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ISP98 Rule 1.02: Relationship to Law and Other Rules
1. Generally. Rule 1.02 addresses the relationship and relative priority between ISP98 and the law applicable to an ISP98 standby and any other practice rules to which it may also be made subject. It assumes that applicable law will distinguish between mandatory and non-mandatory provisions, giving effect to the terms of the undertaking with respect to non-mandatory provisions. It also provides that the provisions of ISP98 would control over any conflicting provisions of other practice rules to which an ISP98 standby letter of credit is also made subject.
2. Background of Rule 1.02. Neither ISP98 nor the standbys subject to it operate in a vacuum with respect to law. Where there is a dispute that requires judicial or arbitral resolution, the application of ISP98 and its specific rules must be within the context of the governing legal system, as applied under the conflict of law rules of the forum or place where the dispute is being resolved. Rule 1.02(a) attempts to situate ISP98 within the context of applicable law in general and of letter of credit law in particular in which the principle of freedom of contract and party autonomy is paramount.
Rule 1.02(b) addresses the situation where a standby letter of credit is subject to ISP98 and some other practice rule without establishing relative priorities. It provides that in such a situation the provisions of ISP98 supersede conflicting provisions in those other practice rules.
3. These Rules; Rules. Rule 1.02(a) refers to “Rules”. The word “Rule” or “Rules” is used in three senses in ISP98. The word “Rule” in both singular and plural were deliberately chosen instead of the word “article” or its variations in order to avoid confusion with other practice rules which use the word “Article”.
In the sense used in Rule 1.02(a), “These Rules” refers to the entire ISP98. Second, as provided in the caption “Rule 1: General Provisions” and other similar headings, it is the title used for each unit of ISP98, including various related subunits. Third, it has been used in the singular (“Rule”) in THE OFFICIAL COMMENTARY ON THE INTERNATIONAL STANDBY PRACTICES1 and generally from the outset, although not formally in ISP98 itself, as the name of each of the subunits which are not titled “subrules” to avoid confusion in light of the second usage. Hence, Rule 1: General Provisions consists of Rule 1.01 through Rule 1.11 inclusive.
4. Role of Law. The application and use of private rules of practice such as ISP98 does not render law unnecessary. There are certain issues which cannot be decided by private rule-making or, if decided, cannot be enforced. These matters include giving legal force to definitions, enforcement of obligations and delineation of rights, enforcement of the rules themselves, enforcement of the effective date of obligations and their limitation or termination, determination of priorities between competing entitlements, overriding or supervening issues of public policy, effect on third parties, and fraud or illegality. Even though private rules can address some of these questions, they cannot be given effect without the sanction of law. As a result, law and practice naturally complement one another. Indeed, ISP98 was drafted as a direct result of the work on the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (UN Convention) and the U.S. Revision of Uniform Commercial Code Article 5 (Letters of Credit).
5. Practice Rules and the Role of Practice. ISP98 constitutes a rule of practice. The significance of rules of practice in modern commerce stems in part from their international character. In the absence of an effective international regime of law, it has been necessary for parties in need of certainty to turn to private rules of practice to order their collective behaviour in international transactions. Such rules are often formulations of widely accepted practices which are given currency and credibility by endorsement of recognised national or international organisations and widespread use. As such systems of rules have emerged, they constitute far more than a formulation of trade terms or definitions or standardised clauses. In their most advanced form they are, in effect, an alternative system resembling law which orders behaviour, providing sophisticated remedial provisions and attempting to balance various rights and equities in various situations. In the annals of commercial law, the UCP stands out as the classic example of private rule-making. Its near universal adherence makes it far more effective at governing transnational relationships than any known system of positive or judicial law.
6. Supplement to the Extent Not Prohibited; Rule 1.02(a). Rule 1.02(a) states that the provisions of ISP98 supplement the applicable law to the extent not prohibited by that law. There is a healthy relationship between modern commercial law and practice rules. The foundation of modern commercial law is the principle of freedom of contract or party autonomy. In effect, that means that in most cases, the terms of an agreement control over terms of law. Most commercial law, whether in codified form or judicial decisions, can be derogated from, that is, it is non-mandatory, or variable. Giving effect to party autonomy, the law typically defers to the selected private rule, whether in the form of contract terms or practice rules, except where that rule conflicts with public policy. As a result, there are relatively few instances of true conflict (as opposed to apparent conflict) between law and rules of practice.
