“LEGAL INCIDENCES OF DOCUMENTARY
LETTER OF CREDIT AS A VIABLE SECURITY
OPTION”
SEMINAR PAPER PRESENTED TO THE SECURED
CREDIT TRANSACTION
2010/2011 LL.M CLASS, FACULTY OF LAW,
UNIVERSITY OF LAGOS
BY:
GABRIEL ONOJASON - 109061001
OMOSEDE OKPIARU - 020601130
SUPERVISING LECTURER: DRS. OLUDAYO G.
AMOKAYE AND TUNDE OTUBU
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LEGAL INCIDENCES OF DOCUMENTARY LETTER
OF CREDIT AS A VIABLE SECURITY OPTION
Introduction:
Documentary letter of credit is also known as letters of credit or bankers
commercial credit. The financing of international trade presents peculiar
problems because the parties to the transaction reside in different countries and
are therefore not able to know and/or ascertain not only the financial standing of
the other party but also of each other’s reputation in his home country. This
difficulty makes it imprudent of the seller to part with his goods without a
reliable arrangement for payment and the buyer to pay for the goods without
assurance of delivery of the goods.1 The use of letters of credit as a means of
financing international contracts of sale has to a considerable extent obviated
these problems.
International trade is one of the areas where bankers make credit available to
customers to discharge obligations in connection with their businesses. In
relation to imports and exports of goods, the modern system of international
commercial banking enables advances to be made to customers upon the security
of the goods. It has been rightly claimed that “the enormous volume of sales of
produce by a vendor in one country to a purchaser in another has led to the
creation of an equally great financial system intervening between vendor and
purchaser, and designed to enable commercial transactions to be carried out with
the greatest money convenience to both parties.” This system of financing can be
accommodated in a payment mechanism known as documentary credit.2
It must be noted that the use of Letters of Credit is a common feature of import
and export trade where buyers and sellers are able to enter into across the border
contractual sale transactions. The usual characteristic of bankers commercial
credits is that arranges with a bank (the issuing bank) to pay the seller. For
example, a Nigerian exporter of cocoa may enter into a contract to sell cocoa to a
buyer in London. The Nigerian exporter will normally require that the buyer
should arrange payment through a Bank in Nigeria (the confirming Bank). The
London buyer arranges with a Bank in Nigeria to effect payment either directly
or through a London Bank. Also a Nigerian importer (buyer) is required to
provide similar credit through a bank in the seller’s country to the seller so that
1
David Tiplady, Introduction to the Law of International Trade, Schmitthoff. Export/Trade (9 th ed. 1990)
2
I.O Smith: Nigeria Law of Secured Credit – Ecowatch Publications Limited: 2001-pg 377
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he is assured of payment under the sales contract. In practice, the payment is
made on behalf of the buyer by a Bank and the Bank will be reimbursed by the
buyer for whom it had acted.3
The purport and principle of commercial credit or documentary credit was
explained by Scrutton L.J in the case of Guaranty Trust Company of New York
vs. Hannay & Co4 as follows:
“The enormous volume of sales produce by a vendor in one country to a
purchaser in another has led to the creation of an equally great financial system
intervening between vendor and purchaser, and designed to enable commercial
transactions to be carried out with the greatest money convenience to both
parties. The vendor, to help the finance of his business, desires to get his
purchase price as soon as possible, after he had dispatched the goods to his
purchaser, with this object, he draws a bill of exchange for the price, attaches to
the draft the documents of carriage and insurance of the goods sold and
sometimes an invoice for the price, and discounts the bill with document
attached to an exchange house. The vendor thus gets his money before the
purchaser would, in ordinary course, pays; the exchange house duly presents the
bill for acceptance, and has, until the bill is accepted, the security of a pledge of
the documents attached and the goods they represent. The buyer on the other
hand, may not desire to pay the price till he has sold the goods. If the draft is
drawn on him, the vendor or exchange house may not wish to part with the
documents of title till the acceptance given by the purchaser is met at maturity.
But if the purchaser can arrange that a bank of high standing shall accept the
draft, the exchange house may be willing to part with the documents on
receiving the acceptance of the Bank. The exchange house will then have the
promise of the Bank to pay, which if in the form of a bill of exchange is
negotiable, and can be discounted at once. The Bank will have the documents of
title as security for its liability on the acceptance and the purchaser can make
arrangements, to sell and deliver the goods.”
Lord Denning L.J, in Pavia & Co. S.P.A vs. Thurmann - Nielsen5 commenting on
the increasing sale of goods across the world in the following words:
“The sale of goods across the world is now usually arranged by means of confirmed
credits. The buyer requests his banker to open a credit in favour of the seller, and in
3
E.O. Ehigiato: The Law of Credit & Security – Ben Auster Ventures Limited: 2008 – pg 122
(1918) 2 KB @ 623; (1918) The All ER 151
5
(1952) 2 QB 88; (1952) 1The All ER 492
4
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pursuance of that request the banker, opens the credit in favour of the seller. This credit is
a 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 the credit must be strictly fulfilled otherwise the seller would not be entitled
to draw on it.”
From the foregoing, it is obvious that a letter of credit is a form of personal
security as the terms of the letter are enforceable by legal action6. Furthermore, an
injured party in a letter of credit transaction is entitled to a claim for damages as
well as being able to obtain an injunction in exceptional circumstances to restrain
a threatened breach of the terms of the letter7.
NATURE OF DOCUMEANTARY CREDIT
A letter of credit may be defined as a written instrument, addressed by one
person to another requesting him to give credit to the person in whose favour it
is drawn. It is an engagement by a Bank or other person made at the request of a
customer that the issuer will honour drafts or other demands for payment upon
compliance with the conditions specified in the credit. It is an undertaking sent to
the customer’s creditor assuring him that the financial obligation of the customer
shall, in due course be fulfilled. It is also a security to the banker in the form of
deposit with the latter of the documents of title to the goods for which the
customer is paying by means of the credit.
According to Chorley8 the institution of documentary credit “has enabled the
vast financial resources of the banks to be placed at the service of the mercantile
community and has made available to the banks a reasonable security for their
advances.”
A letter of credit has the characteristics of a negotiable instrument and is a means
whereby a person asks another to advance money or credit to a third party, and
promises to pay the person granting the credit. Although a guarantee of some
sort (a letter of credit is on the same ground as a banker’s guarantee to the extent
that it constitutes an undertaking as to settlement of debt9), a documentary credit
is independent of the underlying loan contract. Transactions by documentary
6
Akinsanya vs. UBA Ltd (1986) 4 NWLR (Pt. 35) 273; Nasaralai Enterprises Ltd vs. Arab Bank Nig. Ltd (1986) 4
NWLR (Pt. 36) 409.
7
Maurice O’ Meara Co vs. National Park Bank 239 N.Y. 386, 146 N.E 630 (1925); United City Merchants
(Investments) vs. Royal Bank of Canada House of Lords (1982) 2 ALL ER 720; (1982) 2 The All ER 720
8
Chorley: Law of Banjing, 6th ed. London (Sweet & Maxwell) 1974 p. 224
9
I.O Smith: Nigerian Law of Secured Credit, Lagos (Ecowatch Publications Limited) 2001 p. 378
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credit are not concerned with matters relating to such transactions or dispute as
to the performance of the contract of sale. This peculiar nature of documentary
credits was succinctly explained in the dictum of Bello JSC (As he then was) in
Nasaralai vs. Arab Bank of Nigeria (supra) that:
“Now, in the business world of documentary credits, parties are not factually
concerned with the seaworthiness of a ship or loading it or monitoring its
voyage or ensuring its compliance with maritime law of the country of discharge
of its cargo. They are not concerned with actual delivery or non – delivery of the
goods. The whole transaction may in reality be a fraud or forgery. There may be
no ship and there may be no goods at al. Parties are only concerned to ensure
compliance on papers with the relevant terms of their respective contracts. It is
all essentially a matter of documentary contract between a banker and his
customer, which has nothing to do with maritime law.”
