Payment for paperless trade: Are the viable alternatives to the documentary credit?

Law and Policy in International Business, Fall 2001 by Laryea, Emmanuel T

maturity or negotiate drafts under the credit.49 These additional roles do not, however, constitute any undertaking by the advising bank to the beneficiary to pay, accept drafts or negotiate.50

A confirming bank adds its own undertaking to that of the issuing bank,51 usually at the request of the issuing bank.52 Confirmation creates an obligation on the confirming bank-provided the exporter presents the stipulated documents, and all other conditions and terms of the credit are met-either to pay or accept the seller's draft.53 The beneficiary thus obtains an undertaking from both the issuing bank and the confirming bank. A correspondent issuer opens the documentary credit in its own name and advises the beneficiary without mention of the original issuing bank.54 Under such an arrangement, the only undertaking that the seller obtains is that of the correspondent issuer.55 To the seller, the correspondent issuer is the issuing bank, but, in reality, there is usually an issuing bank located in the buyer's country that is liable to the correspondent issuer.56

A documentary letter of credit may be revocable or irrevocable. All credits must clearly indicate whether they are revocable or irrevocable, and in the absence of such an indication, the credit is deemed irrevocable.57 A revocable credit, on the one hand, does not constitute a legally binding undertaking between the issuing bank and the seller and may be modified or cancelled at any time without notice to the seller." However, a nominated bank that accepts documents tendered under the credit and pays, accepts or negotiates a draft before obtaining notice of the revocation, cancellation or modification of the credit is entitled to reimbursement from the issuing bank.59 An irrevocable credit, on the other hand, constitutes a definite undertaking on the part of an issuing banker that the provisions for payment contained in the credit may neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.60 In practice, most credits are irrevocable; revocable credits are rare.61

E. Advantages of Documentary Credits The advantages of the documentary credit over the other methods of payment are its security, liquidity, and proximity, which are crucial qualities in international business.

1. Security For the exporter, trade credits add the creditworthiness of a reputable bank, usually a confirming bank in its home country. This reduces the exporter's exposure to the risks of an importer's insolvency or non-payment. Without a documentary credit, an exporter may be unwilling to deal with an importer it does not know because it would not want to part with the goods without assurance of payment. That is not to say banks do not become bankrupt.62 Nonetheless, the incidence of reputable banks becoming insolvent is rare. Moreover, the exporter can assess the credit standing of a bank more easily than that of an overseas importer. Furthermore, if the bank becomes insolvent before the exporter is paid, the exporter may proceed against the importer irrespective of whether the importer has already paid the insolvent bank in full or in part.63 The exporter thus has a double layer of protection and is affected by bankruptcy only when both the importer and the bank become bankrupt. Trade credits assure the exporter of payment upon presentation of specified documents-an assurance that is not weakened by disputes arising under the underlying contract of sale.64 An exporter with a documentary credit and the stipulated documents is able to ship the goods secure in the knowledge that payment will be effected.am