It is not possible, however, for a private rule to establish this principle. Thus, ISP98 could not provide that its provisions supersede the variable provisions of applicable law with binding effect. Only applicable law can so provide. Thus, Rule 1.02(a) uses the neutral word “supplement” to describe its relationship to applicable law in the expectation that modern commercial law will give effect to its provisions over non-mandatory provisions of applicable law; not by operation of ISP98 but by operation of applicable law.2 The word ‘supplement” should not be interpreted as a provision indicating that non-mandatory provisions of applicable law would supersede ISP98 rules. Such an interpretation would not only violate the public policy underlying the principle of party autonomy but the intention of the drafters of ISP98.
7. Applicable Law. Rule 1.02(a) refers to “applicable law”. This phrase refers to the law that applies to the standby either by an express choice of law provision in the standby or by operation of so-called conflict-of-law rules of the forum where any dispute is being litigated, or both. This phrase was chosen in preference to “local law” because of the inherent ambiguity in the word “local”. If by “local” is meant the forum for litigation, the “local” law might not be the applicable law.
8. Standby Letter of Credit. Rule 1.02(b) uses the term “standby letter of credit” instead of “standby”. As explained in Rule 1.11(b) (Interpretation of these Rules),3 the name “standby letter of credit” refers to the type of independent undertaking for which ISP98 was intended, namely an undertaking to honour the timely presentation of complying documents which do not relate to a current ongoing commercial or similar transaction in which the documents themselves are contemporaneous representations of performance of the transaction. In general, it is a letter of credit undertaking which is not a commercial letter of credit.
Thus, under Rule 1.02(b), ISP98 would supersede any conflicting provision of URDG 758 or UCP600 where the undertaking that was subject to both was being used as a standby letter of credit or similar undertaking such as an independent guarantee. It would not supersede UCP600 in the case of a commercial letter of credit.
9. Supersede Conflicting Provisions in Other Rules of Practice. Rule 1.02(b) refers to other rules of practice to which a standby letter of credit may be made subject. There is a choice of practice rules available to an issuer of standby letters of credit in addition to ISP98. This choice includes the Uniform Customs and Practice for Documentary Credits (UCP) in the form of its current iteration, ICC Publication No. 600 (2007), or past iterations. Until the formulation of ISP98, many standbys were subject to iterations of the UCP. For various reasons, parties may wish to continue issuing some or all standbys subject to the UCP. It is less likely that they will use the ISP for commercial letters of credit because of the differences regarding the typical documents presented and the expectations of the parties. Nonetheless, certain Rules of ISP98 clarify provisions of the UCP and may serve as models for specific clauses in commercial letters of credit or be of assistance in interpreting provisions of UCP600. Similarly, the Uniform Rules for Demand Guarantees which was intended to be used for performance independent guarantees could be used for performance standbys.
An undertaking may be inadvertently or deliberately issued subject to ISP98 and at the same time also issued subject to other rules of practice (e.g., “Subject to both ISP98 and UCP600”). In the case where such an undertaking is deemed to be a standby letter of credit, ISP98 would supersede any conflicting provisions in the other practice rule. This result is consistent with the stated intent to apply to and govern standby letters of credit. If an undertaking is not a standby letter of credit but instead, for example, a commercial letter of credit, then Rule 1.02(b) would not apply to conflicting provisions. Where there were no conflicts or where one rule enhanced or explained the other, both would be applicable.
10. Forms and Data Transmission Systems. Rule 1.02 does not address the relationship between its provisions and the formats used to teletransmit standbys such as SWIFT MT 760. SWIFT MTs impose certain constraints in the terms used and their length. Some formats have detailed protocols for placing information within certain fields. In addition, issuers or other nominated banks occasionally will use MTs or fields for purposes for which they were not intended. Where there is a conflict between the actual terms used in a standby in the light of ISP98 which demonstrates the intent of the issuer and its placement under various formatting protocols, ISP98 should control.
