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Introduction

A documentary letter of credit is a letter from an issuing bank which promises payment on the presentation of stipulated documents by a seller of goods. The letter of credit is opened by the issuing bank on the request of the buyer of the goods. It is widely used in international trade, and has been described as 'the life blood of international commerce'.1 It helps reconcile the opposite interests of distant parties that can hardly evaluate with accuracy the reliability of the party they deal with.

While the buyer typically fears it will not receive the goods it bargained for and will want to inspect the goods before effecting payment, the seller fears the buyer's default. The letter of credit is a reliable response to these concerns as it acts as a guarantee of payment to the seller, and leads the issuing bank to examine documents that most likely prove that the proper goods were shipped.

The letter of credit is essentially independent from the underlying contract of sale of goods, as the bank's obligation to pay arises on the presentation of conforming documents, and not on the inspection of the goods.2 It is only where the contract of sale indicates that the Uniform Customs and Practice for Documentary Credits (the 'UCP') apply to the letter of credit to be issued that the UCP will effectively apply.3 Most of the letters of credit issued today are governed by UCP 600, the newest version of the UCP rules developed by the ICC, which became effective in July 2007. These rules aim to codify '"international banking practices, as well as to facilitate and standardize developing practices" for the trade finance community'.4

The underlying contract of sale is generally governed by a different set of rules, either chosen by the parties if specified in the contract or determined by the applicable conflict of laws rules.5 Another relevant set of rules developed by the ICC are its Rules for Documentary Instruments Dispute Resolution Expertise (the 'DOCDEX Rules'), the newest version of which entered into force in May 2015. The DOCDEX Rules provide a dispute resolution procedure for parties to letters of credit and other trade finance instruments, whereby a panel of three experts renders a decision on the dispute arising out of the instrument in question.6

Based on a review of recent ICC cases7 dealing with letters of credit, this article identifies issues that may arise throughout the life of a commercial relationship, from the conclusion of the underlying contract of sale to the delivery of the goods and payment by the issuing bank honouring a complying presentation of documents. In Part I, the article deals with issues arising with the opening of the letter of credit under the terms of the underlying contract of sale. In Part II, it deals with issues arising out of the interaction between letters of credit and the underlying contract of sale.

I. Obligation to open the letter of credit under the underlying contract of sale

The letter of credit transaction only starts when a buyer and a seller include in their contract of sale a stipulation that a payment shall be made through a documentary letter of credit or other statement to this effect.8 Considering that the credit is only enforceable against the issuer 'as of the time it issues the credit',9 the issuance of the letter of credit is itself effectively governed by the underlying contract of sale.

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It is the buyer's obligation to request that its bank open a letter of credit in favour of the seller pursuant to the terms of the application, which gives a full description of the documents that will provide adequate evidence of the seller's compliance with the contract of sale.10 The buyer will usually execute this obligation through a bank in its own country.11 Until a bank has provided a letter of credit to the seller following the application of the buyer, the seller customarily has no obligation to perform its contractual obligation.12

The law governing the underlying contract of sale depends on the choice of law made by the parties, if they have expressed any. The parties might have chosen the United Nations Convention on Contracts for the International Sales of Good (the 'CISG') as governing law. Where the parties instead elected the law of a state, the CISG might still apply if their choice is the law of one of the 83 Contracting States13 to the CISG. Where the parties have not chosen any applicable law, the CISG applies where the parties have places of business in Contracting States to the CISG, or when the rules of private international law lead to the application of the law of a Contracting State.14 As mentioned, the law applicable to the contract of sale is generally different from the law applicable to the letter of credit, which is UCP 600 in most cases.

The parties normally benefit from specifying the requirements of the credit in the terms of the contract, such as its recoverability, the dates at which it must be issued and its currency requirements.15 However, it is common to see contracts that specify simply that the payment is to be effected through an irrevocable letter of credit in favour of the seller. This raises the issue of (A) the moment at which the credit must be opened. Other issues raised by the issuance of the letter of credit are (B) whether the contract of sale can be avoided by the seller where the buyer fails to open the credit, and (C) whether damages related to a currency devaluation can be recovered where they were caused by a delay in issuing the credit.

