In international trade, the documents will commonly comprise a bill of lading which gives title to the goods and related documents. This facilitates the exchange of the payment instrument for the documents to the goods, which carry the entitlement to the possession and ownership of the goods themselves.
The Uniform Custom and Practice for Documentary Credits (UCP) is very widely accepted in international trade. The code represents the latest in a series of rules produced by the International Chamber of Commerce over the last 80 years. The rules do not have the force of law but are incorporated in contracts in respect of most international documentary credits.
A United States party may adopt the uniform UCP in place of the letter of credit provisions in the US Uniform Commercial Code.
Banking organisations and associations in many states recommend or require their members to follow the code.
The International Chamber of Commerce has published international standard banking practice notes which supplement the code and give guidance.
A credit is an arrangement howsoever named or described that constitutes the definite undertaking of the issuing bank to honour a complying presentation. Honour is defined
- as payment on sight if the creditor is payable on sight;
- to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment;
- to accept a bill of exchange drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Stand Alone Arrangement
Article 4 provides that a credit by its nature is a separate transaction from the sale or other contract (including a customer relationship) on which it may be based.
Banks are in no way concerned with or bound by such contract even if a reference to it is included in the credit. The undertaking of a bank to honour, negotiate or fulfil any other obligation under a credit is not subject to claims or defences by or against the applicant (buyer) resulting from its relationship with the issuing bank (buyer’s bank) or the beneficiary (e.g. the seller).
A beneficiary cannot avail itself of the contractual relationship existing between banks or between the applicant and the issuing bank. An issuing bank should discourage any attempt by the applicant to include as an integral part of the credit copies of the underlying contract, proforma invoice and the like.
Article 5 provides that banks deals with the documents and not with the goods services or performance to which documents may relate. This emphasises the standalone nature of the letter of credit. It is in many respects similar to a bill of exchange.
It is regarded by the courts in international practice as an important principle, that banks honour the obligations in letters of credit which they issue. They are not concerned with any underlying disputes which may arise. The bank must honour the credit notwithstanding that the buyer has a counterclaim. The letter of credit, like a bill of exchange, is equivalent to cash or a draft and must be honoured as such.
The principle of strict compliance applies to letters of credit. The bank is entitled to reject documents that are not in strict conformity with the terms of the credit. The rationale is that the advising bank is an agent of the issuing bank and the issuing bank is a special agent of the buyer. In accordance with general principles of agency, the agent must act within the strict terms of his agency or face the risk that is principal will not be bound and that he may breach his obligations to his principal.
The bank determines whether the documents tendered comply with the terms of its instruction/mandate and the particulars specified in the credit. Banking practice requires strict compliance even if the differences are apparently small. If the bank refuses payment on the credit, the remedy is to obtain a waiver from the other party (the buyer).
Where the credit requires a specific description of the goods, the bank may accept a bill, notwithstanding that there may be clauses exempting liability or disclaiming precise details.
Accepting or Rejecting
UCP provides that the issuing bank, the confirming bank if any or a nominated bank acting on their behalf shall have a reasonable time, not to exceed five banking days (UCP 600 reduced this time from seven days), following the date of receipt of documents to examine them and determine whether to take up or refuse the documents and to inform the party from which it receives the documents accordingly.
What is reasonable depends on the circumstances. If the documents are particularly complex, a longer period may be required. Factors such as language, urgency and the arrival of the vessel and the nature and status of the goods are relevant. Generally, rejection should be within three working days or less.
A five-day time limit applies under UCP 600. This is a maximum limit or what is reasonable may be less. The bank is required where it decides to refuse to honour or negotiate the instrument to give notice by the close of business on the fifth day following the date of presentation.
In accordance with the principle of strict tender, ambiguous documents are not good tender. However, if properly interpreted, the words in the instructions and the tendered documents have the same meaning, and they correspond, although not identical, they may be accepted. Exceptionally, a bank may be willing to accept ambiguous documents, if a specific and satisfactory indemnity is given.
UCP sets out the procedure for refusal. The bank must furnish the presenter with a notice confirming that the bank is refusing to honour or negotiate the credit and setting out each discrepancy in respect of which the bank refuses to honour or negotiate.
The bank must confirm that
- it is holding the documents pending further instructions from the presenter
- that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it or receives further instructions from the presenter prior to agreeing to accept a waiver
- the bank is returning the documents or
- the bank is acting in accordance with the instructions previously received from the presenter.
