by Miss Mardiah Chowdhury
Globally the volume of transactions is increasing day by day in the international trade area. Therefore a secured transaction mechanism is preferred. .There are many ways to secure transactions in international trade like Cash in Advance or Prepayment, Documentary Collection, Documentary Credit or Letter of Credit, and others. This paper will be a focus on the letter of credit.
The legal position of a Letter of Credit in Bangladesh is an undertaking issued by a bank on behalf of the buyer (who is the importer) to the seller (exporter) to pay credit for the goods and services provided and upon presentation of the documents the bank is bound to provide the credit if the documents comply with the contract terms and condition. In Gooryonly (BD) Textiles Ltd. vs. Chartkar 54 DLR (AD) 2002, the Appellate Division held that “a letter credit is independent and unqualified by the contract of sale or underlying transaction.
The letter of credit is the most popular transaction in international trade in Bangladesh because under this the risk is distributed in a balanced way between the exporters and importers, on the other hand, the exporters take the credit from the bank so there is no chance of fraud by the buyer. The letter of credit is termed the lifeblood of international commerce because of its popularity and it is a widely recognized framework of ICC known as ‘Uniform Customs and Practices for Documentary Credit’ publication number 600. The stages of forming a letter of credit are given below-
- The contract between parties for the sale of goods
- The buyer applies to his bank (issuing bank) to open a Letter of Credit in favor of the seller
- After approving the LC application, the Bank issued the Letter of Credit to the seller’s bank (advising bank)
- After receiving the Letter of Credit, the seller shipped the goods to the buyer as per the terms which are underlying the sale of the contract
- Then the seller will obtain all the required documents to present to the advising bank or confirm the bank
- Advising the bank to transfer all the documents to the issuing bank
- The issuing bank examines all the documents and pays the seller in the manner of a Letter of Credit.
- The issuing bank sends all the documents to the buyer and collects the payment.
It is to be mentioned that there are two types of letters of credit, firstly The irrevocable letter of credit type of LC cannot be amended or canceled, and the bank is legally bound to pay to the seller the issuing bank undertaking to provide the security to the seller. Also, in M/S Centex Fashions Ltd. vs. Mim, represented by its managing director and others 2018 (1) LNJ 13 the Court held that when an irrevocable letter of credit is opened and confirmed by a bank, then such bank is left with no option but to honor its obligation under the letter of credit and pay thus the Court by refusing an order of temporary injunction committed no error of law. Secondly, a Revocable letter of credit can be amended or canceled by the issuing bank and less priority of the beneficiary is noticeable also this type of credit has no legally binding effect between the bank and the seller.
There are two Characteristics of the letter of credit under Article 4-5 of the UCP 600, firstly, the autonomy of the letter of credit which protects seller payment, and secondly the doctrine of strict compliance which works for buyer protection. According to the principle of autonomy of a letter of credit, the bank deals with the documents not with the goods, services, or performance, therefore if the documents comply with the terms of the contract bank is bound to pay. Next according to the principle of strict compliance, if the documents which are tendered by the seller are not similar to the face of the original contract then the acceptance or rejection of the documents depends upon the issuing bank or confirming bank. It is to be mentioned that the bank accepts the tender documents in strict conformity with the terms of the contract.
As under the principle of autonomy of letter of credit, we can see that the bank is always bound to pay the seller if the documents comply with the contract terms, but in practical view sometimes the court may grant an injunction against payment if the seller does any fraud, thus in the case of Alternative Power Solution Limited v Central Electricity Board [2014] UKPC 31 where the Privy Council has ruled on an appeal from the Mauritian Court of Appeal which granted an injunction to prevent a bank from paying out under a letter of credit. Also, there is some other except when the payment can be stopped under the letter of credit, where fraud has been committed in terms of the document presented by the seller or the supporting documents showing that the demand does not match with the requirements or nullity, Illegality, Breach of faith and others, as can be seen in the case of Alvi Spinning Mills Ltd & Ors. Vs. Govt of Bangladesh & Ors. 19 MLR (HCD) 2014 held that since the petitioners are the borrowers, they are obliged to repay their outstanding liability to their respective banks as their letter of credit was refused by the issuing banks being forged by them and the petitioner are also subject to the provisions of Artha Rin Adalat Ain, 2003.
In Bangladesh, the import of goods is regulated by the Ministry of Commerce in terms of the Import and Export (Control) Act, of 1950, the chief controller issued a notice and the Bangladesh bank regulated the payment system, through its Exchange Control Department.
According to the Imports and Exports Act, 1950 if anyone is willing to carry import business he must be registered with the licensing authority, and import by opening a letter of credit needs to fulfill the following criteria. They are-
a) Registered importer having valid IRC.
b) Trade license must be valid.
c) Valid membership certificate from the local chamber of commerce of a related association.
d) Income tax clearance/ declaration in case of newcomer.
e) VAT registration certificate.
After fulfilling the criteria, he must obtain some documents like-
- The application of a letter of credit.
- Indent / Performa invoice/purchase order/contract/agreement.
- Charge documents duly & properly executed.
- Letter of Credit Authorization Form (LCAF) duly sealed & signed.
- Insurance cover note.
It is to be mentioned that the importer must have to be a customer of the bank and the letter of credit must be opened by a competent authority.
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Lastly, it can be said that the letter of credit is a highly reliable method of payment in international business transactions and the import and export policy of our country encourages this letter of credit system.
