Table of Contents

Letter Of Credit- Its Enforcement Across The Nations...............................................................1

Introduction:.................................................................................................................................1

Review Of Literature:......................................................................................................................2

Statement Of Problem:....................................................................................................................2

Hypothesis:......................................................................................................................................2

Research Objectives:.......................................................................................................................2

Method Of Study:............................................................................................................................2

Definition Of Letter Of Credit:........................................................................................................3

Autonomy principle 6

Doctrine of Strict Compliance 7

Enforcement procedure in letter of credit 9

Advantages Of Letter Of Credit:...................................................................................................13

Letter Of Credit Advantages For The Seller..................................................................................14

Letter Of Credit Advantages For The Buyer.................................................................................14

Conclusion:....................................................................................................................................16

LETTER OF CREDIT- ITS ENFORCEMENT ACROSS THE NATIONS

INTRODUCTION:
Documentary credits or letter of credits are highly sophisticated tools for financing international
commercial transactions. They help to reduce the risk of both buyers and sellers. In international
trade buyer and seller reside in different countries. They are exposed to various major risks.
Banks provides an undertaking to act as their intermediaries and help them to mitigate the risks
involved in the transaction. The letter of credit’s object is to provide a means of payment for
goods and services supplied by a seller to a buyer, usually to facilitate dealings between

1
merchants in different countries. It is done by ensuring payment to the seller for the contract of
goods and services on one hand and their delivery to the buyer on the other.

Letters of credit (LC) are often referred to as ‘the life blood of international commerce because
of the critical role they play as a financing method in so many transnational transactions. The
aim of this project is to assess the efficacy of the LC as a legal device for enabling international
trade. Letter of credit is one of the most commonly used modes for the payment of goods in
international trade. The letter of credit transactions are governed by UCPDC 600.1 A Letter of
Credit (LC), also referred to as a documentary credit, is a contractual agreement whereby the
issuing bank (importer’s bank), acting on behalf of its customer (the buyer or importer),
authorizes the nominated bank (exporter’s bank), to make payment to the beneficiary or exporter
against the receipt of stipulated documents. Letters of credit are one of the most secure
instruments available to international traders. An LC is a commitment by a bank on behalf of the
buyer that payment will be made to the beneficiary (exporter) provided that the terms and
conditions stated in the LC have been met. Thus, in a LC the buyer ordinarily requests his bank
to pay for the goods through a letter to the seller. By the letter the seller comes to know that the
bank will honor the payment. The letter is addressed to the seller as the named beneficiary.

REVIEW OF LITERATURE:
1) Roger J. Gewolb in his article The Law Applicable to International Letters of Credit 2
has highlighted various problems in international letter of credit transactions.
2) Ebenezer Adodo in the book Letters of Credit: the Law and Practice of Compliance 3
defines the rights of the parties and it also describes some discrepancies in the letter of
credit transactions.
3) Alphonse M. Squillante in article Letter of Credit4:A Discourse has discussed the
nature and scope of letter of credit and the role it plays in commercial transactions.
4) H.C Gutteridge & Maurice Henry Megrah in their book titled Law of Banker’s
Commercial Credits5 have explained in detail the concept of letter of credit.

1
International Chamber of Commerce- Uniform Customs and Practice for Documentary Credits (UCP 600).
2
Roger J. Gewolb, The Law Applicable to International Letters of Credit, (11 Vill. L. Rev. 742 (1966).
3
Ebenezer Adodo, Letters of Credit: The Law And Practice Of Compliance,( oxford university press, 2014).

4
Alphonse M. Squillante, Letter of Credit: A Discourse , Hein Online, ( Part I, 84 Com. L.J. 372, 1979).

2
STATEMENT OF PROBLEM:
What is the enforcement procedure in international letter of credits?

HYPOTHESIS:
Letter of credit in international transactions has increased the smooth flow of transactions
between buyers and sellers.

