Rights and Duties in a Letter of Credit Transaction

Rights and Duties in a earn of acknowledgement Trans live up toIntroductionThe earn of realization is the more or less usu e rattling last(predicate)y utilize regularity of wages for goods in supranational guile. This thesis highlights the derangement of the workoutds and duties of the parties in a earn of book of facts movement by emphasising deficiencies in the earns of ac credence dodge. In addition, on those beas where at that place is omit of jurist and equity and which fill the agreement of the garners of intuition indefensible for dishonorable activities.This thesis is organize in five chapters. First chapter after briefly discussing the structure of the earn of consultation arrangement, much(prenominal) as parties to the garner of assurance doing, kinds of earns of reliance, beat by meter procedure of the action, different geek of the documents manipulationd and the mutual defects in those documents, it as well explains clos e to the division of the luck low much(prenominal) a action and how the appli mountaints danger has increased infra UCP and very often the vendee is yielding(a) for the goods he had non lowtake for.Second chapter after brief discussion of the draught and reading material of the UCP, explains intimately the reluctance of the judicial dodges to intervene in order to difference the rights and duties of the parties in a garner of faith handwritingings, status of the UCP, scope of the desires duties and in addition the disavowal clauses under UCP. Chapter three explores the autonomy of the earns of belief, the article of belief of stern form and the ways in which the motor hotels deal with accusative film conformance. It boost considers that overcherishion of the emancipation belief, and the lack of bonnie c be on the part of patoiss provides opportunities of pretender to the venders to obtain allowance without actually performing their duties to s trands and vendees.Chapter tetrad explains shammer exclusion to the autonomy rationale in detail, the position of the fraud exception in England and the history of the English cases relating to the fraud. In addition it in like manner ensures the reasons for such an terrific increase in the snatch of cases relating to fraud. Finally, chapter five considers near of those orders, which stinkpot be used to avoid such an increase in fraud cases and too provides few suggestions to relief the rights and duties amongst all the parties to the earn of point of reference transaction.Chapter 1 organize of a garner of credence exertion moneymaking(prenominal)ized earn of assent energize a bun in the oven been used for the centuries as a most everyday method of pay, in foreign trade. garner of attribute used in outside(a) proceedings atomic number 18 governed by the International sleeping accommodation of Commerce render Customs and place for Documentary Cre dits (UCP).A commercial letter of credence is a driveual agreement in the midst of a jargon ( exit blaspheme), on behalf of one of its customers ( purchaser), authorizing a nonher aver (advising or electropositive bound), to exact recompense to the benefactive role ( trafficker). The number slang, on the practical exertion of its customer (buyer), opens the letter of book of facts, and sucks a commitment with the buyer to honour the conviction, if the documents presented by the benefactive role be conform to the cost and conditions of the de nonation. Thus, the outlet replaces the customer to prevail pay to the marketer.Elements of a garner of CreditAn childbed prone by put out rely to make paymentIssuing swear gives undertaking on behalf of a applierTo pay a stipulation occur of money to the venderOn presentation of needful documents under the letter of extension at heart a condition term as provided by the letter of opinionDocuments mu st be in contour to the harm and conditions of the letter of character referenceDocuments must be presented at a specified place provided by the letter of de nonationBeneficiary Beneficiary is comm scarcely the provider of the goods or services and is entitled to payment as keen-sighted as he burn down provide the conformist documents mandatory by the letter of deferred payment. The letter of ac de nonation is a distinct and wear transaction from the central capture ( engage amongst marketer and buyer). All parties deal in documents and non in goods. The publicize rely is not liable for the writ of execution of the primal drive between the buyer and trafficker.The exit affirms responsibleness to the buyer-appli freightert is to examine all documents to check off that they be in compliance with the scathe and conditions of the reference. To pass water the payment it is for the beneficiary to provide all the take documents. If the marketer-beneficiary conforms to the letter of quote, the seller must be paid by the blaspheme.Issuing lodgeletter of credit wholly concerns with the documents, not with the goods, on that pointfore the occupation of b ar depose to pay to the beneficiary and than to be reimbursed from its customer leave alone only be completed upon the goal of the damage and conditions of the letter of credit. Under the viands of the coherent Customs and Practice for Documentary Credits, the brim is entitled to confuse a reasonable clipping after receipt of the documents from the beneficiary, to examine the documents and then to make the payment.The issuing confide provides a see to the seller that if the documents presented by the beneficiary argon in compliance with the call and conditions of the credit, then the imprecate allow make the payment to the seller. Generally the documents presented include a commercial circular, snout of lading or airway bill and an insurance document etceteraAdvisin g imprecateAn advising fixing concern is commonly a foreign equivalent commit of the issuing strand which advises the seller-beneficiary. Generally, the beneficiary wants to use a local coast to insure that the letter of credit is valid. In addition, the advising situate is responsible for direct the documents to the issuing till. The advising lingo has no opposite financial obligation under the letter of credit. accordingly, if the issuing depose does not pay the beneficiary, the advising trust is not obligate to pay.Confirming BankAt the request of the issuing entrust, the correspondent bound whitethorn establish the letter of credit for the seller-beneficiary and obligates itself to insure payment under the letter of credit. The substantiative money box is usually the advising curse. in that respect argon 2 main pillow slips of garners of credit(1) voidable(2) Ir voidableRevocable Letter of CreditRevocable letter of credit is not a commonly used pill ow slip of the letters of credit. This type of letter of credit can be revoked by the issuing slang at m whatever(prenominal) time, without poster to the beneficiary, for whatever reason. much(prenominal) type of letter of credit can not be sustain by the correspondent sticking concern and the shore go out act as an advising margin only.A revocable letter of credit can not be revoked after the presentation of the documents, if the documents ar conform to the toll and conditions of the letter of credit and the payment has been made. sealed Letter of CreditUse of irrevocable letters of credit is very common in international trade. Irrevocable letter of credit can not be revoked or changed without the go for of the beneficiary. Issuing bank give make the payment to the seller, if the seller presents the documents complying with the terms of the credit, as hold between seller and buyer. such(prenominal) a letter of credit can only be changed with