A. Opening the letter of credit where the contract of sale does not determine when it should be opened

ICC case 1332316 provides an example of how an arbitral tribunal may deal with a case where the parties did not determine in the contract of sale of industrial equipment when the letter of credit should be operable. The applicable law was the law of a West Asian country that was not a party to the CISG. Lacking both relevant local case law and specific literature on the issue at stake, the tribunal decided to rely on the most common practice and principles known to it and reflected in case law from elsewhere, including England, to determine when the letter of credit had to be opened.

The tribunal first looked at the widely cited case Ian Stach Ltd v. Baker Bosly Ltd,17 rendered by the High Court of England, which stated that where the parties did not agree on a date when the letter of credit should be opened, the letter of credit should be open not later than the earliest shipping date. The decision was justified on the basis of the certainty it would bring to a very common commercial contract. The tribunal then considered another case, Plasticmoda Societa per Azioni v. Davidson,18 where it was decided that the letter of credit should have been opened a reasonable time before the earliest shipping day. Certain scholars did not approve of this decision, arguing that such a result would be acceptable only if the contract price also included transportation costs to the harbour, as any other result would be inconsistent with the purpose of the letter of credit, which is to guarantee payment for the goods delivered.

The tribunal followed the court's reasoning in the Plasticmoda case and determined that the letter of credit should have been operable by the date on which the first shipping of industrial equipment was expected to be ready for transport, which it considered to be a 'reasonable time' before the first shipping day.

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This result is satisfying in that the ambition of the letter of credit is not only to guarantee payment for the goods once they are delivered, but also to ensure that the seller has the certainty that it will be paid before it dispatches the goods for shipment if it makes a complying presentation of documents.19 The letter of credit should encourage sellers to enter transactions with international buyers they might not know and on whose creditworthiness they might have no information. It is only if letters of credit are open sufficiently early that they can play their role as the backbone of international commerce, although they might not have to be opened as early as suggested by one of the arbitrators in the aforementioned case.

According to this arbitrator, the seller was entitled to expect that the letter of credit would be opened before it began production, but more importantly before the performance of its obligations, so as to be certain of receiving payment as consideration for its performance. Particularly in the context of the delivery of customized goods that can hardly be resold to a different buyer, it would be sensible business practice to ask that the letter of credit be opened before the seller starts production.

B. Breaches of the underlying contract of sale in relation to the opening of the letter of credit

ICC case 1914920 helps explain the nature of the obligation to open a letter of credit when it is stated in a contract of sale governed by the CISG. The contract of sale provided as follows concerning the moment at which the letter of credit had to be opened:

14. Deadline for L/C opening

The documentary credit will be at seller's disposal fully operative and in full-compliance with the contract terms latest by the 13th July 2012.

If the L/C is not opened within the date indicated above the seller has the right to:

a) either extending the shipment period by one day for each day of delay in providing seller with a fully operative documentary credit without paying any late shipment penalty.

b) or declaring the buyer in default and thus canceling this sale contract.

The buyer approached several banks but was uniformly refused letters of credit because of the economic upheaval faced by its country, causing banks to tighten their financing conditions especially, as here, where a buyer had to finance the purchase of goods under a contract.

The obligation to open the letter of credit pursuant to Clause 14 of the contract was contemplated by the tribunal as being an obligation of result, and not an obligation of means. Failure to open the letter was equated with a failure to pay the purchase price on time and in accordance with the method contractually agreed upon, which amounted to a breach of Article 53 of the CISG:

The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention.

The opening of the letter of credit pursuant to Clause 14 was not, however, a resolutory condition of the contract of sale. Rather, the contract of sale gave the seller the option either to extend the deadline for the opening of the letter of credit (which was done for a certain period of time) or to cancel the contract (which it finally did).

