BASIC PRACTICE RELATING TO A COMMERCIAL LETTER OF CREDIT

Introduction:

It is trite, that a letter of credit denotes an instrument under which the issuer (usually a bank) at a customer’s request agrees to honour draft or other demand for payment complies with specified conditions; regardless of whether or not any underlying agreement between the customer and the beneficiary is satisfied. See Black’s Law Dictionary 9th edition, 2009 at 987.

The four autonomous contractual relationships involved in a commercial letter of credit:

In the case of United City (Investments) Ltd. v. Royal Bank of Canada (1983) A.C. 168 at 182-183, Lord Diplock explained that four (4) contracts are involved in a commercial letter of credit. He said:

“It is trite law that there are four (4) autonomous though interconnected contractual relationships involved viz:

(1)    The underlying contract for the sale of goods, to which the only parties are the buyer and the seller;

(2)    The contract between the buyer and the issuing bank under which the latter agrees to issue the credit and either itself or through a confirming bank to notify the credit to the seller and to make payments to or to the order of the seller (or to pay, accept or negotiate bills of exchange drawn by the seller) against presentation of stipulated documents; and the buyer agrees to reimburse the issuing bank for payments made under the credit. For such reimbursement the stipulated documents, if they include a document of title such as a bill of lading, constitute a security available to the issuing bank;

(3)    If payment is to be made through a confirming bank the contract between the issuing bank and the confirming bank authorizing and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit;

(4)    The contract between the confirming bank and the seller under which the confirming bank undertakes to pay to the seller (or to accept or negotiate without recourse to drawer bills of exchange drawn by him) up to the amount of the credit against presentation of the stipulated documents.” See the case of Nasaralai Enterprises Ltd. v. Arab Bank Nigeria Ltd. (1986) LPELR-1942(SC) per BELLO, JSC at pp. 20-21, paras. E-F

Whether a bank is duty bound to honour the terms and conditions in a letter of credit once a letter has been issued and confirmed by it:

The law has been aptly stated by Lord Denning M.R. in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. & Umma Bank (1978) 1 Lloyd’s Rep. 166 at 170 thus:

“It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit.”

That was clearly stated in Hamzeh Malas & Sons v. British Imex Industries Ltd. (1958) 2 Q.B. 127 at p. 129 where Lord Justice Jenkins, giving the judgment of this Court, said:

“.... it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice.”

Basic practice relating to a commercial letter of credit:

The basic tenor of the law and practice relating to commercial letter of credit is that parties deal in documents not in goods or ships. Article 8(a) of the Uniform Customs and Practice for Documentary Credits 1974, which apply to the letter of credit, provides:

“In documentary credit operations all parties deal in documents and not goods. The only thing a bank is required to do is to examine documents and to treat them on their face value. See Imoka & Anor v. United Bank For Africa PLC (2012) LPELR-19837-CA, per SAULAWA, JCA at p. 26, paras. B-D.

Whether all parties to a documentary credit have the right to reject documents which do not comply with the terms and conditions of the letter of credit:

It must be appreciated that subject to the law relating to acceptance, estoppel and waiver, all the parties, i.e. the buyer, the issuing bank and the correspondent or confirming bank, have the right to reject documents which do not comply with the terms and conditions of the letter of credit and in the case of a buyer if the documents do not also comply with his mandate to the issuing bank for the opening of the letter of credit. See the cases of J.H. Rayner & Co. Ltd., and the Oilseeds Trading Co. Ltd. v. Hambros Bank Ltd. (1943) Lloyds Rep. 10 (CA.); Bank Melli Iran v. Barclays Dominion, Colonial & Overseas (1951) 2 Llyod’s Rep 367; Panchaud Freres S.A. v. Et. General Grain Co. (1970) 1 Llyod's Rep. 53 at 57. I shall amplify the law relating to the right to reject later in this judgment.

Basic practice relating to a commercial letter of credit:

The law is well settled that in opening a letter of credit, a bank has a duty to comply with the instructions of its customer: Midland Bank v. Seymour (1955) 2 Lloyd’s Rep. 147.

In considering the basic practice relating to a commercial letter of credit, which involves a most important aspect of commercial law, Lord Denning L.J., (as he then was) dealt with the increasing sale of goods across the world, in the case of Pavia & Co. S.P.A. v. Thurmann Nelsen (1952) 2 QB. 84 where he said at page 88 as below:

“The sale of goods across the world is now usually arranged by means of confirmed credits. The buyer request his banker to open a credit in favour of the seller, and in pursuance of that request the banker, or his foreign agent issues a confirmed credit in favour of the seller. This credit I promise by the banker to pay money to the seller in return for the shipping documents. Then the seller, when he “presents the documents, gets paid the contract price. The conditions of credit must be strictly fulfilled; otherwise the seller would not be entitled to draw on it”.

See also the case of Nwangwu v. First Bank Ltd. (2008) LPELR-4478-CA per BAGE, JCA at P. 24, paras. A-D.

For further information contact the author:

Kingsley Izimah, Esq.

kingsley.izimah@gmail.com

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