In this case, the Appellants approached the Respondent to help finance the
purchase of 100, 000 bags of rice at the price of $ 2.2 Million from Thailand. On
this application by the Appellants, the Respondent issued an irrevocable letter of
credit to Bank of Tokyo in Thailand to pay the said price to World Grain
Company Ltd., the seller on receiving from the seller documents drawn in
conformity with thge terms and conditions of the letter of credit. The rice was
first shipped on board a vessel M.V. Lucky Dragon on 15th November, 1978. On
15th December, 1978, the Managing Director of the Appellants, Alhaji Lamidi
Popoola accepted the documents on behalf of the Appellants and authorised the
Respondent to debit the purchase price to the Appellant’s account. On these
documents accepted by the Appellants, it was discovered that:
i. The letter of credit did not contain the provision of the Merchant Sgipping
(Amendment) Decree No. 9 of 1978 – that no ship other than a Nigerian
ship shall carry the Appellants’ rice unless that ship is not more than 15
years old since the date of 1st Registration;
ii. The Bill of Lading permitted transhipment while the letter of credit did not
permit transhipment;
iii. While the Bill of Lading showed that rice had been loaded on board the ‘
Lucky Dragon’ on 15th November, 1978, the Hatch Report and Loading
Report showed that loading commenced on 22nd November, 1978.
The Lucky Dragon unfortunately broke down in early December 1978 and the
rice was discharged and stored in Singapore. The Appellants’ Managing
Director travelled to Singapore and made private arrangement to ship the rice
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to Nigeria. The second ship on which the rice was loaded broke down again
in South Africa. Part of the consignment of rice was finally shipped from
South Africa but no single bag got to the Appellants. The Appellants then
brought an action for N1, 231, 807.97k special and general damages for breach
of contract and relied on the conditions of the contract breached. The High
Court of Lagos State gave judgment in the Appellants’ favour. But the Court
of Appeal reversed the High Court’s decision on the ground that the
Appellants by their conduct had waived whatever breach the Respondents
committed. On further Appeal to the Supreme Court, the Appeal was
unanimously dismissed on the grounds that letters of credit are a different
specie not concerned with breaches of contract.
Thus the undertaking of a Bank ‘ to pay’, ‘ accept and pay drafts’ or ‘ negotiate
and/or fulfil any other obligations under the credit’ is not subject to claims or
defences arising or resulting from any relationships with the issuing bank or
the beneficiary. For example, banks involved in the credit arrangement cannot
rely on the defective nature of the goods shipped as a reason for refusing
payment unless the defects appear on the face of the documents. In NBN Ltd
vs. Edo Textiles Mills Ltd10 the Respondent negotiated with the foreign
company for the supply of machinery for making carpets and then applied to
the Appellant for a bank’s guarantee for the money required to cover the cost
of the machinery and their installation by the foreign company. The
application was approved and the banker’s guarantee for the total sum
requested by the Respondent was given by the Appellant through the
Banker’s drafts. After the first draft was paid, the Respondent refused to
honour the remaining drafts on the ground that the Appellant had been
warned not to pay in the other drafts as the machinery supplied by the
foreign company was not of merchantable quality. It was held that the
opening of an irrevocable letter of credit constitutes a bargain between the
banker and the seller of goods which imposes on the banker an absolute
obligation to pay irrespective of any dispute between the buyer and the seller
in regard of the quality of the goods.
It is even immaterial that the breach by a party to the contract goes to the root
of the contract in the sense that no goods exist for shipment. The case of
Akinsanya vs. UBA (supra) is very instructive. In this case, the Appellant
trading in the name and style of Rocky Merchants having decided to import
10
(1983) FNLR 356
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10, 000 metric tons of cement contracted with a Swiss Company to supply him
with the cement. Pursuant to this agreement, he approached and contracted
with the Respondent to open a letter of credit for the transaction in favour of
the Swiss Company. The letter of credit was issued by the Respondent after
the Appellant had applied for it using a standard form prepared by the
Respondent. The letter of credit was to be irrevocable and confirmed. The sum
of $ 570, 000 was to be made available to a bank in Switzerland accompanied
by some specified documents including full set of clean Bills of Lading. The
standard form prepared by the Respondent contained an important condition
which stipulates that:
“it is understood that our engagement that is (Appellant’s engagement) to pay shall
continue in force notwithstanding any changes in our and/or your constitution and
that no responsibility is to attach to yourselves or your correspondents as to the
documents, beyond seeing that they purport to be in order.”
On the strength of the application, the Respondent after sending a cable to the
Swiss Bank confirmed the letter of credit. Two important conditions for the
payment of the letter of credit are inter – alia:
a. Presentation of full set of clean on board Bill of Lading.
b. Shipment of the goods may be made either:
i.
By conference line vessel
ii.
By non – conference line vessel.
However, no cement was shipped to the Appellant. When the Respondent
checked whether the vessel named on the Bill of Lading “THOMAS MANN”
existed or not, it was discovered that there was no such ship owned by
conference line. But notwithstanding his knowledge of these facts, the Appellant
curiously collected the shipping documents from the Respondent and
acknowledged that “we have examined the documents which we hereby affirm to be
acceptable in all respects...Please debit our account accordingly.”
The Appellant thereafter commenced an action for breach of contract against the
Respondent and its agent the Swiss Bank for payment wrongfully made out of
letter of credit contrary to its terms and conditions; general and special damages
for negligence on the part of the Respondent and its agent for accepting and
making payments against a forged Bills of Lading; and an order that the
Respondent shall forthwith revert or cancel the debit entries made on the
Appellant’s account. The action was dismissed at the Trial Court and at the Court
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of Appeal. At the Court of Appeal, the Majority (Nnaemeka – Agu dissenting)
found that the matter was admiralty matter and that the Lagos State High Court
had no jurisdiction to try it. On a further appeal to the Supreme Court, the
Appeal was also dismissed. The Supreme Court held inter – alia that once the
documents presented to the Swiss Bank by the Swiss Company conformed on its
face with the requirement of the credit as notified to the Swiss Company by the
Respondent, the Swiss Bank was under a contractual obligation to the seller to
honour the credit notwithstanding that the Swiss Bank had knowledge that the
seller, at the time of presentation of the confirming documents was alleged by the
buyer to have, or in fact, had already committed a breach of his contract with the
buyer for the sale of the goods to which the documents appeared on their face
relate.
