Banking and Trade: An Exploration of Letters of Credit

The provided content consists of various academic articles and books related to bills of lading, bankers' documentary credits, and letters of credit. The topics covered include fraud prevention, international law, public administration, and financial instruments. The sources include Routledge publications, journals such as the University of Toronto Law Journal and the Banking Law Journal, and academic articles from Public Administration & Law and International Journal of Management, IT and Engineering.

International law
related to credit
letter

Table of Contents
INTRODUCTION...........................................................................................................................3
1. Need of law of international law for monitoring the international transaction.......................3
2. The provision of uniform custom and practice for documentation credit and international
standardization banking practice.................................................................................................4
3. Principles of strict compliance................................................................................................5
4. Fraud Exception doctrine........................................................................................................6
5. Doctrine of independence.......................................................................................................6
6. Type of letter of credit............................................................................................................6
7. Purpose of letter of credit........................................................................................................7
8. Letter of credit impact on bill of lading..................................................................................7
9.. Examination of documents “on fair face”..............................................................................7
10. Linkage of document............................................................................................................8
11. Remaining issues and advice to parties ................................................................................8
12. The approach of Turkish Supreme Court regarding the examination of the documents......9
13. Contractual act....................................................................................................................10
13. Sale of Goods Act...............................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
The letter of credit is popular in international trade transaction because it Is a most
common method which used for international business before lots of years ago. This letter used
as security by one trader to another trader for any goods. Further, in pastime, business man made
letter by hand and sign on basis of financial company guarantee but in modern time period it
totally generates by computerised technology 1. The letter of credit also treated as international
contractual agreement where one of trader contract with bank by fulfilling letter of credit and
authorised to another countries bank for payment to trader. Moreover, this document exhibit
assurance by one parties to another party for payment made if state term and condition has been
fulfilled. It is to be noted that seller must submitted document which stated all term has been
fulfilled 2. Further, it governs by international chamber of commerce uniform customer and
practice for documentary credits.
Element of letter of credit
 Title, date of issue, date of expire
 Document submitted by seller at the time of contractual relationship made.
 Term and condition are state on letter of credit which must be fulfilled by buyer for
receiving payment.
1. Need of law of international law for monitoring the international transaction
The international law is necessary for maintained standardization throughout world.
Further, in pastime period, countries made their own law so that business transaction are not
possible to perform in right way so that It also main reason for introduction of international law
3. On other hand, lots of countries like turkey has not own law so that it required. Therefore, it
1 Xiuzhi, L. and L. Zheng,. A New Analysis of the Causes and the Countermeasures of
Fraud in Letter of Credit—Take Ningbo LIANHE V. Hong Kong NUOHA as An Example.
Public Administration & Law. 7. 2014. pp.022.
2
Koskenniemi, M., ‘Empire and International Law: the real spanish
contribution’, University of Toronto Law Journal, vol. 61, no. 1, 2011, pp. 1-36.
3
Von Glahn, G. and J. L. Taulbee, Law among nations: an introduction to public
international law, Routledge, 2015.

