Zaid AL-Rizzo

Date of Award


Degree Type





Professor Mohamed Khimji


The high rate of discrepancies in letter of credit transactions, and the waiver of the overwhelming majority of these discrepancies by applicants, reveal that buyers and sellers are not benefiting from their primary advantage—legal enforceability. Two hypotheses are proposed in this thesis to provide a tentative explanation for the phenomena under consideration. First, letters of credit are an “assured-payment” mechanism—so long as the beneficiary submits conforming documents, it is legally entitled to payment. Second, letters of credit provide the beneficiary with a “verification” service—they assure that the applicant is financially solvent. Qualitative and quantitative researches are employed as the methodological approaches. Specifically, descriptive research is employed to investigate the underlying theories regarding letters of credit. Empirical data is utilized to demonstrate both the high-rate of discrepancies and the most common discrepanciesinletterofcredittransactions. Thefindingsrevealthatboththe“assured- payment” and “verification” theories fail to address why sophisticated commercial parties pay substantial fees for the issuance of letters of credit and then choose not to take advantage of its legal enforceability. Accordingly, both hypotheses are rejected. In conclusion, an alternative hypothesis is developed in this thesis which adopts the “bilateral assurance” mechanism to address the research question posed. This theory emphasizes informational signaling within the

context of international business transactions. Specifically, the preparation of the bill of lading, commercial invoice, insurance certificate, packing list, and country of origin are viewed as concrete actions by which the commercial parties can modify their behavior and legally enforce their rights.



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