entitle Buyer to withhold payment under the credit if the terms of the letter of credit have not been fully complied with [42] .

Similarly, Issuing Bank cannot as a defense to a claim under the letter of credit, plead that it has a claim for damages or right of set-off against Buyer or that it has not been put in funds by Buyer to meet the Credit. Conversely, Seller as a beneficiary is not entitled to avail himself of the contract between Buyer and Issuing Bank [43] .

In the autonomy of the credit the attempts by buyers to invoke breaches of the sale contract to prevent payment under a letter of credit have invariably been blocked by the courts, whether the buyer’s line of attack has been an application for an injunction against the seller to restrain him from presenting the documents and collecting payment or against the bank to restrain him from presenting the documents and collecting payment or to restrain it from making payment under the credit. Even the illegality of the contract of sale does not affect the enforceability of the letter of credit [44] . It is hence a one way abstract transaction, in which the emitting bank cannot reject the execution of its obligation by referring to the non-execution of obligation by other parties to the transaction [45] . This autonomy principle is necessary because it helps the letters of credit to remain as good as cash [46] .

In the case of Solo Industries UK Ltd v. Canara Bank [47] it had been held that

"The bank is entitled to rescind a credit induced by a financial conspiracy or misrepresentation by Seller or his agent or to have the credit set aside for mistake, as where it has been issued to the wrong party who is aware that he has no right to it"

Also in the case of Hongkong and Shangai Banking Corp v Kloeckner & Co AG [48] 

"It has been held that the bank may set off against the amount due to the beneficiary, Seller, a liquidated sum due from Seller to the bank" [49] 

In the case of Hamzeh Malas & Sons v. British Imex Industries Ltd [50] , the buyer claimed that the goods were defective and thus applied for an injunction to prevent the bank from paying under the letter of credit. The court held that the injunction could not be granted. It laid that the opening of a letter of credit constituted a bargain between the banker and vendor of goods thus imposing an absolute obligation to pay [51] .


Fraud is the only exception to the absolute obligation of a bank to pay under a letter of credit in the principle of autonomy of credit [52] . The essential element of such an exception to the rule being that there must be fraud on the part of the beneficiary or his agents in relation to the underlining contract of sale [53] . However, a mere allegation of fraud is insufficient to affect the banks obligation to make payment under a credit [54] and for the fraud exception to apply, the documents must contain, expressly or by implication, material representations of facts that are untrue and further, the seller must fraudulently present the documents for the purpose of drawing on the credit with the knowledge of such untruth [55] . This principle was further reiterated in the case of Discount Records Ltd. v. Barclays Bank Ltd [56] ., where the buyers, alleging fraud, sought an injunction to stop they bank from paying the sellers on the credit. It was held that mere allegation of fraud was insufficient to issue an injunction. Similarly, information that would lead a reasonable banker to infer fraud is insufficient [57] . According to the courts the fraud must be proven [58] .

It is also an essential requirement to establish the degree of evidence of fraud and knowledge of such fraud which the beneficiary and/or the bank must have for the fraud exception to be available. A seller, who is found innocent of fraud, is entitled to payment under the credit, and the issuing bank is entitled to reimbursement [59] 

The rules as to clarity of evidence, both in regard to fact of fraud and as to the bank’s knowledge were held to be not only on the uncorroborated statement of the customer [60] and the courts required strong corroborative evidence of allegation, usually in the form of contemporary documents, particularly those emanating from the buyer for the evidence of fraud to be clear [61] .

In Szteijn v. Henry Schroder Banking Corporation [62] it was held that "The principle of autonomy of credits did not apply in a case which involved not just a breach of warranty but an intentional fraud on the part of the seller [63] ".

This distinction between a breach of warranty and fraud in US Case law has been described in Szteijn and in United Bank Ltd. v. Cambridge Sporting Goods Corp [64] ., which ruled that a bank could only be issued an injunction for not paying a Letter of credit when fraud is evident, and the bank has been informed of this before the documents had been presented.

