Letters of credit remain a core part of documentation in international trade. Despite the ease in cross-border payments facilitated by fintech companies, letters of credit continue to present themselves as indispensable documents in trade finance.
It is against this background that this essay examines the legal intricacies involved in the use of letters of credit.
Applicability of the ICC Uniform Customs and Practice for Documentary Credits (UCP 600)
In its circular dated June 25, 2007, the Central Bank of Nigeria (CBN) informed importers that the UCP 600 was to become operational the next month and all letters of credit are subject to the UCP 600.
Hence, it seems that even if parties do not incorporate the UCP 600 in their contract, it would apply all the same if the goods are being imported to Nigeria. As a result, it is advisable that importers who intend to ship goods to Nigeria ensure that the letters of credit meet the standards stipulated in the UCP 600.
Issuing Bank situated in Nigeria is responsible for errors of Confirming Bank abroad
Case laws reveal that the confirming bank abroad is considered an agent of the issuing bank in Nigeria. Hence, the issuing bank in Nigeria can be liable for errors or negligence of the confirming bank abroad. This was the position of the court in the case of NASARALAI ENTERPRISES LTD. v. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985.
Similarly, in the case of Akinsanya v. United Bank for Africa LTD. (1986) LPELR-SC.95/1985, the court held that where the confirming bank abroad acts on defective documents which occasions loss for the buyer, the buyer could make a claim against the issuing bank and the issuing bank can refuse to reimburse the confirming bank abroad.
In the case, the court repeatedly noted that the confirming bank abroad is an agent of the issuing bank. These decisions solidify the point that the confirming bank is an agent of the issuing bank.
An error by the Bank can be waived by the Importer impliedly
In the case of NASARALAI ENTERPRISES LTD. v. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985, the Supreme Court of Nigeria held that the respondent bank in the suit was negligent on the basis that inconsistencies in the letter of credit were not detected.
However, the court held that the importer was not entitled to a remedy. The court made this decision on the basis that the importer had waived his right when he ordered that the bank should debit his account after he confirmed that the ship had left the dock in the exporting country.
The appropriate Court with jurisdiction on disputes relating to Letters of Credit
In Nigeria, the jurisdiction of the court is of utmost importance in the pursuit of a court action. Without jurisdiction, an appellate court would nullify the decision of a trial court no matter the decision. As a result, it is important that an importer or bank institutes a suit at the appropriate court conferred with jurisdiction.
Section 251(1)(d) of the Nigerian Constitution provides that the Federal High Court has exclusive jurisdiction on matters that relate to banking. However, the section further provides that ‘’this paragraph shall not apply to any dispute between an individual customer and his bank in respect of transactions between the individual customer and the bank’’.
In addition, section 251(1)(g) of the Nigerian Constitution further provides that the Federal High Court has exclusive jurisdiction on admiralty matters and matters that border on carriage by sea. These provisions seem to confer jurisdiction on the Federal High Court in light of the fact that letters of credit seem to fall within the scope of banking, admiralty and carriage by sea.
However, Nigerian courts have held that State High Courts are the courts with jurisdiction on matters that border on letters of credit. In the case of NASARALAI ENTERPRISES LTD. V. ARAB BANK NIGERIA LTD. (1986) LPELR-SC.138/1985, the court held that the State High Court and not the Federal High Court is the court with jurisdiction on issues that border on letter of credit.
As such, it would be wrong to institute such an action before the Federal High Court. In reaching its conclusion, the court noted that letters of credit are not within the scope of admiralty matters. The court noted that parties in a letter of credit deal in documents and not goods. As such, a State High Court is the appropriate court to institute an action in which a letter of credit is the subject of dispute.
However, this recommendation should be adopted with caution as there are a few cases in which the federal high court has adjudicated on disputes that border on letters of credit. Particularly, in the case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006, the Court of Appeal adjudicated on an appeal which emanated from the federal high court and a letter of credit was the main subject of dispute.
While the issue of jurisdiction was not raised by the parties and not discussed by the court, the fact that the case was not upturned on the basis of lack of jurisdiction speaks to the fact that the federal high court could have jurisdiction on the matter.
Whether a Letter of Credit can be cancelled
As a result of a number of factors, parties may desire to cancel a letter of credit. In the case of U.B.N. Ltd v Okwara (1998) 1 NWLR (Pt. 532) pg 118 @ 126 Para H, the court held that a letter of credit can and may be cancelled at the stage of processing. However, it cannot be cancelled when the credit has been issued and forwarded to the confirming bank. Hence, it is advised that an importer that seeks to cancel a letter of credit should do so before it is issued forwarded to the confirming bank.
How to determine whether a Letter of Credit is confirmed or unconfirmed
In the case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006, the Court of Appeal held that a letter of credit is confirmed or unconfirmed depending on the role played by the correspondent bank. Where the issuing bank merely instructs the correspondent bank to notify the seller that the letter of credit has been opened and that the correspondent bank should accept documents on behalf of the issuing bank, the letter of credit is unconfirmed and the correspondent bank is an advising banker.
However, if the correspondent bank proceeds to confirm the credit i.e “adds to the promise of the issuing banker an undertaking of its own to accept or negotiate a draft or to pay the amount of credit to the seller against conforming documents, the correspondent banker becomes a confirming banker and the commercial credit is a confirmed credit”.
Confirmation and stamping
The case of FBN PLC V. J.O. IMASUEN AND SONS NIGERIA LTD (2013) LPELR-CA/B/151/2006 reveals that it is important that a letter of credit is confirmed by the correspondent bank in order that it is enforceable. Hence, where a Nigerian exports goods and a letter of credit is issued by a bank on the instruction of the importer, it is advised that the Nigerian exporter insists that the letter of credit is confirmed by the correspondent Nigerian bank.
The court further held that stamping of a letter of credit by the Nigerian bank does not amount to confirmation of the letter of credit. The court held that the stamping only showed that the confirming bank had received the letter of credit. More so, the court held that First Bank – which was the Nigerian bank against whom the letter of credit was sought to be enforced – was only notifying the respondent that the letter of credit has been issued.
The fact that the appellant forwarded the letter of credit to the respondent and stamped same does not imply that the letter of credit was confirmed.
In addition, amendment made to a letter of credit by the importer should be forwarded to the confirming bank and not to the exporter alone. As such, this essay advises that a Nigerian exporter should ensure that the correspondent Nigerian bank has received the amendment made to the letter of credit in order to have the provisions of the amended version enforceable.
Furthermore, letters of credit must be routed through the bank and must comply with all relevant guidelines. In paragraph 15 of its circular dated 30 April, 2014, the Central Bank of Nigeria has directed that banks must not endorse or pay on documents that do not comply with the routing requirement.
Stamp duties: Letters of Credit to be stamped before execution
Section 12 of the Stamp Duties Act provides that every instrument first executed in Nigeria shall be stamped on or before its first execution. Furthermore, section 44 of the Stamp Duties Act provides that a bill of lading – which is defined to include letters of credit – must be stamped before execution.
Section 44(2) further provides that it is an offence to make or execute a bill of lading not duly stamped. As such, it is advisable that an exporter that intends to ship goods to Nigeria insists that it is stamped before it is executed. Nevertheless, section 23 provides that an unstamped or insufficiently stamped document may be stamped within 40 days of the first execution. If beyond 40 days, the stamp duty and a penalty shall be paid.
Furthermore, section 40 provides that a bill of exchange – which is defined to include a letter of credit – which is made outside of Nigeria shall be stamped before it is presented for payment in Nigeria.