shipper Mine risk insurance to be effected by me/us under blanket policy Marine No........ ..issued by..... (name of insurance company) This credit is (not) to be confirmed by a correspondent bank. Drafts must be drawn and presented, or negotiated, not later than.... (expiration date) I/we hereby agree to sign, and deliver to you, an agreement for such credit, in the form now used by you, the provisions of which are agreed to as defining your rights and my/our obligations. Each of the provisions on the back hereof, except so far as otherwise expressly stated, is to be incorporated as part of the credit. Yours very truly, ILLUSTRATION 16 Application for a Commercial Letter of Credit COMMERCIAL CREDIT CONFERENCE - FORM B IRREVOCABLE CREDIT Credit No. B.............. .19.... Dear Sirs: We hereby open our irrevocable credit in your favor for account of ...for a sum or sums not company draft) .Bank dated.. .19......" All drafts so drawn must be marked: (To be used when not all the documents are to ac There must be forwarded by early mail to..... the following documents... the draft. All remaining documents must accompany The amount of any draft drawn under this credit must be endorsed on the reverse hereof, and the presentation of each draft, if negotiated, shall be a warranty by the negotiating bank that such endorsement has been made and that documents have been forwarded as herein required; if the draft is not negotiated this credit and all relative documents must accompany the draft. This credit must accompany any draft which exhausts the credit and must be surrendered concurrently with the payment of such draft. Each of the provisions on the back hereof, except so far as otherwise expressly stated, is incorporated as part of this credit. We hereby engage with the drawers, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this credit that the same shall be duly honored on due presentation and delivery of documents as specified at... 19..... if negotiated or presented on or before.. Yours very truly, ILLUSTRATION 17 beneficiaries of the opening of credits, these institutions generally feel themselves obligated to serve notice upon the beneficiary of the act of cancellation. RENEWABILITY Ordinarily a credit is "non-revolving" or not renewable, once the exporter has drawn his drafts up to the amount specified in the letter. A revolving credit, on the other hand, is automatically renewed so that funds are further available to the exporter against additional shipments. A revolving credit has been well described in a recent British case, Norskog vs. National Bank, as follows: A revolving credit is one for a certain sum which is automatically renewed by putting on at the bottom that which is taken off at the top. If you have a revolving credit for £50,000 open for three months to be operated on by drafts at thirty days sight, as drafts are drawn, they temporarily reduce the amount of the credit below the £50,000. As these drafts run off and are presented and paid they are added again to the top of the credit and restore it again to the £50,000. That is what is known technically as a revolving credit, and it is automatic in its operation and does not need renewal. The words 'revolving credit' are used inaccurately in regard to a credit which is opened for a certain amount for so many months, e.g., A credit in favor of A to be drawn on at a rate not exceeding £50,000 per month over certain months. It is a credit for a total of £50,000 multiplied by the number of months for which it has been opened and subject to the restriction you cannot draw more than £50,000 in a month. (See also Foreign Commercial Credits, pp. 26-27.) This case illustrates the danger to the bank in issuing a revolving credit, since the defendant in stitution could, under the terms of the particular credit in litigation, have been held liable for over a half million pounds sterling. Because of these possibilities, banks seldom issue revolving credits except to especially favored and reliable clients. OPERATION OF A LETTER OF CREDIT The actual operation of a letter of credit transaction may be traced as follows: 1. The exporter (A) and the importer (B) enter into a contract of sale which calls for the opening of a letter of credit. 2. The importer requests his bank (C) to open the credit and fills out a formal application (see Illustration No. 17). If the bank accedes to this request, the importer then signs the letter-of-credit contract in which he agrees to reimburse the bank for all outlays and to give it full security for such advances. 3. The bank then issues its letter of credit to the exporter. 4. The exporter in time presents the letter of credit and the draft with the accompanying documents to a local bank (D) which compares all these papers and if in agreement, will negotiate the draft. 5. The negotiating bank then forwards the draft, with the documents, to a correspondent bank (E) in the same city as the issuer of the credit. 6. The correspondent bank then presents the drafts to the issuing bank, which either pays or accepts and thereupon receives the shipping documents. These are turned over to the importer on his signing a trust receipt. These several steps in the operation of a letter of credit transaction may be illustrated in the accompanying chart. OPERATION OF OTHER FORMS OF CREDITS The above description applies only to the operation of a dollar irrevocable credit. The other forms of credit as classified above involve certain variations. Where an American bank opens a credit |