The notice should be given by an expeditious mechanism of communication. Electronic or other such telecommunication should be used.
The bank may exercise a discretion to seek a waiver from the applicant (buyer) prior to giving notice of dishonour or non-acceptance.
The bank must follow the procedure for rejection in order to treat the documents as non-compliant. Where non-confirming documents are rejected, the beneficiary of the credit may correct the discrepancy provided that this is done so within the period of validity.
The UCP provides that the transport documents may be issued by a party other than a carrier owner, master or charterer provided that they comply with the requirements of UCP 600 for multimodal transport documents, bill of lading, sea waybills, air transport documents, road transport documents, rail transport documents or inland waterway transport documents.
Where the transport documents apply to two or more modes of transport, the documents are to include the name of the carrier, signed by the carrier, master or agent. The bank is to accept a transport document indicating that transhipment may or will take place provided the carriage is covered by one and the same transport document. This is so even if the credit prohibits transhipment.
Bill of Lading Port to Port
Where the credit requires a bill of lading for port-to-port shipment, the following is required.
The bill must appear to indicate the name of the carrier and be signed by the carrier, master or named agent on their behalf. It must state on whose behalf he is signing.
The bill must indicate that the goods have been shipped on board a vessel named at the port of loading stated in the credit. This may be evidenced by pre-printed wording or by an onboard notation indicating the date on which the goods have been shipped on board.
The bill of lading must indicate the shipment from the port of loading to the port of discharge provided in the credit. A bill which authorises transhipment may be tendered.
Other Transport Documents
The requirements for a charterparty bill of lading reflect those for bills of lading. In this case, the whole vessel is hired. It may be signed by the master, owner, charterer or their agents. The bank may accept a charterparty bill of lading. It is not obliged to examine the charterparty contract, even if it is required to be presented under the credit.
Article 23 applies to air transport documents. A carrier or named agent is to sign the documents. They must show the goods have been accepted for carriage. They should show the airport of destination and departure provided for in the credit. The date on which the air transport document is issued is presumed to be the date of “shipment” unless notation otherwise indicates.
Article 21 deals with non-negotiable seaway bills. Broadly similar provisions apply as apply to bills of lading. Article 24 deals with road, rail and inland transportation. Once again, similar provisions apply to these modes of transport.
The transport documents must be clean. This means that there must not be any clause expressly declaring a defect in the apparent condition of the goods or their packaging.
Unless specifically allowed by the credit, banks do not accept a transport document providing that goods are to be loaded on deck. Transport document which states that goods may be loaded on deck may be accepted.
The UCP provides for commercial invoices. The invoice must be in the currency of the credit. The bank may reject documents with an invoice for an amount in excess of the credit.
The invoice must appear to have been issued by the beneficiary of the credit. It need not be signed. It must be made out in the applicant’s name. It must contain a description of the goods, services or performance in accordance with the credit. Other documents may contain a description in general terms which is not inconsistent with the terms of the credit.
Insurance and other Documents
The insurance documents are to accord with the credit. They must be signed by the insurance company underwriters, agents or representatives. They should set out the capacity in which they sign. If documents set out that there is more than one original, all must be presented.
Cover notes are not permissible unless authorised. Insurance cover must extend as and from at least a date of shipment. Goods / documents should be insured for their value plus 10 percent. If the CIF or CIP value, cannot be determined from the documents, then insurance cover of at least 110 percent of the amount of the credit or the gross value of the goods in the invoice is required.
Where other documents are required, there should be exact and detailed instructions as to the required content. The bank may accept the documents as presented provided that they appear to fulfil the relevant description and function.
Documents Required I
Generally, the bank / buyer must receive the original documents. The bank may treat as original any document bearing an apparently original signature mark, stamp or label of the issuer of the document unless the document itself indicates that it is not an original.
Unless otherwise indicated, the bank will also accept the document as original if it appears to be written, typed, perforated or stamped by the issuer’s hand, appears to be on the document issuer’s original stationery or states that it is original. It is sufficient that the documents collectively in a set meet the requisite requirements unless the contrary is provided.
Goods must be described in the invoice in the same manner of the credit. Other documents which relate to the same goods may be in general terms
Documents Required II
The UCP provides that a date in a document when read in the context of the credit, need not be identical to, but what must not conflict with the date in any other stipulated document or the credit.
The UCP provides that an authenticated teletransmission of a credit or amendment is deemed to be the operative credit. An amendment in any subsequent mail confirmation shall be disregarded.