The buyer's confirmation that it would never open the letter of credit entitled the seller to avoid its obligations under the contract of sale, through the combined operation of paragraphs (1) and (3) of Article 72 of the CISG and the definition of 'fundamental breach' in Article 25 of the CISG. Indeed, it was clear that the buyer would commit a fundamental breach of the contract prior to the performance of the contract.

The obligation to open a letter of credit on time is one of result, but defaulting on such obligation by delaying the opening of the letter of credit might be condoned implicitly and the time limit to establish such credit extended where the seller requests the buyer to carry out amendments to the letter of credit after it has been opened.21 Such implicit waiver was given in ICC case 14823,22 where the question was then whether the buyer had the obligation to carry out all the amendments to the letter of credit sought by the seller.

More specifically, the arbitral tribunal had to determine whether, by not carrying out certain amendments requested by the seller, the buyer had breached the contract of sale, thereby allowing the seller to avoid its obligations. Clause 6.1 of the contract of sale read as follows:

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6.1 Unless agreed otherwise, financial arrangements shall be made … in irrevocable without recourse to the drawer's Letter of Credit (LC), governed by Uniform Customs and Practices for Documentary Credits (as applicable on date of opening of LC conforming to SELLER's standard format) …

The arbitral tribunal considered that at no stage had the buyer stated that the amendments sought by the seller were either not in compliance with the UCP or the seller's standard format. Consequently, the buyer had failed to comply with Clause 5.1, which clearly stipulated that unless financial arrangements were made by the buyer as per Clause 6 the seller would not be obliged to supply the cargo to the buyer. The seller was also entitled to the amount of a bank guarantee given on behalf of the buyer in the event the financial arrangements were not made by the buyer within the agreed time.

The obligation to open the letter of credit must not be confused with the requirement to obtain confirmation of the letter of credit. In ICC case 1864323 the credit was opened in due time and covered the agreed time of shipment, but the bank nominated in the contract of sale, and shown in the letter of credit as being the paying bank, refused confirmation. The bank explained the refusal as being for 'internal security reasons'.

The arbitral tribunal then had to decide whether the failure of the paying bank to confirm the letter of credit was capable of rendering the performance of the buyer's payment obligation under Article 54 of the CISG in breach of the contract of sale, considering that the contract was not specific with respect to this obligation. Article 54 of the CISG reads as follows:

The buyer's obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made.

The arbitral tribunal found that Article 54 does not require the buyer to undertake that its efforts will result in the issuance of the letter of credit - though it could do so, as was the case in ICC case 19149, discussed above - or obtain confirmation of the letter of credit already issued. The literal interpretation of Article 54 leads to the conclusion that the obligation to procure confirmation is an obligation of means and not an obligation of result. Furthermore, it was noted that the confirming bank was entirely a choice of the seller, that the buyer could not have guaranteed that the confirming bank would confirm the credit, and that the bank's stated reason for refusal could hardly have been attributed to the buyer and was clearly beyond its control.

C. Damages related to currency devaluation

Some of the risks faced by parties entering into international contracts of sale are related to exchange rates and currency control laws of a particular country banning or restricting the amount of foreign currency that can be traded or purchased. The latter risk can be dealt with in the letter of credit by providing for confirmation of the documentary credit by a bank outside the country that enforces the currency control laws.24 However, documentary credit can hardly be said to provide any protection against exchange rate movement. Other instruments are more appropriate to deal with this risk, notably forward exchange contracts and currency exchange options.25

It is somewhat surprising that the arbitral tribunal in ICC case 13323, which we have already discussed, found that the delay in the opening of the letter of credit entitled the seller to damages relating to a devaluation of the US dollar that occurred during that period, notably because one of the clauses of the contract aimed to protect the seller against the currency risk by imposing on the buyer the obligation to have the letter of credit opened as soon as possible. This clause read as follows:

6.3. The Supplier shall have right to exchange the total value of the L/C amount in Euro at the time of negotiating the documents by accepting the exchange rate.

The seller submitted that the buyer must have been aware of the seller's intention to convert the total value of the amount from US dollars (the currency of the contract) to euros (the currency of the seller) as it was expressly mentioned at Article 6.3 in the contract of sale that the US dollars could be immediately exchanged.