the license of both b uyer and seller. If it is not unresolved from the letter of credit that whether it is revocable or irrevocable, it automatically considers as irrevocable.Irrevocable letters of credit argon of two kindsun support creditIn case of un affirm letter of credit, advising bank does not confirm the credit to the seller and the issuing bank is the only political comp some(prenominal) responsible for payment to the beneficiary. Advising bank go away only pay to the seller after give out payment from the issuing bank and at that place is no jeopardy for the advising bank.Confirmed creditIn this type of credit, advising bank confirms credit to the seller. When the advising bank confirms that the documents presented be conforming to the terms of the credit, it volition make the payment to the seller, and after that advising bank will contact with the issuing bank to get the payment. This type of letter of credit is commonly used, when the seller is unfamiliar with the issuing bank. Su ch a type of letter of credit is quite dear(predicate) be courting the banks remove round obligation.Step-by-step processIn international trade as the buyer and seller are in different countries so when the buyer and the seller of the goods agree to conduct business, than because of the falling out of time between delivery of goods and the payment, usually the seller wants a letter of credit as a guarantee of payment from the buyer. Than the buyer makes a request to his bank called the issuing to open a credit in the favour of the seller. at the request of the buyer, issuing bank stretch outs a letter of credit in favour of the seller and forwards it to the corresponding bank called the advising or conforming bank., which is usually located in the sellers country.Advising bank than each confirms the credit or not, depending upon the type of credit, and forward it to the seller. vendor than ships the goods and collects the documents required in order to meet the requirements of the letter of credit and in the long run to get the payment in time. Seller presents the required documents to the advising or plus bank in order to get the payment in time. Advising or confirming bank examines the documents presented by the seller to check that whether they are conforming to the terms and conditions of the letter of credit.If the documents are in compliance, advising or confirming bank, in case of support letter of credit, will make payment to the seller and will be reimbursed from the issuing bank and in case of unconfirmed letter of credit, advising or confirming bank will forward the documents to the issuing bank. Than the Issuing bank will, after examine of the documents, debit the buyers account if the documents are in compliance to the terms of the letter of credit. In the end, Issuing bank forwards the documents to the buyer. or so commonly used documents in a letter of credit transaction includeCommercial InvoiceThis includes description of the goods, their price, fob origin, and name and words of the buyer and the seller. The buyer and seller information must be in compliance with the description provided in the letter of credit. broadsheet of LadingIt is a document which shows the receipt of goods for shipment by a freight mailman. It is an evince of the control of the goods and likewise acts as an evidence of the carriers obligation to transport the goods to their good destination.Warranty of TitleA warranty given by a seller to a buyer of goods that states that the title being conveyed is good. It is ordinaryly comebackd to the buyer.Letter of IndemnityIt is a letter specifically indemnifies the purchaser against a authoritative stated circumstance. Indemnification is generally used to guarantee that shipping documents will be provided in good order when available. leafy vegetable Defects in the documents presentedA discrepancy is roughwhat defect in the documents presented by the seller, which show their non-com pliance with the terms of the letter of credit. Issuing bank can not change the terms and conditions of the letter of credit with out t he permission of the buyer. whence to avoid whatever see to it in getting payment. Beneficiary should be careful in preparing the required documents. Common defects in the documents presented by the seller includeIf the description of the goods is not consistent.There is some victimizedoing in the insurance documents.If the draft amount is not pit to invoice amount. core and destination ports are not aforeextensioned(prenominal) as provided by the letter of credit.Merchandise description is not kindred as in the credit.If whatsoever of the documents required by the credit is not presented.Documents are generally conflicting such as quality, etc.If the names of the documents required are not correct, as mentioned in the credit.Invoice is not sign as provided in the letter of credit.If prior to the presentation of the draft, Letter of Credi t has expired.If the watch mention in the bill of lading is different from the date stated in the credit.If on that point are some changes in the invoice which are not authorized by the letter of credit.In international changes, as the seller and the buyer are in different countries, there is a common problem of payment due to the difference of time between ship and delivery. Obviously, seller would like to know payment for the goods when delivering them to the carrier and the buyer would favour to delay the payment of the price until receipt of the goods. Therefore, a letter of credit solves this problem between the seller and the buyer.Generally, there are three separate transactions in a letter of credit transaction. The prototypical coarse is between a seller and a buyer, called an central transaction, by which the seller provides promise goods to the buyer. The bit transaction is between the buyer- applier and the bank (is work onr of the letter of credit), in whi ch the bank relinquishs a letter of credit to the seller-beneficiary.Finally, the letter of credit itself creates a kin between the issuer and the beneficiary, in which, the issuer makes payment for goods upon the beneficiarys presentation of the required documents, in accordance with the terms and conditions of the letter of credit as agreed between seller and buyer. The banks surgical procedure of payment is qualified on the delivery of conforming documents by the beneficiary. The banks are called issuers and are usually the applicators bank.Normally the issuing bank opens a letter of credit in its own name and requests its correspondent bank to give the axe the seller about the letter of credit. Sometimes, the issuing bank asks the correspondent bank not only to inform the seller of the issuing banks undertaking provided also to add a confirmation. In this case, the credit is known as a confirmed credit and the correspondent bank as a confirming bank.The payment obligation of the issuing bank depends upon the beneficiarys presentation of complying documents to the confirming bank or to every other nominated bank, in accordance with the terms and conditions of the credit. Under general practice, presenting complying documents agency that they comply with the conditions of the credit on their stage. From banking point of view, compliance on their face of the presented documents is sufficient. The independence principle (which will be discussed later) is the primaeval principle of the letter of credit arrangement, which prohibits banks from looking beyond facial compliance of the documents, and thereof exclude whether or not there is actual exercise by the seller-beneficiary.In fact, letters of credit system has emphasised the independence principle