Letters of credit have been described '' as the lifeblood of Essay

Letters of credit have been described '' as the lifeblood of international commerce'' . ( Kerr L J in R D Harbottle ( Mercant - Essay Example They are Open Account, Bill of Exchange, Documentary Bill and Letter of Credit.1 Open Account is a type of practice whereby contracting parties agree on payment of cash against order. This means the importer has to make advance payment along with his order. The risk for the importer is at a maximum. On the other hand, exporter assumes equal risk if he agrees to ship the goods and receive payment at a later date on or after delivery. Secondly, bill of exchange is an arrangement by which the exporter obtains an undertaking that the importer shall pay the value of goods received after a certain period from the date of supply, delivery or against despatch as the case may be. This is a negotiable instrument just as a cheque or promissory note and it is governed by the Bills of Exchange Act 1882. In case of default by the importer in payment, the exporter acquires legal rights to proceed against the importer. This arrangement is safer than an open account type of payments. The third type o f payment Documentary bill refers to Bill of Exchange accompanied by the bill of lading which is document of title to goods. The Bill of exchange drawn by the exporter along with the bill of lading for the goods shipped is accepted by the importer for payment as per the negotiated terms as to whether it is payable at sight or after a period of say 30 to 90 days. These three types of payment do not guarantee payment or shipment (in case of advance payment by the importer) to the respective party. The last of the above said types is the letter of credit. This form of payment removes difficulties encountered by the parties in the first three types of payment. The letter of credit has therefore been regarded as life blood of business as rightly said by Kerr L.J.2 This type of payment wherein third parties step in to guarantee payment thus lubricating the wheels of commerce is however not without problems that would affect the interests of either party.3 This paper discusses the importan ce of letter of credit as the lifeblood of international commerce in the following pages. Letter of Credit The letter of credit opened by a bank on behalf of an importer guarantees payment to the exporter in a foreign country through his nominated bank. Thus, the importer’s bank after satisfying with the credentials of the importer who may be its long standing client and taking necessary precautions to collect payment from its client, sends an irrevocable letter of credit as per the terms and conditions agreed upon between the importer and the exporter to the exporter’s bank. The exporter’s bank in turn forwards the letter of credit to the exporter and intimates the fact to the importer’s bank. The exporter ensures the compliance of stipulated terms and conditions and ships the goods to the importer. The bill of lading which evidences the shipment of goods and becomes the document of title to goods, is submitted to the exporter’s bank along with ot her documents such as invoice, certificate of insurance, certificate of origin etc and the bank is instructed to collect payment for the goods shipped against delivery of the said documents to the importer’