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Taking into account the declaration of the supplier`s commercial manager, and considering that the clause was drafted by laymen without legal assistance, the arbitral tribunal read into Article 6.3 that the parties' intention was to protect the seller against the currency risk by imposing on the buyer the duty to minimize the time elapsing between the conclusion of the contract of sale and the opening of the letter of credit:

An open Letter of Credit (i) would have allowed [Seller] to protect itself against losses arising from the diminishing of the contract currency and (ii) when all documents would be available, [Seller] could have asked the issuing bank to be paid in Euro. 26

Furthermore, referring to doctrine on the CISG, the arbitral tribunal concluded that the damages related to the devaluation of the US dollar were direct and certain, and thus recoverable under the applicable law. The concept of certainty of loss was said to somehow correspond to the concept of foreseeability under the CISG. According to the commentary on the CISG by Schlechtriem/Schwenzer,27 the seller is normally entitled to request damages resulting from the devaluation of a currency because such risk is foreseeable from the moment the contract price must be paid in a foreign currency.

This decision sends the message to the parties of international contracts of sale that they can obtain protection against devaluation of currency by requesting that the buyer opens the letter of credit within a limited amount of time, even though other tools - perhaps more expensive - are available to counter such risk. Clauses requiring such protection should be clear as to the time within which the letter of credit should be opened and explicit as to the entitlement of the seller to damages if the buyer does not comply with the time limit agreed upon. It would not be sensible to have the risk of a currency devaluation rest with the buyer for the period of time preceding the moment the buyer should open the credit, as it could discourage the buyer from participating in transactions involving a different currency from that used by the seller.

II. Interaction between the letter of credit and the underlying contract of sale

Once the letter of credit has been issued in accordance with the terms of the contract of sale - the issuing bank then being irrevocably bound to honour the seller's presentation of complying documents28 - the seller prepares the documents it must present to the issuing bank, or some other bank nominated by the issuing bank, in order to satisfy the credit's documentary conditions.29 The seller presents the documents to the issuer through the bank where the credit is to be available.30 The bank document-examiners then examine the documents to determine whether or not the documents appear on their face to constitute a complying presentation, and in doing so refer to international standard banking practices.31 The seller must present the documents early enough to be able to correct any discrepancies and re-present modified documents before the latest presentation deadline for transport documents.32

When the issuing bank refuses to honour a presentation of documents, it must give notice of each discrepancy justifying its refusal within five days following receipt of the documents; otherwise it will be precluded from claiming that the documents do not constitute a valid presentation.33 Once either the issuing or nominated bank honours the presentation of documents, the credit is made available to the seller. In the case where the nominated bank honours the presentation, it is entitled to reimbursement from the issuing bank.34 At no point can the buyer, who initially applied to the issuing bank to open the credit, interfere with the bank's undertaking to honour the presentation of documents under the credit by arguing, for example, that the seller did not fulfil its obligations under the contract of sale. The credit is a different [Page114:] transaction from the sale,35 and the bank deals only with documents.36 It does not examine goods or investigate the underlying sales contract.37

This technical description of the process through which the seller is paid under the letter of credit highlights the way the interests of the seller and of the buyer are protected. First, the fact that the documents presented by the seller to the issuing bank must strictly comply with the description found in the letter of credit provides protection to the buyer in that it minimizes the risk of non-conforming goods being shipped by the seller.38 Second, the letter of credit provides the seller that presents conforming documents with 'an irrevocable and unconditional entitlement to be paid, irrespective of the state and nature of the goods actually sent',39 unless an independent agency's inspection certificate confirming the quality of the goods sent has to be included among the presented documents.

The second part of this article deals with certain issues arising out of the balance the letter of credit aims to strike between the divergent interests of the buyer and the seller and of the inevitable interaction between the letter of credit and the underlying contract of sale, notably (A) the way the rule of strict compliance is dealt with under UCP 600 (effective as of July 2007) and how non-compliance of documents can lead to a breach of the contract of sale, and (B) the obligations that the buyer has under the contract of sale to amend the letter of credit or waive discrepancies in order to allow the letter of credit to fulfil its purpose.

