LETTERS OF CREDIT

Letters of credit also known as documentary or commercial credits.

They are better alternatives to a documentary bill

Their popularity in International commerce has led judges to describe them as the life blood of international commerce. Read Harbottle v National West Minister Bank

Their origins have been traced to various ancient cultures such as that of Roma, Egypt and China.

In Modern times, reference to letters of credit in England can be found. Read Pillans v Van Mierop

LAW RELATING TO LETTERS OF CREDIT

The feature common to all types of letters of credit is in accordance with the agreement between the seller and buyer in the contract of sale ( the underlying contract )

The buyer arranges that payment is made by a bank, normally at the seller’s place on presentation of specified documents.

On presentation of the documents the bank pays the purchase price according to the terms of the credit.

The essence of the letters of credit transaction is its documentary character ie where the goods are represented by a bill of lading; this document of title is used as a mean of financing the transaction. Read: United City Merchants Ltd v Royal Bank of Canada

The paying banker is prepared to pay the exporter because it holds the documents as collateral security.

Read: Article 1,2,3 and 4 of the Uniform Customs And Practice Of Documentary Credits (UCP)

STAGES IN A DOCUMENTARY CREDIT TRANSACTION

* Stage 1: The exporter and the buyer agree in the contract of sale that payment shall be made under letters of credit. Read: Kronos Worldwide Ltd v Sempra Oil Trading

*Stage 2: The buyer ( applicant ) applies to the bank ( Issuing Bank ) to open a credit in favor of the seller ( Beneficiary )

The applicant will give details of documents required such as transport documents, invoice, insurance policy, certificate of quality and certificate of origin to the bank. Read: Articles 19,20,21,22,23 and 24 of the UCP

*Stage 3: The issuing bank will generally instruct a correspondent bank in the beneficiary’s country to advise the seller to open the documentary credit.

*Stage 4: The advising or confirming Bank will inform the beneficiary of the opening of the credit.

*Stage 5: On shipment, the seller will obtain the transport documents and other documentations as required under the credit such as certificate of origin and certificate of quality and present them to the advising bank.

The banks normally expect clean transport documents. A clean transport document is defined in Article 27 UCP

*Stage 6: The Bank will effect payment provided that documents conform.

*Stage 7: The advising Bank or the confirming Bank will forward the documents to and will be reimbursed by the issuing Bank which pass the document to the buyer and collect payment.

CHARACTERISTICS OF LETTERS OF CREDIT

* There are two main characteristics of letters of credit that is the principle of autonomy and doctrine of strict compliance

* Principle Of Autonomy

This means that the responsibility on the part of the issuing bank to pay the seller under the terms and conditions of the letters of credit is a separate obligation

The issuing bank must honor the payment under letters of credit irrespective of any problems or disputes that arise under the contractual transaction EXCEPT where fraud can be proven

Read: Article 4 and 5 of the UCP

Read: Hamzeh Malas and sons v British Imex Industries Ltd

Discount Records Ltd v Barclays Bank Ltd

* Doctrine Of Strict Compliance

Acceptance or rejection of the documents by the bank is dependent on whether the documents conform on their face to the terms of the credit.

If on their face, they are in strict compliance with the terms of the credit, the bank will accept the documents.

This is commonly known as the doctrine of strict compliance

Read: Equitable Trust Company Of NewYork v Dawson Partners Ltd

Rayner v Ham bros Bank Ltd

Hamzeh Malas and sons v British Imex Industries Ltd

David Kasingwire v Standard Chartered Bank Uganda

Uganda Commercial Bank v Makerere University Kampala

Read: Article 18,14,30 and 5 UCP

FRAUD EXCEPTION

Read: United City Merchants Ltd v Royal Bank of Canada

Edward Owen Engineering Ltd v Barclays Bank International Ltd

Harbottle v National West Minister Bank Ltd

Discount Records v Barclays Bank

Standard Chartered Bank v Pakistan National Shipping Corporation

Gill v Berger

Themehelp Ltd v West

TYPES OF LETTERS OF CREDIT

* Documentary letters of credit and Standby letters of credit

There are two main types of letters of credit, Documentary and Standby letters of credit

Documentary letters of credit are most common and are used on an individual transaction, order or invoice basis.

They generally have specific conditions applied to them such as being irrevocable by the buyer and confirmed by the bank.

Standby letters of credit are used as a back - up should the buyer fail to pay the contract price as agreed upon.

Standby letters of credit allows the buyer to ensure the security of the transaction with the seller.

* Revocable and irrevocable letters of credit

Read:Cape Absestos Co Ltd v Lloyd’s Bank Ltd

* Confirmed and unconfirmed letters of credit

* Revolving letters of credit

* Transferable letters of credit

* Back To Back Letters Of Credit

HK Mubiru 2020