Note that although the law is that in documentary credits, parties deal in
documents and not in goods, where the letter of credit makes the performance of
the contract of sale or documentary proof of it a condition for payment to the
seller, the contract is construed accordingly so that more obligation is imposed on
both the issuing bank and on the confirming bank to ensure actual performance
of the contract of sale.11
In A.G. Bendel State vs.UBA Ltd (supra) the Appellants were successors of the
Midwest Mass Communication Corporation (hereinafter referred to as M.M.C.C),
a statutory Corporation and original party to the transaction leasing to these
proceedings. The MMCC agreed with one Wilhelm Stiber to buy an Aircraft for
the sum of 2, 250, 000 Deutsche Mark. Payment was to be against confirmed
irrevocable letter of Credit as declared in the purchase agreement. The MMCC
approached the Respondent to open an irrevocable letter of Credit in favour of
Stiber. The application to that effect was accompanied by a cheque for the Naira
equivalent of the purchase price. The Aircraft was to arrive at Benin Airport not
later than 30th June, 1975. The application for the establishment of the letter of
Credit contained a clause which read thus: “we agree to hold you and your
correspondence harmless and indemnified in all respect of any loss or damage
that may arise in consequence of error or delay in transmission of your
correspondents, messages, or misrepresentations thereof, or from any cause
beyond your or their control.”
The Respondent Bank opened the Letter of Credit in favour of Stiber and a copy
of it was forwarded to the MMCC. The Correspondent Bank was the BHF Bank
11
A.G Bendel State & Ors vs. UBA Ltd (1986) 4 NWLR (Pt. 37) 547
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in West Germany. One of the terms of the letter of credit was that the Aircraft to
be purchased by the Appellant was to arrive Benin, latest 30th June, 1975 and the
letter of credit will be valid till 15th July, 1975 in West Germany. At the back of the
Letter of Credit is an endorsement:
“on presentation of documents in strict conformity with the letter of credit, you must
claim on us by tested cables...”
The Aircraft did not arrive at Benin Airport on 30th June, 1975 and on 7th July,
1975, the Respondent wrote the MMCC stating: “we advice that the shipment date of
the above credit expired on 30th June, 1975. Kindly instruct us further.”
Upon receipt of the letter, the MMCC discovered that the Aircraft, subject matter
of the contract and letter of Credit has been sold. The MMCC then, on 11th July,
1975, wrote to the Respondent to suspend payment of the purchase price
pending a new beneficiary. The letter did not disclose that the Aircraft had been
sold to someone else. The Respondent received the letter that same 11th July,
1975, but the Benin Branch only communicated this to the Head Office on 17 th
July, 1975. Meanwhile, the beneficiary – Stiber had been paid on 15th July, 1975,
which was the last day of the validity of the credit and the payment was made
against the presentation of apparently stipulated documents. The trial Court and
the Court of Appeal found that the confirming Bank informed the Respondent of
the payment immediately after it was made on 15th July, 1975. The cable message
was received by the Respondent in Lagos on 16th July, 1975 but the documents
relating to the payment were delivered to the MMCC on 31st July, 1975 by the
Benin branch of UBA. The MMCC took no action in respect of the matter until
February, 1978 when the suit was instituted. The claims, inter alia, were for
special damages for the fraudulent misrepresentations, refund of the purchase
price together with interests, damages for breach of contract and recission of the
Contract. The trial judge found for the Plaintiffs. On appeal, the Court of appeal
allowed the Appeal. The Plaintiffs have appealed to the Supreme Court. The
appeal was dismissed unanimously inter alia that the Appellants’ delay and
inaction in rejecting the payment to the seller for a period of 31 months after the
receipt of the documents defeat their claims. They have slept over their right if
not the Respondent would have been found liable for breach of contract or
negligence.
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APPLICATION OF THE UNIFORM CODE OF CUSTOMS AND PRACTICE
FOR DOCUMENTARY CREDITS.12
Documentary letters of Credit are generally governed by a code known as the
Uniform Code of Customs and Practice (UCP) for documentary credits produced
by the International Chamber of Commerce. Once this notion of commercial
credits became acceptable as a significant factor in export and import trade,
attempts were made from time to time to standardise the conditions on which
bankers would be willing to issue and act on commercial credits. The
commencement of such standardisation started in the early 1933 when the
International Chambers of Commerce (ICC) published the first edition of the
UCP. The current version of the UCP was made on the 4th day of December, 2006.
It came into effect in July, 2007, known as UCP 60013. The UCP contains the rules
and regulations for the use of credit to finance international trade.
The U.C.P. is the basic document which banks the world over adhere to in
opening letters of credit as a means of financing international trade14. Article 2 of
the code explains what a Documentary transaction. Article 3 states that by their
nature, credits are separate transaction from the sales or other contract (s) on
which they may be based and that banks are in no way concerned with or bound
by such contract (s) even if there is a clear reference to such contract (s) in the
credit. This provision gives the credit its autonomous nature and this is one of its
major attractions.
Article 4 further confirms this position. It states that in credit operations, all
parties concerned deal in documents and not in goods, services and/or other
performances in which the documents may relate.
Thus, by virtue of Articles 3 & 4, a binding contract, independent of the contract
of sale, comes into being once the seller/beneficiary is notified of the credit by
either the issuing bank or the advising bank. The seller acts on the strength of
such notification to either demand payment or to make arrangement for the
financing of his transaction with another beneficiary. If there is no autonomy, it
will be difficult to act on it since its realisation may be adversely affected by the
contract of sale as illustrated by case.
12
The Law of Credit and Security (Part 1): E.O Ehigiato - Ben Auster Ventures Limited: 2008 – pg 128
Uniform customs and practice for Documentary Credits: http\\www.cowbo.org; New Rules for letters of
credit by Buddy Baker – http\\www.fcibglobal.com
14
Schmitthoff “The New Uniform Customs for Letters of Credit” (1983) J.B.L 193 cited by Agomo C. K in
“International Trade, Letters of Credit and Negotiability” (1999) MPJFIL, Vol. 3; No. 1
13
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In Hamzeh Malass & Sons vs. British Imex Industries Ltd.,15 the plaintiffs
contracted to buy some quantities of reinforced steel rods from the defendants.
Payment was to be made by banker’s credit payable i two instalments. The letters
of credit were opened. Upon receipt of the 1st instalment, the plaintiffs sought an
injunction to stop the defendants from collecting the second instalment on the
ground that the goods delivered were defective. The action failed. The Court said
that:
“the opening of a confirmed letter of credit constitutes a bargain between the banker and
the vendor of 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.”
In Bolivinter Oil S.A vs. Chased Manhattan Bank & ors16 the Court of Appeal
once again highlighted forcefully the autonomous nature of letters of credit when
it stated:
“the unique value of such a letter, bond or guarantee is that the beneficiary can be
completely satisfied that whatever disputes may thereafter arise between him and the
bank’s customer in relation to the performance or indeed the existence of the underlying
contract, the bank is personally undertaking to pay him provided that the specified
conditions are met.”
Note that a letter of credit is not a negotiable instrument like the bill of exchange
because it is not transferable by mere delivery or by endorsement and delivery.
This is because by its nature, the liability of the advising bank or the issuing
bank, as the case may be, is in favour of the seller alone and is not freely
transferable.
ARE THESE CODES LEGALLY BINDING?
I am of the opinion that it is not except where parties on their own decides to
incorporate its terms into their credit transactions. Also, the International
Chamber of Commerce has no powers to make laws, as such the Uniform
Custom codes are not laws. It must however be noted that the codes are only
applicable to the transaction where the credit is documentary and the issuer is a
Bank. Parties are free to incorporate such codes into their documents and may
15
16
(1958) 2 W.L.R 100
(1984) 1 Lloyds Rep 251;
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exclude same by agreement. In the words of Dolan17, “if the credit is silent, to the
extent that a party proves that the Uniform customs describe a regularly observed usage
of trade, the uniform customs fill in points which the parties have not considered and in
fact agreed upon. If the credit is silent and there is no proof that the uniform customs
describe a regularly observed usage of trade, they still serve as the latest, best and most
persuasive thinking on the practices in question.”
