Letter of Credit - Lifeblood of International Commerce Essay

Letter of Credit - Lifeblood of International Commerce - Essay Example The title was again reconfirmed in Intraco v Notis. To better understand what letters of credit are, how they are used and why it was called â€Å"the lifeblood of international commerce†, this paper will detail all pertinent information and know-how on the subject, from its origin to its present status in the international trade. 1. Brief Overview of Letter of Credit The letter of credit is about 180 years of age in the financing of trade exports. It has been one if not the most commonly used facilities for international trade payments. Today, its version is better known as the electronic letter of credit which with the use of the internet and computers, have become quite easy to use. The letter of credit comes in variety of forms, most common of which is the documentary credit, also referred to as just L/C, or credit or commercial in the UCP 600 or the ICC Uniform Customs and Practice for Documentary Credits 600 (UCP 600). The information contained in this paper is the standard type of documentary credit that is the common payment mechanism for international trade. There are other forms of letter of credit that may be mentioned but will not be dwelt upon are the standby letter of credit and the acceptable credit. Standby credit is not exactly related to the fundamental contract of shipment or sale of goods, unlike the documentary credit; therefore, it is not exactly applicable in payment condition and the investigation of shipping files and documents is not required. The standby credit’s primary role is the prevention of one party or both to attempt breaching a contract because o market changes or other reasons. The use of standby credit as collateral security and fidelity bonds in financing operations, and as performance bonds in the field of construction is increasing. In the transportation of oil, for example, particularly in short journeys such as transportation between countries in Europe, goods might be shipped to the discharge port within a day while the bills of lading are not yet delivered to the port of loading. Instead of documentary credits, the use of cash as the instrument for payment is more convenient and practical for the parties of sale contract in situations such as this. Then again, to increase the seller’s sense of security and confidence in doing business, a standby letter of credit can still be issued by the buyer as backup. From which it can be observed that a standby letter of credit is not exactly applicable in payment conditions. Even though the standby letter of credit has a significant role as a guarantee, it is not equivalent to a bank letter of guarantee by all means. Evidence of non-performance of the underlying transaction is required by the standby credit, instead of the sole requirement of the beneficiary’s documentary compliance. In addition, in standby credit, the proof of fraud is more difficult than in documentary credit. Simply put, proving that the breach of contract of the beneficiary is a fraud is very difficult. Just as Judge Kerr said, the case of Harbottle (Mercantile) Ltd. v. National Westminster Bank4 is not a case of established fraud at all. The seller may indeed be correct in arguing that a buyer h as no contractual right to payment of any part of the guarantee, let alone the entire guarantee. However, all these rest on contractual disputes. They fall in a subject distant from fraud, particularly established fraud. 2. Defining the Letter of Credit Basically, the most common form of credit it documentary form is the Letter of Cre