to such an extent that banks are ignoring the cognitive process of the primal contract very confidently. As a result, all the pretend is on the serious buyers, who are sometime paying for goods t hat they had not promise for.Importance of the lookThe saucer-eyed purpose of the letter of credit system is to facilitate international trade, sort of than to provide an opportunity to the banks to make profit. As the fraud is very common in these days, merely UCP is not designed to foresee fraud. The number of frauds relating to the letters of credit has increased over the years. Buyers are particularly vulnerable to such practices under the letter of credit system. This speckle shows that there is some ambiguity in the letter of credit system and a lack of balance between the rights and duties of the parties to a letter of credit transaction, which is being put-upon very easily by fraudsters.Division of adventure under a Letter of Credit TransactionAs we have discussed above, a letter of credit transaction consists of three linked but independent contracts. The first step is that the buyer makes a contract with the seller for the sale of goods, called the fundamental c ontract. Subsequently the buyer signs an application form requesting the bank to open a credit, which is an arrangement between the buyer and the bank. The third step is that the issuing bank informs the seller, who is the beneficiary of the letter of credit, of the credit and promises to pay against the peg downd documents provided the terms and conditions of the credit are met.The letter of credit allocates risk between the applicant and the beneficiary. By postulating a letter of credit, the beneficiary may greatly squeeze the risk of not being paid and ultimately allowing the beneficiary of the letter to reallocate the risk of non-payment for delivered goods which do not conform to the underlying sale contract.Generally, banks are indisposed to dishonour a credit, since to do so may damage the banks reputation as a credit issuer. The cost of honour, however, locomote on the honest applicant, not the bank. If the beneficiary has infracted the underlying transaction, payment under the credit to him will occasion hurt, but that loss will not be the banks it will be the applicants. enlarge in the applicants risk and falling off in the banks risk under UCPUCP is the organisation legal philosophy of the letters of credit, consequently there should be a balance regarding the rights and duties of the parties, but UCP withdraws rules that reduce bank risk. There is no provision asking for juridic intervention to chastise letter of credit parties in case of banks negligence. The edible in favour of banks fall into two categories. The first provides sweeping electrical resistance from liabilities that national legal systems may impose.Example of such a disavowal is obligate 15. Under name 15, banks assume no indebtedness for the genuineness, deception or legal effect of both documents and therefore the issuer is immune from the liability for paying against forged documents, which on their face egress regular. Therefore, the payment by the issuing bank does not show that the buyer has received the goods, which he had promise for. The security, which the beneficiary is getting under the letter of credit system is not the same with the security of the buyer.The second home of pro-bank alimentation check offs rules that go down precise boundaries on what the banks must do, which reduces uncertainty about bank function and provides displace guidance to bank employees. For example, the customer cannot stipulate non-documentary conditions of payment, and time limits on examination of documents are fixed rather than open-ended.In case of any(prenominal) loss, the buyer, which is the applicant for a credit, can take action against the seller for gap of contract or fraud, but has no right of action against the bank for banks negligence in examining the documents, which can be baseless for several reasons, such as insolvency of either the applicant or the beneficiary. and then the burden of risk on the applicant is more than any political party in a letter of credit transaction and in most of the cases, buyers are paying for the goods, they have not contracted for.Chapter 2UCP and letters of creditOriginally UCP has been drafted by the Banking explosive charge of the ICC, which was comprised of the representatives of the banking community, which shows the federal agency of the banks and banking experts. Their dominance in UCP drafting, hints that in drafting UCP, ICC was acting as a private legislature. It looks that the rules contain in the UCP are much beneficial for the banks than any other party, and freehand a limited chance to the judiciaries to intermeddle to protect customers from any careless behaviour of the banks.The authority to interpret the UCP rests in the ICC Commission on Banking proficiency and Practice, which can hand these interpretations to solve the problems arising in any case. Because of wide packaging and distribution of relegations serve wells, their interpretation c an be considered as an official interpretation of the UCP.Commission can enhance, interpreting, and sometimes amend the provisions of the UCP. The banks which deal with the letters of credit, act upon these interpretations and any amendments. As in theory, commission is only answerable to ICC members, therefore the chances of any scrap to such interpretation is very low.Role of courts in balancing the rights and duties of the partiesIn Discount Records Ltd. v. Barclay Bank Ltd., the judge was reluctant to interfere with bankers irrevocable credit and not least in the sphere of international banking. The position is same in umpteen other cases. The apparent reason for the reluctance of the settle to interfere looks that they are afraid from the threats of the banking experts that their decisions would have an unfavourable affect on international trade. The difficulties of the courts to balance the rights and duties of all parties to a letter of credit transaction have increased.In Mannesman Handel AG v. Kaunlaran Shipping Corporation, the Swiss bank argued that the bank was in rejecting the documents by the German company relying on the independence principle and the discrepancies bulge outed on the documents. The court was asked not to apply the good faith principle otherwise the court would be calculated to undermine if not get down the doctrine of strict compliance and to blur if not extinguish the attribute between transactions concerning goods and transactions concerning documents.Normally the judicial decisions relating to the legal fonts of documentary credits base on either the express intentions of the parties or realised business practice at the time, the parties entered in a contractual relationship. In cases where the UCP provisions are different from business practice, a court will apply the UCP if the UCP is corporate in the contract of the parties. It shows that courts have assented to the entire documentary credit system being run by th e banking industry and in the end abstaining the courts to intervene to balance the legal rights and duties amongst all the parties.Should the UCP have the status of fairness?Leading assimilator Professor Ross Buckley says originally, the UCP was neither designed nor intended to be law. It was prepared as a set of pattern terms to be incorporated by reference into letters of credit by those parties who chose to do so. This has also been confirmed by the UCP in the preface of UCP ergocalciferol, which states that the UCP is not formula but a compilation of rules made by bankers for their own industry.Therefore