required to maintained fairness in international business by securing the interest of international
trader 4. The case of Octrix Holdings (S) Pte. Ltd vs Vrikish Transworld Holdings Ltd on 22
August, 2008 in this case court state that standardization of law is necessary for fair transaction.
2. The provision of uniform custom and practice for documentation credit and international
standardization banking practice
The provision of USP 600 and USP 500 exhibit the standard of examination of credit
letter. It options to any counties to adopted any standard. Further, USP 600 introduce in recent
time period which related to the latest norm and regulation for transaction 5. It is prepared by
international chamber of commerce commission on banking techniques and practice. The usp
600 has been effective from 1 July 2007.
USP 600 consist following standardization for examination of letter in fair manner.
 USP 600 impose duty on banker to examine all document of credit letter.
 It consists new article 2 for effective examination by avoiding repetition.
 It changes reasonable time for acceptance or refusal of document by maximum period of
five days.
 It also allowed discounting of deferred payment credit.
 It allowed to slimier standardization to payment of credit. It obligated to bank for followed the state provision for fairness of transaction.
ISBP
It is published by ICC as detailed standardization guidance for examination of letter
document 6. It main purpose to reduce the rejection the error and omission of credit letter
transaction. In other word, the UCP rules are general in nature so that it required to perform
transaction with accuracy need some checking standard norm 7. It helps to reduce huge amount
4 Dolan, J., Insolvency in Letter of Credit Transactions--Part III. The Banking Law
Journal. 2015. pp.2016-01.
5 Schaffer, R. et al.,. International business law and its environment, Cengage learning,
2011.
6 Kuhn, M. K. and K. L. Freeman, Using Letters of Credit for Tenant Credit Enhancement.
Prob. & Prop., 27. 2013 pp.56.
7 Shaffer, G. and M.A. Pollack, ‘Hard vs. soft law: alternatives, complements and
antagonists in international governance’, Minnesota Law Review, vol. 94, 2010, pp. 706-99.

of mistake like typing error, mathematics issue, draft process, description of good in invoice and
singing of bill landing etc. on other hand, this process of examination must be authorized period
and entries must be made of each transaction 8. Further, nature of transaction must be common
nature which understand by each person within worldwide area. The cite of M/S. Global Steel
Philippines vs Stc Of India Ltd. & Ors. on 8 May, 2009 state that standard process must
necessary for found misconduct within the bank operation.
3. Principles of strict compliance
The article 5 state that bank is liable for financial transaction so that it is not liable for
good. Further this doctrine clearly state that receiver has to face the strict procedure for receiving
the credit letter amount because it is necessary for maintained standardization. Moreover, bank
has to analysis all the document before payment made as per the provision standard. Otherwise ,
this doctrine liable to bank for wrong transaction 9. This doctrine firstly introduced by case of
Equitable Trust Company of New York v Dawson Partners Ltd 1927 in UK. Further, in this
case there is hard for bank to identified document because document were almost same. The
court word state in this case that "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'. The lord
argument was totally based on fact that bank does not know about transaction document and not
followed standardization in fair manner. Further, this thing arise major loss in transaction.
Moreover, proper transaction with standard formula must be necessary for manage banking
interest in fair transaction. Therefore, lord introduce the doctrine of strict compliance for
purpose of maintained transaction in better manner . Where bank required to follow procedure
until transaction being completed. Apart from this, the bank is not responsible for delay
payment if huge time consumed in proceeding. On other hand, it is also obligated to financial
institute for followed provision in reasonable manner.
8 Lukic, A.,. Bank demand guarantee and standby letter of credit as collaterals in
international trading operations. International Journal of Management, IT and Engineering.
4(12). 2014 pp.272.
9 Golove, D.M. and D.J. Hulsebosch, ‘Civilized Nation: The Early American Constitution,
the Law of Nations, and the Pursuit of International Recognition’, A. NYUL Rev., vol. 85, 2010,
p.932.

4. Fraud Exception doctrine
These principles state that financial institute must be aware from fraud certificate because
sometime untruthfulness certificate provided by fraud person for purpose of receive amount 10.
Further, this rules impose injection again fraud payment. Therefore, financial institute should
followed the rules for purpose of save itself from fraud activities 11.
5. Doctrine of independence
This doctrine state that bank and buyer relationship are different from seller and buyer
relationship 12. Further, bank is only liable for the finance transaction so that bank is not liable for
good and other term in contractual relationship. Besides, financial institute is not required to
investigate good conditions fulfilled as state term or not. Hence, letter of credit is independent
from contract of sales.
6. Type of letter of credit
 Import and export letter of credit – this type of letter of credit is useful in international
transaction 13. For purpose of import and export of good between inter-country
transaction.
 Revocable letter of credit – this type of letter can be changes by either buyer or issuing
bank because of any reason without inform to beneficiary 14. Further, this type of letter of
credit cover under format of USP 600.
10 Locke, J., Second Treatise of Government and A Letter Concerning Toleration. Oxford
University Press. 2016.
11 Andrade, R. E., Letters of Credit and Performance Bonds: How Are These Popular Credit
Enhancement Devices Applied in International Project Finance; From Their Common Law
Origins to Their Application in Civil Law Systems-The Peruvian Case. Fla. J. Int'l L. 25. 2013
pp.417.
12 Blankespoor, E., T. J. Linsmeier, Petroni, K. R., Fair value accounting for financial
instruments: Does it improve the association between bank leverage and credit risk?. The
Accounting Review, 88(4). 2013. pp.1143-1177.
13 Che Hashim, R., The UCP 600 rules in letter of credit (LC). Selected issues. 2015.
14 Danielsson, A., A Critical Analysis of the Protection offered to Third Parties in Respect
of Liabilities and Immunities under a Bill of Lading. 2015.

