The sources of letter of credit law

Introduction

The law of letters of credit has developed mainly through customs. As Kozolchyk explains:

“Many of its operative rules, regardless of geography or legal system, have emerged from the customs of the bankers dealing with importers and exporters, and with shipping and insurance companies" [1] .

Today, the International Chamber of Commerce embodied these customs in the Uniform Customs and Practice for Documentary Credits (UCP).

Banks in most cases subject their letter of credit to the UCP, as a primary source of letter of credit but not the sole source. The law of documentary letters of credit has also been influenced by other regulations created by the ICC, as well as national legislation and case law. This chapter focuses on the most important sources of letter of credit law. It reviews the international regulations drafted by the International Chamber of Commerce, including the UCP, eUCP, and the American statutory the so called Uniform Commercial Code UCC. In addition, court decisions are dealt with in this thesis as they play a significant role in the cases of documentary letters of credit.

The Uniform Customs and Practice for Documentary Credits

General view and the development of the UCP

Due to the growth of international commerce and in order to reduce conflicts within national laws, there have been many attempts to adopt a unified approach in respect to documentary letter transactions in the differing legal systems. On a national basis, the first attempts to unify the law of letters of credit go back to the 1920s. The New American Commercial Credit Conference drafted a set of rules in relation to letters of credit which aimed to be used by the banks in the United States. The same path was followed by Germany [2] and Greece in 1923, France and Norway in 1924, Czechoslovakia, Italy and Sweden in 1925, Argentina in 1926, Denmark in 1928 and the Netherlands in 1930. [3] 

Internationally, in the 1930s it became commercially necessary to adopt international harmonization, in respect to documentary credit transactions. Bankers had already been cooperating on a regional basis in order to create uniform rules with respect to such transactions. [4] The greatest impetus came from the International Chamber of Commerce (ICC), which gathered support for its Uniform Practice for Commercial Documentary credits (UCP), “which have gained worldwide application and have over many years proved a stabilizing element in international trade" [5] .

The first version of the UCP was adopted by the ICC 7th Congress held in Vienna in 1933. [6] It was taken on by bankers in a number of European countries and on an individual basis by some banks in the United States, but not in the United Kingdom or most of the Commonwealth countries. A second version, however, was adopted in 1951, but still, the United Kingdom banks and most Commonwealth countries rejected it, this was motivated by political considerations and was due to some reservations about the Code. [7] In 1951 after World War II, the ICC adopted a new version [8] of the UCP at its Lisbon Conference, in order to keep up with the changes that occurred in international trade. As Harfield stated:

“When the dynamics of finance require conduct that is not foreseen or is inconsistent with recorded custom, appropriate changes can be made, as over the years they have been made. As was said in the resolution adopting the 1951 revision, “[T]he purpose … is to codify the custom and practice as they now exist." [9] 

This version was adopted at a more worldwide scale, not only in Europe and the United States, but also by several banks in Africa and Asia [10] . The United Kingdom again declined to adopt it. [11] 

The next revision of the UCP was in 1962. [12] One of the main objects of the revision process was to “evolve a system that would be of world-wide application. To this end, it was necessary to adapt it to the needs of Britain and the Commonwealth. The 1962 Revision achieved this breakthrough." [13] Since then, four other versions had been adopted in subsequent years, in 1974, 1983, 1993and 2007. Bankers and traders in more than 120 countries worldwide have adopted them. [14] As Kozolchyk points it out: “The draftsmen of the UCP had a realistic and modest goal. The intent was not to codify all the relevant rules of law, customary or otherwise, but rather to compile international banking customs and other rules that facilitate banking functions." [15] 

The UCP rules have been extremely successful, over their 80 years history, in providing self-regulation for the letter of credit industry, the success of the UCP is due to the fact that the conduct it prescribes is indistinguishable from everyday international banking practice. In other words, what the UCP reflects is the banks practice worldwide. Banks apply it because it prescribes and teaches what best practise is. It helps banks stay away from courts, and unlike other sources of the law, it does not tolerate desuetude. [16] In each version revision, the amendments made on the UCP rules have addressed problems arose from the existing version. On this basis, the ICC launched a new version to address the new developments in banking industries and to solve many problems in the previous versions. The UCP 600 came into force on 1st July 2007. Although the UCP600 removed some ambiguities in the UCP500, it remained silent in some issues such as fraud.