A. Strict compliance and breach of the underlying contract of sale

The strict compliance rule which requires tendered documents to be in strict conformity with the terms of the credit has its roots in Articles 4 and 5 of UCP 600 and is essentially explained by two justifications.40 First, if the bank were required to decide which documents fulfil the underlying commercial purposes of the transaction, it would have to be familiar with the commercial practices and terminologies employed by the parties, which are not its concern.41 Second, considering that the bank acts as agent of the buyer, were the bank to exceed its mandate by either wrongfully dishonouring documents or accepting documents that do not conform to the terms of the credit, it might forfeit its right to reimbursement and potentially engage its liability for damages suffered subsequently by the seller or the buyer.42

A strict compliance rule opening the door to more practical functionality43 might give more comfort to banks 'as their tolerance for error with respect to wrongful dishonour'44 would be greatly expanded, but would potentially strike at the heart of the objective of protection of the buyer under a letter of credit transaction.45 Similarly, if insignificant discrepancies are disregarded by the examining bank and the revision of the documents is centered on whether the documents meet the overall intent and expectations of the parties,46 it might shift the balance of protection provided by the letter of credit away from the buyer. The latter would find it more difficult to avoid its obligations under the contract of sale by invoking a breach by the seller for presenting discrepant documents.

1. Evolution of the strict compliance rule towards greater practical functionality

An often-cited passage of the Equitable Trust47 case summarizes the classical common law approach to the strict compliance rule:

It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is no room for the documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. The bank's branch abroad, which knows nothing officially of the details of the [Page115:] transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk.

Article 13(a) of UCP 50048 was in contrast with the common law position and provided that the documents have to comply with the terms and conditions of the credit on their face and that such conformity should be determined by international standard banking practice. Referring to the international standard banking practice might prescribe 'the standard of a reasonably knowledgeable and diligent bank documents checker'.49 Consistent with such standard would be to consider that 'a minor deviation of a clerical, typographical nature will, generally, not justify dishonour'.50 UCP 600, in particular with the additions brought by Article 14, contrasts even more with the common law position.

Article 14(d) of UCP 600 states as follows:

Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.

The UCP Drafting Group, in its Commentary, mentioned that the condition that data must 'not conflict' is narrower than the wording of the previous corresponding provision and 'would require banks to make a determination "based on the compliance of the data itself"'.51 The changes brought by the adoption of UCP 600 are said to have been motivated by the high number of letter of credit rejections caused by non-conforming documents52 and by the hope of reducing this number by adopting a more '"practice oriented" view with respect to typographical errors'.53

The review of the ICC cases conducted for this article can hardly help us answer the question as to whether the new rules introduced by UCP 600 effectively 'reoriented the standard of document review, eschewing "rigid formalism" in favour of "functional" compliance'.54 Indeed, the discrepancies in issue were serious, and it was obvious that the bank could reject the documents.

In ICC case 1782455 the bank rejected the documents owing to multiple discrepancies, including the absence of a signature on the non-negotiable copies of the bills of lading; insufficient details in the inspection certificate; the absence of any shipment advice; and the absence of any reference to the quantity shipped on the master's agent's certificate and the shipper's certificate. The arbitral tribunal rightfully rejected the seller's arguments that these discrepancies were 'minor', 'technical' and 'trivial in nature', and that the substantial performance of the seller's obligations under the contract of sale excused them from these 'venial faults'.56 Accepting these arguments would have amounted to violating both the strict compliance rule and the independence principle. Interestingly, the seller made the argument that the independence principle allowed a seller that had accepted a letter of credit in payment to seek separate payment directly from the buyer as the letter and the contract were two separate transactions. The arbitral tribunal correctly concluded that by so arguing the seller 'turns this principle on its head'.57

In ICC case 1388958 the arbitral tribunal considered that there was no issue in relation to any discrepancy because of the total absence of either an acceptance certificate signed by the buyer or a compliance certificate delivered by a third party, which, together with an invoice, could have released the payment.