 Irrevocable letter of credit – It is only change by issue bank on applications of buyer with
approval of beneficiary.
 Red clause - this type of letter of credit allowed advancing payment to beneficiary before
shipping good.
7. Purpose of letter of credit
The main purpose of letter of credit is to promote business from different territory 15.
Further, in this bank confirm to pay on behalf of one contract party to another party to payment
when particular term has been satisfied 16.
8. Letter of credit impact on bill of lading
Bills of lading is a confirmation document which state contractual term. Further, it is a
agreement between transportation company and seller which main purpose is to delivering good
to actual person 17. Thus, this document is a confirmation letter which state that buyer has
received good so that beneficiary party submit bill of lading with letter of credit for receiving of
amount.
9.. Examination of documents “on fair face”
The USP 600 state guideline for examination of document in standardization manner. It is
obligated to bank for examine the document by using provisions 18. Further, bank should
examine all related dossier which related to particular transaction.
USP 600 state that bank should examine those document which submitted by seller on
their face only. Further, bank is not responsible for document accuracy, truthiness etc. moreover,
It is the responsibility of contractual parties to examination 19. Therefore, bank also liable to
payment in case of trader receiver defective good. The case of Cit vs Vijay Ship Breaking
15 Burrows, A., English private law. OUP Oxford. 2013.
16 Sotchenko, E., THE ROLE OF LETTER OF CREDIT IN REALIZING
INTERNATIONAL TRANSACTIONS. Contribution to International Economy. 1(2). 2015.
pp.37-40.
17 Todd, P., Bills of lading and bankers' documentary credits. Taylor & Francis. 2013.
18 Schoenmaker, D., Governance of international banking: The financial trilemma. Oxford
University Press. 2013.
19 García, R.L.F., ‘The Autonomy Principle of Letters of Credit’ Mexican Law Review, vol.
3 no. 1, 2010, p.4.

Corporation & ... on 20 March, 2003 case state that bank is only responsible to check detail
examination of given document thus, it is not responsible for good which delivers by seller.
10. Linkage of document
The article 14 of USP state that document must not be match with each-other further,
trader should be provided different document for different good 20. Further, bank is not liable to
payment in case document slimier for different good 21. Therefore, trader made transaction for
mutual good than they should made different document. On other word, financial institute see
that type of document in doubtful manner because USP 600 declare invalid document 22. The
case of Alcove Industries Ltd. vs Oriental Structural Engineers on 20 September, 2004 state that
bank is responsible to payment as per the general principles state in USP 600 so that bank will
not being payment in case same document present in front of bank for payment.
11. Remaining issues and advice to parties
After looking at the present situation, it can be stated that the rules have resulted in
development of uncleanness and because of this aspect, various types of applications are
received by the court 23. Furthermore, the banks are also trying and putting the best of their
efforts ensure that customers are not being exploited and their interest is protected in the best
possible manner. It can be expressed that various types of interpretations provided by court can
results in exploitation of consumer interest to a great extent24. However, it can be argued that
there are some development carried out in this field such as introduction of new and latest
version of UCP but it is also not able to deliver or provide with the best possible outcome or
20 Buch, C. M. and L. S. Goldberg,. International banking and liquidity risk transmission:
Lessons from across countries. IMF Economic Review. 63(3). 2015. pp.377-410.
21 Chander, A. and R. Costa, ‘Clearing credit default swaps: a case study in global legal
convergence’, Chicago Journal of International Law, vol. 10, no. 639. 2010.
22 Lessambo, F., The international banking system: capital adequacy, core businesses and
risk management. Palgrave Macmillan. 2013.
23 Schoenmaker, D., Governance of International Banking: The Financial Trilemma
(Chapter 1). Governance of International Banking: The Financial Trilemma, Oxford University
Press. 2013.
24 Focarelli, C., International law as social construct: The struggle for global justice,
Oxford University Press, 2012.

