on it.Without prior warning or notification to the
seller, the bank can cancel or modify its obligation
at any time before payment – even after shipment
has already been made. Since the bank’s commit-
ment is not legally binding, the protection to the
seller is minimal. Exporters generally do not want
to accept a revocable L/C.
Irrevocable letter of credit
This type of L/C is much preferred to the revoca-
ble letter of credit. In this case, once the L/C is
accepted by the seller, it cannot be amended in any
way or cancelled by the buyer or the buyer’s bank
without all parties’ approval. It is possible, however,
for the buyer who receives proper documents but
unsuitable goods because of fraud to obtain an
injunction preventing the banker from paying the
fraudster. When Worlds of Wonder, a US toy
company, filed for bankruptcy protection, four
Hong Kong creditors/suppliers were able to use
irrevocable letters of credit to collect $16.5 million
from an undisclosed bank. Another Hong Kong
manufacturer, Applied Electronics, could not
recover any of its debt since it held no outstanding
letters of credit.
Confirmed letter of credit
For the exporter, it is highly desirable for the L/C
to be confirmed through a bank in the exporter’s
country because the exporter then receives an addi-
tional guarantee of payment from a second bank
(i.e., the confirming bank).The advising bank sends
a cover letter along with the original L/C to the
exporter, stating that the L/C has been confirmed.
A US exporter is in a much better position if there
is a US bank that accepts the responsibilty of paying
the letter of credit in case of refusal to do so by the
buyer and/or the buyer’s bank (i.e., issuing bank in
a foreign country). In the early 1980s, the political
crisis in Iran, for example, made it impossible for
many American sellers to enforce the payment
terms specified in unconfirmed letters of credit.
Naturally, a confirmed L/C is more desirable when
payment is guaranteed by two banks instead of one,
especially if there is some doubt about the issuing
foreign bank’s ability to pay. Moreover, since the
confirming bank is located in the same country
as the exporter, the exporter is able to receive
payment more readily by presenting documents
to the confirming bank (rather than the issuing
bank abroad) to show that all obligations have been
completed.
Honesty is a virtue that cannot be taken for
granted in international trade. A seller may, for
example, ship unordered or inferior goods while
collecting payment. A buyer may refuse to pay for
goods received. It must be emphasized that a mar-
keter can never be too cautious or careful when
dealing in international trade. In the case of a con-
firmed letter of credit, the seller should not accept
a statement from a bank that “confirms the existence
of an L/C” because to confirm the existence of
something is not the same thing as to confirm an
L/C. A confirmed L/C requires the bank’s engage-
ment (i.e., taking obligation). In addition, the bank
that confirms the L/C must be financially sound,
and the exporter should specify that “the confirm-
ing bank must be acceptable to the seller.”
Unconfirmed letter of credit
When the L/C is not confirmed by a bank in the
seller’s country, the certainty is less and payment
slower.An unconfirmed letter of credit may still be
acceptable as long as the foreign bank that issues it
is financially strong. In fact, some multinational
banks are so well known that they prohibit letters
of credit issued by them to be confirmed because
confirmation would tarnish their prestige.However,
letters of credit can still be confirmed confidentially.
It is possible to combine the several types of
L/C. A letter of credit can be revocable and con-
firmed, irrevocable and unconfirmed, and so on.
For maximum security and earliest payment, the
seller should ask for an irrevocable and confirmed
L/C. Japan’s MITI, for example, requires irrevoca-
ble letters of credit before it will issue insurance
coverage for exporters to Brazil.
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TERMS OF SALE AND PAYMENT