Due credit?

When does an irrevocable letter of credit (LC) become revocable? The answer, it seems, is when a court judge says so. Never mind whether the judge himself fully understands the distinction between the relationship of the issuing bank with its client on the one hand, and between the issuing bank and its counterparty on the other.

However, if the bank has accepted all the related documentation then, by custom, it surely has an obligation to ensure that the counter-party does not lose out – typically by buying back the letter of credit, rather than paying out on it, thus sticking to the letter of the law.

In this issue, we examine a growing dispute between SFC Swiss Forfaiting Company Limited and Banco Português de Negócios (BPN) in Portugal. The bank says that it cannot pay a €100,000 LC to Swiss Forfaiting because of a Portuguese court ruling (see Irrevocable LC?, page five).

The judge ruled that the LC must not be paid because the equipment that the client had bought with it was defective.

Sal Chiappinelli, CEO of Swiss Forfaiting, the forfaiting company that acquired the LC, is naturally upset.

Such disagreements do not commonly burst out into the open because, although they occur too frequently, the banks affected know that they have a duty to honour their commitments and to provide restitution in some way.

In the SFC-BPN case, however, it seems that BPN’s legal department has decided that the bank is obliged not pay unless ordered otherwise by the court.

In the case, the relationship manager of the bank said that the company, because the equipment does not work, cannot pay – but that’s not Swiss Forfaiting’s problem; that’s BPN’s problem. It is BPN’s client, after all, and banks these days are expected to ‘know their customers’ and their business.

Failure to deal effectively with a letter of credit sets a very awkward precedent, as well. If a court judge in some far-flung country can stop payment on an otherwise legitimate LC and the bank does not work hard enough to seek an alternative solution, it potentially undermines one of the foundations of global trade – not to mention valuable associated instruments, such as forfaiting.

I hope, therefore, that this has simply been just a misunderstanding and that the participants will be able to reach an amicable solution and soon.

Graeme Burton
Managing editor

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