The Irony of International Letters of Credit: They Aren't Secure, But They (Usually) Work
Banking Law Journal, No. 120, p. 479, 2003
18 Pages Posted: 15 Sep 2008
Because payment under a letter of credit depends upon presentation by the seller-beneficiary of documents that comply strictly with the documents required by the letter of credit, the slightest discrepancy in the documents relieves the bank of its obligation to pay. Indeed, most presentations are discrepant. Yet buyers typically waive the discrepancies in the documents, thereby permitting the seller to be paid by the bank under the letter of credit. This article shows how the seller, by controlling the goods through use of a negotiable bill of lading, consigned to the bank, can protect itself from the potential opportunism of the buyer.
Recently published scholarship has attempted to explain why buyers waive discrepancies since they have no obligation to do so and since seller's presentation of discrepant documents provides buyer an opportunity to avoid payment under the letter of credit. This article will add to the discussion by showing how the seller, by controlling the goods through the use of a negotiable bill of lading, consigned to the bank, can protect itself from the potential opportunism of the buyer. When the seller maintains control of the goods, the buyer has an incentive to waive the discrepancies in the documents, and therefore permit the bank to pay the seller under the letter of credit.
This article first describes how letters of credit are thought to work. It will then show the reality of how the system works. It next focuses on explanations proposed in recent scholarship as to why buyers tend to waive discrepancies, even though they have no duty to do so. Finally, it explains the role of the bill of lading as a control mechanism.
Keywords: international letters of credit, lading
JEL Classification: E50, F34
Suggested Citation: Suggested Citation