This is a financial undertaking that the contract owner would perform the contract agreement. In Edward Owen Engineering Ltd v Barclays Bank International Limited, the court noted that it guarantees and ensures performance under the sale contract. It is usually important in multi-billion naira contracts. Where a party wants to hire a contractor but fears that the contractor may abscond or not fully perform.
Performance Bond entails “A” (usually a bank or other financial institution) telling “B” to award the contract to “C” (together with the money) on the assurance that if “C” does not perform, B can hold A responsible. This is a contract guaranteeing that C would perform the contract. That the contractor would perform the contract and in the event of non-performance, the guarantor would repay. Most guarantors usually get a percentage of the contract price which would be their commission. In practice, A (guarantor) usually collects a collateral from C (contractor). If B absconds, A would usually sell the collateral and use the money to repay B (the contract awarder). 

LOCs are also known as Documentary/Commercial Credit. They have been described as the “lifeblood” of international commerce in United City Merchants (Investments) Limited v Royal Bank of Canada (The American Accord).
Defined in Pillans v Van Mierop (this was the first case where LOCs were extensively discussed) as a written promise of a bank on behalf of a buyer to pay to the seller, an amount… provided the seller complies with the terms and conditions.
Aritcle 2 Uniform Custom and Practice for Documentary Credit defines an LOC as any arrangement “where an issuing Bank (acting at the request and instruction of a customer or on its own behalf) 1. Is to make a payment to or to the order of a third party or is to accept and pay bills of exchange drawn by the beneficiary”. 2. Authorises another bank to do same… provided that the terms and conditions of the credit are complied with.
Lord Wright in T.O Bailey Sons and Co v Ross T. Smyth and Co Ltd noted that the LOC protects the parties from disagreement, complaints and issues of non-payment. LOC transactions are governed by the International Chamber of Commerce.
The Parties involved include: The buyer, the issuing bank, the advising bank and the seller. The buyer is the applicant who is importing. He is the one that requests for credit to be issued to the seller. The Issuing Bank is the bank that gives the credit to the seller. The Advising Bank. The Seller is the beneficiary of the credit.

That is, asking for the credit to be issued to the seller. In Pabia Co SPA v Tourmarn Neilsen the court noted that the LOC should be created/opened by the buyer within the specified time. In Garcia v Page, the court noted that where no time is specified in the contract, the LOC should be opened or created within a reasonable time. 
Stage 1: The importer (buyer) and exporter (seller) agree on the sale and purchase of goods where payment is to be made by a letter of credit.

Stage 2: The importer (buyer) completes an application requesting his bank (the issuing bank) to issue a Letter of Credit in favour of the exporter (seller). Please note that the importer must already have an existing line of credit with the issuing bank in order to request that a letter of credit be issued in his favour.

Stage 3: The issuing bank issues the letter of credit and sends it to the advising bank (which is usually in the country of the seller (exporter) by telecommunication or registered mail in accordance with the importer’s instructions.

Stage 4: the advising bank verifies the letter of credit for authenticity and sends a copy to the exporter (who is the seller). Article 14A UCP. 

Stage 5: When the seller gets a copy of the LOC, he examines it to ensure that:
      a. It corresponds with the terms and conditions in the purchase and sale agreement.
       b. The document stipulated in the letter of credit can be produced.
The terms and conditions of the letter of credit must be fulfilled.

Stage 6: If the exporter is of the opinion that he cannot comply with the terms and condition of the LOC or he notices that it does not correspond with the sale agreement, he is to immediately notify the importer to amend or rectify the LOC as the case may be.

Stage 7: When all parties agree to the amendment, the amendment(s) are incorporated into the terms of the LOC and notified to the exporter through the advising bank.

Stage 8: The exporter arranges for the shipment of the goods. He is then to present the requisite documents required under the LOC within the stipulated period to advising/confirming bank. These documents usually include: Commercial Invoice, Packings, Insurance documents, Certificate of Origin (showing where (the country) the goods are coming from), Inspection Certificate (that the goods have been inspected and they meet the required standard). The bank checks the document against the LOC and thereafter forwards it to the issuing bank.

Stage 9: The issuing bank examines (Article 14 provides that the documents shall be examined on their face to ensure regularity) the document to ensure that they comply with the terms of the LOC and pays the seller where okayed (UCP Art 16 which is to the effect that where there is discrepancy in the document, the bank may refuse to honour the application or it may waive the discrepancy). Then the issuing bank is to obtain payment from the importer (as reimbursement for payment already made).
Stage 10: Documents are delivered to the importer to allow him take possession of the goods from the transport company and the trade cycle is complete when the importer has received his goods and the exporter obtains payment for same.

   a. Autonomy of letter of credit: in the sense that the LOC transaction is separate from the real contract of sale and would not affect the credit. Provided the documents are in strict compliance (The doctrine of “Strict Compliance”: provides that the bank can reject any document/instrument which is not in strict conformity with the terms set out in the documentary letter of credit this is because: LOCs deal purely with documents) with the terms of the LOC Moralice (London) Ltd v ED and F Man the credit stipulated a bill of lading for 5,000 bags. The bank’s rejection of the tendered bill, which referred to 4,997 bags, was allowed), the seller would be paid notwithstanding that disputes may have arisen in relation to the goods-Hamzeh Malas and Sons v British Imex Industries Limited (As Jenkins LJ in this case said, “We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective), Article 3 and 4 UCP. In Power Curber International Ltd v National Bank of Kuwait where the English courts enforced payment by the bank despite an order from a Kuwaiti court forbidding payment. Lord Denning in this case noted: “it is vital that every bank which issues a letter of credit should honour its obligations. The bank is in no way concerned with any dispute that the buyer may have with the seller. The buyer may say that the goods are not up to contract. Nevertheless, the bank must honour its obligations”.
    b. It provides a secured and guaranteed mechanism of payment and financing of international transactions. The bank pays and collects the money from the seller.
     c. Bank expertise makes transactions seamless and faster.
     d. Flexible payment for goods and services.
     e. Cash resources are not tied up.

Disadvantages: Does not protect against insolvency of the bank.

     a. Revocable LOC: can be revoked by issuing bank at any time with or without prior notification (Please note that revocation is uncalled for if the terms and conditions have been complied with). In Cape Asbestos Co Ltd v Lloyds Bank Ltd, the court held where the LOC is revocable, the bank was under no legal duty to inform the plaintiffs.
     b. Irrevocable LOC: Requires the consent of the issuing bank and the beneficiary (seller) before it can be revoked. Reasons for revocation should also be specified. May be confirmed or unconfirmed-Article 2, 7 and 10 UCP.
    c. Anticipatory LOC: This incorporates a clause authorizing the bank.
    d. Transferrable LOC: Allows the beneficiary to transfer his right under the LC to another party or parties after notifying the confirming bank.
    e. Back to Back LC: Usually used where the seller is a middleman. E.g. Where A buys goods from B in US and Sells to C in UK. Usual in transactions involving 2 irrevocable letters of credit. The courts tend to discourage this though.
   f. Deferred Payment LC: where the applicant does not pay until future date specified in accordance with the terms of the letter of credit.
There are others like revolving, Red clause, green clause, etc. which the student is expected to note.


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