The documentary credit in international and national law regulations

There are currently three major sets of rules governing credit transactions, all of which have been adopted by the International Chamber of Commerce (ICC):

1. Uniform Customs and Practice for Documentary Credits (UCP 600);
2. Uniform Rules for Demand Guarantees (URDG 758); and
3. International Standby Practices ISP 98

The ICC adopted three separate sets of rules to govern three distinct situations:

• the UCP 600 to govern commercial letters of credit;
• the URDG 758 to govern independent demand guarantees; and
• the ISP 98 to govern standby letters of credit.

In practice, however, the UCP 600 enjoys widespread use, while the other two sets rules are infrequently used. In addition to these three sets of rules, there is also the United Nations Commission on International Trade Law (UNCITRAL) Convention on Independent Guarantees and Standby Letters of Credit. This Convention was adopted, opened for signature by the General Assembly by its resolution 50/48 of 11 December 1995 and entered on force on 1 January 2000.

The convention is a treaty and has the force of law for those countries that adopt it. The Convention is particularly designed to facilitate the use of independent guarantees and standby letters of credit where only one or the other of those instruments is traditionally in use.

These ICC rules purport to codify existing international banking practice, and they become part of an individual letter of credit or bank guarantee only if the instrument incorporates the specific set of rules by reference. Rules of practice incorporated into the credit are considered to the explicit terms of the credit. If the credit is silent on the issue and does not expressly incorporate any rules of practice, the laws of the applicable local jurisdiction will govern. This is normally the law of jurisdiction in which the credit was issued. Even when rules of practice are expressly incorporated into the credit, they may not preempt local law in its entirety. It should be noted, however, that since the ICC lacks legislative authority, meaning it is not the arm of or authorized by any government but rather a trade association, the UCP are no laws and have to be explicitly incorporated into individual transaction.

The ICC rules of practice address many issues that are fundamental to credit transactions, such as the amount of time the bank has to honour a demand, treatment of non-documentary conditions, standards for examination of documentation, and liability of the bank. Accordingly, when a letter of credit or bank guarantee incorporates rules of practice by reference, the credit instrument need only recite the most basic terms such as the names of the parties, the amount of the credit, the date of expiry, and the specific conditions for presentment and honour. The rules of practice fill in the gaps in the instruments.

The UCP 600 is by far the most common and widely used of these sets of rules, and is routinely utilised in both domestic and international letter of credit and bank guarantee transactions. It is intended to deal with documentary credits used in the sale of goods context, but specifically includes standby letters of credit within its scope. One common criticism of the UCP 600 and former UCP 500 is that it has a number of provisions that are simply inapplicable to standby letters of credit and bank guarantee. It is, nevertheless, commonly incorporated into these instruments. The UCP 600 is especially significant because it is treated as quasi-law in the many countries that have little or no statutory law governing documentary credits. In jurisdictions that do not have well developed law to address bank guarantees or standby credits, a court may look to the UCP 600 to resolve a credit dispute, even though it has not been specifically incorporated into the instrument at issue.

Some countries have enacted statutes regarding documentary credits (see e.g. Article 5 Uniform Commercial U.S. Code). In international trade, however, most parties choose to use the UCP.

The United States is the only country that has enacted a comprehensive statutory regime that addresses documentary credits on a national basis. Although some foreign codes make a passing reference to letters of credit, none have implemented a systematic formulation of the documentary credit law.

The original Model of the Uniform Commercial Code, which was approved in 1952, contained the UCC Article 5. In 1957, Model UCC Article 5 was revised extensively as a result of comments by the New York Law Revision Commission. In the subsequent years this model law was adopted, which, as of this writing, has been enacted in all US states with exception of Georgia and Wisconsin. It should be noted, that, the Uniform Commercial Code is a body of statutes developed to govern commercial transactions. The UCC is not federal law; each state adopted its own version of the UCC. In August 1995, a revised version of Uniform Commercial Code Article 5, which governs letters of credit, was forwarded to state legislatures for adoption. Revised UCC Article 5 aims to bring the legislation on letters of credit up-to-date with new standards in technology and to reflect the interpretation of the original UCC Article 5 by the courts.

