One of the issues frequently asked to me through the trainings and consultation services I have been providing is the questions and comments “Which one predominates other: agreements or letter of credits?” or “We do not make agreements, we prefer to work with letter of credits.”
The main reason for it that our exporters think the letter of credits which are one of the international payment methods as sales agreements. Although I have indicated that this thought is wrong repeatedly in several opportunities, I would like to share a concrete example of adjudgement with you to enable you understand the issue better. Let’s look at a decision made in 2015 by the Economic and Commercial Arbitration Committee of China:
Let’s analyse the decision made by PRC: China International Economic & Trade Arbitration Commission (CIETAC) Shenchen Commission, November 9th 2005, Case No: 1119:
The Chinese seller and Australian buyer signed an agreement by agreeing on the sale of a DVD-player. According to this agreement;
- The shipment of the goods will be carried out through loading and transportation operations,
- They decided on letter of credit as a payment method,
- The submission of the letter of credit to the bank will be completed after the delivery of the goods,
- The parties will pay a specific exemplary damage in case of a breach of the agreement,
- The parties did not choose any kind of laws related to the resolution of the disputes in the agreement.
The seller sent the goods in 5 batches contrary to the conditions they agreed in the agreement. Besides, the seller demand the payment by submitting the letter of credit to the bank and collected the whole amount including the goods which were not delivered.
The buyer on the other hand, received the goods later than the expected since it received them in 5 batches. The buyer claimed that it incurred severe economic losses since the delivery and payment operations are not in accordance with the provisions of the agreement and started an arbitrary process. The buyer demanded an exemplary damage since the seller breached the agreement by submittin the letter of credit and receiving an early payment.
The Arbitration Commission recognized the demand with the exemplary damage by deciding that the seller breached the agreement by receiving the payment with an operation different from the procedures agreed as the letter of credit.
As you can see, the power of the agreement defeated the letter of credit. If the parties had not made an agreement and determined a procedure related to the use of the letter of credit, It would not have been possible for the Australian buyer to apply to the relevant authorities and demand justice.
In sum, the most important document for the international commercial relationships is the agreement between the parties. Letters of credit and other payment methods are designed to facilitate the commercial agreements to be more operative through the effectivenesses of the banks and to manage only the payments of the sale agreements. Expecting more from the payment methods used in the international trade can cause unnecessary tensions, operation costs and complicated legal disputes between the sellers, buyers and banks.