A dissenting opinion has been given forward by the courts in Dynamics Corp. of America v. Citizens and Southern National Bank [65] in which an equitable and broad definition of fraud was given and the injunction was granted even when fraud had not been clearly established, since the beneficiary was not guilty of the fraud [66] .

Also in cases where the bank has paid against forged or fraudulent documents, it may sue for damages from the beneficiary under the tort of deceit or claim the proceeds back as money paid out through a mistake of fact [67] .

The doctrine of strict compliance

Article 14(b) of the UCP 500 [68] requires the issuing bank and/or the nominated bank upon receipt of documents to determine on the basis of the documents alone whether they appear to be in compliance with the terms and conditions of credit [69] . This principle is adopted under the English Common Law principle which requires that the documents must strictly comply with the terms of the credit [70] . The bank may straightaway refuse to take up the documents if they do not appear to be in strict compliance or conformity. [71] UCP 600 employs the expression, "complying presentation" which is defined in Article 2 as "a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice". Thus, apart from the terms and conditions of the letter of credit, a banker must also examine a document presented in light of the UCP and ISBP provisions. It bears re-iterating that the documents must comply on their face [72] ; the bank is only required to determine compliance on the basis of the documents alone, it is not required to examine or investigate the form, genuineness, accuracy or legal effect of the documents. A tender of documents which properly read and understood calls for further inquiry or are such to invite litigation are a bad tender [73] .

In the doctrine of strict compliance the tender of documents that are similar are also not acceptable. In Equitable Trust Co of New York v Dawson Partners Ltd [74] it was laid down that

"It is both common ground and common good and common sense that in both the transaction the accepting bank can only claim indemnity if the conditions on which it is authorized to accept are in matter of the accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. The bank’s branch abroad, which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does not as it is told. It is safe; of it declined to do anything else, it is safe, if it departs from the conditions laid down, it acts at its own risk".

In Bank Melli Iran v. Barclays Bank DCO [75] it was held that the bank was wrong to accept documents because they were inconsistent with each other.

Thus is well settled that before the beneficiary can enforce his claim against the issuing bank there must be strict compliance with the conditions expressly set forth in the letter of credit [76] .

Also in cases where there were certain customs being followed in the trade which resulted in deviation from compliance with the documents, the bank was entitled to refuse payment. In JH Rayner & Co Ltd v. Hambro’s Bank Ltd [77] the court held that, "It was quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of one of the thousands of trades for whose dealings he may issue a letter of credit". [78] 

The doctrine of strict compliance applies to all the contracts involved in the credit operation and must be hence observed by the buyer who procures the issue of the credit; the seller wishing to claim payment under the credit; the paying bank that seeks reimbursement from the issuing bank and the issuing bank that claims reimbursement from the buyer [79] .

The fact that the discrepancy is minor or that stipulations in the letter of credit might appear to the bank to serve no useful purpose is irrelevant. In Seaconsar Far East Ltd v. Bank Makazi Jomhouri Islami Iran [80] the courts laid down the rule as to the specificity of documents for the credit, however trivial they might appear. It was held that

"The bank was entitled to reject the documents as the credit number and the name of the buyer could not be treated as trivial, since they are specifically required".

Hence any defect, even though apparently slight, will therefore justify the bank in refusing to accept drafts presented to it under a letter of credit when they are not drawn in strict accordance with the terms of the letter of credit or are not accompanied by the prescribed papers, that the conditions in the letter are onerous or might have been different is no excuse for noncompliance


This requirement is reasonable and necessary for the protection of the bank issuing the letter of credit since it runs the risk of being refused reimbursement if it pays on terms other than those specified in the letter and its customer suffers thereby [82] .


Uniform Customs and Practices for Documentary Credits, eUCP and International Standard Banking Practice (ISBP)

In international trade almost all documentary credits are expressed to be subject to the UCP published by the International Chamber of Commerce. The UCP were later supplemented by the eUCP for electronic presentation. Until 1983 the UCP were confined to documentary credits in their true sense, that is, credits under which the issuing or confirming bank is the party primarily liable and therefore the first port of call for payment. In the 1983 revision the UCP were extended to standby credits, in which the bank’s payment undertaking, though primary in form, is not properly invoked unless the principal has defaulted [83] .