In attempting to clarify and make it more consistent with international practice, the drafters of Article 5 pursued four stated goals:

• Confirming Article 5 rules to current customs and practices.
• Accommodating new forms of letters of credit, changes in customs and practices, and evolving technology, particularly the use of electronic media.
• Maintaining letters of credit as an inexpensive and efficient instrument facilitating trade; and
• Resolving conflicts among reported decisions.

To a great extent, these goals were achieved by the drafters. In harmonizing the law with current customs and practices, Article 5 was brought into conformity with the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce publication No. 500 (UCP). This codification of rules, as already mentioned, is made applicable to virtually all letters of credit. Like the UCP 500¹, Revised Article 5 requires that an issuer notify a beneficiary of dishonour within a reasonable time, not to exceed seven days (5-108(b)).

It adopts the UCP’s rule of preclusion, prohibiting dishonour when an issuing bank has not given timely notice of dishonour, or has not listed discrepancies in the notice (5-108(c)). Similarly to the UCP, Article 5 declares that a non-documentary condition in a documentary credit may be disregarded by the bank (5-109(b)). Finally, just as in the UCP, Article 5 provides that the documentary credit is considered irrevocable unless it expressly provides that it is revocable

(5-106(a)). Thus, the definition of a “credit” as an “irrevocable” undertaking in UCP 600 article 2 (Definitions – paragraph 8) does not mean that a letter of credit which is issued in revocable form is not a “credit” for purposes of Revised UCC Article 5. Because UCP 600 is a rule of practice and not law, its scope provisions can be varied by agreement and make applicable to any undertaking. Nor does it mean that the term “definite” in the definition of “credit” in UCP 600 has the same meaning as the same term used in Revised section 5-102(a)(10) – “Letter of credit”. As defined in UCP 600, “definite” connotes the notion of irrevocability, whereas in Revised UCC Article 5, it means undertakings that are otherwise too vague to be enforced as letter of credit undertakings.

Thus, even where it is irrevocable, an undertaking that was denominated a documentary credit would not be a documentary credit were it to lack any mechanism for determining the amount due, the identity of the beneficiary or the identity of the issuer.

Generally speaking, the UCP and ISP 98 are de facto consistent with Revised UCC Article 5, but they are much more extensive, addressing many issues that the UCC does not. (The ISP 98 is accompanied by a 350-page commentary)².

Nevertheless, there exist some other important formulations that codify documentary credit law, namely for example the Chinese Letter of Credit Rules.

Chinese letter of credit law has emerged over the last twenty-five years. Thirty-too years ago, Chinese commercial law was in a very basic formative stage with arbitration as the normal means of settling civil disputes, due in large part to concerns about the judicial system. Chinese letter of credit law did not exist. Beginning with the important work of the Supreme People’s Court, in recent years Chinese courts have rendered a series of decisions that reflect a maturing letter of credit jurisprudence. Such progress may be attributed to the Chinese government’s willingness to provide its judges with opportunities for both education and interaction with legal colleagues in other legal systems. Nonetheless, many of the Chinese decisions were both contradictory and confusing. The text of Chinese letter of credit decisions have also been widely circulated in China. Although the Chinese legal system is based on the civil law model, in which even the decisions of the Supreme People’s Court are not binding on other courts in different cases, the opinions of the Supreme People’s Court and certain intermediate appellate courts in documentary credits matters have been widely distributed and are considerable guidance to trial and appellate courts³.

Over the past twenty years, China has experienced a remarkable revolution in its approach to documentary credit law and practice that in many ways parallels its economic emergence.

Although there is no system of binding case law, pursuant to the Chinese Constitution, the Supreme People’s Court has promulgate Rules of the Supreme People’s Court Concerning Several Issues in Hearing Letter of Credit Cases effective 1 January 2006⁴. They are, in effect, the letter of credit law of China since, they are blinding on all Chinese courts and there is no statute or other legislative provision of the Chinese National People’s Congress.

