Housefly:
Here is how letters of credit work. So, Sydney finds a Korean buyer for coal. They talk on the phone, exchange emails but don’t really know each other. Sydney does not want to ship $1 million dollars worth of coal without being sure he is getting paid. The Korean buyer doesn’t want to pay $1 million dollars with being sure he is getting his coal. The Korean buyer could send someone to stand with Sydney and monitor the load up. Once that is done, the liaison could call back to his company and have the money wired. Sydney would be safe because before the train could leave the station he could verify the money was received.
However, that is not the way companies typically interact. Rather, the Korean buyer would deposit money in a bank both companies are comfortable with for payment of the coal. A letter of credit would then be issued by the buyer. Letters of credit are almost the same thing as checks except the have a special condition or conditions. For example, the letter of credit might tell the bank to pay Sydney $103 a ton x the number of tons when he provides a shipping order for the coal with an agreed upon common carrier. This system allows Sydney to be paid within hours/days of shipping but still provides the buyer with some assurance that they are not being ripped off.
Every letter of credit is going to have some language that terminates it. It may be an expiration date, a prior shipment of non complying goods, a change in market price, etc. The revocable/irrevocable letter of credit is for MBA student final exams and isn’t a practical reality in the field.
Here is my problem with the Shinhan letter of credit. It says it isn’t “binding.” By definition, that is not a letter of credit. It also tells me with certainty that Sydney is not a sophisticated businessman (I am stating this in the mildest possible terms). It also does not clearly identify the parties or the conditions.
So Housefly, you say there are lots of different letters of credit. So, what kind is the Shinhan letter of credit? What are the terms? And how does it do anything to help Sydney believe he will be paid anything?