RESEARCH OBJECTIVES:
 To analyze the law and practice in UCP governing letter of credit.
 To examine the strength and weaknesses of the law governing Letter of credit.
 To recommend ways of improving the law on letter of credit in its enforcement across
nations

METHOD OF STUDY:
For this study the research is doctrinal. The nature of the work is both analytical and descriptive.
Information and data for the project will be from various books, articles and other online
resources. The research will include opinions of research scholars, academicians and other
experts who have dealt with this subject.

Definition of letter of credit:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the
request and on the instructions of a customer (the Applicant) or on its own behalf.6

Halsburys Laws of England defines a letter of credit as-

“A letter of credit is in principle an undertaking by a banker to meet drafts drawn under the credit
by the beneficiary of the credit in accordance with the conditions laid down therein."

A documentary credit is generally understood to be one in which the issuing bank undertakes to
honor the bills drawn under credit if they are attached with certain documents which the issuer
can hold by way of security for advances made by him. It is a conditional promise issued by the
issuing bank’. In other words letters of credit are essentially conditional promises to pay for

5
H.C Gutteridge & Maurice Henry Megrah, Law Of Banker’s Commercial Credits, (U.K., Europa publications limited,
2001).
6
Article 2- Uniform Custom And Practice For Documentary Credit (UCPDC) 600.

3
goods or services made by one bank to another, substituting the credibility of the bank's promise
for the buyer's promise to pay.

Parties in a letter of credit:

In Voest-Alpine International Corporation v. Chase Manhattan Bank 7 it was held that “A

typical letter of credit transaction involves three separate and independent relationships –

 An underlying sale of goods contract between the buyer and the seller
 An agreement between a bank and its customer (buyer) in which the bank undertakes to
issue a letter of credit
 The bank's resulting engagement to pay the beneficiary (seller) providing that certain
documents presented to the bank conform to the terms and conditions of the credit issued
on is customer's behalf.

Significantly, the bank's payment obligation to the beneficiary is primary, direct and completely
independent of any claims which may arise in the underlying sale of goods transaction.”

Nature of letter of credit:

Letter of credit is an independent transaction. This independence rule of the documentary credit
is based on two policy considerations. One is that the issuing bank does not assume any liability
for the performance of the underlying contract between the buyer and the seller as the banker
does not have control over making the underlying contract. Another consideration is that if the
issuing bank look beyond the terms of the credit to the underlying contractual controversy
between its customer and the beneficiary the commercial utility of documentary credit will get
eroded. Therefore the issuing bank deals exclusively in documents and not in goods to which the
documents may relate. This situation sometimes brings injustice to the buyer applicant. There
can be situations where the seller has breached the obligation under the basic contractual terms.
The goods might have been actually shipped by the seller and documents may also be in
conformity. However the goods may not confirm with those of contracted on actual verification.

Essentials of a letter of credit:

7
707 F.2d 680 (1983).

4
Commitment document – Letter of credit is an instrument of commitment issued by the buyer’s
bank on the request of the buyer and handed over to the seller or seller’s bank to secure his
payment once the terms agreed by the buyer and seller has been fulfilled by both the parties. It is
a monetary document which entitles the seller to get his payment from the bank after submitting
the required documents to the bank to prove that the terms of the deal have been fulfilled by the
seller and now he has the right to get the payment.

Banks as intermediaries – As per the contract between the buyer and seller, the buyer once
receives the goods as promised by the seller, and then buyer is liable to pay the amount to the
seller in lieu of deal entered by both of them. It is issued by the buyer’s bank i.e. issuing bank as
a payer of the amount on behalf of the buyer and seller receives the payment from his bank
i.e. confirmation bank to which the letter of credit is presented and is obliged to honor the
payment to the seller. Here transaction including a letter of credit is settled through the banks
rather than directly between buyer and seller.

Secured payment – In an international business or trade between the buyer or importer and
seller or exporter there is high probability of fraud and exporter does not receive the payment on
time or payment at all. To curb this risk the letter of credit is issued in which bank undertakes the
guarantee to make the payment to the exporter and his efforts to do a business doesn’t go in vain.
Risk factor in normal course of transaction is very high which almost vanishes with the issue of
letter of credit where the payment is made by the banks and letter of credit. Involvement of bank
as a neutral party through letter of credit allows the seller to trust the contract and buyer which
helps him to with which get his payment on time from the bank.

