THE ROLE OF LETTERS OF CREDIT IN INTERNATIONAL BUSINESSES Essay

THE ROLE OF LETTERS OF CREDIT IN INTERNATIONAL BUSINESSES - Essay Example Secondly, when there is the case of clear-cut fraud or forgery on the part of the buyer (Seyoum, 2009). Thus the letter of credit acts as some form of international collateral for international business transactions unless these two fundamental breeches occur (Craig, 1999 p360). In Wood Hall Ltd V Pipeline Authority [1979] 141 CLR 443 457 the landmark ruling by the Judge was â€Å"The Letter of Credit ... is as good as cash in the eyes of those whom it is issued and that is essentially its function† (Dixon, 2004 p392). This paper therefore examines the use of letters of credit in international business. It begins by critically assessing whether or not it is the cornerstone of international business around the globe. It goes further to examine the evolution of the concept and use of letters of credit in modern business. The assessment of alternatives to letters of credit follows. The paper ends by critically examining the advantages and disadvantages of letters of credits in in ternational business. Letters of Credit as the Lifeline in International Business In a landmark ruling, Lord Justice Kerr stated that Letters of credit are the â€Å"lifeblood to international commerce† (Harbottle (Mercantile) Ltd V National Westminster Bank Ltd [1978] QB 14 6 155). In this ruling, he emphasises the importance of the use of letters of credit in international business. This is reemphasised by Lord Justice Griffith two years later in the case of Power Garber International Ltd V National Bank of Kuwait SAK [1981] 2 Lloyd Rp. Once again, the Judge stated that letters of credit are important and need to be honoured and preserved to enhance international trade (Schmitthoff, 1988). Basically, the use of letters of credit is very important because it enables...In this ruling, he emphasises the importance of the use of letters of credit in international business. This is reemphasised by Lord Justice Griffith two years later in the case of Power Garber International Lt d V National Bank of Kuwait SAK [1981] 2 Lloyd Rp. Once again, the Judge stated that letters of credit are important and need to be honoured and preserved to enhance international trade (Schmitthoff, 1988). Basically, the use of letters of credit is very important because it enables businesses to move about freely in other nations and communities with a collateral that is as good as cash. This therefore presents a positive insight into business across borders and enhances positive business traits and builds partnerships across borders. Also, there have been attempts by the international community to unify the system for the use of letters of credit using the Uniform Customs & Practices for Documentary Credits in 175 states across the world (Schmitthoff, 1988 p573). These nations have Central Banks that monitor and control the issue and cashing of letters of credits. However, in spite of the assurances that letters of credit give, it has â€Å"a failure rate of 50%† (Schmitthoff, 1988). This therefore implies that one out of every two transactions based on letters of credits fail around the globe. This is a piece of alarming statistics that makes it wiser to consider the use of alternative methods of transacting business international or at least a high level of professional scepticism in the field of international payments for business owners.