“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 - 109061001OMOSEDE 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

OPTIONIntroduction:

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 1 David Tiplady, Introduction to the Law of International Trade, Schmitthoff. Export/Trade (9th ed. 1990)2 I.O Smith: Nigeria Law of Secured Credit – Ecowatch Publications Limited: 2001-pg 3772 | P a g e

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 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.”

3 E.O. Ehigiato: The Law of Credit & Security – Ben Auster Ventures Limited: 2008 – pg 1224 (1918) 2 KB @ 623; (1918) The All ER 1513 | P a g e

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 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.” 5 (1952) 2 QB 88; (1952) 1The All ER 4926 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 7208 Chorley: Law of Banjing, 6th ed. London (Sweet & Maxwell) 1974 p. 2244 | P a g e

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 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:

9 I.O Smith: Nigerian Law of Secured Credit, Lagos (Ecowatch Publications Limited) 2001 p. 3785 | P a g e

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 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

10 (1983) FNLR 3566 | P a g e

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, 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.7 | P a g e

b. Shipment of the goods may be made either:i. By conference line vesselii. 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 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

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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 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

11 A.G Bendel State & Ors vs. UBA Ltd (1986) 4 NWLR (Pt. 37) 547 9 | P a g e

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 17th 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.

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

12 The Law of Credit and Security (Part 1): E.O Ehigiato - Ben Auster Ventures Limited: 2008 – pg 12810 | P a g e

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.

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

13 Uniform customs and practice for Documentary Credits: http\\www.cowbo.org; New Rules for letters of credit by Buddy Baker – http\\www.fcibglobal.com14 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. 115 (1958) 2 W.L.R 10011 | P a g e

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 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

16 (1984) 1 Lloyds Rep 251;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)12 | P a g e

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 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

18 Article 3 of the UCP19 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. 53621 Akinsanya vs. UBA (Supra) page 992; Hamzah Malas & sons vs. British Mex Industries Ltd (1958) 2 QB 12722 Lindsay & Co Ltd vs. Eastern Bank (1922) 1KB p. 31823? (1923) 14 LILR 58813 | P a g e

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.

The nature of a revocable letter of credit was explained by Bello JSC in ACB vs. Yesufu28 as follows:

24 See vol. 2 (27th ed) 35725 Article 8a of the UCP 1993 Revision26 Article 86 UCP27 (1921) W.N 27428 (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

“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, 4 th

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:

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;

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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 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 29 Article 9(b) UCP 1993 Revision16 | P a g e

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 UNDER A REVOCABLE/UNCONFIRMED LETTER OF CREDIT?

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 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 30 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) 384.17 | P a g e

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 FROM A DOCUMENTARY/COMMERCIAL LETTER OF CONTRACT

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 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

32 Chorley: Law of Banking, 6th ed. London (Sweet & Maxwell) 1974, p. 225.18 | P a g e

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 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

33 Nasaralai vs. Arab Bank (supra)34 Mead, “Documentary Letters of Credit” 22 Col. L. Rev. 297; P.N. Todds, Sellers and Documenatry credits (1983) J.B.L. 46835 Agomo, C.K Supra P. 66.19 | P a g e

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.

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 36 (1998) 9 NWLR (Pt. 565) CA 24537 Akinsanya vs. UBA (supra); Nasaralai vs. Arab Bank (supra)38 Rayner vs. Hambros Bank (1943) 1 KB 3720 | P a g e

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 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

39 E.O. Ehigiato : The law of Credit and Security (part 1) 2008 – page 13940 Nigerian Commercial law & Practice; Vol. 1, para 13, 164, page 106141 Nasaralai vs. Arab Bank (supra)42 Ibwa vs. Unakalamba (supra)43 Akinsanya vs. UBA (supra)21 | P a g e

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 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 44Article 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 - 14322 | P a g e

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 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 46 Nasaralai vs. Arab Bank of Nigeria (supra); A.G. Bendel State & ors vs. UBA Ltd (supra)47 A.G. Bendel State vs. UBA (supra)48 Akinsanya vs. UBA (supra); Nasaralai vs. Arab Bank of Nigeria (supra)23 | P a g e

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 THE ISSUING BANK AND THE CONFIRMING BANK

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. 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.”

49 Equitable Trust Co. Of New York vs. Dawson Partners Ltd (1926) 27 LILR 49.50 Akinsanya vs. UBA (supra)24 | P a g e

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 Africa54, 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 terms of the description. In J.H. Rayner & Co. Ltd vs. Hambros Bank Ltd (supra), the court held that there is no room

51 E.O. Ehigiato (supra)p. 159.52 ibid53 Ibid; Nasaralai vs. Arab Bank; A.G. Bendel State & ors vs. UBA Ltd (supra)54 (1981) 1 Lloyds Report 68, 74 - 7525 | P a g e

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 implication, material representations

55 Impanoutsos vs. Raymond Hadley Corporation (1917) 2 KB 473; 26 | P a g e

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.

56 Akinsanya vs. UBA Ltd (supra)57 United City Merchants vs. Royal Bank of Canada (supra)58 Part 1, Article 859 United City Merchant (Investments) Ltd vs. Royal Bank of Canada (supra)27 | P a g e

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.

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 BANK’S SECURITY WHERE REIMBURSEMENT IS REFUSED?

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

60 Hong Kong & Shanghai Banking Corp vs. Kloeckner (1989) 3 All ER P. 51328 | P a g e

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.

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 61 Nigerian Law of Secured Credit (2001) Ecowatch Publications Ltd – p. 39462 Lloyds Bank Ltd vs. Bank of America National Trust and Savings Association (1937) 2 KB p. 63129 | P a g e

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 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.

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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 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.

63 (2004) 10 NWLR (Pt. 880) S.C. 10731 | P a g e

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.”

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