Business in any currency – Earlier when any international business used to take place the funds
transfer and currency change was a bigger task but with the letter of credit this hurdle has been
pulled down and letter of credit can be honored in any country as per their currency rates as the
payment is made at the place where the seller resides or has a place of business.

Autonomy principle:

Autonomy principle is the basis of documentary credits. It evolved through peculiar nature of
transaction between the banks and the parties involved in the transaction. In Tukan Timber Ltd

5
v. Barclays Bank P/c.8, it was held that “It is of course very clearly established by the
authorities that a letter of credit is autonomous, that the bank is not concerned in any way with
the merits or demerits of the underlying transaction, and only in the most extremely exceptional
circumstances should the Court interfere with the paying bank honoring a letter of credit in
accordance with its terms bearing in mind the importance of the free and unrestricted flow of
normal commercial dealings".

The rule in relation to the independence principle is embodied in Article 4 and Article 5 of the
U.C.P. Article 4 stipulates: “A credit by its nature is a separate transaction from the sale or other
contract on which it may be based. Banks are in no way concerned with or bound by such
contract, even if any reference whatsoever to it is included in the credit. Consequently, the
undertaking of a bank to honor, to negotiate or to fulfill any other obligation under the credit is
not subject to claims or defenses by the applicant resulting from its relationships with the issuing
bank or the beneficiary.

Article 5 further stipulates: “In credit operations all parties concerned deal with documents and
not with goods, services and/or other performances to which the documents may relate.”

In the United States the independence principle is recognized in U.C.C. It is stated as follows”,
“rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit
are independent of the existence, performance, or nonperformance of a contract or arrangement
out which the letter of credit arises or which underlies it, including contracts or arrangements
between the issuer and the applicant and between the applicant and the beneficiary”.

Fraud exception in letter of credit:

Fraud is recognized as an exception to the absolute payment principle in letters of credit. Banks
are exempted from paying if it knows that the tendered document is false or contains a forged
signature. In Discount Records Ltd. v. Barclay Bank Ltd.9, 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
8
[1987] 1 Lloyd’s Rep. 171.
9
[1975] 1 Lloyd's Rep. 444.

6
interfere looks that they are afraid from the threats of the banking experts that their decisions
would have an unfavorable 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. The term ‘fraud’
in letter of credit is not defined and courts have tried to interpret and give meaning to that.

Doctrine of strict compliance:

One of the fundamental principles governing the LC operation is the doctrine of strict
compliance. The principle requires the seller to present the necessary documents in accordance
with LC requirements; in order to claim payment for the goods sold. The principle of strict
compliance is defined as the legal principle that entitles the bank to reject documents which did
not strictly comply with the terms of LC. The bank is the responsible in determining whether the
presentation complies with LC requirements based on the Uniform Custom and Practice for
Documentary Credit (UCP 600).

The principle of strict compliance aims to protect the buyer who has neither the opportunity to
examine the physical goods nor to supervise the process of loading the goods in the seller’s
country due to geographical distance. It also provides the seller a confirmation of fast payment if
the seller complies with the contract of sale. The Principle also states that the bank is entitled to
reject payment which does not strictly conform to the terms of the LC. Thus, the principle itself
establish a general rule/obligation which ensures that the bank will only pay if the documents
received complies strictly with the terms and conditions of the LC as stipulated by the buyer, and
the seller also knows that the payment will only be received where the transactions
are accordingly performed by both parties thus, there are no scope of fraudulent performance in
against with any parties.

Standard for examination of documents (Art.14, UCP 600]

In UCP 600, Art.14 establishes the responsibility of the banks to comply with the standard for
examination of documents. It has introduced three new features: examination of the documents
on their face (Article 14(a),UCP 600), the time given to the banks for examination (Article
14(b),UCP 600) and consistency between documents tendered (Article 14 (d, e),UCP 600).

