The Problem Of Rejecting Documentary Letters Of Credit Law International Essay

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02 Nov 2017

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In my own opinion, the documentary letter of credit is the lifeline of International commerce. International commerce has numerous risks, and this is because business men trade with people that they are not familiar with each other. On this basis, there must be lack of trust. The documentary letter of credit is issued by a financial organization, and it assures the seller, that the person buying his or her products will pay for them (Head, 219). This document provides a guarantee that the seller, will get the proceeds of his sale, even if the buyer fails to pay for the products. On this basis, the risks that the buyer will fail to pay, rests with the bank that issued the letter of credit.

This letter, also assures the buyer that the goods under consideration meet the expected standard, and are of high quality. On this basis, the documentary letter of credit facilitates trade. International commerce involves the movement of goods and services across the borders. When there is an exchange of these goods and services across the borders, then there must be some compensation, normally in terms of money. When payment does not occur, then this frustrates the notion of International Commerce (Collyer, 76).

This letter ensures that the seller receives his payment because it makes it possible for the buyer to secure the financial resources, before exporting the products under consideration. This letter also ensures that the buyer does not refuse to pay for the products under consideration, because of low quality goods, or a complaint against any aspect of the product (Head, 229). This is because the bank that issues the letter of credit ensures that the goods under consideration meet the expectations of the buyer, and are of high quality.

Whether UCP 600 solve the problem of rejecting documentary letters of credit:

Article 14 of the UCP 600 provides a standard, upon which the issuing and the confirming banks must follow in order to identify if the goods under consideration meet the expected standards. For instance, article 14 (1) denotes that the banks must determine, if by looking at the documents presented, the goods under consideration comply with the terms of the people engaging in internal commerce (Head, 231). Article 14 (5) further goes on to denote that the description of the goods and services contained in the invoice, must not conflict with the description of the goods and services contained in the letter of credit (Collyer, 33).

By following this provision, it would be very difficult to reject a letter of credit with the pretense that the goods do not comply with the standards agreed up by the seller and the buyer. However, in my opinion, this article has many loopholes, and risks might arise that the goods under consideration do not comply with the established standards.

For instance, article 14(4) denotes that data contained in the documentary letter of credit must not be identical with the practices established by the International banking standards. This section denotes that the information can be presented in a general term. This is a loophole that unscrupulous business men can use as a means of providing products that do not comply the agreements that they had with the buyer.

Article 15, of the UCP 600 makes it mandatory for the banks to comply with the letter of credit, if they are sure that the trader under consideration has managed to sale the products that comply with the terms and conditions of the buyer. For instance, article 15 (1) denotes that must honor and comply with the documentary letter of credit it issued after ascertaining that the seller complied with all the requirements of the buyer.

This article mainly concerns itself with the confirming, issuing and the nominated banks. It is important to involve the buyer in this process, because it is him who made the order, and can confirm if the goods under consideration comply with his agreements with the seller. Of course some would argue that the buyer might refuse to accept the goods, even if they do comply with the standards agreed upon by the seller.

On this basis, the buyer should just act as confirming agent, and should not have the authority to decide whether to accept the products or not. Article 16 identifies situations when the issuing bank can decide to dishonor its letter of credit, and the resulting steps that the nominated bank should take. In my own opinion, this article 16 should have contained a provision, which prevents the issuing bank from dishonoring the letter of credit it issued in circumstances when the products under consideration do not comply with the standards agreed upon between the buyer and the seller (Head, 219).

The provision contained is that the banks need to approach the seller, and find out why the goods do not comply with the set up standard, and if it is by choice, then they should refuse to pay, but if it is by default, then the issuing bank should allow the seller to correct his/her mistakes and export products that comply with the buyers descriptions. Despite these shortcomings, articles 14, 15 and 16 help to larger percentage in minimizing instances whereby the issuing bank fails to honor the documentary letter of credit it issues.



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