In ICC Case 1400559 the bank correctly refused to honour the letter of credit, considering that the amount in the invoice was lower than the 5% tolerance allowed by the terms of the letter of credit.

While these ICC cases did not really challenge the interpretation of compliance that could be made with respect to Article 14 of UCP 600, a decision recently rendered by the French Court of [Page116:] Cassation60 might provide an indication that the UCP now allows courts to embrace a functional approach to discrepancies in the presentation of documents. In this case a bank did not allow the seller to draw down on a standby letter of credit because the seller presented unpaid invoices that were allegedly non-complying because they confirmed the delivery of only 'vegetable oil', while the letter of credit required the invoice to confirm the delivery of 'Fana food products (vegetable oil, sardines, pasta and double concentrated tomato puree)'. The court stated that it is allowed to refer to the context in which the letter of credit was issued - but not the context in which the contract of sale was concluded, as it would otherwise violate the independence principle - to conclude that the listing of the products in the letter of credit was meant to be exhaustive, but not cumulative, and that the guarantee dealt with all or some of these products. Accordingly, the seller was allowed to draw down the standby letter of credit.

2. Discrepant documents amounting to fundamental breach of the underlying contract of sale

Even though the contract of sale and the letter of credit are two independent transactions, the failure to comply with the terms of the letter of credit could amount to a fundamental breach of the underlying contract of sale that would allow the buyer to avoid its obligations.61 In international contracts of sale involving letters of credit governed by the UCP, the presentation of non-conforming documents may give rise to a fundamental breach within the meaning of Article 25 of the CISG if, as a result, the bank would refuse to pay the price for the goods.62

The interplay between the UCP and the CISG was of particular interest in ICC case 17824,63 where the buyer was entitled to avoid its obligations under the contract after the defective presentation of documents. Since the seller failed to deliver conforming documents under the letter of credit, and the credit was considered to subsume a separate agreement by the buyer to pay the seller, the seller could not seek payment directly from the buyer.64

B. Obligation to amend the letter of credit and the duty of good faith

The interaction between the letter of credit and the contract of sale is apparent where there is an obligation of good faith in the contract of sale or in the applicable law governing the contract. Such obligation could force the buyer either to amend the letter of credit so as to meet the demands of the seller that wants to make sure it will be able to comply with its obligations under the letter of credit, or to waive discrepancies that would not amount to a fundamental breach of the underlying contract of sale.

When the issuing bank determines that a presentation does not comply, it may in its sole judgment approach the buyer for a waiver of discrepancies.65 Normally, if the buyer receives delivery of the goods and there are only minor discrepancies, it will have no interest in denying the waiver.66 Waiving such discrepancies would be consistent with the principle of good faith that underlies the CISG.67

Such an obligation of good faith can also be found in the 1994 UNIDROIT Principles of International Commercial Sales Contracts, which were referred to in ICC case 14633.68 Here, the contract of sale provided for the application of these Principles as a subsidiary source of legal rules. The seller had submitted a rail waybill that was different from that required under the terms of the letter of credit. The seller qualified this difference as being only a technical discrepancy,69 and urged the buyer to send a message to the issuing bank that the alleged discrepancy was to be considered waived, or to agree to an amendment of the letter of credit that would have had the effect of confirming the rail waybill's compliance. The [Page117:] arbitral tribunal found two reasons justifying the buyer's obligation to amend the letter of credit upon the seller's reasonable request. First, the payment clause in the contract provided that the letter of credit had to be fully workable and acceptable to the seller. The arbitral tribunal found that such a clause required the buyer to comply with the seller's requests to amend the letter of credit where it would have the effect of making this method of payment functional. Second, it was stated that even if the contractual language had been less explicit, the buyer would have been required to comply with the seller's request by virtue of principles of good faith and fair dealing, as enshrined in the UNIDROIT Principles. The arbitral tribunal concluded that the buyer's refusal to amend the letter of credit amounted to both a breach of contract and a violation of its duty of good faith, which allowed the seller to terminate the contract of sale.