there is a dispute as to whether the UCP is a code of the law, or just customary practices, or some mutually consented regulations relating to letters of credit. heretofore in fact, UCP is the governing law of the letters of credit.The Scope of the Banks DutiesBefore analysing the phrasing of the disclaimers used, the scope of the duties undertaken by the banks involved must be identified. Whereas the type of credit and the documentary stipulations in this will usually have been negotiated by the commercial parties and included in their sales contract, the terms and conditions under which a bank undertakes to open a documentary credit will normally appear in the banks standard application form which the importer will be required to complete.Although the application would normally refer to the UCP, it is cardinal to note that the provisions of the UCP would not automatically apply in English law if not expressly incorporated by the parties to the credit and, even if expressly incorporated, its provisions can be excluded, or modified by the express terms of the credit.The duty to issue an legal creditThe importers failure to win the issue of a documentary credit which conforms to the terms of the sales contract may be treated by the exporter as a breach of a condition precedent to his process and a repudiation of the contract by the importer. Wh ether the applicant can sue the issuing bank in respect of its blameable failure to issue (or to issue in good time) a conforming and efficacious credit is, however, by no means clear.The duty to issue a conforming creditAn initial problem arises where the applicant requires the issue of a confirmed credit, that is, a credit in which a second bank, normally in the beneficiarys country, adds its own independent undertaking, to pay against the stipulated documents, to that of the issuing bank. Is the issuing bank in breach of contract towards the applicant if it is unable to procure the confirmation? The answer must depend upon the issuers conduct on receiving the application from the applicant.The second aspect of the duty to issue a conforming credit raises the question of liability for the acts of other banks involved in the transaction. Clearly, if the issuing bank opens a credit which specifies documentation other than that called for by the applicant, then in the absence of a d isclaimer it will be in breach of its contract with the applicant under the doctrine of strict compliance. The position should be the same where the issuing bank unreasonably delays issue of the credit so that the beneficiary incurs loss.A difficulty arises, however, when it is not the issuing bank itself which causes the error or delay in complying with the applicants instruction manual, but the issuers correspondent bank. The doctrine of privity of contract would appear to prevent contractual liability arising in this context. However, in any event, it appears that there is no reason for holding that, in the absence of a disclaimer an issuing bank should not be liable for the consequences of errors by its correspondents. trade to receive and examine documentsThe doctrine of strict compliance means that issuing banks which pay against non-conforming documents are in breach of their contractual obligations to the applicant. The issuer is not, however, a guarantor of the documents a bidance its duty is discharged by the exercise of reasonable care to curb that the documents comply on their face with the terms of the credit.Duty to make payment under the terms of the creditThe party with the primary interest in enforcing the banks obligation to pay against conforming documents is the beneficiary although it is clear that this obligation is also owed to the applicant. Furthermore, any variation of the payment terms would be a clear breach of contract.Duties of correspondent banksIn so far as the confirming bank gives an undertaking in exactly the same terms as the issuing bank, it all the way owes precisely the same duties to the beneficiary. However, since a confirming bank looks to the issuing bank alone for reimbursement, it may be prima facie unconvincing that it owes any duty to the applicant, even where the applicant is paying the confirmation fee. There are, however, some judicial dicta which might support the recognition of such a duty.Banks risk under UCP ( claim clauses) name 15 and 18 (b) of the UCP 500, limits the liability of the banks in a letter of credit transaction and which have almost made it a risk take over transaction for the banks. member 15 saysBanks assume no liability to or responsibility for the form, sufficiency, accuracy, genuineness, defence or legal effect of any document(s) or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s) or for the good-faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignee or the insurers of the goods or any other person whomsoever.Article 18(b) further statesBanks assume no liability or responsibility should the instructions they submit not be carried out, even if they have themselves taken the hatchway in the choice of such other bank(s). The UCP 500 places the applicant-buyer in an absurdly vulnerable position through its disclaimer clauses. To some extent there is a lack of duties on the part of the bank to verify the genuineness of the documents. Hence it might not be wrong to say that albeit there is a waste increase in the use of letters of credit, does not signify that the UCP is fairly drafted.Letters of credit and its usersIt is also very important that whether all the parties to the letter of credit, particularly applicant-buyer are intended about the carriage of these privileges, e.g. by providing a copy of these exemption clauses of the UCP or by swelled a notice of these exemption clauses. It is a rule that to enforce an exemption clause, a reasonable notice should be given to the other party but in practice, buyers are assume to have the notice of the UCP and that they are familiar with the provisions of the UCP.Further, the ap plication for the issuance of a letter of credit and the letter of credit document itself only contain a simple sentence Subject to UCP for Documentary Credits, without any attachment of the provisions of the UCP or any notice of such exemption clauses. Hence it is problematical that why the courts do not look, while dealing with the cases relating to the letters of credit, that whether a reasonable notice has been given relating to the exemption clauses and do not interfere to balance the rights and duties of the parties to a letter of credit transaction?Chapter 3doctrine of strict compliance and independence principleIt is a basic rule of the letter of the credit transaction and which is widely accepted that the letters of credit are transactions independent of the underlying contracts on which they are based. fit to this principle, the issuer has no concern with the underlying contracts between buyer and seller. Its concern is with documents only, rather than the goods or any type of services. Obviously there are some doubts about this principle, i.e. to what extent this principle should be applied. Which some tome may cause injustice to the applicant under certain circumstances.independency PrincipleGenerally, letter of credit is a contract between the issuer and the seller of the goods, which is independent of the underlying contract between the seller and the buyer. The independence principle is mentioned in Article 3 and Article 4 of the UCP. Article 3 states Credits, by their nature, are separated transactions from the sales or other contract(s), even if any reference whatsoever to such contract(s) is included in the Credit.Article 4 further saysIn credit