Commercial letters of credit

Abstract

The purpose of this thesis is to explain and illustrate the operation and legal aspects of that form of payment used in commercial transactions known as commercial or banker's letters of credit. Much of what will be said is based on the “Uniform Customs and Practice for Documentary Credits” (1974 revision), evolved by the International Chamber of Commerce and universally applied by banks since 1962. This sole fact clearly shows that although letters of credit have existed, in one form or another, as far back as the 12th and 13th centuries, the commercial letter of credit is a recent innovation. In fact, Dr. A.G. Davis states: “The commercial letter of credit in its modern form is a product of the Great War, and many legal questions involved in its issue have not yet been fully worked out.” In the second Chapter, the actual operation of a commercial letter of credit will be examined. A typical letter of credit transaction will be illustrated and the economic advantages of this type of payment will be contrasted with those arising out of other modes of payment. The third Chapter will deal with the consequences which the contract of sale, previously entered into by the parties, has on the credit which is subsequently issued. However, this chapter will also deal with the questions of the quantity and amount of the goods and the possibility of partial shipments. The questions discussed in the second and third chapters apply to all types of letters of credit. The fourth Chapter, on the other hand, will distinguish between the various types of letters of credit in use, indicating their advantages and particular uses. The emphasis will, however be laid on the distinction between revocable and irrevocable letters of credit and between confirmed and unconfirmed letters of credit, since those distinctions apply to all types of letters of credit and are of basic importance in such transactions. The fifth Chapter will deal with the transfer and assignability of letters of credit, a question which is closely connected to the previous chapter but which, due to its importance, has to be treated at some length. The sixth Chapter will deal with the legal and contractual aspects of letters of credit. The rights and obligations of the parties involved in such a transaction will be examined and the nature of the contracts established thereby outlined. This is the part of the subject which has been most developed on the Continent and by local Courts, so that a number of Maltese judgments will be referred to. In the seventh and final Chapter, the documents which have to be tendered by the seller to the bank in order that he may demand payment will be examined. Since the letter of credit is usually used in connection with a c.i.f. contract, the documents which will be examined in some detail are the bill of lading, the policy of insurance and the invoice. The main emphasis will, however, be laid on the bill of lading both because it is the most important document as well as because it is the one most likely to contain errors. However, since the seller may demand other documents besides the ones abovementioned, such other documents will also be examined. Finally, the chapter will also deal with the forgery of documents and with the means available to rectify irregular documents – ratification and the giving of an indemnity.