Study Of Legal Problems Of LC Financing

This paper is mainly concerned with legal issues arising from a means of international settlement--Letter of Credit (L-C) as a widely used financing instrument. Letter of Credit, as a financing tool, succeeds in resolving the contradictions of distrust between the importing and exporting parties and reducing the risk of trading parties thus greatly facilitates the international trade development. However, the law in this regard is insufficient and basically makes indiscriminate use of the basic civil law concerning general loan, lacking specific provisions. The paper start from the financing function of the L-C, according to practice of the China banking sector to discuss the design of institutional arrangements and put forward my point of view so as to contribute to improve China's L-C financing laws and regulations, reduce risk, prevent credit fraud, and protect the legitimate rights and interests of the parties involved.The paper consists of five chapters. Chapter One deals with Letter of Credit and Letter of Credit financing, with "Uniform Customs and Practice" introducing the concept of Letter of Credit, describes the specific operational processes of Letter of Credit transactions and summarizes the main features of L-C, where independence is the cornerstone. In terms of the legal relationship of L-C, the various legal relationships involving all the parties are introduced including the one between the applicant and the Issuing Bank, the one between the Issuing Bank and the beneficiaries, the one between the applicant and beneficiary and the one between the Issuing Bank and the Advising Bank. Among which, the legal relationship between the Issuing Bank and the beneficiary is the most basic and fundamental part. At present, the legal nature of the L-C has been a variety of argument, and the author believe the essence is a new type of trading agreement involving offer and commitment. There are various means of financing regarding L-C such as export packing credit, export financing, negotiation, import financing, advances and so on.Chapter Two deals with the legal issues of Issuing Bank and mainly deals with the legal issues in the imported loan. After Issuing Bank deals with the imported loan with the importer and pays the loan under the letter of credit, it holds four kinds of right to the subject goods, namely, ownership, mortgage, lien, and hypothecation. Through the discussion of various theories, the author says more in favor of hypothecation. The right of this is generally the written agreement between the applicant and the Issuing Bank on signing the imported loan agreement. In case of the absence of agreement, the design according to the L-C trading mechanism is, through the "security chain", to ensure that the parties cannot get the documents standing for the imported goods until they pay. Banks who have paid must have the right of hypothecation, to ensure them have the collateral when the issuing bank is bankrupt or the applicant can not be there. As for the discussion of whether the release in the form of trust receipt may be regarded as giving up the right , the author believe, under the trust receipt in the form of of release, the Issuing Bank is not intended to transfer the material possession to the grantor, nor is it to give up the right of hypothecation . However, according to the jurisdictional practice of our country, the Court verdict implys that it might be regarded that the Issuing Bank has given up the right of guarantee. The author then carry on with the analysis of the legal nature of the trust receipt in imported loan and put forward some suggestions as to the the conflict between the reality and the law.Chapter III focuses on the legal issues of bank financing in the exporting country, mainly including the difference between negotiation and the export bill purchase and the issues resulting from the difference between the draft involved in the negotiation and that required by the China's Negotiable Instruments Law Bills of Exchange Notes. Export bill purchase is a kind of credit and debt relation by merging the loaner and the guarantees, while negotiation is a kind of instrument trading relations; there is primary difference between the bank's "receipt of settlement" and the negotiation in the name of law. Although bills were widely used in negotiation, they are dramatically different from the drafts required by the domestic law whether in terms of issuing, acceptance, or in terms of transfer. Only with differentiation of the bill under L-C and that according the domestic law can we better promote the business financing.Chapter Four focuses on the design and suggestions as to the above-mentioned questions. In terms of imported bills, the author proposes the warrantor give up the plea on the goods by referring to the no-transfer hypothecate system. On the dimension of law, the author establishes the legal status of bills of LC by putting forward the concept of loan and negotiation.Chapter Five summarizes the point of the paper.This paper is the study of the legal issues of the letter of credit from the point of view of financing, therefore, there exists the lack of authoritative legal norms.There is no consistent system arrangement and designs among the banks, resulting in no guidelines to follow for the banks, importers and exporters with regards to imported and exported bills. The courts'decision on such disputes lead to the argument and great legal risk to the business. Through the analysis and clarification of the basic concepts, the author aims to offer an tentative solution under the current legal system.