operations all parties concerned deal with documents and not with goods, services and/or other performances to which the documents may relate.From the very starting line independence principle governs letter of credit transactions and very clearly states that the credits are completely separate f rom their underlying transactions and the issuer makes payment depending on the conformity of the documents presented according to the terms and conditions of the credit without considering the performance of the underlying contract by the beneficiary.Rights and Duties in a Letter of Credit TransactionRights and Duties in a Letter of Credit TransactionIntroductionThe letter of credit is the most commonly used method of payment for goods in international trade. This thesis highlights the imbalance of the rights and duties of the parties in a letter of credit transaction by emphasising deficiencies in the letters of credit system. In addition, on those areas where there is lack of justice and equity and which make the system of the letters of credit vulnerable for fraudulent activities.This thesis is structured in five chapters. First chapter after briefly discussing the structure of the letter of credit system, such as parties to the letter of credit transaction, kinds of letters of credit, step by step procedure of the transaction, different type of the documents used and the common defects in those documents, it also explains about the division of the risk under such a transaction and how the applicants risk has increased under UCP and very often the buyer is paying for the goods he had not contracted for.Second chapter after brief discussion of the drafting and interpretation of the UCP, explains about the reluctance of the courts to intervene in order to balance the rights and duties of the parties in a letter of credit transaction, status of the UCP, scope of the banks duties and in addition the disclaimer clauses under UCP. Chapter three explores the autonomy of the letters of credit, the doctrine of strict compliance and the ways in which the courts deal with documentary compliance. It further considers that overprotection of the independence principle, and the lack of reasonable care on the part of banks provides opportunities of fraud to the sellers to obtain payment without actually performing their duties to banks and buyers.Chapter four explains fraud exception to the autonomy principle in detail, the position of the fraud exception in England and the history of the English cases relating to the fraud. In addition it also examines the reasons for such an enormous increase in the number of cases relating to fraud. Finally, chapter five considers some of those methods, which can be used to avoid such an increase in fraud cases and also provides few suggestions to balance the rights and duties amongst all the parties to the letter of credit transaction.Chapter 1Structure of a Letter of Credit TransactionCommercial letters of credit have been used for the centuries as a most common method of payment, in international trade. Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (UCP).A commercial letter of credit is a contractu al agreement between a bank (issuing bank), on behalf of one of its customers (buyer), authorizing another bank (advising or confirming bank), to make payment to the beneficiary (seller). The issuing bank, on the application of its customer (buyer), opens the letter of credit, and makes a commitment with the buyer to honour the credit, if the documents presented by the beneficiary are conforming to the terms and conditions of the credit. Thus, the issuing replaces the customer to make payment to the seller.Elements of a Letter of CreditAn undertaking given by issuing bank to make paymentIssuing bank gives undertaking on behalf of a applicantTo pay a given amount of money to the sellerOn presentation of required documents under the letter of creditWithin a specified time as provided by the letter of creditDocuments must be in compliance to the terms and conditions of the letter of creditDocuments must be presented at a specified place provided by the letter of creditBeneficiary Benef iciary is normally the provider of the goods or services and is entitled to payment as long as he can provide the conforming documents required by the letter of credit. The letter of credit is a distinct and separate transaction from the underlying contract (contract between seller and buyer). All parties deal in documents and not in goods. The issuing bank is not liable for the performance of the underlying contract between the buyer and seller.The issuing banks obligation to the buyer-applicant is to examine all documents to insure that they are in compliance with the terms and conditions of the credit. To get the payment it is for the beneficiary to provide all the required documents. If the seller-beneficiary conforms to the letter of credit, the seller must be paid by the bank.Issuing BankLetters of credit only concerns with the documents, not with the goods, therefore the duty of issuing bank to pay to the beneficiary and than to be reimbursed from its customer will only be co mpleted upon the completion of the terms and conditions of the letter of credit. Under the provisions of the Uniform Customs and Practice for Documentary Credits, the bank is entitled to have a reasonable time after receipt of the documents from the beneficiary, to examine the documents and then to make the payment.The issuing bank provides a guarantee to the seller that if the documents presented by the beneficiary are in compliance with the terms and conditions of the credit, then the bank will make the payment to the seller. Generally the documents presented include a commercial invoice, bill of lading or airway bill and an insurance document etc.Advising BankAn advising bank is usually a foreign correspondent bank of the issuing bank which advises the seller-beneficiary. Generally, the beneficiary wants to use a local bank to insure that the letter of credit is valid. In addition, the advising bank is responsible for sending the documents to the issuing bank. The advising bank h as no other obligation under the letter of credit. Therefore, if the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.Confirming BankAt the request of the issuing bank, the correspondent bank may confirm the letter of credit for the seller-beneficiary and obligates itself to insure payment under the letter of credit. The confirming bank is usually the advising bank.There are two main types of Letters of credit(1) Revocable(2) IrrevocableRevocable Letter of CreditRevocable letter of credit is not a commonly used type of the letters of credit. This type of letter of credit can be revoked by the issuing bank at any time, without notification to the beneficiary, for any reason. Such type of letter of credit can not be confirmed by the correspondent bank and the bank will act as an advising bank only.A revocable letter of credit can not be revoked after the presentation of the documents, if the documents are conforming to the terms and conditions of th e letter of credit and the payment has been made.Irrevocable Letter of CreditUse of irrevocable letters of credit is very common in international trade. Irrevocable letter of credit can not be revoked or changed without the consent of the beneficiary. Issuing bank will make the payment to the seller, if the seller presents the documents complying with the terms of the credit, as agreed between seller and buyer. Such a letter of credit can only be changed with the permission of both buyer and seller. If it is not clear from the letter of credit that whether it is revocable or irrevocable, it