Letters of credit are vital instruments in the financing of international trade. Most letters of credit in international transactions are governed by the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits 500 and 600. In the Sultanate of Oman (“Oman”) letters of credit are governed by the provisions contained in Chapter 6 [Documentary credit] of Sultani Decree 55/90 (the “Law of Commerce”).
A documentary credit, under the Law of Commerce, is a contract whereby the bank (the issuing bank) undertakes to open credit at the request of one of its customers (the applicant/buyer). The consideration is set for a certain amount and a specified period, in favour of another person (the beneficiary/seller), secured by documents which represent the goods that have been shipped or are being prepared for shipment (Article 377).
Usually, four parties are involved in the context of documentary credit transactions, namely: the applicant/buyer, the issuing bank, the beneficiary/seller, and the correspondent bank (confirming/advising and negotiating the letter of credit) (the correspondent bank). The bank opening the credit is obligated to implement the terms as to payment, acceptance and discounting agreed in the contract that opens the credit, provided the documents comply with the particulars specified in such contract (Article 379).
After opening the credit, the issuing bank informs the beneficiary directly or through a correspondent bank in the country of the recipient. The issuing bank may ask the correspondent bank either to advise the beneficiary (in which case the correspondent bank may not be obliged to make any payment to the recipient and is referred to as the advising bank); or advise the beneficiary and add its confirmation (in this case the correspondent bank can be held responsible for making payment to the beneficiary and is called the confirming bank). Once the advising bank has confirmed the documentary credit, it must refuse to accept any instructions to the contrary from the buyer.
Under the Law of Commerce, documentary credits may be either revocable or irrevocable (Article 380).
Revocable
In the case of a revocable documentary credit, the bank may, at any time, amend or cancel the documentary credit on its own initiative or at the request of the buyer and without incurring any liability towards the beneficiary (Article 381).Irrevocable
An irrevocable documentary credit constitutes a categorical undertaking by the bank which is conclusive and direct in relation to the beneficiary, provided the conditions therein are complied with (Article 382). An irrevocable documentary credit may not be cancelled or amended save by agreement of all the parties.It thus represents a direct relationship between the beneficiary and the bank and the right of the beneficiary against the bank is not infringed by any dispute between the buyer and seller to the contract of sale. An irrevocable documentary credit is therefore more advantageous to the seller as it gives more security in terms of payment.
Principle of autonomy
A documentary credit is considered a separate contract from the underlying sales contract under the principle of autonomy. Accordingly, the bank remains independent of such sales contract. The issuing bank assumes the liability of the buyer towards the beneficiary without involving itself in the underlying transaction between the buyer and the seller.The issuing bank will pay the beneficiary unconditionally if the beneficiary fulfils the documentary obligations based on terms mentioned in the documentary credit, irrespective of any disputes connected to the underlying contract between the buyer and seller (Article 385). Courts are reluctant to grant injunctions ordering banks to withhold payment unless there is a clear indication of fraud.
If the applicant does not pay to the bank the value of shipping documents complying with the terms of the opening of the credit within three months of the date of notice of the arrival of such documents, the bank may sell the goods pursuant to procedures specified by the court.
