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Responsibilities of Banks under L/C
发布时间：2015-10-29 发布人：admin
XU BULIN
Letter of credit, in international trade, is the most common method of payment for goods or services. In foreign sale, the buyer and the seller are in different countries and there is a great distance and long period from one to the other during which the cargo is in transit, so that the simultaneous exchange of goods for money is impossible. Letter of credit can commendably solve the problem of which buyer and seller both concern about the business reputation of the opposite side. It is a bank undertaking of payment with banking reputation instead of the business reputation, and it may assimilate with an insurance contract for both the buyer and seller, and practically eliminate the credit risk for both parties, as well as reduce payment delay. Nowadays, letter of credit has rapidly developed to become a very important instrument of payment, and as the English judge said in the case of R. D. Harbottle (Mercantile) Ltd v National Westminster Bank Ltd,[1] it looked like ‘the life blood of international commerce’.
In the field of transactions of the letter of credit, the most valuable attempt was to issue the Uniform Customs and Practice of Documentary Credits (also know as UCP), which was made by the International Chamber of Commerce (ICC) in 1929. Since that, the UCP has been amended for many times and the current version is the Uniform Customs and Practice of Documentary Credits (1993 revision) (commonly called as UCP500), which was published by ICC and entered into force on January 1st 1994. As the most important standard and guidance, the UCP500 is now widely accepted by the most of banks and meanwhile by the most tribunals or courts, all around the world.
2. Letter of Credit: An Introduction
2.1 Definition
Definition Letter of credit is a banking mechanism which allows importers to offer secure terms to exporters. It is basically a document issued by a bank guaranteeing a client’s ability to pay for goods or services. ‘The letter of credit is issued by a bank on behalf of a buyer (importer), authorizing the seller (exporter) to draw funds according to the terms of these letters.’[2] The definition of the letters of credit can be found in Article 2 of the UCP500 as the following:
…the expressions of ‘Documentary Credit(s)’ and ‘Standby Letter(s) of Credit’ (hereinafter referred to as ‘Credit(s)’, mean any arrangement, however named or described, whereby a bank (the ‘Issuing Bank’) acting at the request and on the instructions of a customer (the ‘Applicant’) or on its own behalf,
(ⅰ) is to make a payment to or to the order of a third party (the ‘Beneficiary’), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or
(ⅱ) authorizes another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or
(ⅲ) authorizes another bank to negotiate, against stipulated document(s), provided that the terms and conditions of the Credit are complied with. For the purposes of these Articles, branches of a bank in different countries are considered another bank.
A document credit is conditionally a bank undertaking of payment. It is a written undertaking given by the issuing bank to the beneficiary at the request and on the instructions of the applicant to pay at sight or at a determinable future date up to states sum of money, within a prescribed time limit and against stipulated documents or other conditions.
2.2 Types of the letter of credit
There are varieties of letters of credit that are classified according to the different way, in which the credit is made available to the beneficiary. The most common types of letters of credit are:
Sight credit Payment is at sight, which means that the drafts and documents are honored, if in order, by making payment without delay.
Revocable credit It is referred to that the letter of credit may be amended or deleted by the issuing bank at any time and without prior notice to the beneficiary. (Article 6 & 8 of the UCP500)
Unconfirmed credit Bears only the obligation of issuing bank. The beneficiary should look at the credit worthiness of only the issuing bank, and not to any intermediary. (Article 9 of the UCP500)
Confirmed credit It is always irrevocable. Under this type of credit, a second obligation is added to the letter of credit by another bank. By adding its confirmation to the credit, the advising bank, the branch, or the correspondent thereby undertakes to honour the documents that confirm with the terms and conditions of the credit, and are present within the prescribed time limit. (Article 9 of the UCP500)
Negotiation credit it empowers the beneficiary to draw a bill of exchange on the issuing bank or any other drawee stipulated in the credit. Under this type of credit, the advising bank is authorized to negotiate a bill of exchange drawn by the seller on the buyer or the issuing bank.
Acceptance credit The seller draws the bill of exchange on the advising bank in the specified manner and the bill is normally a time draft. Sometimes, ‘is may accepted by the issuing bank or by the buyer, where the issuing bank issue the credit as irrevocable and it holds itself under Article (a) (ⅲ) of the UCP500, responsible that the bill will be accepted and paid by buyer, where the advising bank confirm the credit, a similar liability is forced on it by Article (a) (ⅲ) of the UCP500’[3].
Standby credit it is an undertaking by a bank to make payment to a third party (beneficiary) and can be drawn against only upon performance of service or financial obligation default. The functions of this type of credit are similar to guarantee.