satisfactory results. The concern of different parties is also not satisfied with the action plan and
strategies which were developed by ICC 25. This can be justified with an example that ICC
introducing ISBP into the entire situation with an objective to offer an appropriate set of
guidelines has also failed to a great extent as it has not provided desired or satisfactory results.
Looking at the present situations, it can be expressed that optional document examination
standard is one of the best and most effective way to deal with the same 26. Along with this,
parties are also required to focus upon different challenges and issues and they also need to
develop appropriate strategies to overcome rom those identified issues and challenges. Some
effective advice which can be used by banks are below mentioned as:
 At the time of issuing credit to their respective customers, it is required by all banks to
develop and insist upon clear and transparent credit instructions 27. On the other side of
this, it is required by customers to become aware of all the major terms and conditions
which are associated with credit.
 Banks are also required to develop appropriate strategies which can help in lowering
down the number of rejections which are generally caused because of the lengthy
descriptions which are associated with financial products 28. In order to deal and
overcome with such kind of situations, it is required by banks to ensure and keep
description of financial services and products very short and simple. This step will play a
very crucial role in reducing the total number of rejections which are being faced by
banks,
25 Bielecki, T. R. and M. Rutkowski, Credit risk: modeling, valuation and hedging.
Springer Science & Business Media. 2013.
26 Kazemi, O. and A. M. Mokarrami, A Comparative Study of Low and Duties Inauguration
of Letter Credit and banks in Iran and International Law. International Journal of Humanities
and Cultural Studies (IJHCS) ISSN 2356-5926, 1(1). 2016. pp.131-135.
27 Soni, P., The Role of Documentary Letters of Credit in International Sale Contract.
Available at SSRN 2424161. 2014.
28 Deeks, A., ‘Consent to the use of force and international law supremacy’, Harvard
International Law Journal, vol. 54, no. 1, 2013.

12. The approach of Turkish Supreme Court regarding the examination of the documents
The turkey supreme court gives their judgment that seller is liable defective good
supplied so that it bank responsibility to paid whole state amount state on the face of the credit
document. It is because of financial institute is responsible for seller good and their behaviors for
such transaction 29. Further, bank will be liable for full payment when trader show legal
document to bank. Therefore, bank only liable for only complied the following transaction in fair
manner.
The strict compliance doctrine state that also describe that bank is liable to check the
document which provided by seller for payment thus, it is not obligated to liable for fraud made
by seller in good quality 30. This approaches save the bank interest. Therefore, bank is not liable
to examine the document in detail manner even institute is not responsible for sufficient
examination of document. The USP 600 state clearly document should be strict compliance on
their face with credit term.
On other hand, bank is examine only those document which provided by buyer for
payment purpose 31. Further, bank is only liable to examine provided document. Therefore, in
case of any transaction made wrongly than bank will not be liable for such wrong transaction. It
is because bank made transaction by provided by buyer.
13. Contractual act
Letter of credit transaction is related to contractual agreement so that it consist of term
and condition which party required to followed. The letter of credit is totally based on
agreement term where payment is depends on fulfillment of condition 32. It is agreement between
two party. In this agreement parties entered into agreement by fulfilling the element of contract.
29 Gallagher, A.T., ‘Improving the effectiveness of the international law of human
trafficking: A vision for the future of the US Trafficking in Persons reports’, Human Rights
Review, vol. 12, no. 3, 2011, pp. 381-400.
30 Kuhn, M. K. and K. L. Freeman,. Using Letters of Credit for Tenant Credit Enhancement.
Prob. & Prop.. 27. 2013. pp.56.
31 Soni, P., The Role of Documentary Letters of Credit in International Sale Contract.
Available at SSRN 2424161. 2014.
32 Crook, J.R., ‘Contemporary Practice of the United States Relating to International
Law’, American Journal of International Law, vol. 105, no.3, 2011, pp.568-611.