The eUCP are concerned not with the electronic issue of letters of credit, for which there is a well-established practice, but with presentation of electronic records either alone or with paper based records. When fully developed, a system of electronic presentation will have a number of advantages, allowing the beneficiary conveniently to present documents directly to the issuing bank instead of to an advising bank or confirming bank, and providing an automated system for the checking of documents, which is currently a laborious manual process, thus saving labour and reducing the currently high percentage of discrepancies. But it is likely to be many years before electronic presentation comes into general use.

The International Standard Banking Practice (ISBP) for the examination of documents under documentary credits is a practical complement to UCP 500 designed to bring uniformity of standards into documentation examination. [84] 


A documentary credit is held together by a series of interconnected contractual relationships. Firstly it consists of the underlying contract between the buyer and the seller. Secondly, the contract which comes into existence is when an issuing bank agrees to act on the instructions of the buyer. The third type is that of, when an correspondent bank agrees to act as per the issuing bank’s instructions and advises or confirms a credit. The last type is that when the payment undertaking given to the seller by the issuing and confirming bank and its correspondent [85] 

The contract of Sale

Contract between the buying and issuing bank

The issuing bank must generally

Forms of Documentary Letters of Credit

When a formal instrument is issued, rather than a mere cable advice, it is usually on the form of the issuing bank, addressed to the beneficiary (seller), authorizing him to draw on the issuing bank for account of the purchaser of the goods up to an amount named, available by his drafts at sight or on time, when accompanied by the specified documents. It may require that the bills of lading be made out to the order of the issuing bank. thus giving it the title to and control of the goods as security for its advances. Particulars in regard to the insurance required may also be stated, with a requirement that the drafts must show on their face that they are drawn under this letter of credit of the issuing bank, identifying it by its number. The credit, if irrevocable, then ends with substantially the following clause:

"We hereby agree with bona fide holders that all drafts issued by virtue of this credit and in accordance with the above stipulated terms shall meet with due honor upon presentation at the office of [the issuing bank] if drawn and negotiated on or before [the agreed date]."

It is obvious that this instrument contemplates payment only against documents. The seller of the goods draws his draft, attaches thereto the documents required, and takes them, with the letter of credit, to his own bank, which, if satisfied that the terms of the letter of credit have been complied with, discounts his draft, and usually endorses the amount of any draft so discounted on the back of the letter of credit, which, if the draft does not exhaust the credit, is returned to the beneficiary. The seller thus receives his pay at once and is through with the transaction. The bank discounts the drafts, without ever seeing the goods, taking the specified documents as evidence that the goods called for have been shipped. In the same way, the issuing bank must honor the drafts when presented to it with the required documents, without regard to the quality or location of the goods. The necessity for conducting the transaction in this way is obvious. The banks are not dealers in goods and may be wholly unfamiliar with the commodities for which they pay. The drafts and documents may arrive at the office of the issuing bank long before the goods arrive in port. For instance, in the case of sugar shipped by a freighter from Java to New York, the draft and documents may be transmitted by mail across the Pacific and may arrive in New York before the freighter has passed the Suez Canal. Both the discounting and the issuing bank, however, must scrutinize the documents with care, to make sure that they comply with the requirements of the letter of credit, since, if they do not, they will not be entitled to reimbursement of the funds paid out [86] .

UCP for documentary credit:

The Uniform Customs and Practice for Commercial Documentary Credits comprise what are called "provisions, definitions, interpretations, etc.," none of which aspects can be said to be exhaustively treated. These are subdivided into General Provisions, Form of Credits, Liability, Documents, Interpretation of Terms, and Transfer [87] .