Except for the aforementioned ones, there are a number of other types of credits such as the revolving credit, the deferred payment credit, the transferable credit and back to back credit, and some unusual types, such as the red clause credit, the green clause credit, the anticipatory credit and the reciprocal credit, etc. Moreover, the rule in the Article 10 (a) of the UCP500 requires: ‘all Credit must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation’.
2.3 Main parties
Many parties may appear in a transaction of the credit, four of which are the most fundamental parties, they are:
(1) the applicant of the letter of credit, it normally also is buyer/ importer; and
(2) the beneficiary of the letter of credit, it normally also is seller/ exporter; and
(3) the issuing bank in the applicant’s country; and
(4) the correspondent bank in seller’s country normally including advising bank and/ or confirming bank, etc.
Furthermore, some of other relevant banks may join into the credit transactions as the accepting bank, or the negotiating bank, or the reimbursing bank. In the field of bank-to-bank reimbursement arrangement, the claiming bank is a general designation of the paying bank, accepting bank and negotiating bank.
3. Fundamental Principles under Transaction of Letter of Credit
There are two fundamental principles,[4] which can also be called the characteristics of letters of credit,[5] governing letter of credit and being basis to standardized liabilities of relevant banks, namely: the autonomy of letters of credit and the doctrine of strict compliance.
3.1 The autonomy of letters of credit The principle of autonomy of the credit is created in Article 3(a) and Article 4 of the UCP500, according to this, the credit is separate from and independent of the undertaking contract of sale or other transactions. A bank operating a credit is dealt only with whether or not the documents tendered by the seller correspond to those specified instruction in the credit and therefore, the letter of credit transaction is a paper transaction. It means that the bank is not relevant to whether the underlying contract concerns the goods purchase or other transactions. However, there is only one case called as ‘fraud exception’, where the bank may refuse to pay.
3.2 The doctrine of strict compliance The principle of the doctrine of strict compliance is made clearly by Article 4 of the UCP500 and besides, it also relate to UCP500-Article 13(a) (b), 14(d) (f) (e) (i), 15, 22 and as well as Article 37, 39, etc.. The doctrine of strict compliance conveniently referred to as that the bank is entitled to reject documents which do not strictly conform to the terms of letter of credit. ‘There is no obligation on the bank to honour non-conforming documents.’[6] Moreover, it should be noticed ‘that this principle applies not only between the seller and the bank, but also between the buyer and the issuing bank, and as well as between the issuing bank and the conforming bank.
The principles above are not only formulated by Ucp500, but supported by many cases as well. For example, Lord Denning explained principle dealing with former principle in the case of Z. Ltd v. A-Z and AA-LL (1982) and another judge, Lord Summer, illustrated the latter principle in the case of Equitable Trust Company of Now York v. Dawson Partners Ltd (1927). In addition, in some other scholar’s views, there is the third fundamental principle to be named ‘the legal relationship between the parties’ [7], which is also considered as an important issue in the field of the letter of credit.
4. Advising bank’s liability under Article 7 of the UCP500
4.1 Liability under Article 7 (a)
Article 7 (a) of the UCP500 is a recapitulative and run-of-mill provision. The Article 7 (a) is:
A Credit may be advised to a Beneficiary through another bank (the ‘Advising bank’) without engagement on the part of the Advising Bank, But that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay.
In respect of Article 7 (a), four points should be considered and comprehended, these are:
Point 1 ‘A Credit may be advised to a beneficiary through another bank’ means the credit also may be advised by the issuing bank itself sending to the beneficiary directly.
Issuing bank chooses the advising bank normally according to an existed relationship of the seal and signature[8] between them, as a result of this, the advising bank can be able to easily check the authenticity of the Credit. To advise the beneficiary after checking can be beneficial to the beneficiary and protect its interest. ICC warned the beneficiary in its Publication No. 411: The beneficiary receives the credit directly from the issuing bank, without relationship of the seal and signature; there might be a fraud and therefore dangerous. Under this situation, the beneficiary should be careful.
Point 2 Advising bank’s responsibilities is to, in accordance with contract to issuing bank, advise the credit to the beneficiary and be only liable for apparent authenticity.
