Question

Ikang Berhad is a company based in Terengganu, Malaysia, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem. Ikang Berhad had an irrevocable L/C issued by a Mongolian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Mongolian company. 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.

Answer 1

Irrevocable letter of credit is a letter of credit which have been issued by the bank that will be reflecting the guarantee from a bank, for payment of goods and service.this letter of credit cannot be cancelled unless both the parties who are involved in the contract agrees to them.

In this case can be said that irrevocable letter of credit has been cancelled by the issuing Bank which is not in line with the rules and regulation, because unless the consent of the party which is the company based in Malaysia, is taken by the bank, the bank cannot revoke the irrevocable letter of credit.

So, it can be concluded that irrevocable letter of credit cannot be cancelled by the bank or the other party unless both the parties has consented to it and in this case, since the bank has cancelled the letter of credit, without taking the consent of the other party,thisthis is not legal.