Letters of Credit

Paper Summary:

This paper explains that the generally accepted rule for banks that have issued a letter of credit, is that they do not need to look beyond the face of the documents to determine if a transaction involves fraud. The author points out that, if the documents on their face appear to be conforming documents, the bank will draw down the letter of credit, paying the beneficiary or seller. The paper states that, if the buyer can show apparent fraud before the bank pays on the letter of credit, then the buyer can approach the bank to prevent payment and can seek an injunction from a court if necessary. The author stresses that the bank can insist that all documents necessary to fulfill the letter of credit conform strictly. The paper presents cases and includes quotations.

From the Paper:

"This essay considers the following scenario: In an international sales contract, buyer and seller agree that payment will be made through the use of a letter of credit. The buyer obtains a letter of credit from the bank, designating the seller as the beneficiary, and specifying the documents the seller must present to satisfy the letter. The seller presents documents which are on their face sufficient to warrant payment. These documents are forged or otherwise contain falsified information. Based on the documents, the bank pays the seller pursuant to the terms of the letter of credit."

Sample of Sources Used:

• Harfield, The Increasing Domestic Use of the Letter of Credit, 4 U.C.C.L.J. 251, 257 (1972).
• J. White & R. Summers, Uniform Commercial Code (Minneapolis, Minnesota: West Publishing Co. 1999).
• Uniform Customs and Practice for Documentary Credits. International Chamber of Commerce. (2000) Available at <www.remburskonsulenten.com/ NewFiles/UCP500.pdf> Internet.
• Auto Servicio San Ignacio v. Compania Anonoimo Venzolano de Navegacion, 765 F.2d 1306 (5th Cir. 1985).
• Far Eastern Textile, Ltd. v. City National Bank and Trust, 430 F. Supp. 193 (S.D. Ohio 1977).

More papers on Letters of Credit:

• Analytical Essay # 130953 : "Letters of Credit and Fraud"
• Term Paper # 107793 : "The Letter of Credit Payment Mechanism"
• Research Paper # 21164 : "Letters of Credit"

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