Point 3 How to explain to ‘take reasonable care to check the apparent authenticity of the Credit’. (a) ‘Reasonable’ commonly means that banker should check the credit with a good faith and as doing as any experienced banker does. (b) ‘The apparent authenticity’, according to ICC Publication No. 411, mainly means the bank has responsibility to check the template of seal and signature. If opening credit by electronic method, the advising bank should check the authenticity of the credit by using the Cipher or SWIFT. If no template of seal so that the authenticity of credit could not be confirmed, the advising bank should check the authenticity by other way, such as using telegraph. Otherwise, if the advising bank lost its reasonable care and insult in damage to the beneficiary, the advising bank would be liable for its negligence. The reasonable care was also interpreted by the common law, in case of Gian Singh and Co Ltd v Banque de l’Indochine (1994)[9], it means ‘to ascertain that they (Banks) appear on their (documents’) face to be in accordance with the terms and conditions of the credit’[10].
Point 4 The advising bank’s liability for checking the authenticity of the credit is applicable to that the advising bank has elected to advise the credit. However, the liability of the advising bank to ‘inform the Issuing Bank without delay’ is applied in the situation where it has not elected to advise the Credit.
4.2 Liability under Article 7 (b)
Under Article 7 (b), the advising bank has two choices when it cannot establish the apparent authenticity of the credit, these are:
(1) that it must to be informed, without delay, the issuing bank that it has been unable to establish the authenticity of the credit; if so, it will ensure that the issuing bank can be able to know, in good time, that the apparent authenticity cannot be established and then, consequently, the issuing bank is likely to make corrections. Or
(2) if it elects nonetheless to advise the credit, that it must be informed the Beneficiary that it has not been able to establish the authenticity of the Credit. If so, it can avoid that the beneficiary put a misconstruction on the credit.
However, UCP500 do not prescribe how long the minimum of time to inform the credit is, so as to avoid increasing the advising bank’s burden. ‘Without delay’ can generally be regarded that the advising bank should inform the issuing bank in the reasonable time with the professional ethics and the good care.
4.3 Advising Bank’s liability under other Articles
Liabilities of the advising bank can also be seen in some other Articles. One example is Article 12, which contains two paragraphs: The first paragraph claims that when incomplete or unclear instructions are received to advise, conform or amend a credit, if the advising bank give preliminary notification to the beneficiary, for information only and meanwhile, it should also state clearly that the notification is provided for information only, but the advising bank does not have responsibility for this notification. However, the advising bank, in any event, must inform the issuing bank of the action taken and request it to provide the necessary information by using the method that should be suitable and satisfying for both the issuing bank and the advising bank. In the second paragraph, after Issuing Bank provide the necessary information, the Credit will be advised…if the Advising Bank is then prepared to act on the instruction. This means that the Advising Bank has a right to chose whether or not to advise the Credit and this provision should be consistent with Article 7 (b). Furthermore, liabilities of the Advising Bank also deal with the UCP Article 9 (c) and Article 10 (c), etc.
5. Liability of issuing bank and confirming bank under Article 9 of the UCP500
5.1 Issuing bank’s liability
In the terms of an irrevocable credit, the liabilities of the Issuing Bank are set out in Article 9 (a) of the UCP500. When the stipulated documents are presented to the nominated bank or to the issuing bank, it will result in constituting a definite undertaking of the Issuing Bank. Under this siyuation, the issuing bank must pay at sight if the credit provides for sight payment, or pay on the maturity date(s) if the credit provides for deferred payment. Besides, if the acceptance credit should be honored by the issuing bank, the issuing bank must accept draft(s) drawn by the beneficiary on the issuing bank and pay them at maturity, or if the acceptance credit should be honored by another drawee bank but it refused, the Issuing Bank must also accept and pay at maturity draft(s) drawn by the beneficiary on the issuing bank or pay draft(s) which accepted but not paid by the drawee bank at maturity.
5.2 Confirming bank’s liability
Primary liability of the confirming bank This is an important point to comprehend the liability of the Confirming Bank under the confirmations of an irrevocable credit. Article 9 (b) states:
a confirmation of an irrevocable credit by another bank (the Confirming Bank) upon the authorization or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
(ⅰ) if the Credit provides for sight payment-to pay at sight;
(ⅱ) if the Credit provides for deferred payment-to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;
(ⅲ) if the Credit provides for acceptance:
(a) by the Confirming Bank-to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or
(b) by another drawee bank-to accept and pay at maturity Draft(s) by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;
(ⅳ) if the Credit provides for negotiation-to negotiate without recourse to drawers and/ or bona fide holders, Draft(s) drawn by the Beneficiary and/ or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional Document(s)
Where the point is that the liability of the Confirming Bank is separate from that of Issuing Bank but its liability is treated as that of the Issuing Bank. The undertaking and liability of the Confirming Bank is independent and primary but not secondary or subsidiary. ‘A direct presentation of the documents to the Issuing Bank or the bypassing of the Confirming Bank, unless otherwise authorized in the Credit, does not amount to presentation of documents and compliance with the terns of the Confirming Bank’s undertaking. unless otherwise authorized in the Credit, if a Confirming Bank is bypassed in the presentation of documents and its confirmation to the Credit expires before it receives such complying documents, the Confirming Bank is no longer liable to honor such presentation’.[11] In the case law, the Bank’s liability refers to as same as that in Article 9 (b). For instance, in the case of Ian Stach Ltd v Baker Boseley Ltd[12], the Confirming Bank was required for an undertaking of payment to the Beneficiary.