If the teletransmission states “full details to follow” or words to similar effect or states that the mail confirmation is to be the operative credit or amendment, then the teletransmission is not deemed to be operative. The issuing bank must then issue the operative credit or amendment without delay in terms not inconsistent with the teletransmission.
A preliminary advice on the issuance of the credit or amendment shall only be sent if the issuing bank is preparing to issue the operative credit or amendment. An issuing bank that sends a pre-advice is irrevocably committed to issue the operative credit or amendment without delay in terms not inconsistent with the pre-advice.
Opening of Credit
The contract for sale may provide as to when the credit is to be opened. This may be by a certain date or immediately. The credit is deemed open when the advice of the confirmation is communicated to the beneficiary.
If the contract does not provide for the time by which the credit should be opened, the matter becomes a matter of interpretation. It may be that the opening of a credit is a pre-condition to the contractual obligations of the seller.
In the absence of stipulation, the credit must be opened within a reasonable time. This is considered with reference to the date of shipment or the first date of shipment. It should give the seller sufficient time to know, prior to sending the goods for shipment, that payment will be secured. Where a seller is given a right to ship over a period, and there is a mechanism for payment, it must be available over the whole of that period.
In the absence of specific agreement, the seller under a free-on-board contract is entitled to see a conforming letter of credit prior to the commencement of shipment.
The letter of credit must provide the expiry date by which documents must be presented at the relevant place. The credit may provide that the shipment must be by a certain date, which must be shown. In addition to providing an expiry date for presentation of the documents, where the credit calls for tender of transport documents, the period of time after the date of shipment during which presentation must be made should be not later than 21 days and in any event not later than the expiry date.
The credit need not be governed by the law of the underlying contract for sale. The UCP does not provide for the governing law. In practice, the issue will not generally arise as UCP provides common international rules.
The credit may provide a choice of law. In the absence of a specific choice, the general provisions of law apply. Generally, this is the place with which the credit has the closest and most real connection, which is usually the place for presentment and examination provided by the credit.
Under the Rome Regulation and Convention, the law is that chosen. If not chosen, the law most closely connect applies, as at common law.
Failure to Open
The failure to open a letter of credit as required may be a breach of contract. General principles of law apply.
The provisions in the Sale of Goods Act for the measurement of damages do not of themselves apply.
The advising banks may also incur liability to the party for breach of obligations.
References and Sources
Consumer Law Long 2004
Commercial Law White 2nd ed 2012
Commercial & Economic Law in Ireland White 2011
Commercial Law Forde 3rd ed 2005
Irish Commercial Precedents (Looseleaf) 2004
Modern law of personal property in England and Ireland Bell 1989
Commercial & Consumer Law: Annotated Statutes O’Reilly 2000
Schmitthoff: The Law and Practice of International Trade 13th ed Carole Murray, David Holloway, Daren Timson-Hunt, Schmitthoffs 2018
Damages Under the Convention of Contracts for the International Sale of Goods 3rd ed Bruno Zeller 2018
International Economic Law 4th ed Asif Qureshi, Andreas Ziegler 2018
Law of International Trade: Cross Border Commercial Transactions 6th ed Jason C.T. Chuah 2018
World Trade Law: Text, Materials and Commentary 3rd ed 2018
The International Sale of Goods 4th ed Michael Bridge 2017
International Trade Law 6th ed Indira Carr, Peter Stone 2017
International Institute for the Unification of Private Law 2nd ed (UNIDROIT) 2017
Understanding the CISG Understanding the CISG 5th (Worldwide) ed 2017
The Law and Policy of the World Trade Organization: Text, Cases and Materials 2017
International Trade Law and Regulation:: Michael Blakeney, Aline Doussin, John Clarke, Mark Clough, 2017
International Sale of Goods: A Private International Law Comparative Edited by: Nicolas Nord, Gustavo Cerqueira 2017
International Sales Law Edited by: Franco Ferrari, Clayton P. Gillette 2017
The CISG Advisory Council Opinions Edited by: Ingeborg Schwenzer 2017
World Competition: Law and Economics Review – Editor in Chief: Jose Rivas 2017
Making Money with Incoterms 2010: Strategic Use of Incoterms Rules in Purchases and Sales Arthur O’Meara 2017
World Trade Organization: Law, Practice and Policy World Trade Organization: Law, Practice and Policy 3rd ed Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, Michael Hahn 2017