7
The standards for the examination of the documents according to the Article 14 of the UCP 600
states that the bank is under an obligation to examine all the documents stipulated in the credit,
on the basis of the documents alone, whether or not the documents appear on their face to
constitute a complying presentation. The examination of the documents on their face indicates
the review of a document in line with the ISBP (International Standard Banking Practice) and
features of the document itself. Also the phrase “with reasonable care”, which was used in Art.13
of UCP 500 has been excluded in order to impose stricter liability on the banks in examining
documents. In addition to this,” Article 14 of UCP 600 provides that the documents need not be
identical between each other but must not conflict with any other document. 

The doctrine of strict compliance was first established in 1927 by English courts with the well-
known words of Lord Sumner in Equitable Trust Company of New York v Dawson Partners
Ltd10 as; "There is no room for documents which are almost the same, or which will do just as
well if the bank does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs
from the conditions laid down, it acts at its own risk''. Lord Sumner's argument was based on the
fact that “the banks know nothing regarding the underlying transaction they financed thus they
cannot distinguish between which document will do well enough and which will not. He also
emphasized that if banks were to be concerned with the underlying transaction as well, it would
be unlikely for business practice to proceed. The reasons for establishing the doctrine of strict
compliance in order to fulfill a payment by Letter of Credit are: First, the rule of strict
compliance itself establishes the law of agency between the banker and the buyer. The Advising
Bank is a special agent of the Issuing Bank and the latter is the special agent of the buyer. Thus,
“if an agent with limited authority acts outside that authority (i.e. his mandate) the principal is
entitled to disown the act of the agent, who cannot recover from him and has to bear commercial
risk of the transaction.”

“The second reason for the rule of strict compliance lies in the bank’s position in relation to the
sale contract. The bank is not a dealer in goods; it cannot be expected to know why the buyer has
stipulated for a particular item and what importance he might attach to that item

How does a letter of credit works ( enforcement procedure):

10
(1927) 27 Ll.L.Rep. 49. 

8
There are several steps which are followed while issuing a letter of credit and using it as a mode
of the payment:-

Step-by-step process in enforcing a letter of credit:

 Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee
payment. The parties i.e. the buyer and seller enter into a contract and negotiate upon the
terms of the contract. This contract determines the nature of the business and mode of
payment by the buyer to the seller if the buyer has received the goods for which both
parties entered into the contract. Normally the letter of credit is issued in international
trade or between importer and exporter.
 Buyer applies to his bank for a letter of credit in favor of the seller. After the contract the
buyer approaches his bank, which is also called the issuing bank, to apply for issuance of
the letter of credit in the favor of seller and seller’s bank i.e. confirmation bank according
to which the issuing bank undertakes the responsibility to pay to the seller on behalf of
the buyer.
 Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its
correspondent bank (advising or confirming). The correspondent bank is usually located
in the same geographical location as the seller (beneficiary). It is issued by the issuing
bank in the name of the buyer which is further issued to the seller as the consideration.
 Advising bank will authenticate the credit and forward the original credit to the seller
(beneficiary). Issued to the seller – Issuing bank issues the letter of credit to seller either
by its branch or any correspondent bank in the seller’s country.
 Seller (beneficiary) ships the goods, then verifies and develops the documentary
requirements to support the letter of credit. Documentary requirements may vary greatly
depending on the perceived risk involved in dealing with a particular company.
 Seller presents the required documents to the advising or confirming bank to be
processed for payment.
 Advising or confirming bank examines the documents for compliance with the terms and
conditions of the letter of credit.
 If the documents are correct, the advising or confirming bank will claim the funds by:
 Debiting the account of the issuing bank.

9
  Waiting until the issuing bank remits, after receiving the documents.
 Reimburse on another bank as required in the credit.
 Advising or confirming bank will forward the documents to the issuing bank.
 Issuing bank will examine the documents for compliance. If they are in order, the issuing
bank will debit the buyer's account.
 Issuing bank then forwards the documents to the buyer.