The termination of the contract of sale for fundamental breach was also at stake in ICC case 14005,70 where the issuing bank had refused to honour the letter of credit, considering that the invoice presented by the seller was for an amount lower than the 5% tolerance threshold allowed by the letter of credit. While the arbitral tribunal stated that the bank was entitled to refuse the presentation of the documents on the basis of the strict compliance rule, it concluded that the discrepancy did not amount to a fundamental breach, as defined in Article 25 of the CISG, of the contract of sale and a reasonable person would not have foreseen this discrepancy as a defined detriment. Considering that the seller did not breach the contract, the buyer remained obliged to take delivery of the goods and pay for them. In fact, after the bank rejected the documents, both parties should have continued to perform their contractual obligations, and the principle of good faith required the buyer to either waive the discrepancy or amend the letter of credit.

Conversely, the buyer in ICC case 1388971 did not have an obligation to sign a certificate of acceptance that would have allowed the seller to draw on the letter of credit. Even though the buyer had an obligation to pay the price of the goods and take delivery of them under the contract of sale as per Article 53 of the CISG, the arbitral tribunal found that the equipment failed to fulfil the contractual requirements. The seller was therefore not entitled to claim for payment directly under the contract of sale.

Conclusion

The letter of credit becomes attractive as a risk mitigation and financing tool if documentary credit practices are perceived as predictable and consistent.72 The UCP, as a codification of international banking practices, help the letter of credit to realize its ambitions. UCP 600, which introduces a new approach of practical functionality with respect to discrepancies, might help to reduce the number of letter of credit rejections caused by non-conforming documents. As such, it helps to give the letter of credit a renewed impetus, while providing assurance to parties to international contracts of sale that they are protected if the party they are dealing with defaults on its obligations under either the letter of credit or the underlying contract of sale.

1
T. Al-Tawil, 'Letters of Credit and Contract of Sale: Autonomy and Fraud' (2013) 16 International Trade and Business Law Review 159 at 160, citing Donaldson LJ in Intraco Ltd v. Notis Shipping Corporation of Liberia; The Bhoja Trader [1981] 2 Lloyd's Report 256, 257.

2
F. Monteiro, 'Documentary Credits: The Autonomy Principle and the Fraud Exception: A Comparative Analysis of Common Law Approaches and Suggestions for New Zealand' (2007) 13 Auckland University Law Review 144 at 147.

3
R.J. Lee, 'Strict Compliance and the Fraud Exception: Balancing the Interests of Mercantile Traders in the Modern Law of Documentary Credits' (2008) 5 Macquarie Journal of Business Law 137 at 145.

4
J.K. Levit, 'Bottom-up Lawmaking through a Pluralist Lens: the ICC Banking Commission and the Transnational Regulation of Letters of Credit' (2007-2008) 57 Emory Law Journal 1147 at 1171.

5
In Part I, this article deals in more details with the law governing the underlying contract of sale. In particular, it deals with the application of the United Nations Convention on Contracts for the International Sale of Goods (the 'CISG').

6
'Foreword', DOCDEX Rules (ICC Publication 872) at 1.

7
In this article, we are concerned with arbitral awards rendered by the International Court of Arbitration of the ICC. DOCDEX decisions are expert decisions that can be found in other ICC publications.

8
T. Al-Tawil, supra note 1 at 162.

9
ICC Uniform Customs and Practice for Documentary Credits 600, 2007 Revision (Paris: ICC, 2006), Art. 7(b). See also J.S. Wood, 'Drafting Letters of Credit: Basic Issues Under Article 5 of the Uniform Commercial Code, UCP 600, and ISP98' (2008) 125 The Banking Law Journal 103 at 114.