11. Variation. The provisions of Rule 1.02 can be varied, that is modified or excluded, by the terms of the standby as is provided in Rule 1.01(c) (Scope and Application).4 Any variation, however, should be considered carefully so as to avoid unintended consequences.5 There would seem to be little point in excluding either provision although Rule 1.02(b) should be modified if it was desired that a provision of another practice rule to which the standby was subject should supersede the conflicting ISP98 provision.
Judicial Opinion Regarding ISP98 Rule 1.02
Alessandra Yarns, l.l.c.c. v. Tongxiang Baoding Textile Co., 2015 QCCS 346 (Québec Superior Court February 6, 2015) [Canada], summarised at Jul/Aug 2016 DCW at 17. (Granting a safeguard order under Canadian law pending a trial of the issues related to an alleged fraudulent demand by the beneficiary under a USD 160,000 standby subject to ISP98.). At ¶ 29, the opinion states that “[t]he rules [ISP98] bind the parties to the standby letter of credit, but are in the nature of supplementary rules, since they can be contractually modified or excluded (article 1.02.a ISP98)”. This reference to Rule 1.02(a) is confusing. The ability to “contractually modify” ISP98, that is vary its provisions by the terms of the standby, is contained in Rule 1.01(c) and not 1.02(a). While Rule 1.02(a) does not use the word “supplement”, it is in the context of the relationship between ISP98 and the applicable law and the Opinion gives effect to the terms of the standby and ISP98 with the exception of LC fraud which is excluded from ISP98 under Rule 1.05(c) (Exclusion of Matters Related to Due Issuance and Fraudulent or Abusive Drawing).
1 The Official Commentary on the International Standby Practices by Professor Jame E. Byrne, published by IIBLP and available at www.iiblp.org.
2 This situation is fully captured in U.S. U.C.C. Art. 5 Section 5-116(c) (Choice of Law and Forum) which states: “Except as otherwise provided in this subsection, the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject. If (i) this article would govern the liability of an issuer, nominated person, or adviser under subsection (a) or (b), (ii) the relevant undertaking incorporates rules of custom or practice, and (iii) there is conflict between this article and those rules as applied to that undertaking, those rules govern except to the extent of any conflict with the nonvariable provisions specified in Section 5-103(c).” As explained in Official Comment 3 to this provision of the Model Law, “Except in the unusual cases discussed in the immediately preceding paragraph, practice adopted in a letter of credit will override the rules of [U.S. U.C.C.] Article 5….” The immediately preceding paragraph states in relevant part “Under revised Section 5.116 letters of credit that incorporate the UCP or similar practice will still be subject to [U.S. U.C.C.] Article 5 in certain respects. First, incorporation of the UCP or other practice does not override the nonvariable terms of [U.S. U.C.C.] Article 5. Second, where there is no conflict between [U.S. U.C.C.] Article 5 and the relevant provision of the UCP or other practice, both apply. Third practice provisions incorporated in a letter of credit will not be effective if they fail to comply with [U.S. U.C.C.] Section 5.013(c) [(Scope)].” U.S. U.C.C. Section 5-103(c) indicates which sections of the statute are nonvariable and states a public policy exception for overbroad exculpatory provisions in the LC. The text of U.S. U.C.C. Article 5 and its Official Comments can be found in the current edition of LC Rules & Laws: Critical Texts (IIBLP Publishing at www.iiblp.org).
3Rule 1.11(b) (Interpretation of these Rules) states: “In these Rules, “standby letter of credit” refers to the type of independent undertaking for which these Rules were intended, whereas “standby” refers to an undertaking subjected to these Rules.”
4Rule 1.01(c) (Scope and Application) states: “An undertaking subject to these Rules may expressly modify or exclude their application.”
5See, for example, the Australian case Griffin Energy Grp. Pty Ltd. v. ICICI Bank Ltd. [2015] NSWSC 87 [Australia], summarised in 2016 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 374, in which three ISP98 standbys for AUD 150 million redefined the ISP98 definition of “banking day” and which resulted in problems for the beneficiary when the expiration date fell on a non-banking day and a required draft was not able to be executed by the deadline in the standby. This drafting exercise resulted in a legal malpractice action against the law firm that drafted the standby in Griffin Energy Group Pty. Ltd. v. Laughland [2016] NSWSC 1057 [Australia], summarised in 2017 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 508.