The Chinese Letter of Credit Rules address a number of important issues, including the independence of the letter of credit undertaking, the standard of compliance, deference to standard international letter of credit practice (permitting their application where the undertaking is issued subject to them and providing for their application even where they are not expressly made applicable), the discretion of the issuer to approach the applicant for a waiver, the implications of a decision to waive discrepancies, what constitutes letter of credit fraud, and the criteria for issuance of orders freezing payment⁵. The Chinese Letter of Credit Rules reflect the influence already mentioned of the UN Convention on Independent Guarantees and Standby Letters of Credit and also of Revised UCC Article 5, providing a useful skeletal framework for the evolution of Chinese letter of credit law that should be the envy of most other legal systems which must rely on erratic judicial decisions⁶.

Below is a brief summary of several of the key rules of the Judicial Interpretation of China Supreme People’s Court for Resolving Disputes Concerning Letters of Credit of 1 January 2006.

• Cases classification and governing laws (§8544)

The Judicial Interpretation is intended to be applied to two categories of cases submitted before courts. The first category includes cases concerning the disputes of issuance, advice, amendment, revocation, confirmation, negotiation, and payment of the L/C (letter of credit). The second category involves cases concerning disputes between applicant and issuer, disputes between principal and agent in a contract for opening the L/C, guaranteeing or financing disputes under the L/C.

The Judicial Interpretation of the Supreme Court has set two different governing laws for each category of the cases. For cases fallen into the first category, Article 2 of the Judicial Interpretation says that if parties concerned have stipulated an international practice or other regulations as governing law in their documents, then the governing law shall be Uniform Customs and Practice for Documentary Credits (UCP) of ICC.

For cases fallen into the second category, relevant Chinese Laws shall be applied by the court as governing laws with one exception. The exception is that if the case involves foreign party and disputing parties have stipulated governing laws rather than relevant Chinese laws in their documents, then the governing laws shall be those thus stipulated⁷.

• Standard for examination of documents (§8545)

The Judicial Interpretation first reiterates the independent feature of the L/C in its Article 5 and makes it clear that no claims based on the underlying transactions shall be supported by any courts except there is fraud⁸, which shall meet the requirements set out in Article 8 of the Judicial Interpretation.

Then Article 6 stipulates that if the case involves the examination of documents, the court shall use the international practice or other regulations chosen by the disputing parties as the examination standard, and if the disputing parties have not so chosen, then the court shall use UCP or other relevant standards stipulated by International Chamber of Commerce (ICC) as the examination standard⁹. The court shall examine all documents stipulated in the documentary credit to ascertain whether or not these documents appear, on their face, to be in compliance with the terms and conditions of the L/C or with each other. However, if the discrepancies among documents or between documents and the terms and conditions of the L/C are insignificant and will not lead to misunderstanding, the court shall ignore such discrepancies.

In Article 7, the Judicial Interpretation further states that it is the rights and obligations of the issuing bank to examine the documents independently, to make a decision on whether discrepancy exists, to decide whether accept or refuse such discrepancy.

• Fraud and Its Exclusion (§8546)

In the P.R.C., fraud is defined under Article 68 of the Interim Opinions of the Supreme People’s Court Concerning the Implementation of the General Principles of the Civil Law of the P.R.C. (IOGPCL) as:

“one party intentionally telling the other party a lie or concealing the truth of a fact in order to induce the other party to come to a decision it would otherwise not come to”.

Article 8 of the Judicial Interpretation sets out standards for the court to acknowledge the existence of fraud¹⁰. It states that fraud shall be acknowledged if following facts exist:

1) the beneficiary has forged documents or submitted falsely recorded documents;

2) the beneficiary has not delivered the goods with vicious intent or has delivered the goods that have no value;

3) the beneficiary and the applicant or other third party have colluded with each other to submit faked documents and there is no real underlying transactions;

4) other circumstances that L/C is used for fraud.

It should be added, that under Chinese judicial practice, no court other than the Supreme Court has reviewed the case facts and given the court a definite approval.