automatically considers as irrevocable.Irrevocable letters of credit are of two kindsUnconfirmed creditIn case of unconfirmed letter of credit, advising bank does not confirm the credit to the seller and the issuing bank is the only party responsible for payment to the beneficiary. Advising bank will only pay to the seller after getting payment from the issuing bank and there is no risk for the a dvising bank.Confirmed creditIn this type of credit, advising bank confirms credit to the seller. When the advising bank confirms that the documents presented are conforming to the terms of the credit, it will make the payment to the seller, and after that advising bank will contact with the issuing bank to get the payment. This type of letter of credit is commonly used, when the seller is unfamiliar with the issuing bank. Such a type of letter of credit is quite expensive because the banks have some liability.Step-by-step processIn international trade as the buyer and seller are in different countries so when the buyer and the seller of the goods agree to conduct business, than because of the gap of time between delivery of goods and the payment, usually the seller wants a letter of credit as a guarantee of payment from the buyer. Than the buyer makes a request to his bank called the issuing to open a credit in the favour of the seller. at the request of the buyer, issuing bank iss ues a letter of credit in favour of the seller and forwards it to the corresponding bank called the advising or conforming bank., which is usually located in the sellers country.Advising bank than either confirms the credit or not, depending upon the type of credit, and forward it to the seller. Seller than ships the goods and collects the documents required in order to meet the requirements of the letter of credit and finally to get the payment in time. Seller presents the required documents to the advising or confirming bank in order to get the payment in time. Advising or confirming bank examines the documents presented by the seller to check that whether they are conforming to the terms and conditions of the letter of credit.If the documents are in compliance, advising or confirming bank, in case of confirmed letter of credit, will make payment to the seller and will be reimbursed from the issuing bank and in case of unconfirmed letter of credit, advising or confirming bank will forward the documents to the issuing bank. Than the Issuing bank will, after examine of the documents, debit the buyers account if the documents are in compliance to the terms of the letter of credit. In the end, Issuing bank forwards the documents to the buyer.Most commonly used documents in a letter of credit transaction includeCommercial InvoiceThis includes description of the goods, their price, FOB origin, and name and address of the buyer and the seller. The buyer and seller information must be in compliance with the description provided in the letter of credit.Bill of LadingIt is a document which shows the receipt of goods for shipment by a freight carrier. It is an evidence of the control of the goods and also acts as an evidence of the carriers obligation to transport the goods to their proper destination.Warranty of TitleA warranty given by a seller to a buyer of goods that states that the title being conveyed is good. It is generally issued to the purchaser.Letter of Ind emnityIt is a letter specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guarantee that shipping documents will be provided in good order when available.Common Defects in the documents presentedA discrepancy is some defect in the documents presented by the seller, which show their non-compliance with the terms of the letter of credit. Issuing bank can not change the terms and conditions of the letter of credit with out t he permission of the buyer. Therefore to avoid any delay in getting payment. Beneficiary should be careful in preparing the required documents. Common defects in the documents presented by the seller includeIf the description of the goods is not consistent.There is some error in the insurance documents.If the draft amount is not equal to invoice amount.Loading and destination ports are not same as provided by the letter of credit.Merchandise description is not same as in the credit.If any of the document s required by the credit is not presented.Documents are generally inconsistent such as quality, etc.If the names of the documents required are not correct, as mentioned in the credit.Invoice is not signed as provided in the letter of credit.If prior to the presentation of the draft, Letter of Credit has expired.If the date mention in the bill of lading is different from the date stated in the credit.If there are some changes in the invoice which are not authorized by the letter of credit.In international sales, as the seller and the buyer are in different countries, there is a common problem of payment due to the difference of time between dispatch and delivery. Obviously, seller would like to receive payment for the goods when delivering them to the carrier and the buyer would prefer to delay the payment of the price until receipt of the goods. Therefore, a letter of credit solves this problem between the seller and the buyer.Generally, there are three separate transactions in a le tter of credit transaction. The first is between a seller and a buyer, called an underlying transaction, by which the seller provides contracted goods to the buyer. The second transaction is between the buyer-applicant and the bank (issuer of the letter of credit), in which the bank issues a letter of credit to the seller-beneficiary.Finally, the letter of credit itself creates a relationship between the issuer and the beneficiary, in which, the issuer makes payment for goods upon the beneficiarys presentation of the required documents, in accordance with the terms and conditions of the letter of credit as agreed between seller and buyer. The banks performance of payment is conditional on the delivery of conforming documents by the beneficiary. The banks are called issuers and are usually the applicants bank.Normally the issuing bank opens a letter of credit in its own name and requests its correspondent bank to notify the seller about the letter of credit. Sometimes, the issuing ba nk asks the correspondent bank not only to inform the seller of the issuing banks undertaking but also to add a confirmation. In this case, the credit is known as a confirmed credit and the correspondent bank as a confirming bank.The payment obligation of the issuing bank depends upon the beneficiarys presentation of complying documents to the confirming bank or to any other nominated bank, in accordance with the terms and conditions of the credit. Under general practice, presenting complying documents means that they comply with the conditions of the credit on their face. From banking point of view, compliance on their face of the presented documents is sufficient. The independence principle (which will be discussed later) is the fundamental principle of the letter of credit system, which prohibits banks from looking beyond facial compliance of the documents, and therefore exclude whether or not there is actual performance by the seller-beneficiary.In fact, letters of credit system has emphasised the independence principle to such an extent that banks are ignoring the performance of the underlying contract very confidently. As a result, all the risk is on the honest buyers, who are sometime paying for goods that they had not contracted for.Importance of the researchThe primary purpose of the letter of credit system is to facilitate international trade, rather than to provide an