Further, parties can liable to another parties. On other hand, bank also liable under contract act
because bank promise to payment by examination of given document as per state provisions 33.
13. Sale of Goods Act
The Sales of Goods Act impacts the letter of credit. Sales of goods act indicates that consensus
has been achieved between the two parties regarding the payment involved in the contract 34.
This law pays a significant role in establishing certainty regarding performance of contract by the
international parties 35. As an impact of this Act, the payment is delegated by the parties to a
mediator. This can be a bank which complies with their wishes.
33 Silber, W. L., Selective credit policies: a survey. PSL Quarterly Review. 26. 2013.
pp.107.
34 Dimitrova-Grajzl, V., P., Grajzl and Todd, R. M., Consumer credit on American Indian
reservations. Economic Systems, 39(3). 2015. pp.518-540.
35 Bluhm, C., L. Overbeck, and Wagner, C., 2016. Introduction to credit risk modeling. Crc
Press.
Othman, A. A. and R. Hashim, Principle of autonomy in letter of credit (LC)-An
overview from legal and Shariah perspective. 2013.

CONCLUSION
Summary of report state that international law maintained standardization on transaction
for easy understanding of whole transaction. The letter of credit firstly govern in UK court lord
because of non compliance of standardization in better manner. The USP 600 introduce recently
in 2007 which article state basic guideline for reliable transaction. Further, such a guideline must
be followed on the basis of process given by ISBP. This process is accurate to maintained
transaction in reliable manner. On other hand, doctrine of strict compliance state that bank is
obligated to followed provisions as right manner for fair transaction.

REFERENCES
Books and journal
Andrade, R. E., Letters of Credit and Performance Bonds: How Are These Popular Credit
Enhancement Devices Applied in International Project Finance; From Their Common Law
Origins to Their Application in Civil Law Systems-The Peruvian Case. Fla. J. Int'l L. 25.
2013 pp.417.
Bielecki, T. R. and M. Rutkowski, Credit risk: modeling, valuation and hedging. Springer
Science & Business Media. 2013.
Blankespoor, E., T. J. Linsmeier, Petroni, K. R., Fair value accounting for financial instruments:
Does it improve the association between bank leverage and credit risk?. The Accounting
Review, 88(4). 2013. pp.1143-1177.
Bluhm, C., L. Overbeck, and Wagner, C., 2016. Introduction to credit risk modeling. Crc Press.
Buch, C. M. and L. S. Goldberg,. International banking and liquidity risk transmission: Lessons
from across countries. IMF Economic Review. 63(3). 2015. pp.377-410.
Burrows, A., English private law. OUP Oxford. 2013.
Chander, A. and R. Costa, ‘Clearing credit default swaps: a case study in global legal
convergence’, Chicago Journal of International Law, vol. 10, no. 639. 2010.
Che Hashim, R., The UCP 600 rules in letter of credit (LC). Selected issues. 2015.
Crook, J. R., ‘Contemporary Practice of the United States Relating to International
Law’, American Journal of International Law, vol. 105, no.3, 2011, pp.568-611.
Danielsson, A., A Critical Analysis of the Protection offered to Third Parties in Respect of
Liabilities and Immunities under a Bill of Lading. 2015.
Deeks, A., ‘Consent to the use of force and international law supremacy’, Harvard International
Law Journal, vol. 54, no. 1, 2013.
Dimitrova-Grajzl, V., P., Grajzl and Todd, R. M., Consumer credit on American Indian
reservations. Economic Systems, 39(3). 2015. pp.518-540.
Dolan, J., Insolvency in Letter of Credit Transactions--Part III. The Banking Law Journal. 2015.
pp.2016-01.
Focarelli, C., International law as social construct: The struggle for global justice, Oxford
University Press, 2012.