The application of the codes is also subject to any local laws existing on the same
subject matter. The Nigerian Courts shall continue to apply the Codes in the
absence of a local law or parties’ intention to the contrary.
Types of Letter of Credit
1. Irrevocable letter of credit:
An irrevocable letter of credit is a definite undertaking by the issuing Bank
provided that the terms and conditions of the credit are complied with.” 18 It
constitutes a contract between the issuing banker and the seller, and is unaffected
by the terms of the contract of sale made between the buyer and the seller or the
contract between the issuing bank and the buyer19. An irrevocable letter of credit
cannot be cancelled or amended and the Bank is obliged to honour the seller’s
draft if the agreed documents are made available to it. The opening of an
irrevocable letter of credit constitutes a bargain between the banker and the seller
of the goods which imposes on the banker an absolute obligation to pay
irrespective of any dispute between the buyer and the seller in regard to the
quality of the goods20. The buyer cannot cancel the credit even where he claims
that the goods are defective or that the seller is in breach of the contract. 21 An
irrevocable letter of credit cannot be withdrawn by the issuing banker without
the consent of the beneficiary and this is so, notwithstanding any definite
instruction to that effect by the buyer.22
While it is a well known fact that an irrevocable constitutes a contract between
the issuing banker and the seller, it is unclear at what time the contract is created
as from which moment the banker may not revoke his undertaking. The UCP
17
The Law of Letter of Credit 4 -16 – 22, 6 – 32 – 34 (1984) cited by E.O. Ehigiato in the law of Credit and
security (supra)
18
Article 3 of the UCP
19
North American Manufacturers Associates Inc vs. Chase National Bank of city of New York (1948) 77F Supp
55.
20
NBN vs. Edo Textiles Mills Ltd (supra) p. 536
21
Akinsanya vs. UBA (Supra) page 992; Hamzah Malas & sons vs. British Mex Industries Ltd (1958) 2 QB 127
22
Lindsay & Co Ltd vs. Eastern Bank (1922) 1KB p. 318
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appears silent on this and there are conflicting judicial decisions on the matter.
Thus in Lindsay & Co Ltd vs. Eastern Bank Ltd (supra) Rowlatt J opined that an
irrevocable letter of credit may not be revoked once the seller has acted upon it,
e.g. by commencing performance of his contract with the buyer. On the other
hand, Greer J., in Dexters Ltd vs. Schenker & Co23 came to the conclusion that
then obligation or engagement of the issuing bank is irrevocable as from the time
at which the credit reaches the hands of the seller. According to Chitty on
Contracts24 the latter view prevails in the United States and appears preferable. It
is humbly submitted that the Nigerian Courts should adopt this position which is
certainly more realistic and in line with the intention of the parties, moreover it
simplifies the test for ascertaining the time of commencement of the irrevocability
of the credit.
2. Revocable letter of Credit
A revocable letter of credit may be amended or cancelled at any time without
prior notice to the beneficiary, i.e. the seller25 but not without reimbursing the
nominated bank for any loss arising from any payment, acceptance or
negotiation made by such bank prior to receipt by it of such notice of amendment
or cancellation26. Thus the opening of a revocable letter of credit creates no
contract between the issuing Banker and the seller. It is one which can be revoked
at any time before the drafts drawn under it have actually been accepted. In Cape
Asbestos Co. Ltd vs. Lloyds Bank27 S & F of Warsaw desired to buy some
asbestos sheets from the plaintiffs. They instructed Lloyds Bank to open a credit
inn their favour. On June 14, 1920, the Bank wrote the plaintiffs informing that a
credit of £1, 620 had been opened in their favour and could be made available by
sight drafts accompanied by an invoice for the goods. The letter concluded: “this
is merely an advice for the opening of the credit and is not a confirmation of same”. On
July 20, 1920, the plaintiffs shipped part of their goods and the draft was
accepted. On August 4, 1920, the Defendants were instructed by their customers
to with draw the credit, but they failed to inform the plaintiffs of this. On
September 30, 1920, the plaintiffs shipped the remaining goods and thereafter
presented their draft with documents attached but the Defendants refused to
accept it. It was held that the Defendants were entitled to do so in view of the fact
that the credit was unconfirmed and revocable.
2323
(1923) 14 LILR 588
See vol. 2 (27th ed) 357
25
Article 8a of the UCP 1993 Revision
26
Article 86 UCP
27
(1921) W.N 274
24
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The nature of a revocable letter of credit was explained by Bello JSC in ACB vs.
Yesufu28 as follows:
“It has been held in Cape Asbestos Co. Ltd vs. Lloyds Bank Ltd (1921)
WN274...that a revocable letter of credit might be revoked at any time and that
there was no real obligation on a banker to give notice of the revocation to his
customer and that the giving of notice was an act of courtesy, which it was very
desirable should be performed, but it was not founded upon any obligation. It
seems to us that Cape Asbestor’s case is the only reported judicial decision in the
common law countries on the matter for it is cited by the learned authors of 3
Halsbury’s Law of England, 4th Edition at P. 100 note 4... to support the
proposition that a banker has no legal duty to give notice of dishonour of a
revocable credit to his customer, we think the support given to the proposition is
weighty. We take it as being the correct statement of the law.”
In that case, the issues for determination before the Supreme Court was whether
the duty of a banker to give notice of dishonour of a bill to his customer applies to
a ‘letter of credit’; and whether a banker has a legal duty to give notice of
dishonour of a revocable credit to his customer. The Appellants claimed from the
Respondent, who is their customer, the sum of £ 161, 185:4s:0d outstanding in his
current account as a debt. They also claimed interest at the rate of 9% from the
date of writ until judgment or payment. The appellants adduced evidence
showing that the Respondent was indebted to them in the amount claimed. The
trial judge found that the bulk of the amount claimed was in respect of bills which
the appellants collected and undertook to negotiate for the respondent and that
some of those bills were dishonoured and some were underpaid. The appellant
did not give notice to the respondent of their dishonour and underpayment. He
also found that because of the failure of the Bank to give such notice the
respondent became heavily indebted to the appellants. He held that the appellants
had a duty to give such notice to the respondent and their failure to do so
constitute negligence and dismissed the appellants’ claim in its entirety on that
ground. The appellants thus appealed to the Supreme Court who found that from
the pleadings before it, it is crystal clear that the “bills” in question were not bills
of exchange but were in fact “letters of Credit”. The Court then held inter alia that:
28
(1978) NSCC 76 @ 73; American Steel Co vs. Irving National Bank (1920) 266 G 41, 43; Akinsanya vs. UBA
(supra); Nasaralai Enterprises Ltd vs. Arab Bank (supra).
14 | P a g e
a. The duty of a banker to give notice of dishonour of a bill to his customer relates
to a bill which is a bill of exchange within the definitions of section 2 and 3 of
the Bills of Exchange Act, Cap. 21. 1958 LFN and Lagos;
b. A banker has no legal duty to give notice of dishonour of a revocable credit to
his customer and accordingly the appellants are entitled to exercise their right
of recourse against the Respondent in respect of all the bills that were
dishonoured by non-payment and they are entitled to recover from him the
value of those bills.