Silent confirmation in a letter of credit:

In letter of credit, in addition to the commitment of the issuing bank, the advising bank can, by
silent confirmation, enter into its own, independent commitment to pay or accept. In contrast to
the confirmed letter of credit, in this case there is no confirmation instruction given by the
issuing bank. Silent confirmations are thus purely agreements between the beneficiary and the
“silently confirming” bank. In order to enforce its claim, the “silently confirming” bank requires
the assignment of all the rights of the beneficiary under the letter of credit.

In case of Commonwealth Bank of Australia v. Greenhill International Pty Ltd 11 an Indian

entity, SBP and Co, approached another Indian entity, Seth Bankatlal Maloo Industries Pvt Ltd,
with a proposal to supply waste paper to Seth Bankatlal.  The approach was made on behalf of
Greenhill International through the business name under which it traded, Valley View
International Trading and Recycling.  As a consequence, Seth Bankatlal placed an order for the
supply of 150 metric tons of OCC waste paper and agreed to pay US$254 per metric ton.  On 10-
11 April 2008, Greenhill International issued to Seth Bankatlal invoices totaling US$34,210 and
US$6,472.30 for 131 tons and 25 tons of paper including interest. On 18 April 2008, Seth
Bankatlal obtained a letter of credit from the Bank of India nominating Valley View
International as beneficiary and provided that letter of credit to SBP and Co. 

On 8 May 2008, the Bank of India advised Seth Bankatlal that the consignment had arrived and
the Bank of India delivered commercial invoices together with the papers concerning the
consignment to Seth Bankatlal. He then took possession of five containers of waste paper on 24
May 2008 and found the goods to be not of the quality ordered and refused to accept the goods. 

11
[2013] SASCFC 76.

10
Later, Seth Bankatlal advised SBP and Co that the goods were not of the quality ordered and
requested that an inspection be made of the goods.  No action was taken by Greenhill
International or SBP and Co.  On 26 July 2008, Seth Bankatlal advised Greenhill International
and SBP and Co that the goods remained with Seth Bankatlal at the risk of Greenhill
International and SBP and Co. On 19 August 2008, an order was made temporarily restraining
Valley View International from encashing the letter of credit dated 17 April 2008 that had been
provided by the Bank of India. 

It was held by the court of appeal that the Acceptance of the bills of exchange by the Bank of
India on 16 and 23 May 2008 did not completely supersede the letter of credit or deprive the
Commonwealth Bank of the right of recourse. Under UCP600, the term “confirming bank”
means a bank that adds its confirmation to a credit upon the issuing bank’s authorization or
request and the term “confirmation” means a definite independent undertaking of the confirming
bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation. 

The contract contained a term that the Commonwealth Bank would silently confirm the letter of
credit.  This amounted to no more than the express undertaking contained in the contract that the
Bank would honor drawings by its customer, Greenhill International, in accordance with the
terms and conditions of the credit upon presentation of the requisite documents. More
importantly, there is nothing in the terms of the contract capable of providing that, if the
Commonwealth Bank should subsequently become a confirming bank, then its right of recourse
would be lost.  That suggestion is contrary to the express recourse term. 

Letters of credit and documentary credits continue to be a mainstay of international trade

transactions.  Letters of credit are also often used in financing transactions, either as a form of
collateral or issued by a bank in connection with an acquisition or another transaction being
financed.  A recent case, Taurus Petroleum Limited v State Oil Marketing Company of the
Ministry of Oil, Republic of Iraq12 [2013] EWHC 3494 relates to letters of credit in a trade
transaction.

Facts of the case:

12
[2013] EWHC 3494.

11
Taurus had been awarded $8 million under an arbitral award against the State Oil Marketing
Company of the Ministry of Oil ("SOMO"), the Iraqi state entity with sole authority for the
export and import of oil and gas products from and to Iraq.  The case related to two letters of
credit issued by Crédit Agricole in respect of an oil transaction between a Shell entity and
SOMO.  Taurus was seeking an order such that part of the payments by Crédit Agricole under
the letters of credit could be paid to Taurus direct, instead of SOMO, to satisfy the arbitral
award. 