opportunity to the banks to make profit. As the fraud is very common in these days, but UCP is not designed to prevent fraud. The number of frauds relating to the letters of credit has increased over the years. Buyers are particularly vulnerable to such practices under the letter of credit system. This situation shows that there is some ambiguity in the letter of credit system and a lack of balance between the rights and duties of the parties to a letter of credit transaction, which is being exploited very easily by fraudsters.Division of risk under a Letter of Credit TransactionAs we have discussed above, a letter of credit transaction consists of three linked but independent contracts. The first step is that the buyer makes a contract with the seller for the sale of goods, called the underlying contract. Subsequently the buyer signs an application form requesting the bank to open a credit, which is an arrangement between the buyer and the bank. The third step is that the issuing bank informs the seller, who is the beneficiary of the letter of credit, of the credit and promises to pay against the stipulated documents provided the terms and conditions of the credit are met.The letter of credit allocates risk between the applicant and the beneficiary. By postulating a letter of credit, the beneficiary may greatly reduce the risk of not being paid and ultimately allowing the beneficiary of the letter to reallocate the risk of non-payment for delivered goods which do not conform to the underlying sale contract.Generally, banks are reluctant to dishonour a credit, si nce to do so may damage the banks reputation as a credit issuer. The cost of honour, however, falls on the honest applicant, not the bank. If the beneficiary has breached the underlying transaction, payment under the credit to him will occasion loss, but that loss will not be the banks it will be the applicants.Increase in the applicants risk and decrease in the banks risk under UCPUCP is the governing law of the letters of credit, therefore there should be a balance regarding the rights and duties of the parties, but UCP contains rules that reduce bank risk. There is no provision asking for judicial intervention to compensate letter of credit parties in case of banks negligence. The provisions in favour of banks fall into two categories. The first provides sweeping immunity from liabilities that national legal systems may impose.Example of such a disclaimer is Article 15. Under Article 15, banks assume no liability for the genuineness, falsification or legal effect of any documents and therefore the issuer is immune from the liability for paying against forged documents, which on their face appear regular. Therefore, the payment by the issuing bank does not show that the buyer has received the goods, which he had contracted for. The security, which the beneficiary is getting under the letter of credit system is not the same with the security of the buyer.The second category of pro-bank provisions contains rules that set precise boundaries on what the banks must do, which reduces uncertainty about bank responsibility and provides clear guidance to bank employees. For example, the customer cannot stipulate non-documentary conditions of payment, and time limits on examination of documents are fixed rather than open-ended.In case of any loss, the buyer, which is the applicant for a credit, can take action against the seller for breach of contract or fraud, but has no right of action against the bank for banks negligence in examining the documents, which can be in effectual for several reasons, such as insolvency of either the applicant or the beneficiary. Hence the burden of risk on the applicant is more than any party in a letter of credit transaction and in most of the cases, buyers are paying for the goods, they have not contracted for.Chapter 2UCP and letters of creditOriginally UCP has been drafted by the Banking Commission of the ICC, which was comprised of the representatives of the banking community, which shows the dominance of the banks and banking experts. Their dominance in UCP drafting, hints that in drafting UCP, ICC was acting as a private legislature. It looks that the rules contain in the UCP are much beneficial for the banks than any other party, and giving a limited chance to the judiciaries to interfere to protect customers from any careless behaviour of the banks.The authority to interpret the UCP rests in the ICC Commission on Banking Technique and Practice, which can apply these interpretations to solve the problems ar ising in any case. Because of wide publicity and distribution of commissions answers, their interpretation can be considered as an official interpretation of the UCP.Commission can enhance, interpreting, and sometimes amend the provisions of the UCP. The banks which deal with the letters of credit, act upon these interpretations and any amendments. As in theory, commission is only answerable to ICC members, therefore the chances of any challenge to such interpretation is very low.Role of courts in balancing the rights and duties of the partiesIn Discount Records Ltd. v. Barclay Bank Ltd., the judge was reluctant to interfere with bankers irrevocable credit and not least in the sphere of international banking. The position is same in many other cases. The apparent reason for the reluctance of the judges to interfere looks that they are afraid from the threats of the banking experts that their decisions would have an unfavourable affect on international trade. The difficulties of the courts to balance the rights and duties of all parties to a letter of credit transaction have increased.In Mannesman Handel AG v. Kaunlaran Shipping Corporation, the Swiss bank argued that the bank was in rejecting the documents by the German company relying on the independence principle and the discrepancies appeared on the documents. The court was asked not to apply the good faith principle otherwise the court would be calculated to undermine if not destroy the doctrine of strict compliance and to blur if not extinguish the distinction between transactions concerning goods and transactions concerning documents.Normally the judicial decisions relating to the legal aspects of documentary credits base on either the express intentions of the parties or established business practice at the time, the parties entered in a contractual relationship. In cases where the UCP provisions are different from business practice, a court will apply the UCP if the UCP is incorporated in the contract of the parties. It shows that courts have assented to the entire documentary credit system being run by the banking industry and eventually abstaining the courts to intervene to balance the legal rights and duties amongst all the parties.Should the UCP have the status of law?Leading scholar Professor Ross Buckley says originally, the UCP was neither designed nor intended to be law. It was prepared as a set of standard terms to be incorporated by reference into letters of credit by those parties who chose to do so. This has also been confirmed by the UCP in the preface of UCP 500, which states that the UCP is not legislation but a compilation of rules made by bankers for their own industry.Therefore there is a dispute as to whether the UCP is a code of the law, or just customary practices, or some mutually consented regulations relating to letters of credit. However in fact, UCP is the governing law of the letters of credit.The Scope of the Banks DutiesBefore analysing the wording of the disclaimers used, the scope of the duties undertaken by the banks involved must be identified. Whereas the type of credit and the documentary stipulations