DOCUMENTARY CREDIT TRANSACTIONS : A CASE OF DOUBLE STANDARDS

At the heart of economic development is international trade, which
constitutes one of the main foreign exchange earners of any country
through the export of goods. Consequently, the relevance of knowledge
of the law governing the international sale of goods can never be
overemphasized.

GERTRUDE NIMAKO BOATENG, ONUG

To be able to fully reap the benefits that international trade offers, merchants (exporters and importers), employers, contractors and bankers must have adequate knowledge of letters of credit, the most widely used and most secure commercial instrument for financing international business transactions. On international markets, however, certain practices are adopted by merchants who have leverage over their weaker counterparts. Most of the time the party with power is the buyer from the developed European country engaging in trade with a poor farmer from an impoverished third world country who is working to produce agricultural goods to market them abroad where he or she can earn some foreign exchange.
It is in these circumstances that I have learnt that race can be a determining factor when it comes to international business transactions. A European buyer may sometimes find a way to exploit the ignorance or weak position of a trader from a developing country in international trade where established rules are in place to ensure uniform application. How sad and shameful !
In international commercial transactions, the seller exporting his or her merchandise from Ghana to a buyer in Switzerland needs to be assured that when the goods are received by the buyer, the buyer will pay the agreed price. This has been made possible by the law governing documentary credits, among which are the “famous” letters of credit. The Uniform Customs and Practice (UCP 500) issued by the International Chambers of Commerce in 1993 embodies the rules that govern transactions involving documentary credits.
What is a letter of credit ? To put it simply, a documentary credit is an arrangement whereby a bank acting at the request or on the instructions of the applicant for the credit (the buyer) agrees to make payment according to the terms of the contract of sale to the beneficiary (the seller) provided the seller tenders certain documents to the bank in relation to goods to be sold. It is actually a contract that is independent of the underlying contract of sale between the seller and the buyer. In documentary credit transactions, the general rule is that banks must pay when documents apparently comply with the terms of the letter of credit. Possible breach of the underlying sale contract by the seller is irrelevant. Furthermore, the letter of credit is not affected if the sale contract is illegal. It is said that this approach is taken to preserve the unique value of a documentary credit, whereby the bank undertakes to pay a beneficiary if the required documents are produced. The bank is not even concerned with the genuineness of the documents tendered. Article 15 of the UCP frees the bank from liability as to the effectiveness and genuineness of documents tendered under the credit. Gian Singh v. Banque de l’Indochine (1974). This is because bankers can only check documents. They do not have the means to verify facts. The only exception to this rule is where fraud can be established, that is if the beneficiary (the seller) tenders to the bank documents that contain material misrepresentation of fact which the seller knows to be untrue. This was so held in the leading case on fraud, United Merchants (Investments) Ltd. V. Royal Bank of Canada (The American Accord) (1983).
In documentary credit transactions, of which the use of letters of credit is an example, the buyer is protected by the doctrine of “strict compliance”. The doctrine stipulates that the documents presented under the documentary credit must strictly comply with the terms and conditions of the credit. This principle represents the buyer’s principal protection, which he gains in return for giving up control over the mechanics of payment. Consequently, the beneficiary is entitled to payment from the nominated bank only if he or she presents documents which strictly comply with the terms of the credit. As Viscount Sumner explained in Equitable Trust Co v. Dawson (1926), “There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines.” This is a sure protection for the buyer. It is his trump card. If the documents do not conform to the terms stipulated in the letters of credit, there is no way the bank will pay the seller. This is adequate protection to enable the buyer enter into a contract for the sale of goods.
Unfortunately, this is not enough for some European buyers to agree to include a letter-of-credit clause in their contract of sale. It must be noted that the right of the seller to demand payment by a letter of credit and the terms on which such a credit is to be issued depend on the terms of the contract of sale. Unless there is a provision in the contract of sale between the seller and buyer that calls for payment by a letter of credit, the buyer is not under any obligation to pay by that method. Such a clause is known as a ‘documentary credit clause’, and it puts the buyer under an obligation to have a documentary credit opened in favour of the seller. In the Law of Contract, fulfilment of the obligation to open a letter of credit will usually be treated as a condition precedent to the seller’s own duty to perform his delivery obligation. Why might a buyer not want to enter into a letter-of-credit transaction ? For the simple reason that, if the seller has complied with the criteria for the issue of the letters of credit, the buyer is bound to pay whether or not the goods arrive in good condition. The buyer, on the other hand, could manage this risk by taking out insurance to cover the import of perishable goods.
In my interview with the head of a cooperative of African farmers who export their agricultural produce to Europe, I advised this person to insist that his buyer issues a letter of credit for the sale of his goods to Europe. His reply was that if he did so, the buyer would boycott his goods.
What often happens is that the seller ships the goods and is paid only if the buyer judges the goods to be in good condition, and of course this is a risky operation given that the seller is not present to see the condition of the goods for himself. As there is no other buyer to sell to, the seller is obliged to accept the buyer’s insistence on paying only for the goods the buyer judges to be in good condition. The goods that are judged unmarketable are not paid for, even if they leave the country of origin in good condition. Already, the buyer usually purchases the farm produce from developing countries so cheaply that refusing to pay for everything can simply become unprofitable for the farmer. Fearful of not finding any other market in Europe for his or her produce, the seller accepts these conditions. In the long run, he or she runs at a loss because the price paid is not even sufficient to cover the transport of the goods. Won’t African entrepreneurs be driven out of international markets this way and eventually go out of business ? It would be interesting to know the type of international trade rules that are applied to largescale European farmers in developing countries who export agricultural produce to Europe.
Is there an international organization, whether governmental or non-governmental, overseeing private international commerce ? To protect the voiceless who are most of the time, if not always, from developing countries, I am prepared to work with any expert group in international trade law to ensure that the poor medium-scale exporters from the third world take full advantage of international trade rules. This would encourage more farmers to engage in international trade and would gradually help developing countries to develop their economies.