The points to note in the context of financing transactions arising from the case are:13

1. Always ensure that the letter of credit specifies the governing law of the letter of credit. 

The two letters of credit issued by Crédit Agricole did incorporate the Uniform Customs and
Practice for Documentary Credits (UCP) 600; but not a governing law clause.  The court held
that where a letter of credit does not specify governing law, its governing law is to be determined
pursuant to Article 4(2) of Rome I.  Under this Article, the governing law is the law of the
country where the characteristic performer has its habitual residence.  In this case, on the
presentation of conforming documents, Crédit Agricole in London made payment by instructing
JP Morgan in New York to make payment at the counters of the Central Bank of Iraq ("CBI") in
Baghdad to CBI's account at the Federal Bank New York ("FRBNY").  The Judge held that the
characteristic performer is Crédit Agricole making payment steps in London and therefore the
credit is governed by English law.

The Judge also held that the lex situs of the debt is English law (not New York where payment
was to be made by crediting CBI's account with FRBNY).  The Judge applied the general rule
that a debt situate is where it is recoverable. 

2. Always ensure that the identity of the beneficiary is clear: 

In this case, the beneficiary of the letter of credit was clearly SOMO and this was not disputed. 
CBI was identified as advising and confirming bank (although it did not confirm the credit).  On
the basis of the text in the letter of credit, the Judge held that CBI was also a joint promisee of
the letter of credit and equally entitled to the debt owed by Crédit Agricole.

13
http://www.fieldfisher.com/publications/2014/02/letters-of-credit#sthash.OgSzbNWm.dpbs (accessed on 10th
april, 2018).

12
Separately, SOMO argued that it had been acting as agent of the Republic of Iraq and that
therefore the Republic of Iraq could enforce letters of credit as an undisclosed principal.  The
Judge rejected this on the basis that SOMO was not acting as the agent of the Republic of Iraq
and also held that the terms of the credit would preclude enforcement by an undisclosed principal
because (i) UCP 600 plainly contemplates the beneficiary being the sole party who can enforce
the issuing bank's payment obligation made to the beneficiary and (ii) credits were expressed to
be non-transferrable.

3. Letters of credit are autonomous transactions, independent of the underlying sale contract. 

In this case, SOMO submitted that since under Iraqi law title to oil and all proceeds in respect of
disposals belong to the government (other provisions supplement this by requiring a portion of
proceeds to be paid into a separate United Nations compensation account), SOMO did not have
title to the oil and therefore did not have entitlement to receive the sale proceeds at the counters
of the Central Bank of Iraq ("CBA") in Baghad.  The Judge rejected this argument as having a
bearing on the letters of credit as matters that impacted upon the sale contract for the oil itself but
not the letters of credit which stood independently of that contract.  On the terms of the letter of
credit, SOMO does have title to enforce the debt constituted by Crédit Agricole's promise to pay
on the terms of the credit.  Autonomy of letters of credit is a rule as a matter of general English
law and also reiterated under Article 4 of UCP 600.

4. Always ensure the letter of credit is clear on the requirements for the presentation of
documents.

This final point is not specifically addressed in the case.  It is always critical to ensure that the
terms of the letter of credit are clear as to the documents which are to be delivered in order for
the obligations to honor the credit to be triggered, the place of presentation and any time limits
upon their presentation.

Advantages of letter of credit:

It may happen that a buyer or an importer is not well verse with the market other than his own to
enable him to rely solely on his reputation for solvency and honest dealing. It may be essential
that he should be able to purchase on credit, if he cannot afford to be deprived of the use of his

13
capital during the period which must of necessity elapse between the shipment of goods and their
receipt and resale by him in the home market or elsewhere.

Exporter may be in need of credit but he may not be able to lock up capital that is required in his
own business pending the receipt of payment of goods. Thus, a letter of credit mechanism
ensures that a prompt payment is being made.

Letter of credit advantages for the seller

 The seller has the obligation of buyer's banks to pay for the shipped goods;
 Reducing the production risk, if the buyer cancels or changes his order.
 The opportunity to get financing in the period between the shipment of the goods and
receipt of payment (especially, in case of deferred payment).
 The seller is able to calculate the payment date for the goods.
 The buyer will not be able to refuse to pay due to a complaint about the goods.