10
W. Baker & J.F. Dolan, Users' Handbook for Documentary Credits under UCP 600 (Paris: ICC, 2008) at 44.

11
R.J. Lee, supra note 3 at 142.

12
Ibid at 147.

13
The states currently party to the Convention are listed on the UNCITRAL website at <http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html>

14
CISG, Art. 1.

15
R.J. Lee, supra note 3 at 141.

16
See hereinafter, page 123.

17
Ian Stach Ltd v. Baker Bosly Ltd, [1958] 2 Q.B. 130.

18
Plasticmoda Societa per Azioni v. Davidson, [1952] 1 Lloyd's Report 527, 528.

19
R.J. Lee, supra note 3 at 137.

20
See hereinafter, page 180.

21
See ICC case 14823 hereinafter, page 147, §§ 79, 80.

22
Ibid.

23
See hereinafter, page 175.

24
W. Baker & J.F. Dolan, supra note 10 at 8.

25
Ibid, at 9.

26
ICC case 13323, § 181.

27
P. Schlechtriem & I. Schwenzer, eds., Commentary on the UN Convention on the International Sales of Goods (CISG) , 2d ed. (Oxford University Press, 2005) at 755.

28
UCP 600, Art. 7(b).

29
W. Baker & J.F. Dolan, supra note 10 at 46.

30
Ibid.

31
UCP 600, Arts. 14(a) and 14(d).

32
W. Baker & J.F. Dolan, supra note 10 at 47.

33
UCP 600, Art. 16.

34
UCP 600, Art. 7(c).

35
UCP 600, Art. 5.

36
Ibid.

37
W. Baker & J.F. Dolan, supra note 10 at 66.

38
R.J. Lee, supra note 3 at 159.

39
Ibid.

40
Al-Tawil, supra note 1 at 178, 179.

41
See also R.J. Lee, supra note 3 at 153, 154.

42
Ibid.

43
J.K. Levit, supra note 4 at 117.

44
N. Manganaro, 'About-Face: The New Rules of Strict Compliance Under The Uniform Customs and Practice for Documentary Credits (UCP 600)' (2011) 14 International Trade and Business Law Review 273 at 275.

45
E.O.I. Adodo, 'Conformity of Presentation Documents and a Rejection Notice in Letters of Credit Litigation: A Tale of Two Doctrines' (2006) 36 Hong Kong Law Journal 309 at 322.

46
J.K. Levit, supra note 4 at 1218.

47
Equitable Trust Company of New York v. Dawson Partners Ltd, (1926) 27 Lloyd's Law Reports 49, cited in R.J. Lee, supra note 3 at 148, and in E.O.I. Adodo, supra note 45 at 313.

48
ICC Uniform Customs and Practice for Documentary Credits 500, 1993 Revision (Paris: ICC, 1992).

49
E.O.I. Adodo, supra note 45 at 315.

50
Ibid.

51
N. Manganaro, supra note 44 at 283, citing Commentary on UCP 600.

52
W.G. Schulze, 'The UCP 600: A New Law Applicable to Documentary Letters of Credit' (2009) 21 South African Mercantile Law Journal 228 at 241.

53
N. Manganaro, supra note 44 at 283.

54
J.K. Levit, supra note 4 at 1218.

55
See hereinafter, page 165.

56
Ibid., § 80.

57
Ibid., § 91.

58
See hereinafter, page 130.

59
See hereinafter, page 133.

60
Commercial Chamber, decision no. 244 of 28 Aug. 2015 (application no. 14-11335).

61
L. Graffi, 'Remarks on Trade Usages and Business Practices in International Sales Law' (2011) 29 Journal of Law and Commerce 273 at 289.

62
Ibid.

63
See hereinafter, page 165.

64
Ibid., §§ 93, 94.

65
UCP 600, Art. 16(b).

66
L. Graffi, supra note 61 at 289.

67
Ibid.

68
See hereinafter, page 142.

69
A rail waybill SMGS was presented instead of a rail waybill CIM. CIM notes are used under the Convention Concerning International Carriage by Rail 1980. SMGS are notes used under the Agreement on International Freight Traffic by Rail. The buyer's country was party to both conventions.

70
See hereinafter, page 133.

71
See hereinafter, page 130.

72
J.K. Levit, supra note 4 at 1169.