Dissertation- Biplav Jung Karki - 200735678

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  1. 1. 1 TO WHAT EXTENT ARE LETTERS OF CREDIT STILL A VALUABLE TOOL IN TODAYS COMMERCIAL WORLD GIVEN ONLINE PAYMENT SYSTEM LIKE PAYPAL? by Biplav Jung Karki Student number: 200735678 September 2013 LLM International Banking and Finance Law School Of Law
  2. 2. 2 Abstract Over the years technology has changed the way we do things, it has also shaped the architecture of letters of credit and international commerce. While letters of credit at times has been criticised for not moving with the pace of technology, new system to facilitate trade like PayPal have emerged which is a direct result of technology and innovation. In this thesis, letters of credit and PayPal is analysed to see what they offer and how important letters of credit is in the modern era of ecommerce. The study also presents the challenges lying ahead of PayPal in becoming an ideal instrument to trade. The findings of this thesis shows that letters of credit cannot be written off immediately as some of the functions it provides are unique and valuable to international commerce. Nonetheless the findings also suggest that PayPal can offer some distinctive features that can make trading less complicated and fast. The contribution of this dissertation shall add to the existing knowledge about the scenario of international trade and letters of credit. In addition to this it also seeks to inform about the new possibilities that PayPal has to offer and how international commerce can benefit from it.
  3. 3. 3 Acknowledgements This dissertation is a highlight in my academic career. I have been fortunate to come this far and carry out a research on a topic that has been a significant interest to me for a long time. I am grateful to a number of people who guided me throughout the process and without whom my endeavours would not have been fruitful. First and foremost I offer sincerest gratitude to my Supervisor and Tutor, Professor Gerard McCormack, who has supported me throughout the project with his knowledge and patience whilst allowing me the room to work on my own. He convincingly and continually forwarded a good spirit of adventure and excitement in regard to the research. Without his persistent help and valuable guidelines this dissertation would be limited to a premature idea rather than a research project. One simply could not wish for a better and friendlier supervisor. I would also like to take this opportunity to thank Mr Nirmal Chaulagain (Business Consultant and Advisor risk management Merchant banking at KBC Financial Products) who backed up my ideas and encouraged me to undertake it as my dissertation topic. I am also grateful that he shared his experience, view and insight about the working of letters of credit. Lastly, thanks to my loved ones who have supported me throughout the process by motivating and believing in me.
  4. 4. 4 Table of Contents Abstract ...............................................................................................................2 Acknowledgements ............................................................................................3 Introduction:........................................................................................................6 Chapter 1 Letter of Credit: Its development, function and effectiveness: .....9 Introduction:.................................................................................................................9 What is Letters of Credits?...........................................................................................9 Origin of Letters of Credit:..........................................................................................10 Clash of interest and risk in trade:..............................................................................11 ICC and its contribution to letters of credit: ................................................................11 The procedure involved in a typical LC transaction....................................................14 Variations in Letters of credit: ....................................................................................22 LCs reputation and unique advantages:....................................................................23 Network of legal contracts:.........................................................................................24 Strict Compliance:......................................................................................................25 The Autonomy principle/Autonomy of credit:..............................................................26 Autonomy and the fraud exception ............................................................................27 Banks and Buyers right and duties in a fraud situation:.............................................29 Disadvantages of LC: ................................................................................................30 Conclusion:................................................................................................................32 Chapter 2: PayPal: its evolution and growing importance............................33 Introduction to PayPal:...............................................................................................33 Beginning of PayPal: .................................................................................................34 PayPal and its services:.............................................................................................37 Framework of PayPal: ...............................................................................................39 Why PayPal?.............................................................................................................40 PayPal and Innovation:..............................................................................................43 PayPal dispute settlement: ........................................................................................44 PayPals future: .........................................................................................................46 Conclusion:................................................................................................................47 Chapter 3: International trade and LC in the electronic age .........................48 The digital age and its impact on the international commerce:...................................48
  5. 5. 5 Electronic records in LC:............................................................................................49 The eUCP:.................................................................................................................50 Scope of eUCP:.........................................................................................................52 The difficulty of proving electronic records in letters of credit: ....................................52 Conclusion:................................................................................................................53 Chapter 4: Can PayPal actively perform in international commerce? Where does it stand against LC? ................................................................................54 Introduction:...............................................................................................................54 PayPal: not just an ordinary online payment system:.................................................54 PayPals potential contribution to International Commerce: .......................................55 PayPal feasibility:.......................................................................................................56 Cost comparison between letters of credit and PayPal: .............................................57 Analysing the costs:...................................................................................................63 Benefits of LC over PayPal: .......................................................................................64 Can PayPal mirror some of these advantages?.........................................................65 Advantages of using PayPal over LC:........................................................................66 Conclusion:................................................................................................................66 Chapter 5: Challenges ahead of PayPal..........................................................68 Introduction:...............................................................................................................68 Disputes in international commerce: ..........................................................................68 Differences in Law: ....................................................................................................69 Unpredictable nature of foreign countries: .................................................................70 Conclusion:................................................................................................................71 Chapter 6: Conclusion......................................................................................73 Bibliography:.....................................................................................................75
  6. 6. 6 Introduction: Alexander Graham Bell famously stated that Man is an animal which alone among the animals refuses to be satisfied by the fulfilment of animal desires1 . The never ending desire to possess every essential and luxury goods, fuelled by the rapid technological development and innovation has resulted a boom in transcontinental and transnational trade activities. Along the line as the reliance amongst countries cemented further a reliable and efficient method was required to carry out trade. Moreover, when trade is carried out between different countries there are lots of barriers. For example differences in the language, differences in trade practice, conflicts of l