Letter of credit advantages for the buyer

 The bank will pay the seller for the goods, on condition that the latter presents to the bank
the determined documents in line with the terms of the letter of credit;
 The buyer can control the time period for shipping of the goods;
 By a letter of credit, the buyer demonstrates his solvency;
 In the case of issuing a letter of credit providing for delayed payment, the seller grants a
credit to the buyer.
 Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

A Critical Appraisal of letter of credit ( disadvantages):

The main operative problems of documentary credit are delay, cost and fraud. The procedure for
letter of credit takes too long as its mechanism involves the movement to issue and transmit
paper documents. By the time the exporter gathers and presents the stipulated documents for
payment, considerable time may have elapsed.

14
Another cause of delay is that documents tendered are often discrepant with credit terms.
Discrepancy in tendered documents causes delays because of the fundamental principle of
documentary credit law that documents must strictly comply with the terms of the credit. Apart
from this if the discrepancies are minor, banks often used to inquire from their customers
whether they wish to waive their right to reject the discrepant documents. The process of
consultation with customers on discrepant documents causes further delays.

Along with the increased use of letter of credit it has become an area for growing volume of
litigation, particularly litigation over fraud. As the triggering event for payment under trade
credits is the presentation of specified documents, crooked sellers may ship rubbish or send no
goods at all and forge all the documents to obtain payment. As a result fraud exception is
recognized as part of onerous duty of bank.

Apart from this there are technological advancements in the field of banking in electronic
banking being a striking example of this. The contractual agreements through online are
governed by different laws. There is no law to regulate electronic letter of credit contracts. Hence
how far law can regulate electronic letters of credit is relevant in the letters of credit transaction.

Nation's reputation may also get jeopardized if delay in payment occurs. It may also result in
increasing instances of international commercial frauds. It is done either by practice of fraud in
collusion with banks or shipping agents. Its rampant growth threatens the financial security of a
nation.

LIMITATIONS:

Although letter of credit has uplifted the international trade and business, apart from its positive
interventions letter of credit also lacks in its efficacy in various strata.

 Quality of goods not taken care of – With the issue of letter of credit banks are only
responsible to check the documents and fulfillment of terms of the contract based upon
what bank releases the payment but quality of the goods is not verified in this state. If the
quality of the goods is not up to the mark buyer has to suffer as he cannot stop the
payment.

15
  More expensive – Letter of credit involves the charges which are paid to the bank as well
which makes this mode of payment more expensive.
 Complex – Issuance of letter of credit functions with certain degree of complexities the
more rules and regulations to be followed by the parties as well as their banks which
makes this recourse a complex one.
 Foreign currency – Letter of credit allows the seller to receive the payment in its territory
and in case of international trade factors like difference in currencies and currency
fluctuations adds more risk in this.
 Default of bank – The letter of credit transfer the creditworthiness of buyer to the bank, if
bank defaults in making the payment then the risk on the seller’s payment still exists.
 Specific time period – Letter of credit is issued with the time limit specified in it and if
the letter of credit is not presented within that certain period it gets lapsed. The
documents submission has to be done within that period of time only otherwise the time
to receive the payment and make use of letter of credit gets expired due to which a new
process has to be followed and again adds to the business cost.

CONCLUSION:
Thus, a letter of credit is an independent transaction which ensures a smooth flow of business
between the buyer and seller. Letter of credit serves as a useful instrument in international
transactions as there are instances when parties do not know each other. In spite of certain
discrepancies in a letter of credit transaction, the advantages outweigh them. The autonomy
granted to the banks in letter of credits facilitates the trade in international commerce. And the
bank’s non-payment even at the slightest discrepancy makes the system fool-proof and infuses
confidence in the buyers. The fraud exception rule at the same time disciplines the unwary or
careless banker by preventing him from taking undue advantage of the autonomy principle.
Thus, letter of credits are very important for conducting business.

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