The Letter of Credit, its resilience and viability in securing international commercial transactions

Abstract

Purpose – This paper aims to address issues of law and policy, the potential pitfalls such as fraud, conflict of law and documents discrepancies that are often encountered by the parties in usage and practice of the Letter of Credit (LC). The article has gleaned other forms of payment mechanisms in international commercial trade to demonstrate that despite the upsurge in international payment instruments, the LC has remained a viable commercial product. This article aims to provide an in-depth analysis of the law governing the LC and why it has remained resilient and a viable commercial product for many years. Design/methodology/approach – The author has utilized the current version of UCP 600 (2007) and the legislation such as Brussels Convention (2000) in Europe, litigated cases and secondary data sources in writing the paper. The data generated were then evaluated taking into account the most recent legal and policy changes regarding the usage and practice of the LC in international commercial transactions. The paper straddles many issues but evaluated in a distinctive way to underscore the purpose for writing it. Findings – The findings of the paper have demonstrated that despite a myriad of payment mechanisms as a result of innovation in international trade, the LC is still a viable commercial product. Parties will need to be knowledgeable and skilled enough to keep abreast of dynamic changes on law and policy relating to usage and practice of LCs. Short of that parties could be vulnerable to risk exigencies inherent in international trade they sought to eliminate by subscribing to the LC. Research limitations/implications – The limitations lie in realm that the paper was largely library-based and the author did not carry out extensive corroborative research studies on issues it was written on. Thus, any future work on the LC will try to corroborate issues of policy and practice and how they are internalized in commercial practice. Practical implications – The paper has articulated the governing law of the LC and the context in which it is harnessed in commercial practice. It has articulated potential risk areas that the parties ought to watch out for before and during the process of harnessing the LC as a payment mechanism. The paper has demonstrated that risks inherent in international trade are now higher than in past decades because of globalization and its attendant fluid environment. The paper is relevant to banks, regulators, governments and also students because it internalizes most recent changes in the usage and practice of the LCs in international trade. Social implications – International trade affects local businesses, banks, ordinary people, national governments and it has far reaching implications for societies as whole. The LC is utilized to mitigate, if not eliminate, potential risks in international trade transactions, and it has far reaching social implications for economies to be overlooked. Originality/value – The article has gleaned other forms of payment mechanisms in international commercial trade to tease out that despite the upsurge in international payment mechanisms, the LC has remained a viable commercial product. This article is a MUST read because it internalizes recent changes in the usage and practice of documentary credit which have not been addressed in its context. Even though the article has been undertaken by analysis of secondary and primary data sources, the author has done so in a distinctive way to underscore the most recent changes to the usage and practice of the LC and the purpose it was written.