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3.4 Other types of letters of credit
Many other letters of credit exist. Some of them service particular trades. Three of the most important ones are the revolving, back-to-back and ‘red clause’ credits.
3.4.1 Revolving credit
A revolving credit is employed when buyer and seller deal regularly with each other or have arranged to trade over a period. In such a situation it is inconvenient to set up a separate documentary credit for every transaction. Accordingly, the buyer establishes a credit with a maximum limit of payment for drawings by the seller. So long as the seller presents correct documents, the confirming bank will pay according to the terms issued by the issuing bank. The obligation of the buyer is that he must continue to reimburse the issuing bank to keep the maximum sum to pay for each transaction.
3.4.2 Back-to-back credit
The primary purpose of the back-to-back credit is to back the financial security of one letter of credit with the obligations assumed by the advising or confirming bank of another.6 A seller will in most cases have to buy from the wholesaler or manufacturer the goods he intends to sell. He may require his buyer to set up a credit in his favour and then use this credit to support a second credit, which he opens for the benefit of his own supplier. This arrangement will set up an elaborate system of supporting letters of credit, tracing down to the ultimate purchaser, the buyer who initiated the first letter of credit.7 The second or further credits will naturally differ from the first in respect of the price and the date of delivery of the goods.
3.4.3 Red clause or anticipatory credit
A ‘red clause’ credit is also referred to as an anticipatory credit.8 Under this credit, the beneficiary is entitled to claim a portion of the credit before the requisite documents stated in the terms of the credit are produced. This type of credit is based on trust between the buyer and the seller.
4. Some attributes of letters of credit
Two principles stand out as fundamental to the effective use of letters of credit in international trade: the doctrine of strict performance and the autonomy of the credit.
Under the doctrine of strict performance, the paying bank has a right to reject documents submitted by the seller for payment, if the seller cannot strictly comply with the terms of the credit. Under the autonomy of the credit, if the seller tenders the documents required under the terms of the credit, the bank will be bound by law to honour that credit. The bank will never be affected by any dispute between the buyer and the seller. But if there is an element of fraud in the transaction of sale in which the beneficiary has knowledge, the confirming bank must refuse to accept the documents, and refuse to pay the beneficiary under the clear evidence.
III. Carriage of Goods by Sea
1. General observations
The contract of carriage of goods by sea evidenced by the bills of lading or charterparties is governed by Hague Rules, Hague-Visby Rules and Hamburg Rules respectively. Hague-Visby Rules are an amended version of the earlier Hague Rules and intend to strike a balance between the different interests of carriers and cargo owners arising out of the contract of carriage by sea. However, it is still to be considered too much in favour of the carrier. So the Hamburg Rules has been drawn up under the auspices of UNCITRAL but this code has not yet been adopted. The countries which follow the Hague Rules are: the United States, Malaysia, India, Indonesia, South Korea, Philippines and Taiwan of China. And the countries following the Hague-Visby Rules are: the United Kingdom, Canada, Singapore, Hong Kong, Brunei, Japan and Australia.
2. The Charterparty
Charterparty constitutes the contract of carriage of goods by sea, also known as the contract of affreightment, or works as an evidence of the contract depending on different purpose for which the vessel may be employed. There are three types of charterparties involving the carriage of goods named voyage charterparty, time charterparty and demise charter.
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