A Comparative Analysis of Bank Security in A Letter of Credit Transactions

The Pledge of a Bill of Lading under English and Ethiopian Law

Abstract

This article examines the security of banks using bills of lading as
collateral in letter of credit transactions with a focus on proprietary and
contractual rights. The exploration employs doctrinal tools of
comparative analysis. Juxtaposing the features of English and Ethiopian
laws, the investigation unraveled issues, such as proprietary and
contractual rights, banks’ ability to claim delivery or sue carriers, and
the legal consequences of these issues. The evidences from the
comparative analysis show that the English law clearly sanctions
prejudicial legal consequences on banks whereas the Ethiopian law
leaves outcomes ambiguous. Further, the exploration reveals that the
validity of security interest may be challenged if goods are delivered
before the bill reaches the bank. Yet this is treated as spent under
Ethiopian law, in contrast to the case law under English law. Both
jurisdictions require the transferor to hold title, potentially invalidating
the bank’s security if the seller lacks title. Besides, the English law
considers the intention of parties in transferring title via bills, while
Ethiopian law lack such clarity. The financing bank’s temporary release
of the bill of lading in return for trust receipts further undermines its
security under both legal systems. Finally, pledging bills of lading as
collateral may leave banks as unsecured creditors, questioning the
perceived reliability of this security mechanism.