Overview of the Letter of Credit Contractual Relationships
A. Buyer and Issuing Bank
2.06 The relationship between the buyer and issuer is relatively straightforward.
There is usually an underlying bank-customer relationship pursuant to which the issuer agrees with the buyer to establish a credit in the seller's favour and notify the seller of the credit. The notification will usually be sent via a secure network, such as SWIFT, to the correspondent bank in the seller's jurisdiction for advising or confirmation. Thereafter, the issuer's primary duty is to pay the seller or the nominated bank on the presentation of complying documents.[151] Provided it has adhered to its instructions, the issuer is entitled to reimbursement from the buyer. Often that reimbursement comes from the sale proceeds of the goods that have been bought and the issuer will commonly take security over the goods, for example, via a trust receipt.[152] The contract between buyer and issuer is likely to be governed by standard terms and conditions that, amongst other things, may seek to protect the issuing bank in the event that it pays on non-complying documents, ie breaches the doctrine of strict compliance.[153] The validity of such provisions may be governed by the mechanisms used in the applicable jurisdiction to control contractual unfairness.[154]B. Issuing Bank and Correspondent
2.07
As noted in summary above, the correspondent bank may assume a variety of roles including: advising bank, confirming bank, and negotiating bank.
Multinational banks will, where possible, use their own overseas offices as correspondent banks. The UCP treats the branches of a bank in different countries as separate banks,[155] which facilitates the advising or confirmation by a local entity. An advising bank incurs minimal responsibility to the seller, its main obligations being to satisfy itself that the credit is authentic and to advise the terms of the credit accurately.[156] It has no obligation to pay or negotiate the credit.[157] The confirming bank incurs obligations to the seller similar to the issuer, as discussed below.C. Buyer and Correspondent
2.08
It is well-established that the buyer and correspondent are not usually in a contractual re- lationship.[158]0 As a result, any default by the correspondent is not actionable by the buyer as a breach of contract and the buyer would have to resort to tort if it wished to pursue the correspondent directly. At common law such a tort claim is, however, unnecessary as the issuing bank is accountable to its customer for the defaults of the correspondent.[159] The issuer,
in turn, has recourse against the correspondent. In an era of standard terms and conditions, however, this solution is routinely compromised by the ubiquitous use of exemption clauses exonerating the issuing bank from liability for the correspondent’s defaults. As referred to earlier, such exemptions may be subject to statutory controls on unfairness in the governing jurisdiction.
D. Collecting Bank and Seller
2.09 The collecting bank, often the seller’s own bank, presents the documents to the confirmer or issuer on behalf of the seller, and thus acts as an agent of the seller. The seller’s bank is likely to be financing the seller, in which case it has an interest, formal or otherwise,[160] in the credit proceeds, which is one reason why it may wish to be involved as a collecting bank. The seller and its bank will have a bank-customer relationship very similar to that of the buyer and the issuer.
III.