As international trade continues to grow exponentially, the adoption of letters of credit as a global trade settlement instrument has presented challenges due to varying laws among different countries. To address these difficulties and promote easy international trade, uniform regulations have been established. The International Chamber of Commerce developed Uniform Customs and Practice 600 (UCP600), which set standard rules of international trade and aimed to minimize the risks associated with trading goods and services. In this paper, I will examine the role of banks in international trade, how they handle foreign traders' documents, types of letters of credit, relevant articles of UCP 600, and the advantages and disadvantages of documentary credits.

Letter of Credit:

A letter of credit, also known as a documentary credit, is an instrument used for trade settlements worldwide. Article 2 of UCP 600 states that commercial credits are arranged to pay the seller once they receive the goods. It serves as a connection between the buyer and seller and assures the seller of payment while the buyer receives the necessary shipping documents under the credit.

In international trade, where buyers and sellers are in different countries, the letter of credit serves as a convenient instrument, ensuring payment for sellers and shipping documents for buyers. There are various types of letters of credit, such as unconfirmed and confirmed credits, revolving credits, transferable credits, back-to-back credits, and clause credits and green clause credits.

Revocable vs. Irrevocable Letter of Credit:

A revocable letter of credit can be cancelled or amended at any time by the issuing bank without the consent of the other party. In contrast, an irrevocable letter of credit cannot be altered unless consent is obtained from all parties involved. The general rule is that all letters of credit are irrevocable, unless specified or consent is given.

The aim of having an irrevocable feature in the letter of credit is to offer protection to all parties in the transaction. In Cape Asbestos v Lloyds Bank, the bank failed to inform the beneficiary of credit cancellation, resulting in the bank's refusal to pay the seller upon document presentation. While the seller claimed that the bank was duty-bound to notify them of revocation, the court found that they had no legal obligation.

An irrevocable letter of credit provides greater security than its revocable counterpart. In Ian Stach Ltd v Bank Bosley Ltd, the Court of Appeal held that, under FOB contracts, the buyer must open a letter of credit as specified in the contractual terms. In Pavia & Co SpA v Thurmann-Nielsen, payment under CIF was to be made through an irrevocable letter of credit, prompting the court to order the opening of the credit at the shipping period's onset.

The use of a letter of credit has both advantages and disadvantages for sellers and buyers. One of the main advantages is that it provides security for both parties involved. If all the terms and conditions are met, a letter of credit is one of the safest and most convenient payment methods for a seller. It ensures that they receive the agreed amount of money on time, provided the relevant documents are provided within the agreed time frame. However, there is still a risk of non-payment as the bank takes responsibility for payment.

For buyers, using a letter of credit provides assurance that the seller will deliver as specified in the documentation. However, there may be additional costs involved since the bank charges fees for its services. The buyer also needs to exercise caution when dealing with an exporter and carefully research their reputation to avoid the risk of receiving low-quality goods.

Negotiation is essential when drafting a letter of credit to ensure practical and convenient payment arrangements and timeframes are agreed upon. Failure to comply with the terms and conditions of a letter of credit may result in rejection of documents presented at the bank.

The UCP 600 imposes strict compliance regarding document requirements. However, it aims to prevent the rejection of documents for excessively technical reasons. The description of goods in the commercial invoice must correspond with the description in the credit, and non-documentary conditions must be ignored. The bank is not obligated to honor drafts unless they are in strict compliance with the letter of credit's terms and accompanying documents.

However, banks need to exercise adequate discretion, as the margin allowed to the bank in interpreting the documents is narrow, and the bank is at risk if it fails to insist on strict compliance.

In some cases, the credit instructions may contain stipulations that are impossible to satisfy and described as gibberish. In these cases, banks must exercise caution. In summary, a letter of credit provides security for sellers and buyers, but it is essential to exercise caution when drafting it and complying with its terms and conditions to avoid risk.

In summary, when a seller and a buyer are involved in cross-border trade, they are not just dealing with goods but are also dependent on a letter of credit. This document hinges on the honesty and integrity of both parties involved, and the associated documents must be meticulously checked to ensure compliance. Banks will only approve a letter of credit if the documents are in order, and any discrepancies will result in rejection.

Sources cited in this context include Stephen A Jones' book "Trade and Receivable Finance" and the Methuen CO Ltd publication "The Bill On London, Or, The Finance of Trade by Bills Of Exchange". The Dictionary for International Trade, written by D.C. van Hoof and D Verbruggen, is also essential in this field. The importance of meticulousness is further highlighted by legal cases such as Cape Asbestos v Lloyds Bank and Ian Stach ltd v Bank Bosley ltd. Legal guides like "Complete Guide to Credit and Collection Law" by Jay Winston and Arthur Winston, and "Briefcase on Commercial Law" by Michael Connolly, are also invaluable resources.

Further relevant authorities include Article 14 of UCP 600 and Chitty Joseph's "Chitty on Contracts: Second Cumulative Supplement to The Thirty-Third Edition". Legal cases such as English, Scottish and Australia Bank v Bank of South Africa, Gill & Duffus S.A. v. Berger & Co, and W.N. Lindsay & Co.Ltd. v. European Grain &Shipping Agency Ltd., are also worth noting. Finally, the International Chamber of Commerce (ICC) provides additional resources for anyone interested in this field.