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At each transfer of documents, the documents specified in the contract contained in the letter of credit are therefore considered to be in the nature of negotiable instruments. The credit transaction is operated by the use of documents, where the documents are deemed to represent the goods. At each negotiation, by endorsement and delivery, the proprietary rights to the goods, which the documents represent, are also transferred to the transferee.
In common law countries, the nature of the letter of credit has been regarded as a form of guarantee for payment and it works in the same way. But the letter of credit is not the exclusive vehicle for claiming the payment of the goods, particularly when the letter of the credit was unconfirmed. In Saffron v Socite Miniere Cafrika3, the unpaid seller who had the benefit of an irrevocable but unconfirmed letter of credit sued the buyer under the contract of the sale which was held by the High Court of Australia.
2. The Proper Law of the Credit
The international trading payment by the letter of credit involves four contracts separately in two or four jurisdictions. The proper law of the letter of credit is decided by the principle of the closest and most real connection with the contract. In Power Curber International Ltd v National Bank of Kuwait4, the Court of Appeal held that the proper law of a letter of credit is where its payment is made.
3. Types of Letters of Credit
Letters of credit are of various types. The two principal types are the irrevocable and revocable credits.
3.1 Irrevocable and confirmed credit
An irrevocable credit is a credit expressly stated to be irrevocable. Thus it cannot be cancelled or modified provided that the seller presents the correct documents to the confirming bank in the contract period. This arrangement obviously gives considerable security to a seller but may have disadvantages for the buyer, since he is committed to the credit. An irrevocable credit is confirmed when the confirming bank, in addition to notifying the seller of the opening of the credit in his favour, adds its own confirmation of the credit to pay. At the moment the legal obligation is transferred from the issuing bank to the confirming bank. In Hamzeh Malas & Sons v British Imex Industries Ltd, the Jordanian buyers opened two confirmed letters of credit with the Midland Bank. Each letter of credit was to pay for each instalment of the goods shipped. The buyer found that the first instalment of the goods did not fit for the contractual quality after the first confirmed letter of credit had been realised. So the buyer applied for an injunction to the court to prevent the bank from paying on the second letter of credit. Both at the first instance and on appeal, the injunction was refused for the reasons that the opening of a confirmed letter of credit imposes upon the banker an absolute obligation to pay, irrespective of any dispute rising between the two parties. So the liability posed on the confirming bank must be independent of the contract of sale in order to keep the good commercial system.
3.2 Irrevocable and unconfirmed credit
In this kind of credit transaction, the issuing bank cannot revoke its undertaking but the confirming bank does not confirm its own obligation to pay upon a tender of documents. Thus the beneficiary is left to proceed against the issuing bank in the buyer’s domain. This type of credit is less expensive for the buyer because the confirming bank merely advises the seller of the opening of the credit without confirming the irrevocable credit. So the confirming bank works just as an agent of the issuing bank and not as a principal. The irrevocable and unconfirmed credit is popular when the issuing bank is reputable in the world.
3.3 Revocable and unconfirmed credit
Such a credit is one, which the buyer has established, but which he may later modify or cancel in so far as the seller has not already drawn on it. The issuing bank may be liable to the confirming bank if a payment has been made in accordance with the terms of credit conveyed by the issuing bank to the confirming bank before the buyer modify or cancel the credit.
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