Question

In: Finance

Ocean Traders of North America is a company based in Mobile, Alabama, that specializes in seafood...

Ocean Traders of North America is a company based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however, Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions. Explain the function of irrevocable L/C for the case above.

Solutions

Expert Solution

Irrevocable letter of credit means all those letter of credit which cannot be cancelled by any party unless all the parties which have been involved in that letter of credit agrees to it.

Irrevocable letter of credit will mean that a letter of credit which has been issued by the bank that will be reflecting the guarantee of the bank for payment of the goods and services which have been purchased by the domestic client, and the bank will be issuing the guarantee that it will be paying the the foreign entity under any circumstances unless the consent for the cancellation is taken by the bank from the individual.

In this case, it can be seen that the bank has cancelled the irrevocable letter of credit without taking the consent from the company, this act of the bank is completely not in line with the rules and regulations and this act is illegal as irrevocable letter of credit cannot be cancelled without consent of all the parties involved.


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