Choice and conformation A bank, when it is authorized or required by the Issuing Bank to add its confirmation to a credit, has the right to choose whether or not accept this authorization or requirement. If it accepts the authorization or request, it should assume obligations as the Confirming Bank under the UCP500. If it refuses accepting the authorization or request, it must inform the Issuing Bank without delay.
Sometimes, the Issuing bank specifies the advising bank as the confirming bank. However, if the advising bank adds its confirmation without the issuing bank’s authorization or request, the issuing bank is not liable to this confirmation. According to ICC’s expression, this confirmation has been beyond the domination of the UCP500.
5.3 Amendment of the irrevocable credit
Article 9 (d) is dealt with amending and canceling the letter of credit. An irrevocable credit, except as otherwise provision in Article 48, cannot be amended or cancelled, unless the consensus has been reached by all parties of the beneficiary, the issuing bank and the confirming bank.
The issuance or advice and communication of amendment, once issued, cannot be withdrawn by issuer (bank(s)). The Issuing Bank and the Confirming Bank (if it extend its confirmation to such amendment) are irrevocable bound such amendment. However, the Confirming Bank may advise the amendment without extending its confirmation, if so, it must inform the issuing bank without delay. Moreover, it should be noted that before the beneficiary accepts such amendment, the regional credit still remain in force and amendment cannot be accepted partially, if so, it is deemed a non-effective acceptance.
Issuing Bank, for purpose of convenience, often adds into the irrevocable credit with an additional term, which is normally written as: Any amendment will become automatically effective unless formally rejected by the beneficiary within a specified period of time, or by a specified date. Sometimes the Advising Bank also adds a similar term like this. However, this is opposed against the Article 9 (d) (ⅰ) as well as the domestic laws in many countries and thus, ICC’s Working Group declared that the aforementioned term is lack of legal effectiveness. Consequently, such term cannot exempt liability on amending or canceling the credit from Issuing Bank and/ or the Advising Bank.
6. Liability of banks under the UCP500 part C: Liabilities and Responsibilities
6.1 Examination of documents
Article 13 (a) states that:
Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.
Document not stipulated in the Credit will not be examined by banks. If they receive such documents, they shall return them to the presenter or pass them on without responsibility.
On their (documents’) face, reasonable care and international standard banking practice The phrase ‘on their face’ is not interpreted as meaning as either the ‘face’ or the ‘reverse’ of a document. It means whether or not the documents are compliance with the terms and conditions of the Credit, whether or not are consistent with one another is based exclusively upon the banker’s examination of the document, and not upon some else’s understanding.
The phrase ‘reasonable care’ is not that banker’s examination should be word-by-word or letter-by-letter, it can be recognized as the following two aspects: professional ethic and ability. The first one requires that bankers examine the documents with good faith and prudence, in other words, bankers should pay attention to examination without reckless or negligence. The second one bases on the banker’s ability, if he has done what he could be able to do and, as possibly as any common and qualified banker can do, it can be believed the banker has already examined with reasonable care. In the common law position is not different, see back to 3.1 and footnote 8.
Moreover, Article 13(a) of the UCP500 introduces the notion of the ‘international standard banking practice as reflected in these Articles’ to determine compliance of documents, on their face, with the terms and conditions of the Credit. ‘The introduction of this international banking standard does not limit a bank’s duty to exercise reasonable care when checking documents. It is intended to determine the scope within which reasonable care is to be applied.’[13] Therefore there is not conflict between requirements of ‘reasonable care’ and ‘international standard banking practice’.
Reasonable time Bank must examine the documents within the reasonable time, which is stipulated in Article 13 (b) as 7 banking days. This rule applies to the same with the issuing bank, the confirming bank, if any, or a nominated bank, each of them has a limit not to exceed 7 days following the day of receipt of the documents, to examine and determine whether to accept or refuse the documents. The 7-days limit is only a maximum time. The word of ‘reasonable’ hereby does not means that the bank has to take all of 7 days to examine the documents and determine whether to accept or refuse the document, rather it means that the bank has to finish its work within a maximum of seven days. Otherwise the bank will lose authority to refuse the documents. There might be different standards required by different courts or in different countries. According to UCP500, examining documents should not be beyond 5 or seven days. Either in UCP or in courts the banker’s practices are ordinarily considered; one example of this is an English case namely Bankers Trust Ltd v State Bank of India[14].