The nature and application of the UCP:

The text of the UCP is neither systematic nor comprehensive to warrant the legal characterisation of a ‘code’, [17] in fact, they are not set out in a legal language. If its purpose were to regulate the documentary credit transaction and its effects upon all intervening parties in a coherent fashion, then it would have to deal with many areas of the law which are presently governed by the respective national laws and court decisions. Examples of these are the availability of injunctions, restraining orders or other summary procedures, negotiation, and the effect of fraud etc.

The ICC, although an international organisation, does not possess legislative authority but an organisational representational of world business and finance. Although the UCP rules do not have the force of law, it cannot be denied that it is forceful since it has been incorporated by reference in the majority of letters of credit used worldwide. As Lord Mustill pointed out in Royal Bank of Scotland Plc v. Cassa di Risparmio delle Provincie Lombarde [18] :

“Undeniably the UCP have an important role in the conduct of international trade. They expound technical terms; they promote consistency; and they enable the parties to express their intention briefly, without the need to negotiate and set out all the terms of the relationship at length. Nevertheless, whilst not belittling the utility of the UCP, it must be recognized that their terms do not constitute a statutory code, as their title makes clear they contain a formulation of customs and practice, which the parties to a letter of credit can incorporate into their contract by reference".

The application of the rules depends on its adaptation by the individual banks or by the bankers associations in specific countries. This point has been recognised by Article 1 of the UCP, which stipulates that documentary credits should include words rendering the transaction, subject to the provisions of the Code. The ICC would not have insisted on this inclusion of such stipulation in documentary credits if it was thought that the Code had achieved the standing of an independent law. [19] 

The UCP rules have contractual force; parties can agree to apply them by either incorporating them expressly in the credit contract, or by agreeing by some entirely independent contract that the rights and duties under a documentary credit should be governed by the UCP, even if the UCP were not incorporated into the text of the credit itself. [20] In the same way, a court can find that the parties had adopted the UCP by implication, for example from prior and consistent course of dealing incorporating the UCP, or even from the fact that the UCP have been universally applied, that it could be assumed the intention was to apply them. [21] This approach respects the intention of the parties to choose a preferable method to express such an intention. However, the UCP are subordinated to countries’ public policy if a UCP article contradicts with the national laws [22] or if public policy deems that a certain article is rendered unenforceable. [23] .

Parties to a documentary credit transaction can exclude one or more articles of the UCP if intended, but this has to be clearly agreed, if it happens and a conflict arises between the terms of the credit and the UCP, English courts will first try to find a resolution which gives effect to both without causing too much violence on either part. [24] 

Should a situation arise in which an English court has to choose between giving effect to a provision of the UCP or to another term of the credit, which is in express contradiction of it, the solution is of real difficulty and remains an open question, which has no authority on it. [25] 

Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP)

In response to the growing need for the banks industries to utilise electronic commerce, the International Chamber of Commerce authorised the Task Force to formulate standards for electronic presentation of documents [26] .

The new supplement for the UCP was adopted by the ICC Banking Commission meeting in Frankfurt in 1st April 2002; the Uniform Customs and Practice for Documentary Credits for Electronic Presentation or the “eUCP" V1.0. Corresponding to the development of the UCP600, the updated version of the V1.1 eUCP came into force on 1st July 2007. There are no substantive changes to the eUCP, merely references to the UCP600.

It can be seen from the title of the eUCP; the Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation, that it is simply a supplement to the UCP not independent from it. Thus, the eUCP, when used in conjunction with the UCP, will provide the essential rules needed for presentation of the electronic documents, under letter of credits. The eUCP allows for complete electronic presentation of documents or for a part-electronic (mixture of paper documents and electronic presentation). The eUCP has taken a step towards the electronic age where the documents will be electronically presented.