It is observed that a revocable credit is not of much benefit to the seller. To avoid
ambiguities, article 6(b) of the 1993 revision requires that all credits should state
clearly and categorically whether they are revocable or irrevocable. In the absence
of such indication, the credit is deemed to be irrevocable under article 6(6) of the
1993 Revision. The onus is therefore on the applicant and the issuer of credit to
indicate clearly in both the instruction for the credit and the credit itself that the
credit is revocable if that is their intent.
Also, a revocable letter is a worthless security from the point of view of the lender.
In the case of a dispute with the buyer or upon the latter’s instruction, or
insolvency, his banker may refuse the seller’s draft.
3. Confirmed /unconfirmed letter of Credit
A commercial letter of credit may be confirmed or unconfirmed, depending on
the obligation undertaken by the correspondent bank. If the duty of the
correspondent bank is merely to notify the seller about the opening of the
commercial credit by the issuing bank, and to accept, on behalf of the issuing
bank, a tender of document complying with the terms of the credit, the
correspondent bank acts as an agent of the issuing bank and assume the role of
advising bank. In such case, the commercial credit is unconfirmed, on the part of
the correspondent bank, although it may contain an undertaking of the issuing
bank and thus be irrevocable.
If on the other hand, the correspondent bank confirms the credit, i.e. adds to the
promise of the issuing bank its personal undertaking to accept or negotiate a
draft or to pay the amount of the credit to the seller on presentation of confirming
15 | P a g e
documents, the correspondent bank assumes the role of a confirming bank and
the commercial credit is said to be confirmed29.
An irrevocable letter of credit may be unconfirmed. The implication of this is that
the seller under the contract of sale did not deem it necessary to have, or could
not obtain the agreement on the part of the buyer to add the confirmation of an
advising/nominated bank. On a wrongful refusal to pay, the seller has only a
contractual remedy against the issuing bank or the buyer on the contract of sale if
the letter of credit is a form of conditional payment only. The
advising/nominated bank, by not adding its confirmation, cannot be sued on a
refusal to pay since there will be no contractual relationship between the
seller/beneficiary and the advising/nominated bank.
In practice, sellers would rather accept only irrevocable and confirmed letters of
credit and the correspondent bank is asked to confirm a credit only if it is
irrevocable. This is because the irrevocable/confirmed letter of credit is the best
the seller can obtain in any transaction involving documentary credit.
Advantages include these:
a. In a wrongful refusal to pay, the seller has a contractual remedy against
the confirming and the issuing bank.
b. If the letter of credit is a form of conditional payment only, he may sue
the buyer on the contract of sale.
Though it is usual for the seller to pursue remedies against the confirming bank
since the confirming bank is situated in the seller/beneficiary’s country thereby
obviating the need to embark on foreign litigation and enforcement abroad. This
is because in an irrevocable and confirmed letter of credit, the seller receives an
undertaking of both the issuing and correspondent bank.30
IS
THERE
ANY
REMEDY
FOR
A
SELLER
REVOCABLE/UNCONFIRMED LETTER OF CREDIT?
UNDER
A
According to Smith31, although the seller/beneficiary does not receive an
undertaking from the issuing or advising/nominated bank under a revocable
credit/unconfirmed, he may tender relevant documents at a bank in the
29
Article 9(b) UCP 1993 Revision
Nasaralai vs. Arab Bank (supra); Akinsanya vs. UBA (supra); United City Merchants (Investments) Ltd & ors
vs. Royal Bank of Canada & ors (supra); Pavia & Co., S.P.A vs. Thurmann – Nielsen (supra).
31
I.O Smith: Nigerian Law of Secured Credit (supra) 384.
30
16 | P a g e
beneficiary’s own country and on refusal to pay, an action lies against the buyer
for breach of contract of sale mainly.
The main commercial purpose of confirmed and irrevocable commercial credit is
to give the seller an assured right to be paid before he parts with the control of
the goods and to afford credit to the buyer pending subsales upon security over
documents of title to the goods. It has therefore been described as “the crankshaft
of modern commerce.”32
THE
LEGAL
RELATIONSHIP
ARISING
DOCUMENTARY/COMMERCIAL LETTER OF CONTRACT
FROM
A
It should be noted that there are four parties to a letter of credit transaction – the
seller, the buyer, the issuing bank and the correspondent or confirming Bank.
There are many judicial decisions on letters of credit transaction. In practice,
litigations can arise in any of the following instances:
a. The buyer’s bank may pay when the documents are different from those
specified by the letter of credit.
b. The buyer’s bank may refuse to pay when the documents are in
conformity with the letters of credit.
c. There may be an argument between the parties as to whether the
documents do conform or not.
d. The buyer’s bank may be aware that the seller has breached the sales
contract by shipping non conforming goods (under conforming documents
before it pays against the documents.
An authoritative statement on the legal relationship arising from a letter of credit
can be found in the pronouncement of Lord Diplock in United City Merchants
(Investments) Ltd vs. Royal Bank of Canada (supra). Lord Diplock said as
follows:
“...so the point falls to be decided by reference to first principles as to the
legal nature of the contractual obligations assumed by the various parties to
a transaction consisting of an international sale of goods to be financed by
means of a confirmed irrevocable documentary credit. It is trite law that
there are four autonomous though interconnected contractual relationship
involved: (1) the underlying contract for the sale of goods, to which the only
32
Chorley: Law of Banking, 6th ed. London (Sweet & Maxwell) 1974, p. 225.
17 | P a g e
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 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 authorising 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 the seller (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”
which was adopted by the Nigerian Supreme Court in the case of
Akinsanya vs. UBA (supra).
There are four contracts involved in any transaction involving documentary
credit, namely:
i. Contract between the buyer and the seller
ii. Contract between the buyer and the issuing bank
iii. Contract between the issuing bank and the confirming bank
iv. Contract between the confirming bank and the seller
v. Where the letter of credit requires a bill of lading, the contract of
affreightment between the shipper and the ship owner.33
The legal basis of the first three is not difficult to establish. The elements required
for the existence of a valid contract are present. The fourth class is hard to fit into
33
Nasaralai vs. Arab Bank (supra)
18 | P a g e
the slots of offer, acceptance and consideration34. Indeed to do so is to distort the
essence of the arrangement which has its root in the law of the Merchant35
We shall only concern ourselves with the first four forms of contract above in this
paper.
1. CONTRACT BETWEEN THE BUYER AND THE SELLER
This is the underlying contract for the sale of goods in question. Without this
underlying contract, the other contracts will not arise. In IBWA vs.
UNAKALAMBA36 the Court of Appeal described it as a contract for the sale of
goods or merchandise to which the only parties or operators are the buyer and
the seller. The buyer and the seller negotiate and agree upon the terms for the
purchase of the goods, the type of credit and the means of transportation of the
goods from the country of purchase to the country the goods are to be delivered.
This involves basically contract for the carriage of goods at a certain price. Where
the mode of payment chosen in the contract between the Buyer and Seller is that
of documentary credit, the Buyer is under a duty to the seller to ensure that a
credit is issued within a reasonable time or an agreed time and the credit must
comply with the conditions which have been laid down by the parties to the
agreement.
Article 37 of the UCP requires all documentary credits to stipulate an expiry date
for presentation of documents for payment and where no expiry date is
contained in the credit, the seller is entitled to reject it.
By virtue of Article 41 of the UCP, credits must stipulate a specified period of
time after the date of issuance of the Bills of lading or other shipping documents
during which presentation of documents for payment, acceptance or negotiation
must be made and if the credit stipulates no such time, then credits must be
presented to the Banks for payment within 21 days after the date of issuance of
Bill of Lading after which the Banks are entitled to reject it.