Non-documentary requirement Article 13 (c) states:
If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not states and will disregard them.
This is a specific directive. However, it is often ignored by many applicants or issuing banks and, many letters of credit or amendments of credit contains specifying conditions without stating the documents to be presented in compliance therewith. Consequently, the ICC Banking Commission has to reaffirm that it is a problem in existing practices and it present serious difficulties to the Documentary Credit Parties. The bank will accept the documents that are contained in the Credit, and on their face, in accordance with the terms and conditions of the Credit. Moreover, this matter also deals with some guidance and principle in other articles of UCP500, such as Article 4: ‘In Credit operations, all parties concerned deal with documents, and not with goods, services and/ or other performances to which the documents may relate.’ and Article 5 (b): ‘All instructions for the issuance of a credit and the credit itself and, where applicable, all instructions for an amendment thereto and the amendment itself, must state precisely the document(s) against which payment, acceptance or negotiation is to be made.’ All of documentary credit parties, especially the appliance and the issuing bank, should abide these principles. In credit operations, the following points should be noticed: (1) the issuing bank should pay attention to examination on the application for credit in order to ascertain whether or not it contains ‘non-documentary’ condition(s). If so, the bank will have duty to inform the Applicant to amend it/them. (2) The bank should not issue the Credit and should require the beneficiary to present documents with out specifying conditions, for example, to add request in the Credit as ‘Shipment by fast steamer or on Liner Terms.’ (3) When the condition of the credit looks like the non-documentary condition, the bankers should be careful to ascertain whether it is. According to the commentary made by ICC Banking Commission, if any condition in the credit relates to stipulated document, this condition cannot be deemed non-documentary condition.
6.2 Discrepant document and notice
Duty of the Issuing Bank and Confirming Bank to accept the Document and to reimburse the Nominated Bank Under Article 14 (a), the Issuing Bank and the Confirming Bank, if any, have duties to reimburse the Nominated Bank, if the Nominated Bank, according to authorization by the Issuing Bank, has paid, incurred a deferred payment undertaking, accepted Draft(s), or negotiated, and meanwhile accept the documents.
Examination on the documents alone It is necessary to emphasis that Article 14 (b) applies not only to the Issuing Bank, but also to other banks that have been authorized to take up the documents, including the Confirming Bank or Nominated Bank acting on their behalf. All these banks have a duty to those who present the documents to determine alone whether or not the documents appear on their face to comply with the terms and conditions of the Credit. Otherwise, these banks do not have responsibility to take up the documents; rather the banks can refuse to accept them.
Time limit Under Article 14 (c), the Issuing Bank determine that the documents appear on their face not to comply with the terms and conditions of the credit, it may solely contact the applicant for a waiver of the discrepancy(ies). However, the issuing bank should not exceed the seven banking days, which has been stipulated in Article 13 (b). Otherwise, the issuing bank will lose authority to refuse the documents.
Under Article 14 (d) (ⅰ), if the issuing bank and/ or the confirming bank, if any, or the nominated bank acting on their behalf, decides to refuse the documents, it must inform presenter of the documents within 7 banking days.
The responsibility under Article 14 (d) (ⅱ), (ⅲ) and (e) The notice of rejection must state all discrepancies in respect of that the bank refuses the documents, and must state the documents have held by bank or have been returned to presenter. And then, ‘the Issuing Bank and / or Confirming Bank, if any, is entitled to claim from the remitting bank, not only the principle amount of the payment made, but also the interest accrued if the Issuing Bank or Confirming Bank, if any, refuse to take up discrepant documents’[15]. However, Article 14 (e) adds a rule of preclusion, which limits the Issuing Bank and/ or Confirming Bank, if any, to claim the discrepant documents, if they have failed to act in accordance with the rule of Article 14.
6.3 Dissolution and remission of the responsibility
‘Disclaimer on Effectiveness of Documents’ Banks just needs to examine the documents with a reasonable care to ascertain whether they appear, on their face, to be in compliance with the terms and conditions of the Credit. Except for this, the banks assume no liability or responsibility for:
the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or for the general and /or particular conditions stipulated in the documents(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and/ or omissions, solvency, performance or standing of the consignors, the carriers, the forworders, the consignees or the insurers of the goods, or any other person whomsoever.