To protect the interests of bona fide banks involved in L/C disputes, Article 10 of the Judicial Interpretation regulates that the court shall not enjoin the payment even if fraud does exist in the following cases:

1) the bona fide nominated bank or authorized bank has made the payment;

2) the bona fide issuing bank, nominated bank or authorized bank has accepted the instruments;

3) the bona fide confirming bank has made the payment;

4) the bona fide negotiating bank has negotiated the instruments¹¹.

• Conditions and procedure for enjoining payment (§8547)

To prevent the L/C mechanism being interrupted by improper judicial practice, Article 11 sets out five condition for the party who applies to enjoin the payment prior to a trial¹². These conditions are:

1) The court accepts the application shall have the jurisdiction over the case;

2) The evidence provided by the applicant shall indicate the existence of fraud per Article 8;

3) The applicant shall suffer irreparable harm if not freezing the payment;

4) The applicant has provided reliable and sufficient collateral;

5) The application does not include the cases stipulated in Article 10.

It should be noted, that if the applicant wants to enjoin the payment during a trial procedure, then conditions 2), 3), 4), 5) shall be satisfied.

If the above-mentioned conditions have been met, Article 12 stipulates, the court shall make a decision on whether or not to enjoin the payment within forty-eight hours¹³. If the court decides to enjoin the payment, the decision shall be carried out immediately. The decision shall also list the names of applicant, respondent and the third party.

Article 13 further states that if the parties concerned want to demur at the decision, they can file a petition to the higher court for reviewing the decision within ten days of the issuing of the decision¹⁴. The higher court shall make a ruling within ten days after receiving the petition. During reviewing period, the decision remains valid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about a specific circumstances.

In considering whether to select the Chinese Letter of Credit Rules in a UCP jurisdiction, there are several questions to consider. Indeed, the Chinese Letter of Credit Rules are likely to evolve. Unlike a statute, which is only likely to apply to documentary credits (as in a revised U.S. UCC Article 5) issued after the effective date of the statute, the Chinese Letter of Credit Rules would be applicable to any documentary credit regardless of when the instruments was issued¹⁵.

In the conclusion it should be noted, that Chinese letter of credit law today is a system fit for the 21^st Century. In large part, this advance has been made possible by the two decrees of the Chinese Peoples Supreme Court affecting letter of credit litigation. One relates to jurisdiction and the other relates to substantive letter of credit law. In these steps, the Court has placed China at the fore front of modern letter of credit law in several significant respects. These issues have been thoroughly analyzed in the published in the current year’s work by Jin Saibo¹⁶.It is worth noting that this work includes not only a detailed and thousugh analysis of all 18 articles making up the core of the Law of Letters of Credit in China¹⁷, but also includes commentary on the Chinese Supreme People’s Court’s judicial interpretations of letters of credit, among others, the issues not addressed or unresolved in the LC judicial interpretations¹⁸.

Last of all, it should be added, that in spite of fact, that the documentary credits are known and used around the world as an instrument to secure proper payment of cross-border transactions, it may seems surprising that many jurisdictions’ statutes do not specify address L/Cs, although they are undisputedly legal instruments. It should be clearly indicate that the countries whose laws include special provisions on documentary credits are in minority (see table 1). The quality of the statutory provisions varies widely, from comprehensive coverage (see above mentioned American and Chinese regulations) to much simpler rules that do not contain much more than a reference to the applicability of the UCP (for example Poland Banking Law of 29^th August 1997, in that, the reference to the letter of credit is only in articles 85 and 86).

Some national law rules correspond of the UCP, others handle issues differently from the UCP, such as non-mentioned in table 1. the Kuwaiti or Colombian principle of the documentary credit’s general revocability.

It should be added that, the problem whether the UCP or national laws prevail in the practice, depends on the applicable national law and even if the many countries agree on the application of the UCP, national statutes on documentary credits need to be taken into consideration. Although the UCP are often used as an unmodified set of rules in all parts of the world, there is no uniform interpretation of the rules by practitioners and courts.

Table: Documentary credit legislation from the select countries of the world

Source: Professor Dr Rolf A. Shütze and Dr Gabriele Fontane, “Documentary Credit Law throughout the world. Annotated legislation from more than 35 countries”, ICC Publication No. 633, Paris, December 2001, Part II, pp. 45-139.