All imports in the country are regulated by the Import and Export Control Act 1950; regulations under the said Act are enacted in the form of Import policy order or notifications. As per para 4 of the import policy order, imports from world-wide sources are permissible except where the said are restricted or banned. However, one important restriction placed by these regulations is that where any change occurs in the status of importability, the same will not affect those imports in respect of which Bills of Lading or Letter of Credit stood issued prior to the commencement of change. In this background, this write-up seeks to throw lights on the various types of actions and instruments that provide protection against future regulatory changes relating to importability of goods.

The most important document establishing the effectiveness of a contract relating to import of goods is Letter of Credit established through a scheduled bank, but there exist multiple Letters of Credit and the question arises which Letter of Credit provides protection to future regulatory changes.

For example, regulatory changes take place and the importability of goods becomes doubtful; the importers may take the plea that standby Letter of Credit was established, hence imports were not affected by the regulatory changes. The claim of the importer requires examination by analysing the nature of Standby Letter of Credit. Standby letters of credits are performance guarantees and this type of credit is payable where agreed performances does not takes place. In fact such a credit is not for the purposes of ensuring that the buyer did perform its agreed obligation in favour of seller regarding supply and shipment of goods. Rather it serves as a form of guarantee or assurance that the seller will perform its obligation to the buyers. (or to a foreign government, developer, etc) Thus where guarantee in the form of performance bond, or insurance policies cannot be made, the same purpose may be achieved through the issuance of standby letter of credit. It is basically a new commercial device and the same is commercially accepted on the basis of its own value as it supplements the performance bond in many commercial transactions.

"A sample of such a guarantee in the form of standby letter of:

Credit is as under:

"... To: The President of Uganda

Uganda

"By order of: MYM Electronics Systems Division of High Fly Corporation of Brazil

For account of same Gentlemen: We hereby establish our irrevocable credit in your favour, for the account indicated above for a sum or sums not exceeding in all four hundred ten thousand four hundred seventy two and 50/100 US Dollars (US$410,472.60)-

Available by your draft at sight,DRAWN ON us.

This must be accompanied by A signed certificate as follows: "The President of Uganda being one of the parties to the agreement dated March 21, 1965 signed and exchanged between President of Uganda and the High Fly Electronics for the permission to set up, purchase and supply of electronic equipment as per schedule thereof for the total contract value of $1,168,632.00, does hereby certify in the exercise of reasonable discretion and in good faith that the High Fly Electronics has failed to carry out its contractual obligations therein under the said Agreement ..."

A review of the said guarantee reveals that such Letters of Credit are issued by the sellers, contractors, and project developers in favour of the buyers committing that payment will be made on demand if obligations under the contract are not met. It is a demanded guarantee binding the supplier, contractor or project operator to commit in good faith that he will meet his obligations and in case of failure to meet obligation under the contract, the other party will get the amount guaranteed without further delay. These types of transactions are the opposite of the Letter of Credit issued in the documentary sale. In the standby credit, the guarantee is given by the seller to carry out his obligations or performance under the contract, but the important point is that the documents do not control the goods having no independent value of their own.

The standby letter of credits are governed by Article 5 of the UCC and the UCP, as the document falls under the broader category of undertaking by a bank to honour a commitment of performance to the beneficiary .One may note that the current version of UCP 600, addresses such undertakings, which have an express incorporation and the UCP rules in these cases apply. Article 1 in this regard is relevant in addition to URDG 758 of ICC rules addresses the subject which treats it as a civil law instrument.

The obligations under this type of letter of credit are independent of the buyer's and seller's obligations under the sale of goods contract and the bank's payment obligation is not subject to defence arising out of the underlying transaction; in other words, the dispute between buyer and seller will have no relevance for making payment under the guarantee.

The second rule in this regard is that the banks deal only with documents required by and presented under the letter of credit but the presented documents must comply strictly with the requirements of the letter of credit. UCP and UCC Article 5 make it clear that these obligations also apply to standby letters of credit under strict liability principle.

As regards the requirements provided under para 4 of the current import policy order, it is submitted that the same is referring to letter of credit relating to documentary sale, which are issued by the bank to safeguard the payments to the supplier of goods or in other words, standby letter of credit is a performance related guarantee given by the performer to purchaser. The standby letter of credit is not the one referred to in para 4 of the import policy order and does not protect the regulatory changes.

The second condition in para 4 of the import policy relates to issuance of bill of lading. A bill of lading is issued once the goods have been loaded on the ship, meaning thereby that the sales contact stands complete. It is thus evident that para 4 of the import policy order is talking about the guarantee given by the purchaser to the seller in respect of payment of goods.

It is evident from what has been stated above that para 4 of the Import policy order is prescribing requirement on the part of purchaser to issue a letter of credit acceptable to the seller or issuance of bill of lading, which confirms the completion of contract of sale prior to occurrence of regulatory changes.

The standby letter of credit amounts to a promise of performance on the part of seller, and is different from a normal letter of credit relating to contractual sales and have different rights and obligations under the law

(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)

Copyright Business Recorder, 2017