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The letter of credit is one of the most successful instruments ever devised for managing payment risk in cross-border trade. It provides a simple but powerful assurance: if the seller ships the goods and presents conforming documents to the bank, the bank will pay, regardless of whether the buyer is willing, solvent, or satisfied. For the buyer, the corollary assurance is that the bank will not release funds until the stipulated documents have been presented. This double security has made the documentary credit indispensable to global commerce and, for many commodity and capital goods transactions in Nigeria, effectively mandatory.
ICC, Uniform Customs and Practice for Documentary Credits (UCP 600) (ICC Publication No 600, 2007 Revision) arts 7(a), 15(a)-(b).
Yet disputes continue to arise with regularity, and often involve substantial sums. Letters of credit are highly standardised in practice, and parties involved are generally familiar with their structure, terms, and operational mechanics. However, disputes persist because the foundational principles governing letters of credit are frequently misunderstood.
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