34
Mead, “Documentary Letters of Credit” 22 Col. L. Rev. 297; P.N. Todds, Sellers and Documenatry credits
(1983) J.B.L. 468
35
Agomo, C.K Supra P. 66.
36
(1998) 9 NWLR (Pt. 565) CA 245
19 | P a g e
The acceptance of documents under a letter of credit does not preclude the buyer
from rejecting the goods subsequently if the goods on their arrival do not
conform to the contract of sale.37
For the seller to comply with the terms of the credit, he must tender the agreed
documents. If the documents do not correspond with those specified in the
credit, the bank can refuse to pay or to accept the draft38. If the bank pays on such
documents, the buyer can refuse to reimburse it. According to Ehigiato39 in
practice, the banks may accept defective documents where the seller undertakes
to indemnify it. According to Orojo40 if the seller tenders the documents and the
credit is irrevocable and confirmed, in the absence of fraud or illegality, the bank
is liable to pay him and if it fails to do so will be liable in damages.
Although these five contracts are interrelated, a bank – whether the issuing or
confirming bank has nothing to do with the execution or performance of the
contract of sale between the seller and buyer or the contract of affreightment41.
2. CONTRACT BETWEEN THE ISSUING BANK AND THE BUYER
This is a contract between the buyer and the Issuing bank under which the latter
agrees to issue the letter of credit and either itself or through a confirming bank
to notify the credit to the seller and to make payments to the seller or to the order
of the seller (or to pay, accept or negotiate Bills of Exchange drawn by the seller)
against the presentation of stipulated documents of titles such as Bills of Lading
constituting a security to the issuing Bank.42
An irrevocable letter of credit is a definite undertaking by the issuing bank that
the following terms and conditions of the credit would be complied with43 :
i.
To pay, or that payment will be made if the credit is provided for
payment, whether against a draft or not;
ii.
To accept drafts if the credits provide for acceptance by the issuing
bank or to be responsible for their acceptance and payment at
maturity if the credit provides for the acceptance of drafts drawn on
37
Akinsanya vs. UBA (supra); Nasaralai vs. Arab Bank (supra)
Rayner vs. Hambros Bank (1943) 1 KB 37
39
E.O. Ehigiato : The law of Credit and Security (part 1) 2008 – page 139
40
Nigerian Commercial law & Practice; Vol. 1, para 13, 164, page 1061
41
Nasaralai vs. Arab Bank (supra)
42
Ibwa vs. Unakalamba (supra)
43
Akinsanya vs. UBA (supra)
38
20 | P a g e
the applicant for the credit or any other drawee specified in the
credit
iii.
To purchase or negotiate, without recourse to drawers and or bona
fide holders, drafts on the applicant for the credit or on any other
drawer specified in the credit; or to provide for purchase or
negotiation by another bank, if the credit provides for
purchase/negotiation.
IS THIS A NORMAL BANKER/CUSTOMER RELATIONSHIP?
No, though, it could be likened to it. This is because in a normal banking
relationship, a customer wanting a loan facility enters into a simple informal
contract known to common law or statute. In a documentary credit transaction,
there is a standard form of application. The form usually incorporates the UCP
and the buyer is required to fill the document where the terms of the contract are
set out in detail.
IS THIS RELATIONSHIP AFFECTED BY THEIR OBLIGATIONS OR
RIGHTS AGAINST OTHER PARTIES?
No. The relationship between the issuing bank and the buyer depends solely on
the nature of the contract between them which is not affected by rights or
obligations which either of them has against or owes to other parties.
In this relationship, if the buyer has provided the form of any document against
which payment is to be made, the issuing bank must insist upon complete
compliance. There is no room for documents which are almost the same, or
which do just as well44.
According to Poules and Hazelwood45 where the issuing bank receives the
documents with a request for payment it pay at its perils against documents,
which do not exactly comply with the terms of the credit. Any discrepancy
between the instructions given with the credit and the documents will render
payment improper and the bank will lose its right of indemnity. The courts in the
USA adopted a liberal approach having regard to the fact that where a Letter of
Credit is substantially complied with, every reasonable effort is made by the
courts to uphold its validity particularly where the objections are technical in
44
Article 8 of the UCP; Equitable Trust Co of New York vs. Dawson Partners Ltd (1926) 27 LIL R49; Rayner & Co
Ltd vs. Hambro’s Bank Ltd (1943) KB 37.
45
“Maritime Fraud -1” 1884 J. Bus. Law 31 cited in the Law of Credit and Security (part 1) by E. O. Ehigiato 143
21 | P a g e
nature and made only with a view to escaping from the legal consequences of the
transaction. Poules and Hazelwood are of the opinion that such approach only
appears at overcoming purely technical difficulties and would not apply to
substantive defects.
If the buyer, with the knowledge of the breach of authority of the issuing bank,
adopts his act, he is considered or deemed to have ratified the act of the issuing
bank and is obliged to reimburse him despite the breach. Such ratification or
waiver may arise from the course of dealings between the parties and the buyer
will be stopped from denying the representation he has made46. Undue delay by
a party to a credit transaction in the exercise of his right to reject constitutes
ratification or waiver of any irregularity committed by the defaulting party.
Undue delay may also amount to estoppel47
Also, the issuing bank has a contractual duty to write in the letter of credit all the
terms and conditions the buyer as its customer instructed it to open the credit. If
a bank fails to comply with the mandate of the buyer, then the bank is in breach
of contract and the buyer has the right to reject documents for non – compliance
with his mandate and is not liable to reimburse the bank for any payment made
by it irrespective of whether the goods have been shipped to the country of the
buyer or not.48
Does exemption clause in a letter of credit exculpate the issuing bank from
liability?
It depends on the construction of the exemption clause incorporated into the
letter of credit. It is usual to find in an application form clauses excluding the
banker from responsibility or liability for matters beyond his control. These
clauses are set out in the UCP and are usually incorporated in the contract
between the buyer and the issuing bank. In practice, even without an express
exemption clause, an issuing bank is not liable if it turns out that an apparently
regular document accepted from the seller has been forged or obtained by fraud.
It is clear that the issuing bank is not responsible if he fails to notice a defect that
a prudent inspection would not disclose. In Akinsanya vs. UBA (supra), the
Supreme Court was called upon to construe this exemption clause incorporated
into the contract “it is understood that our engagement that is (Appellant’s
engagement) to pay shall continue in force notwithstanding any changes in our and/or
46
Nasaralai vs. Arab Bank of Nigeria (supra); A.G. Bendel State & ors vs. UBA Ltd (supra)
A.G. Bendel State vs. UBA (supra)
48
Akinsanya vs. UBA (supra); Nasaralai vs. Arab Bank of Nigeria (supra)
47
22 | P a g e
your constitution and that no responsibility is to attach to yourselves or your
correspondents as to the documents, beyond seeing that they purport to be in order.”
The Apex Court opined that the general rule concerning exclusion clauses is that
a party to a contract may be precluded from relying on the provision of an
exemption clause contained in such a contract if he is guilty of the breach of
fundamental term or breach of the contract. However, the doctrine of
fundamental breach has been overruled and it has been held that the
applicability of exclusion clause is in all cases a matter of construction. Thus, the
Supreme Court held that in construing the contract between the parties, it is clear
that the intended to relieve the Respondent of liability once the Respondents saw
that the documents purport to be in order. Thus, they are entitled to the benefit to
the benefit of the exclusion clause.
