Business

Exemplary Actions in Case of Revocable Letter of Credit

On 10th October 1991, you have negotiated export documents valued at US $ 5,500 under ‘Revocable Letter of Credit’, valid up to 11th October 1991, duly complying with the credit terms including dispatch of documents by courier in one set. You telexed on 10th October 1991 the issuing bank about negotiation and reimbursement claimed. On 12th October  1991 you receive a cable dated 11th October 1991 from the opening bank advising that the letter of credit has been revoked.

On 13th October 1991 you receive second cable marked ‘URGENT’ from the issuing bank claiming refund of $ 5,500 with interest at prime rate from 11th October 1991 till the date of refund, being reimbursement claim debited to their account  with their Nostro correspondents in New York.

What action will you take: (i) On the two cables received by you; and (ii) Refund of the amount with interest from your exporter client who has not yet withdrawn the amount credited by you.


It is not clear if the negotiating bank was the advising bank of the letter of credit. In that case its position would be safe. A revocable credit can be revoked at any time by the issuing bank, but the issuing bank is bound to reimburse another bank for any negotiation made by such bank prior to receipt by it of notice of cancellation, against documents which appear on their face to be in compliance with the terms and conditions of the credit (Article 8).

Where a letter of credit is advised through a bank, any amendment or cancellation of the credit should also be advised through the same bank. Therefore, if the revocable letter of credit had been cancelled, the cancellation would have been advised through the same bank. If the negotiating bank was also the advising bank, it could claim with certainty that the credit was not cancelled at the time of negotiation of the documents drawn under it.

In an open letter of credit, under which any bank can negotiate documents, it would be futile to expect the issuing bank to issue the notice of cancellation to all the banks in the beneficiary’s country. The notice would have been issued only to the advising bank. In case the negotiating bank was not the advising bank, and by the time the documents were negotiated the notice of cancellation had already reached the advising bank the issuing bank could claim that the letter of credit had already been cancelled.

In either case, the negotiating bank can recover the amount from the beneficiary  together with expenses incurred by the bank.

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