These enumerated rules are stipulated in Article 15 of UCP500.
‘Disclaimer on the Transmission of Messages’ and ‘Force Majeure’ The credit is used in international trade and international settlement; in the transaction of the credit, there are many transmissions of messages, letters, documents or telecommunication and besides, there might be many translations and interpretations of technical terms. According to Article 16, banks assume no liability or responsibility for delay, loss, and any other errors. Moreover, banks also assume no liability or responsibility for the consequence due to the interruption of their business by force majeure, such as Acts of God, riots, civil commotions, insurrection, wars, strikes, lockouts, or any other cause beyond their control. To exclude liability for force majeure events is a common principle for the contract law, both in the international level and in the national level. It is also fixed as a principle into Article 17 of UCP500.
Disclaimer for acts of an instructed party The main point of Article 18 is that the instructing party, who normally is the applicant, should remain ultimately and finally liable for risk and for payment of banking charges, if they cannot be collected from the other relevant parties. The risk may appear if the Issuing Bank utilize the services of another bank or other banks, or if banks decide for themselves to nominate other bank(s). Under these circumstances, all liabilities and responsibilities will be imposed on banks by international laws or customary rules. The charges normally include commissions, fees, costs and expenses concerned with instructions. If there are opponent rule in other Article of UCP500, or such risks or charges occurred due to negligence of the bank, the bank should assume liability or responsibility for such risks or charges.
7. Issuing bank’s liability to other banks
7.1 Issuing bank’s liability under bank-to-bank reimbursement arrangement
Article 19 of the UCP500 is entitled ‘Bank-to-Bank Reimbursement Arrangement’, which burden the issuing bank some liabilities, these are:
To provide instructions or authorization The issuing bank should provide them to the reimbursing bank in good time to honor reimbursement claims, if it intends that the claiming bank claim on and obtain the reimbursement from the reimbursing bank. The claiming bank including the paying bank, the accepting bank and the negotiating bank, are hereby unlikely to obtain directly from the issuing bank, but from the reimbursing bank, who is instructed and authorized as an agent of the issuing bank.
Certificates of compliance In Article 19 (b), the issuing bank is forbidden ‘to require a Claiming Bank to supply a certificate of compliance with the terms and conditions of the credit to the Reimbursing Bank.’ The ICC publication 511 explain that this provision is a ‘recommendation’, and ‘if the Issuing Bank wishes to disregard this recommendation, and is insistent on requesting such a certificate of compliance, then it has a duty to so notify the Negotiated Bank and the Reimbursing Bank. Under this arrangement the Reimbursing Bank has no other choice but to dishonour any claim made that fails to include such a certification of compliance.’ (P.55)
Liability to reimburse and loss of interest Under Article 19 (c), the Issuing Bank cannot be exempt from reimbursement, if the claiming bank does still not receive reimbursement from the reimbursing bank, where the Issuing Bank has the primary liability. Afterward, Article 19 (d) burden the issuing bank another liability to the Claiming Bank for any loss of interest due to no reimbursement provided by the reimbursing bank on time -‘on first demand, or as otherwise specific in the credit, or mutually agreed, as the case may be.’
The reimbursing bank’s charge the Issuing Bank is responsible for the reimbursing bank’s charge if it has truly occurred. Article 19 (e) set forth general principle of an Issuing Bank’s liability for reimbursement charges but allow the parties to stipulate otherwise was adopted. This sub-Article also preserves the secondary liability for reimbursement charges. If the reimbursement authority is not drawn on to allow collection by the Reimbursing Bank of its charges, and then such charges are collectible from the Issuing Bank.
7.2 Some supplements in the URR, ICC Publication No. 525
The URR (the Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits) , ICC Publication No. 525, which was entered into force in July 1st 1996, stipulated some new rules dealing with the issue of reimbursement. In which, some stipulations relate to the Issuing Bank’s liability. The examples are as the following:
The URR 525 Article 4 states that the reimbursing bank is not liable to have to provide reimbursement, unless the reimbursement of guarantee has issued. The Reimbursing Bank is an agent of the Issuing Bank; expect for the Issuing Bank, it is separate from other parties. If it does not provide reimbursement, the Issuing Bank is of cause liable to provide reimbursement.
The URR 525 Article 5, entitled as Liability of the Issuing Bank, according to this, the Issuing Bank has liability to address the contents in its authorization of reimbursement and the Credit.
