International Commercial & Trade Disputes: Letters of Credit-Dishonor by Banks

Advocates, in spite of counseling their clients, the latter counting at the dollars offered by importers abroad, do not enter into any valid agreements and export goods from India based on the assurance provided by the applicant banker in the form of Letters of Credit. An E-Mail message from the importer looking for gullible exporters triggers the export.

The importers have different ways of convincing the exporters and unethical strategies to deceive.

One such method adopted is this:

The importer will initially promptly pay the consideration for few successive import orders, say, first two or three orders (PLACED BY E-MAILS) without any hustle. Obviously exporters will be carried away by these initial payment gestures shown by the importers. Next comes a purchase order carrying a hefty dollar value. The exporter will somehow ensure to export believing the importer.  The importer, this time, will not pay.

Like this, there are several instances we have come across wherein the exporter is put into severe hardship. In all these cases, what we have noticed is that the exporter’s belief in the importer moved by the dollar hanging on their face, not executing a proper agreement with the importer with a fear that the latter may back out if insisted for an agreement and other reasons make the exporter to execute the contract on the face value. If at all there is an agreement, we have noticed that it is not in parity with the international trade agreements, clauses are improperly framed, lacks in security, arbitration clauses either missing or not captured as per the ICC requirements.

The importer in connivance with his banker will not make the payment. Or, the shipping documents along with LC will be returned to the exporter’s bank quoting flimsy discrepancy reasons. There are instances wherein the importer’s bank returns the LC after a lapse of several months, sometimes a year, without giving any reasons. There are instances where the importer, after releasing the goods imported, is missing. In the latter type of cases, some of our clients have gone in search to the country where the importers reside only to see that there are no such addresses found.

These types of deceits are not just found limited to our neighboring countries but pops up in Middle East, Egypt, Europe, Russia and China also.

The exporter, instead of approaching an advocate who practices in international law, will approach consulates, chambers of commerce, others who have no authority to take up the matter, thereby wasting time. Finally, after reaching a stage of giving up hope of recovery, the exporter will approach an advocate by which time the limitation period might have expired or about to expire.

In all these instances, the grievance turns into an international commercial and trade dispute, cross border dispute to be fought based on treaties and conventions- International Law.

PRECAUTION IS BETTER THAN CURE: It is in the interest of exporters to ensure to

1. Check the antecedents of the importer
2. Do a similar check on importer’s bank
3. Have a legally valid agreement/contract covering all clauses required under treaties and conventions
4. Include an arbitration clause capturing applicable law
5. Insist for an irrevocable LC
6. Credit guarantee from ECGC

The author can also be reached at drgubbilegal@gmail.com