Content of the eUCP

The eUCP contains twelve articles that aim to deal with some problems in relation to the use of electronic record, namely:

e1) the scope of the eUCP; e2) relationship of the eUCP to the UCP; e3) definitions; e4) format; e5) presentation; e6) examination; e7) notice of refusal; e8) originals and copies; e9) date of issuance; e10) transport; e11) corruption of an electronic record after presentation; and e12) additional disclaimer of liability for presentation of electronic records under eUCP. [27] 

Although, most of these articles express technical aspects of electronic presentation, such as Article e4, e5, e9, and e11, there are some other articles that deal with substantive issues. For instance, Article e8 contradicts with the originality of the documents, thus it may inconsistent with the applicattion of the UCP rules. [28] 

The application of the eUCP and its relationship with the UCP

Similar to the legal status of the UCP, the eUCP is not a statutory code but is a codification of rules of practice, [29] and therefore should be applied in the situation where parties have an intention to be governed. Although the eUCP is described as a “bridge between the UCP and the processing of the electronic equivalent of paper-based credits," [30] the eUCP has certain differences from the application of the UCP. First, the eUCP allows the parties to choose whether the eUCP combined with the UCP applies or whether the UCP alone applies. [31] If the parties choose to present the paper documents and incorporate the UCP expressly, then the UCP alone acts as the governing rules. Alternatively, the parties are entitled to present the electronic record and agree to be governed by the eUCP, combined with the UCP rules. Secondly, the eUCP applies when the credit indicates that it is subject to the eUCP. According to Article e1 (b) of the eUCP, "the eUCP shall apply as a supplement to the UCP where the credit indicates that it is subject to the eUCP". [32] This regulation does not require express incorporation as does that of Article 1 of the UCP 600. So the eUCP applies where it can be determined from the communication taken in the context of the practice that the credit is intended by the issuer to be subject to the eUCP. [33] 

The relationship of the eUCP to the UCP is declared by Article e2:

“a Credit subject to the eUCP (“eUCP credit") is also subject to the UCP without express incorporation of the UCP"

“where the eUCP applies, its provisions shall prevail to the extent that they would produce a result different from the application of the UCP".

This automatic incorporation of UCP 600 in a credit subject to the eUCP and the prevailing role of the eUCP, in the case of a conflict between a provision of the eUCP and UCP 600, makes it possible to avoid future problems, which might arise due to the fact that a considerable part of the eUCP is made up of definitions and principles and it does not address any issues relating to issuance or examination.

The intent of eUCP was to provide rules for full or partly electronic presentation of documents. This intent is made clear by Article e2(c) that exempt transactions that do not involve electronic documents from the scope of the eUCP, even if the credit has been issued subject to the eUCP. In this case the rules of UCP will solely apply.

Concerning its personal scope, the eUCP remains silent and does not indicate whether its rules apply to advisers, confirming banks, negotiating banks, paying banks or other parties. However, reading eUCP in conjunction with the relevant article of UCP 600 that reads:

“The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 ("UCP") are rules that apply to any documentary credit ("credit") (including, to the extent to which they may be applicable, any standby letter of credit) when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit." [34] 

It is clear that the provisions of eUCP, when indicated in the text of the credit, apply to all parties involving on the credit.

The eUCP is issued in “versions"; this allows for a revision every time it is deemed necessary, this is motivated by the constant development of the banking practice. As indicated by Article e1(c) the current version is Version 1.1. Therefore, when subjecting a credit to eUCP, it is recommended that the applicable version number is included. Failing to do so, the eUCP declares that the version applied shall be the one in effect when the credit is issued.

Uniform Commercial Code

In the US, the federal government and indeed the government of each state are able to create laws. The Constitution advises of the limits to the laws and gives a list of the subjects that are controlled by federal law.

Individual state movement and business between states has increased since the economy has grown, which has been the motivation for more uniform laws. This can be characterised by: 1. Federal laws being created on the subject and 2. The creation of drafts for “Uniform State Laws"; uniform law dates back to the 19th century.