3. CONTRACT BETWEEN
CONFIRMING BANK
THE
ISSUING
BANK
AND
THE
The legal status of the confirming bank vary with the role adopted between the
two banks. The relationship may be agent or a relationship of two independent
principals. If the confirming/correspondent bank does not agree to be solely or
primarily liable but merely forwards to the seller with or without confirmation a
letter of credit issued by the issuing bank, an agency relationship is readily
imputed vis – a- vis the transmission of the credit to the seller.
The principal is the issuing bank and the buyer is not a party to the relationship
and as between the buyer and the correspondent bank, there is no privity of
contract49 because the confirming bank is the issuing bank’s agent and not the
buyer’s agent, thus the buyer is entitled to reject the documents even for an
apparent defect on the face of the document and refuse to be bound by the acts of
the confirming bank as the confirming bank is not his agent50.
MUST THERE BE STRICT COMPLIANCE WITH THE TERMS OF THE
INSTRUCTION?
The answer is yes going by judicial decisions, although Article 13 of the UCP
revision rules (1993) states as follows:
“Banks must examine all documents with reasonable care to ascertain that they
appear on their face to be in accordance with the terms and conditions of the credit.
49
50
Equitable Trust Co. Of New York vs. Dawson Partners Ltd (1926) 27 LILR 49.
Akinsanya vs. UBA (supra)
23 | P a g e
Documents which appear on their face to be inconsistent with one another will be
considered as not appearing on their face to be in accordance with the terms and
conditions of the credit.”
This implies that a confirming bank is concerned solely with the appearance of
the documents and is not liable if it fails to notice a defect that a prudent
inspection would have shown. The bank is required to ascertain whether the
documents are of the right type, and whether they are in the form usually
issued.51
If the confirming bank honours a credit on acceptance by it of defective
documents and the buyer rejects the documents, he could proceed against the
issuing bank basing the action on the contract between the buyer and the issuing
bank. In the contract between the issuing bank and the confirming bank, the
confirming bank is only entitled to reimbursement or remuneration if it complies
strictly with the instructions of the letter52.
If the confirming bank as agent of the issuing bank has been held to have acted
on defective documents and the buyer thereby incurs a loss, the buyer can claim
against the issuing bank who could in turn refuse to reimburse the confirming
bank. But if the documents presented to the confirming bank are ex facie in
conformity with the relative conditions of the credit, the issuing bank would be
entitled to reimburse the confirming bank and it would not matter whether there
is any dispute between the buyer and seller53.
The requirement of strict compliance is well known and continually reiterated. In
England Scottish and Australian Bank vs. Bank of South Africa 54, the Court
stated as follow:
“it is elementary to say that a person who ships in reliance on a letter of credit
must do so in exact compliance with its terms. It is also elementary to say that a
bank is not bound or indeed entitled to honour drafts presented to it under a letter
of credit unless those drafts with accompanying documents are in strict accord
with the credit as opened.”
This duty is applicable whether the documents show slight variations from the
contract terms such as minor difference s in the quantity shipped or alter the
51
E.O. Ehigiato (supra)p. 159.
ibid
53
Ibid; Nasaralai vs. Arab Bank; A.G. Bendel State & ors vs. UBA Ltd (supra)
54
(1981) 1 Lloyds Report 68, 74 - 75
52
24 | P a g e
terms of the description. In J.H. Rayner & Co. Ltd vs. Hambros Bank Ltd
(supra), the court held that there is no room for documents which are almost the
same, or which will do just well. Thus the documents must be exactly the same.
4. THE CONTRACT BETWEEN THE SELLER AND THE CONFIRMING
BANK
Although a commercial credit whether revocable or irrevocable is not required in
any specified form, in practice, most current forms follow a uniform pattern.
Thus the form is dated and numbered, its duration and amount of cover
provided are clearly spelt out. It is usually addressed to the seller and states that
on the instruction of the buyer, the banker authorises the seller to draw bills of
exchange up to the stated amount.
An irrevocable letter of credit creates a legally binding contract between the
banker and the seller. However, where the irrevocable letter of credit is
unconfirmed, the contract is between the seller and the issuing bank. If the credit
is both irrevocable and confirmed, both the confirming and issuing bank are
liable to the seller55.
Where the documents presented by the seller/beneficiary to the confirming bank
conform, on the face of them, with the requirements of the credit as notified to
the seller/beneficiary, the confirming bank is under a contractual obligation to
the seller to honour the credit notwithstanding that the bank had any knowledge
of any breach of the primary contract by the seller for the sale of goods to which
the document appear on their face to relate.
CAN A BANK (ISSUING OR CONFIRMING) REFUSE PAYMENT
WHERE THERE IS NO DEFECT ON THE FACE OF THE
DOCUMENTS?
The general rule is that the banks cannot refuse payment so long as the
documents conformed to the letter of credit. However, there are circumstances
under which this rile will not apply. These are:
a. Where there is a fraudulent misrepresentation existing in the
documents tendered under the credit. Where the seller, for the
purpose of drawing on the credit fraudulently or dishonestly presents
to the confirming bank documents that contain, expressly or by
55
Impanoutsos vs. Raymond Hadley Corporation (1917) 2 KB 473;
25 | P a g e
implication, material representations of fact which are untrue to his
knowledge, the bank is not bound to honour the credit56.
But fraud by a supplier or by some other party who is not an agent of
the seller, of which fraud the seller is not aware, will not justify the
bank in refusing to pay and the issuing bank cannot refuse to reimburse
the bank which does not pay out57.
The fraud rule makes it possible for the issuer of letter of credit to
disrupt the payment of a letter of credit when fraud is established. It is
essential to circumscribe the activities of fraud stars but its scope
should be carefully limited so as to uphold the commercial utility of an
instrument that exists to serve as an assurance of payment.
b. Where honouring of the credit could be illegal according to the law of
the place where the bank’s performance is due. Such instances
include:
i. If the letter of credit infringes exchange control provisions of a
country which is a member of the International Monetary Fund,
an English Court would refuse to enforce the credit in view of
the Bretton – Woods Agreement order in council 194658 but the
mere violation does not necessarily vitiate the letter of credit
intoto. The Court will enforce payment of any part (based on the
principle of severance) of the amount of the credit which is
unaffected by the violation and hence lawfully due
notwithstanding the exchange control contravention59.
ii. In Nigeria, a letter of credit issued in contravention of any law in
force will be tainted with illegality and cannot be enforced by the
courts. Thus if a letter of credit is issued by a person other than a
licensed bank, the transaction will be a nullity.
c. Where the bank is owed a liquidated sum due from a beneficiary under
another transaction thereby giving rise to a right of total or partial set off60.
56
Akinsanya vs. UBA Ltd (supra)
United City Merchants vs. Royal Bank of Canada (supra)
58
Part 1, Article 8
59
United City Merchant (Investments) Ltd vs. Royal Bank of Canada (supra)
60
Hong Kong & Shanghai Banking Corp vs. Kloeckner (1989) 3 All ER P. 513
57
26 | P a g e
HOW DO BANKER’S ENSURE THEIR SECURITY IN A DOCUMENTARY
CREDIT TRANSACTION I.E HOW DESIRABLE IS A LETTER OF CREDIT?
Documentary credit provides two advantages:
a. It enables the exporter to get paid immediately for the price of the
goods on shipment;
b. It enables the importer to get credit upon security of title documents
with the issuing bank.