therein will usually have been negotiated by the commercial parties and included in their sales contract, the terms and conditions under which a bank undertakes to open a documentary credit will normally appear in the banks standard application form which the importer will be required to complete.Although the application would normally refer to the UCP, it is important to note that the provisions of the UCP would not automatically apply in English law if not expressly incorporated by the parties to the credit and, even if expressly incorporated, its provisions can be excluded, or modified by the express terms of the credit.The duty to issue an efficacious creditThe importers failure to procure the issue of a documentary credit which conforms to the terms of the sales contract may be treated by the exporter as a breach of a co ndition precedent to his performance and a repudiation of the contract by the importer. Whether the applicant can sue the issuing bank in respect of its culpable failure to issue (or to issue in good time) a conforming and efficacious credit is, however, by no means clear.The duty to issue a conforming creditAn initial problem arises where the applicant requires the issue of a confirmed credit, that is, a credit in which a second bank, normally in the beneficiarys country, adds its own independent undertaking, to pay against the stipulated documents, to that of the issuing bank. Is the issuing bank in breach of contract towards the applicant if it is unable to procure the confirmation? The answer must depend upon the issuers conduct on receiving the application from the applicant.The second aspect of the duty to issue a conforming credit raises the question of liability for the acts of other banks involved in the transaction. Clearly, if the issuing bank opens a credit which specifi es documentation other than that called for by the applicant, then in the absence of a disclaimer it will be in breach of its contract with the applicant under the doctrine of strict compliance. The position should be the same where the issuing bank unreasonably delays issue of the credit so that the beneficiary incurs loss.A difficulty arises, however, when it is not the issuing bank itself which causes the error or delay in complying with the applicants instructions, but the issuers correspondent bank. The doctrine of privity of contract would appear to prevent contractual liability arising in this context. However, in any event, it appears that there is no reason for holding that, in the absence of a disclaimer an issuing bank should not be liable for the consequences of errors by its correspondents.Duty to receive and examine documentsThe doctrine of strict compliance means that issuing banks which pay against non-conforming documents are in breach of their contractual obligatio ns to the applicant. The issuer is not, however, a guarantor of the documents conformity its duty is discharged by the exercise of reasonable care to ascertain that the documents comply on their face with the terms of the credit.Duty to make payment under the terms of the creditThe party with the primary interest in enforcing the banks obligation to pay against conforming documents is the beneficiary although it is clear that this obligation is also owed to the applicant. Furthermore, any variation of the payment terms would be a clear breach of contract.Duties of correspondent banksIn so far as the confirming bank gives an undertaking in exactly the same terms as the issuing bank, it clearly owes precisely the same duties to the beneficiary. However, since a confirming bank looks to the issuing bank alone for reimbursement, it may be prima facie unlikely that it owes any duty to the applicant, even where the applicant is paying the confirmation fee. There are, however, some judicia l dicta which might support the recognition of such a duty.Banks risk under UCP (exemption clauses)Article 15 and 18 (b) of the UCP 500, limits the liability of the banks in a letter of credit transaction and which have almost made it a risk free transaction for the banks.Article 15 saysBanks assume no liability to or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s) or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s) or for the good-faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignee or the insurers of the goods or any other person whomsoever.Article 18(b) further statesBanks assume no liability or respon sibility should the instructions they submit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). The UCP 500 places the applicant-buyer in an absurdly vulnerable position through its disclaimer clauses. To some extent there is a lack of duties on the part of the bank to verify the authenticity of the documents. Hence it might not be wrong to say that albeit there is a waste increase in the use of letters of credit, does not signify that the UCP is fairly drafted.Letters of credit and its usersIt is also very important that whether all the parties to the letter of credit, particularly applicant-buyer are conscious about the presence of these exemptions, e.g. by providing a copy of these exemption clauses of the UCP or by giving a notice of these exemption clauses. It is a rule that to enforce an exemption clause, a reasonable notice should be given to the other party but in practice, buyers are assume to have the notice of the UC P and that they are familiar with the provisions of the UCP.Further, the application for the issuance of a letter of credit and the letter of credit document itself only contain a simple sentence Subject to UCP for Documentary Credits, without any attachment of the provisions of the UCP or any notice of such exemption clauses. Hence it is debatable that why the courts do not look, while dealing with the cases relating to the letters of credit, that whether a reasonable notice has been given relating to the exemption clauses and do not interfere to balance the rights and duties of the parties to a letter of credit transaction?Chapter 3Doctrine of strict compliance and independence principleIt is a basic rule of the letter of the credit transaction and which is widely recognised that the letters of credit are transactions independent of the underlying contracts on which they are based. According to this principle, the issuer has no concern with the underlying contracts between buyer a nd seller. Its concern is with documents only, rather than the goods or any type of services. Obviously there are some doubts about this principle, i.e. to what extent this principle should be applied. Which some tome may cause injustice to the applicant under certain circumstances.Independence PrincipleGenerally, letter of credit is a contract between the issuer and the seller of the goods, which is independent of the underlying contract between the seller and the buyer. The independence principle is mentioned in Article 3 and Article 4 of the UCP. Article 3 states Credits, by their nature, are separated transactions from the sales or other contract(s), even if any reference whatsoever to such contract(s) is included in the Credit.Article 4 further saysIn credit operations all parties concerned deal with documents and not with goods, services and/or other performances to which the documents may relate.From the very beginning independence principle governs letter of credit transacti ons and very clearly states that the credits are completely separate from their underlying transactions and the issuer makes payment depending on the conformity of the documents presented according to the terms and conditions of the credit without considering the performance of the underlying contract by the beneficiary.