To encourage uniform laws across states, the National Conference of Commissioners on Uniform State Laws (NCCUSL) [35] was created;’ they outline the laws that states need to take on. The National Conference of Commissioners has drafted more than 200 uniform laws since they came into action; the most important one being the “uniform law". In 1952, the first manuscript of the Uniform Commercial code was published, but to date it has been modified many times. There are 11 articles within the text and they outline the most important aspects of commercial law.

The letter of credit transaction is outlined in Article 5 of the UCC. In the 1950’s, when Article 5 was first written, the aim was to create communications in technology and innovation. Since the creation of standby letters of credit, the law has changed and therefore Article 5 has been modified to amend the “weaknesses, gaps, and errors in the original statute which compromise its relevance" [36] .

Members of the American Bar Association and the USCIB developed a group in 1986 that aimed to examine previous case law and to study where the gaps lay in the 1962 version. Their main objectives were to:

Make sure that Article 5 adhered to current customs and practices

Allow for new form letters of credit and changing technology; namely electronic media

Ensure that letters of credit would still be inexpensive and an easy tool to use for making trade possible

Resolve any conflicts with reported decisions

The review process lasted for many years and many public debates occurred due to it. Several drafts were made between 1991 and 1995. The latest draft of UCC Article 5 was adopted in 1995.

Should the ICC consider harmonisation of the Law of the Letters of Credit?

There are different views with regards to what can be added to the UCP, these are:

The ICC should only think about issues that fall under the UCC and UCP. If this happened, many of the problems would be resolved, however, there would be many differences between the set of standards with regards to the LC that would not be settled.

The ICC could only contemplate issues that are not significantly related to the legalities of letters of credit transactions, like fraud, insolvency, indemnity and other issues that aren’t related to one certain legal system, such as consideration. If this approach was taken on then harmony could be reached between UCP 600 and the UCC. However, if there were two sets of standards there would still be confusion between parties with regrds to LCs transactions and the laws regarding LCs would not be uniform internationally.

So that a uniform global set of standards, regarding LCs can be achived, the ICC should think about all the differences that there are between UCP 600 and the UCC. This includes, legal standards and customs and practices in relation to LCs. It is believed that this could be the approach that is most appropriate in achieving internation uniform laws for the LCs. For this approach to work the ICC would need to have strong motivation, a good source of money and make sure that there is a reasonable balance between the differing interests of the parties. It has been outlined:

"The essence of uniform law revision is to obtain a sufficient consensus and balance among the interests of the various participants so that universal and uniform enactment by the various states may be achieved." [37] 

The questions that still remain are that will the ICC be able to take on such a challenge and if they can’t what alternative option is there? Although steps have been taken to create a uniform set of standards, there is still a big gap between them and a solution needs to be created. It is believed that this harmonisation will take a while; there needs to be a change in attitude from both parties; the ICC and the USA.

With regards to an alternative solution for harmonising the UCP 600 and the UCC laws on LCs, it is felt that unified laws should be decided upon globally. The preparation of Article 5 showed that there is a need for strong willingness and dedication to making the laws uniform, coupled with financial support. If this is the case, there will be more of a chance of harmonisation. This has already happened in many states in the USA, that have different jursidictions. Furthermore, it is an ideal time to carry out a compartive study between different legal systems, with regards to LCs under different auspices of United Nations Organisations (such as UNCITRAL or UNIDROIT).

With regards to coding the law of LCs from a global perspective, it would be impossible for the ICC to take on the task of creating a set of global standards concerning LCs, which cover both the issues of the practicalities of the existing system and legalities relevant to the documentary credit system in international trading. Moreover, leaving the development of a uniform code up to national law of each individual state has no justification. Banks and international organisations also need to play a role in the promotion of a uniform law as having uniform provisions, with regards to practical issues of the documentary credit system is important. Past experience of creating the UCP and Article 5 of the UCC can provide valuable insights and a cornerstone for the development of the documentary credit system in the future.

The need for the hormonisation of the law of LCs at an international level, will be considered in the conclusion chapter; this chapter confirms that the UCP as the main existing source of the letter of credit law at an international level; but, still needs more efforts to cover all the vagueness aspects in LCs.