Letters of Credit (LCs) are a cornerstone of international trade—independent, irrevocable, and documentary in nature, they can provide exporters with a secure and widely trusted method of payment.
The use of LCs is governed by the Uniform Customs & Practice for Documentary Credits (UCP600), a set of rules issued by the International Chamber of Commerce. First introduced in 1933 to streamline international trade, eliminate conflicting national regulations, and ensure consistency in transactions, these rules have now standardized LC practices across 175+ countries.
Often referred to as the “lifeblood of commerce”—a phrase coined by Justice Kerr in the landmark case Harbottle v. National Westminster Bank (1978)—LCs operate on the principle of autonomy. Under English law, banks are obligated to honour LCs without interference, except in cases of clear fraud.
But can exporters always rely on LCs for guaranteed payment? The short answer: Not always.
In a recent case, Recovery Advisers (RA) was appointed to represent an exporter in a dispute with an Algerian bank that had issued an irrevocable letter of credit in the exporter’s favour. The LC, covering imports worth more than USD25million, was issued subject to UCP600.
The dispute arose when the exporter fulfilled its contractual obligations but did not receive payment from the Algerian bank. To compound the issue, the bank released the documents to the applicant/buyer without payment, thereby violating Article 16(f) of UCP600.
Having failed to reach an amicable resolution with the bank despite presenting them with an opinion from ICC DOCDEX confirming their obligation to honour, the case proceeded through multiple legal stages starting with commercial court litigation in front of the Courts of First Instance, appeals and finally a review by the Algerian Supreme court.
In the first instance, the Algerian bank’s defence was that it could not process the LC payment due to an official freeze order on the buyer’s accounts as the buyer has been placed under administration. The exporter’s claim was dismissed by the court, who ruled that the bank could not violate the judicial freeze order.
On appeal, RA/the exporter argued that under UCP600, honouring payments under an LC is an independent and abstract obligation on the issuing bank which is not influenced by the fact that the applicant is under administration. The Appellate Court upheld the first instance ruling, finding that according to Algerian domestic laws the issuing bank acts as an agent for the applicant and therefore the applicant’s consent is required before payments under the LC can be released.
On final appeal, RA/the exporter contested the appellate decision, arguing that the terms of UCP600 as well as the core functions of Documentary Credits rest on the independence of the issuing bank’s payment obligations. As such, requiring the consent of the applicant to release payment not only violated UCP600, but also went against the very essence of Documentary Credits and their function.
Supreme Court ruling
The Supreme Court verdict ruled in favour of the Algerian bank, citing Art. 1 and Art. 48 of the Bank of Algeria’s Regulation 07-01/2007 [of 3 February 2007] concerning the applicable rules to transactions concluded with external parties and foreign currency accounts, whereby Art. 48 of that regulation states that “the authorised agent shall carry out any transfer to the outside [of the country] based on instructions by the transaction owner, provided that the transaction owner presents the authorised agent the documents necessary to prove that the goods are shipped exclusively towards the country’s customs territories along with the associated commercial invoices”.
This was in further reference to the decision by the Court of Appeal which stated that “There is no evidence in the claim file that the LC applicant gave any instructions to the authorised agent [i.e. the issuing bank] to transfer the claimed amount outside of the country in compliance with Art. 48 of regulation 07-01 issued by the Bank of Algeria“.
Conclusion
This case highlights a conflict between international banking norms and Algerian domestic financial regulations. Despite the exporter’s reliance on the letter of credit and UCP600, the Algerian courts consistently ruled in favour of the issuing bank, emphasising that in accordance with domestic law, the issuing bank is merely an authorised agent for the importer, which therefore necessitates the importer’s consent in order for the agent (issuing bank) to release the payments due.
To avoid similar issues, exporters may wish to consider obtaining a separate confirmation of the LC from a bank located in a jurisdiction where it is more difficult for the confirming bank to restrain payment.
If you have any questions or would like to discuss a specific case, please contact your dedicated case manager or email us at [email protected].
