Letters of credit attempt to address a wariness in sellers and buyers of goods in international sales. That wariness may be captured as follows: Sellers are circumspect of shipping to buyers they do not know, in some far-off country, who might never make payment. Buyers, on the other hand, are wary of paying for goods that might never arrive.
To address that wariness, banks – using letters of credit – have placed themselves as intermediaries between sellers and buyers. Thus, sellers can look to a bank for payment, provided that the documents evidencing the sale are in order. Therefore, sellers need not worry about the financial standing of an unknown buyer. Buyers, on the other hand, have the satisfaction of knowing that payment will be made only once the goods are in the hands of a carrier for transportation to the buyer.
It is estimated that up to 15% of all international trade today, totalling over US$1 trillion per year, is financed by letters of credit. It is further estimated that almost all these credits are subject to the Uniform Customs and Practice for Documentary Credits (UCP).
This Update will examine the relationship between the holy trinity of commercial trade: the sale contract, the carriage contract and the financing arrangements. This examination will be done in the context of a recent judgment of Malaysia’s apex court, Malayan Banking Berhad v Punjab National Bank [2022] 4 MLJ 758 (Federal Court).
For more information, click here to read the full Legal Update.