8. Fraud exception
Fraud is the only exception to lead to that the obligation of banks to pay under the letter of credit is curtailed. No provision relating to fraud exception is directly stipulated in UCP500. The fraud exception was originally created by cases under the Common Law setting up on the principle of autonomy of letter of credit, which is regarded coming from the maxim – ‘ex turpi causa non oritur action.’[16] The banks that engaged in a letter of credit transaction are, in principle, not involved in any dispute, which arise between the parties to the undertaking contract of sale. The fraud exception is admitted to permit a court to consider evidence other than the actual tern terms and conditions of the credit and is set on such maxim, where it can be pleaded successfully, the issuing bank under an irrevocable credit or the advising bank if it has added its confirmation should refuse to pay, accept or negotiate according to the terms of the credit, if the correct documents are tendered before the expiry of the credit.
Normally, the allegation of fraud is raised by buyer so as to prevent the bank from honouring the credit. The bank is not obliged actively to ascertain whether the alleged fraud has occurred or whether it can be proved. In the most time, the evidences are shown by buyer to prove that the fraud has been committed. In the common sense, three kinds of circumstance should be distinguished in order to ascertain whether or not the fraud exception can be applied. First of all, if the evidence shows that the fraud has occurred and the beneficiary knew of this fraud, bank must not honor its undertaking and assume no liability to pay under the credit. In the case of Szteijn v J Henry Schroder Banking Corporation,[17] the earliest case, Judge Shientag established a precedent of fraud exception on applying that ‘fraud unravels all’; Secondly, if only an allegation made by buyer that the fraud has occurred and there is no more evidence can be established, the bank should still pay. In the case of Discount Records Ltd. V. Barclays Bank Ltd and another, [18] the first English case, Judge Megarry claimed that injunction for stop of payment should be based on the significant evidences. Thirdly, although it is established that the fraud has occurred, if it cannot clearly be proved by evidences that the beneficiary knew of the fraud, the bank should pay, because in this circumstance, the fraud may be committed by a third party and, not only the bank or by the buyer, but the seller may be deceived by the fraud of such third party. This point can be found in the cases of, for instance, United City Merchants (Investment) Ltd V. Royal Bank of Canada (The American Accord).[19]
Recently, more and more courts in different countries take legal practice in the field of the fraud exception. China is one of them, Chinese courts have heard and sentenced many cases concerning with the fraud exception. Among them, the ‘Summary of the Meeting for Administration of Justice’ (1989)[20] and X. H. Corporation (Korea) v European & Asia Commercial Company (China) (the Supreme people’s Court of the P.R.C.)[21]are powerful for the administration of justice. The former one stated some principles, which include two main aspects: (1) Choice the law, making certain how to apply domestic laws and international customary laws; (2) In the case of application for injunction restraining bank to accept or pay under the credit, (a) what is the requirement for evidence; and (b) which principles should be applied to making injunction. In the latter one, the Supreme People’s Court clarified a concept of ‘substantiality fraud’. The Court recognized that fraud exception should be applied, if it has been proved by evidences that the fraud is existence and substantiality. Since that, these principles have been followed by inferior courts in China.[22]
9. Conclusion
‘Letter of credit’ is commonly regarded same as documentary credit and sometimes it is also called banking/ or bankers commercial credit. In the broad sense, the concept of ‘letter of credit’ contains all types of credit including documentary credit. For example, in America, the letters of credit can be issued by commercial institutes even an individual. However, in this assignment, the concept of ‘letter of credit’ is defined same as the documentary credit by following the UCP500.
Letter of credit, in recent global trade, is the most universally used method of payment. It is a written undertaking by the issuing bank on behalf of the applicant (exporter or seller), authorizing the given to the beneficiary at the request, and on the instruction of the beneficiary (importer or buyer) to obtain payment within a specified timeframe once the terms and conditions outline in the letter of credit are met. The letter of credit is a commercial speciality that is similar but different to contracts or guaranty agreements. The letter of credit is not itself a contract, although contracts underlie the letter of credit. A new argument engaged in an English case in 2000, in the case the defendant, a demurrer, claimed a new counterargument – ‘Inefficacy exception’ instead of fraud exception. It was eventually rejected by court, because the judge thought the credit is separate from the sale contract.[23] The UCP500 has addressed the rule: ‘the separation between documents on the one hand, and the goods, services or performances on the other.’[24] The letter of credit bases on the sale contract, but it and contract always separate out as soon as it is issued. This means that in the transaction of credit banks are in no way concerned with or bound by the contract on which they are based (Article 3 of the UCP500). Each bank is an independent party and solely assumes their liabilities under the relevant laws and rules, in which the UCP500 is the most important one. Unless a fraud is truly exist and the beneficiary knew or, participate in the fraud, no reason can support banks to refuse to honour their undertaking to pay, accept and pay draft or negotiate and/ or to fulfill any other obligation under the credit.