Although it is common for contracting parties to choose the UCP to "govern" the letter of credit, and indeed for courts to refer to the UCP as ‘governing’ the letter of credit, UCP is in no sense the law applicable to the letter of credit transaction. The UCP is not and is not intended to be a complete code on the rights and liabilities of the parties, and has to be applies against the background of a general system of private law. [88] The UCP apply only if the parties have expressly incorporated them into their contract [89] . Article 1 of the UCP 600 makes this clear [90] . Hence, these Customs bind only those banks which subscribe and not banks which do not, nor importers and exporters except to the extent to which they agree, or are required by issuing banks to subject themselves, to them when making application for credits. [91] 

Even where the UCP are adopted specifically or generally, the parties are at liberty to contract out of them, or to exclude the operation of specific parts, as is clearly expressed in Article 1, quoted above. [92] 

The UCP has also issued the International Standard Banking Practice (ISBP) [93] in order to supplement the UCP and to provide guidance on examining documents presented under letter of credit.

UCP 600 contains fewer articles than its predecessor, UCP500, the number being reduced from 49 to 38. Amongst its changes are the introduction of separate articles covering definitions [94] and interpretations [95] , with the object of making the UCP easier to understand and use, as well as the elimination of phrases such as "reasonable time" and "on its face".

Legal Validity of UCP as Customs

Legal Status of the UCP

From all this it appears likely that so far as a large part of the continent of Europe and the United States of America are concerned, the courts of law would treat the Uniform Customs, where they are not contradictory to its terms, as read into a documentary credit contract 'between banker and banker or banker and buyer. Shortly, the Uniform Customs are not law; if included in credit contracts expressly or by reason of the general adherence to them of parties to the contract they are suppletory and binding on them. They would be so regarded by a United Kingdom court if they were adopted by the British banks.

Almost invariably, the different contracts initiated by the Buyer’s application to open a credit will be expressed to be subject to the UCP. The traditional view in England is that the UCP are simply a set of standard rules having no legal force except so far as incorporated by reference into the contract between the parties concerned. These accords with the text of the UCP itself. Upon this basis, no contracting party is bound by the UCP unless the contract expressly or impliedly so provides. By contrast, certain writers in other countries have described the UCP in more elevated terms, as a code, a codification of usage or even a uniform law of an international character operative of its own force without dependence on incorporation by somewhere between the two extreme positions. As Professor Kozolchyk has pointed out in his superb comparatively study, the text of the UCP is neither systematic nor comprehensive enough to warrant the legal characterization of a "code"

There are many facets of relationships between the various parties on which the UCP are silent and which have to be answered by reference to the common law. It seems equally exaggerated to refer to the UCP as an international uniform law. On the other hand, to regard the UCP as a set if model rules which have no significance for the parties unless adopted by their contract is to take to narrow a view of their standing

In the first place the UCP embody, in considerable measures, usages which have gained international acceptance among bankers. Hence when where they have no contractual force they are strong evidence of banking customs and practices, which themselves will be readily be treated by the court as impliedly incorporated into the various documentary credit contracts as established usage. Of course, the UCP are not, and are not intended to be, purely declaratory of existing practices, for these vary somewhat from one country to another and, indeed from one locality to another, and a primary objective of the UCP is to produce consistency and to remove difficulties created by bad practice. Moreover the UCP are revised from time to time in order to eliminate weaknesses and accommodate new developments and are thus intended to be normative in some measure. But in so far as the UCP have gained near-universal acceptance, it can reasonably be assumed, in the absence of evidence to the contrary that even if a rule in the UCP does not embody what was previously settled practice, the practice will have become broadly uniform as the result of the rule, so that if at the relevant time the rules have been in operation for a reasonable period, they will have become indicative of prevailing practice.

But we can reasonable go a stage further and instead of treating the UCP merely as evidence of usage impliedly incorporated into the contract, regard them as directly incorporated but implication into the contract on the basis that their adoption is so much a matter of course that the parties must be taken to have intended to contract with reference to them even if the contract does not state this in terms and even if one of the parties (e.g. a non-banking party such as Buyer or Seller) was not aware of the UCP.

The place of UCP in the hierarchy of binding sources is a complex question which cannot be examined in detail here. Suffice it to say that so far as English law is concerned the UCP are contractual in nature are subordinate to mandatory legislation may be excluded or restricted by contract and if incorporated into the contract, are, as a set of contractual terms, subject to the court’s normal powers, at common law and by the statute, to adjudicate upon the enforceability of contractual provisions [96] .