Gallagher, A. T., ‘Improving the effectiveness of the international law of human trafficking: A
vision for the future of the US Trafficking in Persons reports’, Human Rights Review, vol.
12, no. 3, 2011, pp. 381-400.
García, R. L. ‘The Autonomy Principle of Letters of Credit’ Mexican Law Review, vol. 3 no. 1,
2010, p.4.
Golove, D. M. and D. J. Hulsebosch, ‘Civilized Nation: The Early American Constitution, the
Law of Nations, and the Pursuit of International Recognition’, A. NYUL Rev., vol. 85,
2010, p.932.
Kazemi, O. and A. M. Mokarrami, A Comparative Study of Low and Duties Inauguration of
Letter Credit and banks in Iran and International Law. International Journal of Humanities
and Cultural Studies (IJHCS) ISSN 2356-5926, 1(1). 2016. pp.131-135.
Koskenniemi, M., ‘Empire and International Law: the real spanish contribution’, University of
Toronto Law Journal, vol. 61, no. 1, 2011, pp. 1-36.
Kuhn, M. K. and K. L. Freeman, Using Letters of Credit for Tenant Credit Enhancement. Prob.
& Prop., 27. 2013 pp.56.
Kuhn, M. K. and K. L. Freeman,. Using Letters of Credit for Tenant Credit Enhancement. Prob.
& Prop.. 27. 2013. pp.56.
Lessambo, F., The international banking system: capital adequacy, core businesses and risk
management. Palgrave Macmillan. 2013.
Locke, J., Second Treatise of Government and A Letter Concerning Toleration. Oxford
University Press. 2016.
Lukic, A.,. Bank demand guarantee and standby letter of credit as collaterals in international
trading operations. International Journal of Management, IT and Engineering. 4(12). 2014
pp.272.
Othman, A. A. and R. Hashim, Principle of autonomy in letter of credit (LC)-An overview from
legal and Shariah perspective. 2013.
Schaffer, R. et. al. International business law and its environment, Cengage learning, 2011.
Schoenmaker, D., Governance of International Banking: The Financial Trilemma (Chapter 1).
Governance of International Banking: The Financial Trilemma, Oxford University Press.
2013.

Schoenmaker, D., Governance of international banking: The financial trilemma. Oxford
University Press. 2013.
Shaffer, G. and M. A. Pollack, ‘Hard vs. soft law: alternatives, complements and antagonists in
international governance’, Minnesota Law Review, vol. 94, 2010, pp. 706-99.
Silber, W. L., Selective credit policies: a survey. PSL Quarterly Review. 26. 2013. pp.107.
Soni, P., The Role of Documentary Letters of Credit in International Sale Contract. Available at
SSRN 2424161. 2014.
Sotchenko, E., THE ROLE OF LETTER OF CREDIT IN REALIZING INTERNATIONAL
TRANSACTIONS. Contribution to International Economy. 1(2). 2015. pp.37-40.
Todd, P., Bills of lading and bankers' documentary credits. Taylor & Francis. 2013.
Von, G. and J. L. Taulbee, Law among nations: an introduction to public international law,
Routledge, 2015.
Xiuzhi, L. and L. Zheng,. A New Analysis of the Causes and the Countermeasures of Fraud in
Letter of Credit—Take Ningbo LIANHE V. Hong Kong NUOHA as An Example. Public
Administration & Law. 7. 2014. pp.022.