Thus, the confirming bank has a prima facie right to reimbursement
from the issuing bank (its principal) for the bills of exchange
honoured in favour of the seller and the issuing bank has the right
to get paid by the buyer to the extent of the amount debited on his
account. In each case, the bank may exercise rights against the
document or the goods or both as security for payment.
CONFIRMING
REFUSED?
BANK’S
SECURITY
WHERE
REIMBURSEMENT
IS
Property in the goods evidenced by the bill of lading is the confirming bank’s
security for the payments made to the seller/beneficiary until the same becomes
vested in the buyer upon payment. The property in the goods does not vest in the
buyer but remains in the bank until the issuing bank reimburses the confirming
bank.
The confirming bank can realise its loss or part of it by selling the goods by
dealing with the documents while the goods are still in transit or by taking
delivery of the goods for the purpose of dealing with them. Where the bill of
lading is made out “to order” and indorsed to the bank, both these means are
available because the bank can transfer the bill of lading to third party or can
demand delivery of the goods from the ship as the holder of the bill of lading.
ISSUING BANK’S SECURITY AS AGAINST THE BUYER
Although in many cases, the issuing bank never sees the goods the subject matter
of the loan transaction, the issuing bank obtains constructive possession of them
by virtue of the title documents to them. The bill of lading is the main document
that provides the banker’s security.
27 | P a g e
Where the customer’s account becomes overdrawn as a result of the payment
made on his behalf, the issuing bank may retain its rights as pledge. This could
be done in one of two ways mainly:
a. By taking delivery of the goods and keeping them in a
warehouse. Delivery orders are then issued on the warehouse to
release goods to purchasers against payment by the latter. This
may be necessary where there is fear that the customer may not
place the proceeds of sale to the credit of his account.
b. By obtaining a ‘trust receipt’ from the customer at the time of
handing the documents over to the customer. The trust receipt
acknowledges that the customer has obtained from the bank the
bill of lading and other relevant documents which he undertakes
to hold together with the proceeds of sale of the goods in trust
for the bank. The bank remains a pledge by virtue of the trust
receipt and as a secured creditor, has priority of claim over
unsecured creditors in the event of customer’s bankruptcy.
According to I.O. Smith61 this second option is fraught with
dangers. A fraudulent customer may sell the goods and divert
the proceeds elsewhere or may pledge the documents to some
other lender. In either situation, the transferee of the goods or
pledge of the documents of title is protected provided he acted in
good faith and without notice of the prior pledge62
IN THE EVENT OF DISPUTE WHICH COURT HAS JUISDICTION TO
ADJUDICATE?
This is one area where a seemingly confusion exists as to whether a letter of crdit
dispute falls within the exclusive admiralty jurisdiction of the Federal High
Court or just a simple banker – customer relationship which confers concurrent
jurisdiction on the State and Federal High Courts. We shall examine judicial
authorities on this briefly.
A letter of credit dispute does not fall within the admiralty of the Federal High
Court of Nigeria. In Akinsanya vs. UBA (supra), the matter was commenced at
the Lagos State High Court which dismissed the suit. On appeal to the Court of
61
62
Nigerian Law of Secured Credit (2001) Ecowatch Publications Ltd – p. 394
Lloyds Bank Ltd vs. Bank of America National Trust and Savings Association (1937) 2 KB p. 631
28 | P a g e
Appeal, the appeal was dismissed but the court of appeal raised the issue of
jurisdiction suo moto. The majority (Uthman & Kutuigi, J.C.A – As they then
were) Nnaemeka – Agu dissenting held that the dispute was admiralty matter
and that the Lagos High Court had no jurisdiction to try it. On further appeal to
the Supreme Court, the Supreme Court opined that a matter concerning the
opening of a letter of credit, in which there is a collateral agreement of carriage of
goods by sea is not an admiralty matter and that the state high court has
jurisdiction to try it. This is because the whole transaction being a documentary
credit, a bill of lading is not itself the contract of carriage between the shipper and
the charterer, but is merely evidence of the terms. All parties to international
Documentary credit deal in documents only, and as the present action is between
the buyer and the Issuing bank, the Lagos High Court has jurisdiction.
In Nasaralai vs. Arab Bank of Nigeria (supra), Bello JSC while relying on Jamal
Steel Structure Ltd vs. ACB Ltd (1973) 1 ALL NLR (Pt. 2) 208 held that it is a
misconception of law and practice of commercial credit to describe the case as
one governed by maritime law which is within the exclusive admiralty
jurisdiction. The learned Jurist went on to say that “Now in the business world of
documentary credits, parties are not factually concerned with the seaworthiness
of a ship or loading it or monitoring its voyage or ensuring its compliance with
the maritime law of the country of the discharge of its cargo. They are not
concerned with the actual delivery or non – delivery of the goods. The whole
transaction may in reality be a fraud or forgery. There may be no ship and there
may be no good at all. Parties are only concerned to ensure compliance on papers
with the relevant terms of their respective contracts. It is essentially a matter of
documentary contract between a banker and his customer, which has nothing to
do with maritime law. It is a matter within the jurisdiction of High Court of
Lagos State and not the Federal High Court.
The 1999 Constitution of the Federal Republic of Nigeria has made elaborate
provisions for the jurisdiction of the Federal High Court. S.251 (d) provides for
the exclusive jurisdiction of the Court in the matters listed there but added a
proviso to the effect that “provided that this paragraph shall not apply to any dispute
between an individual customer and his bank in respect of transactions between the
individual customer and the Bank.”
There is no doubt that a letter of credit transaction dispute falls within the ambit
of banking transactions and one may therefore be tempted to hold that the
Federal High Court can exercise jurisdiction. From the foregoing provisions if the
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letter of credit dispute is between two banks or involves the Central Bank of
Nigeria, the Federal High Court may have exclusive jurisdiction based on the
provisions of S. 251 (d) of the Constitution.
However, as far as letters of credit disputes between individual customers and
their banks are concerned, being that it is a civil matter, does the Federal High
Court have concurrent jurisdiction with the State High Court in the light of
NDIC vs. Okem Enterprises Ltd63 where the provisions of S. 272 (1) and the
proviso to S. 251 (d) of the 1999 Constitution were construed to mean that the
Federal High Court and the State High Court will share jurisdiction over any
dispute between an individual customer and his bank.
CONCLUSION
The financing of international trade creates peculiar problems as the parties to
the transaction reside in different countries. Consequently, they are not in a
position to ascertain or know the financial standing or reputation of the other
party. The letter of credit makes it possible for the seller to part with the
possession of the goods by providing reliable arrangement for payment and
assurance of delivery of the goods. It is therefore recommended that the use of
letters of credit should be encouraged as it is of great economic importance.
Letters of credit simplifies international trading which is a form of economic
progression and development. It is also safer and less risky to transact
international business through the medium of documentary credit than carrying
cash.
The courts are keen on enforcing a letter of credit according to its terms. The
courts will not in the ordinary course of things interfere by way of injunction to
prevent its implementation. The exact nature of the credit will determine its legal
effect. Two things are clear, namely, that the regime of letters of credit is separate
from any contract upon which it arose, and documents which must accompany
any request for payment must comply strictly with the terms of the credit.
Finally, it is an assured form of security because according to Lord Diplock “the
whole commercial purpose for which the system of confirmed irrevocable credits
has been developed in international trade is to give the seller an assured right to
be paid before he parts with control of his goods.”
63
(2004) 10 NWLR (Pt. 880) S.C. 107
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