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COVID-19: Letter of Credits in the Wake of Covid-19 Pandemic in Turkey

30 March, 2020

The discrepancies in legal systems and practices of the courts in international trade bring forth risks for the buyer and seller in terms of settling the payment in a transaction. To ease the issue on different practices, the letter of credit, as a financial instrument to secure the payment between the contracting parties especially in cross-border transactions, is designed to reduce the risk borne by each party. Letter of credits provide the credit of a third party, banks in general, as an independent assurance of payment to preserve the parties to commercial contract.[1] In this respect, letter of credits are deemed to be popular owing to their characteristics bearing reliability and certainty of payment. Therefore, the parties to the contract may be encouraged to participate in a more sheltered payment mechanism through issuing letter of credits.

However, even though there are noticeable advantages of issuing a letter of credit, there are some uncertainties to apply or issue those in Turkey, since the legislations on letter of credits are not expressly regulated under Turkish laws as the case in many countries. The source which one can benefit from is that the precedents resolved by the Turkish Court of Cassation and the Uniform Customs and Practice for Documentary Credits developed by International Chamber of Commerce (“UCP 600 Rules”) which are also put into perspective by the Turkish courts in assessment of the disputes.

A letter of credit has three essential components as follows; i) beneficiary (refers to the seller as the recipient/claimant of the letter of credit); ii) the applicant (refers to the buyer who purchases the goods or services); iii) the issuing bank (refers to the bank issues the letter of the credit on the applicants request and in favor of the beneficiary). In some cases, there may be an advising bank involved which advises the credit at the request of the issuing bank. Nevertheless, involvement of another bank does not essentially alter the essence of the underlying perception of the letter of credit which is the “undertaking of payment of the issuance bank at the request of the applicant with the complying presentation of the documents”.

What is more important in that sense is that the independency of the letter of credits. Independency in this respect must be understood as a different undertaking from the actual contractual relationship between the applicant and the beneficiary. From this aspect, banks do not have to and are not entitled to examine whether the contractual liabilities are fulfilled by the parties; rather to issue the payment, the issuing bank is entitled to evaluate the documents presented and the compliance to the letter of credit in question. The obligation of an issuing bank to pay the amount of the letter of credit regardless of the contractual relationship is stated in the article 15 of UCP 600 Rules through the statement that “when an issuing bank determines that a presentation is complying, it must honor”. To enlighten the independency, Court of Cassation in its rulings held that “the applicant is liable to claim the letter of credit from both conforming bank and the issuing bank in conformity with the independent characteristics of the letter of credits”.[2]

There are of course several types of letter of credits aiming at meeting the needs of the contractual parties in a cross-border transaction. To specify the type of letter of credits, several dynamics are considered. General types may be classified i) in terms of the position of the party in a transaction (“import/export”); ii) if a third bank approve to the issuing bank is provided (“confirmed/unconfirmed”); iii) according to its transferability (“transferrable/non-transferable”); iv) in case any specific bank is appointed which transfers the shipping documents (“restricted/unrestricted”); v) according to the right of withdrawal provided to the applicant(“revocable/irrevocable”) or; x) as per the terms of the payment or as per the occurrence of a non-performance situation (“standby letter of credit”). In practice, it is recommended to the beneficiary to require the applicant to provide an irrevocable letter since an irrevocable letter of credit stipulates no amendment or cancellation in absence of the parties’ consent. In further, to upgrade the assurance to an irrevocable letter of credit, one may ask for a confirmed letter which essentially requires another banks’ guarantee other than the issuing bank. To do so, the beneficiary may have more reliance on the letter of credit when it comes to issue it.

Nonetheless, there may be obstacles tackled by the parties in issuing the letter of credit especially in the wake of the Covid-19 outbreak. It is a question whether the Covid-19 pandemic does constitute a “force majeure event” which eventually affect the issuance of the letter of credit. In contract law, force majeure events are specifically determined in a contract by the parties so that any possible results of non-performance due to such events could be scrutinized. However, in case of absence of such regulation in a contract, one might foresee the impacts and contributor factors to a force majeure event through UCP 600 Rules. The article 36 of UCP 600 stipulates the force majeure event as “an interruption of a bank’s business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control”. Thus, as clearly seen, even though pandemic is not specified within the article, in case of interruption beyond the bank’s control a force majeure event may be asserted to be realized. For instance, in its ruling, the Court of Cassation, in a dispute between the seller and the buyer arisen out of non-performance due to typhoon in Vietnam, stated that the force majeure event conditions ought to be evaluated by the experts in business in order to conceptualize as if the typhoon in the dispute may be considered as an actual force majeure.[3]

All in all, with the spread of the Covid-19 and the major economic slow-down, there may be several firms willing to postpone, suspend or cancel their contractual liabilities. As in China, governments may issue force majeure certificates to the Chinese companies struggling with Covid-19. Nevertheless, in terms of issuing the letter of credits, the issuing banks must prove that the event has inhibited the fulfilment of their liabilities undertaken. Hence, in the case that a bank could perform its liabilities through online banking or any other alternatives, it ought not to be perceived as a force majeure event. The interruption criterion must be the initial and core condition to constitute an actual obstacle.

Author: Ezgi Aysima Kır

[1] Christopher Leon, “Letters of Credit: A Primer” (1986), Maryland Law Review p.432

[2] 11th Chamber of the Court of Cassation, E. 2014/711, K. 2014/7120 T. April 4, 2014

[3] 13th Civil Chamber, E. 2013/21315 K. 2014/1269 January 1, 2014

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