Reference
Charles del Busto, Documentary Credits: UCP500 & 400 Compared, ICC Publishing S. A, 1993
Gabriёl Moens and Peter Gillies, International Trade and Business: Law, Policy and Ethics, Cavendish Publishing Pty Limited, 1998
G. A. Penn, A. M. Shea and A. Arora, The Law & Practice of International Banking, Sweet & Maxwell, 1987
Indira Carr, Principles of Int,ernational Trade Law, Cavendish Publishing Pty Limited, 2nd ed., 1999
Jeffrey L. Seglin, Bank Administration Manual, Bank Administration Institute, 3rd ed. 1988.
Jianzhou Wu, The Case: Issuing bank’s duty on the Fraud Exception and the Ineffective Exception, Magazine of administration on foreign exchange, 3-2002, at the Chinese website: http://www.chinaforex.com.cn/magzine/0203/504.asp
Kaiqi Wu and Xuifen Guo, Modern International Settlements, Lixin Accounting publishing Company, 1997
K. C. D.M. Wilde and M. Rafiqul Islam, International Transactions: Trade and Investment, Law and Financ,e, The Law Book Company Limited, 1993
Lazar Sarna, Letters of Credit: the Law and Current Practice, Carswell, 1986
Leo D’Arcy, M. A., Carole Murray, M. A and Babbara Cleave, LL. B. The Law and Practice of International Trade, Sweet & Maxwell, 2nd ed., 2000
The cases release and Article and Review, etc. a Chinese website: http://www.ChinaLawInfo.com
[1] [1978] Q.B. 146
[2] Jeffrey L. Seglin,Bank Administration Manual, Bank Administration Institute,3rded.1988.P.233
[3] Leo D’Arcy, M. A., Carole Murray, M. A and Babbara Cleave, LL. B. The Law and Practice of International Trade, Sweet & Maxwell, 2nded., 2000
[4] Gabriёl Moens and Peter Gillies, International Trade and Business: Law, Policy and Ethics, Cavendish Publishing Pty Limited, 1998, P.397
[5] Indira Carr, Principles of International Trade Law, Cavendish Publishing Pty Limited,2nd ed., 1999, P.272
[6] Gabriёl Moens and Peter Gillies, International Trade and Business: Law, Policy and Ethics, Cavendish Publishing Pty Limited, 1998, P.407
[7] K. C. D.M. Wilde and M. Rafiqul Islam, International Transactions: Trade and Investment, Law and Finance, The Law Book Company Limited, 1993, P.81
[8] There is a kind of relationship between relevant banks. Each bank hold the sample of seal, signature of the president, or cipher of the another bank, which is used to check distinguish the authenticity of documents from the another bank. I am sorry because I have not found them in books and dictionaries yet.
[9] [1974] 1 WLR 1234; 2 Lloyd’s Rep 1
[10]
[11] Charles del Busto, Documentary Credits: UCP500 & 400 Compared, ICC Publishing No. 511, 1993, P. 24
[12] [1958] 2 QB 130; 1 All ER 542
[13] Charles del Busto, Documentary Credits: UCP500 & 400 Compared, ICC Publishing No. 511, 1993, P. 39
[14] [1991] 2 Lloyd’s Rep 443
[15] Charles del Busto, Documentary Credits: UCP500 & 400 Compared, ICC Publishing No. 511, 1993, P. 47
[16] Indira Carr, Principles of International Trade Law, Cavendish Publishing Pty Limited,2nd ed., 1999, P. 297
[17] [1941] N.Y. S. 2d, 631 at 634
[18] [1975] 1 WLR 315
[19] [1983] 1 AC 168
[20] http://www.ChinaLawInfo.com (* Note: Translated and summarized by me)
[21] http://www.ChinaLawInfo.com (* Note: Translated and summarized by me)
[22] In China, the Country Supreme Court has authority to interpret the existing laws, which is called by some scholars as ‘court making laws’. The Country Supreme Court’s sentences and judgments are, in fact, followed by inferior courts.
[23] Jianzhou Wu, The Case: Issuing bank’s duty on the Fraud Exception and the Ineffective Exception, Magazine of administration on foreign exchange, 3-2002, at the Chinese website: http://www.chinaforex.com.cn/magzine/0203/504.asp
[24] Charles del Busto, Documentary Credits: UCP500 & 400 Compared, ICC Publishing No. 511, 1993, P. 47
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