The nature and enforceability of the bank’s promise

An irrevocable credit binds Issuing Bank wherein the bank must pay on tender of correct documents by the seller and that it should not be concerned with the terms of the contract [97] , and the confirmation of a credit binds Advising Bank, upon issue of the credit, that is, upon its release from the control of the issuer or confirmer, irrespective of the time it is delivered to or received by, the beneficiary, seller. If the credit is rejected by Seller, e.g. because it does not conform to the contract of sale, it ceases to have effect.

Though there is no reported case since the adoption of the ‘irrevocable’ label in which point has directly arisen for determination, there are several dicta indicating judicial acceptance of the binding nature of the credit by virtue of the issue of the document. Similarly, it is accepted that Issuing Bank and that Advising Bank, as Conforming bank become committed to the second beneficiary under a transferable credit upon issue of the new letter of credit to him. The problem is to reconcile the binding nature of the bank’s undertaking with traditional concepts of general law, which deny legal effect to a simple promise unless consideration is furnished by the promise, producing a contract, or the promise is induces to act in reliance on the promise, generating some form of estoppel. The difficulty created by the undertaking embodied in an irrevocable letter of credit is that it appears to be binding on the issuing bank and enforceable by Seller, despite the fact that Seller has furnished no consideration for the Issuing Bank’s promise and, indeed, may not have taken steps to act upon it nor even have signified his assent to its terms. The same applies to Advising Bank’s confirmation. How, then can the bank concerned become bound to the beneficiary solely by virtue of the issue of the letter of credit to him?

Various ingenious theories have been advanced designed to accommodate the binding nature of the bank’s undertaking within the framework of traditional contract law. All of these fall to the ground because in an endeavor to produce acceptable theoretical solution, they distort the character of the transaction and predicate facts and intentions at variance with what is in practice done and intended by the parties. The defects in these various theories show undesirability of trying to force all commercial instruments and devices into a strait jacket of traditional rules of law. Professor Ellinger has rightly argues that the letter of credit should be treated as a sui generis instrument embodying a promise which by mercantile usage is enforceable without consideration. Professor Kozolchyk takes the description a stage further, treating a letter of credit as a new type of mercantile currency embodying an abstract promise of payment, which like the bill of exchange possesses a high though not total immunity from attack on the ground of breach of duty of Seller to Buyer [98] .


It is almost a consensus that documentary credits are one of the most frequently used instruments of payment in international trade and that this instrument has existed for more than 100 years. Documentary credits provide the exporter with an independent bank undertaking of payment. The buyer is certain that the payment will not be made unless the seller presents documentary evidence concerning the merchandise. A documentary credit traditionally does not have any legal force but were simply a simple set of standard rules. The place of UCP in the hierarchy of binding sources is a complex question which cannot be examined in detail here. Suffice it to say that so far as English law is concerned the UCP are contractual in nature are subordinate to mandatory legislation may be excluded or restricted by contract and if incorporated into the contract, are, as a set of contractual terms, subject to the court’s normal powers, at common law and by the statute, to adjudicate upon the enforceability of contractual provisions.

The banks also have various liabilities and rights under a documentary letter of credit. The doctrine of strict compliance applies to all the contracts involved in the credit operation and does not allow for banks to deviate from any documents. It straightaway allows the banks to reject non-conforming documents. Another primary function of the letter of credit is to create an abstract payment independent of the contract of sale. The autonomy of the credit rule closely resembles that of a bill of exchange, and the courts have shown an equal reluctance to allow the personal claims and defenses of the buyer under the underlying contract of sale to be set up by the bank as an answer to a claim by the seller on the letter of credit. Also the bank does not have to verifying the physical state of the goods if any other facts external to the documents, so also it is not responsible for ensuring the accuracy, genuineness or authenticity of the documents but must simply exercise reasonable care to ensure that these appear to be in order. Also it is not the bank’s duty to investigate allegations or suspicions of fraud. It is entitled to pay in the absence of compelling evidence of fraud, but is equally free to withhold payment on mere suspicion, provided that in any proceeding brought against it by the beneficiary, the bank is then able to establish fraud. Thus the banks help facilitate the process of Letters of Credit by various means.

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