Article

Pakistan

In the last couple of decades, the world wide acceptability of letters of credit has grown substantially. One of the main reasons is the certainty that surrounds the interpretation of trade terms used therein and the security of payment. For when a seller is selling its goods across borders, he faces one basic concern: "Will I be paid if I supply the goods as per the contract?" To a great extent, this concern has been removed in UCP 600 by delineating and emphasizing the independence principle. In Pakistan, we appreciate that to allay these concerns and other issues faced by the parties to L/Cs, efforts have been by the world business community to make credit arrangements more certain, secure and independent from underlying contracts.

We also appreciate that independence is the cardinal principle of UCP 600 and is also one of the main factors in propelling commercial letters of credit to the fore front of cross-border- trade. Article 4 of UCP 600 contains the foundation of the principle, and the rest of the rules, particularly articles 5 and 14, develop it further by providing a clear definition of a credit and imposing a corresponding obligation on banks to honour and follow the principle of independence.

Article 4 of says that the credit is a separate transaction from the sale or other contract, that banks are not at all concerned with the contract and that the obligations of banks under the credit are not affected by any other contractual relationships. This article goes further to impose an obligation on the issuing bank to discourage any attempt on the part of the applicant to make copies of under lying contracts an integral part of the credit. Article 5 takes this idea further still and reiterates that in trade using commercial letters of credit, banks deal with documents only and not with goods or services. We also appreciate that though the language of articles 4 and 5 is very simple, their significance and utility is far reaching in the sense that they draw a clear line between the sale and purchase transaction between the parties and the credit arrangements between banks. The combined effect of both of these articles is to place banks under an absolute obligation to make payment if the documents comply with the credit terms; moreover, their obligation to pay is not affected by disputes between the parties arising under the contract regarding the quantity and quality of goods and services.

It is worth mentioning that in most cases, the courts in Pakistan have followed and upheld the autonomy principle and have only ignored it in exceptional cases, such as those in which there is an apparent fraud or a challenge to the validity of the L/C. The Supreme Court of Pakistan, in the famous case Haral Textile Limited vs. Banque Indosuez Belgium S.A & Others (1999 SCMR 591), discussed the autonomy principle in detail and refused to grant an injunc tion to restrain payment under an L/C. The Court held that the effect of an irrevocable letter of credit is to substitute the issuing bank for the buyer as the party that undertakes to buy the shipping documents, and that this undertaking is absolute in the sense that so long as the documents of title to the goods which the seller submits to the bank are in accordance with the terms of the contract, the bank is under an obligation to accept the same regardless of any dispute between the seller and the buyer as to the quality of goods or otherwise. The Court further said that it that only in exceptional cases would it interfere with the irrevocable obligation assumed by banks, since this is the lifeblood of international commerce.

Irfan Munawar Gill Deputy Director (Law), Securities and Exchange Commission of Pakistan (SECP) Islamabad E-mail: irfangill@hotmail.com (The views expressed, including any errors and omissions, are attributable to the writer only and do not reflect in any manner the policies of SECP.)

Spain

I am not going to mention names, though I could. It's just that I am not willing to put myself at odds with some important banks. Apparently, some multinational banks are offering smaller and more local banks the possibility of reissuing, in the country of the beneficiary, documentary credits for imports, so they can reduce their costs of handling. Apart from those possible savings as far as hand ling costs are concerned, the beneficiary receives the documentary credit as if it had been issued by the multinational bank established in the country of the beneficiary. It also seems that even the number of the original credit is maintained.

It is here that my doubts about the legality of this system begin. In fact, operating in this manner appears to offer a single documentary credit involving two different issuing banks but only one beneficiary. For the applicant, the issuing bank is the small local bank. But for the beneficiary, the issuing bank is instead the multinational bank established in its own country.

I am not referring to those cases, perfectly legal and covered by UCP 600, whereby a bank either adds its confirmation or advises the credit or transfers it or even issues documentary credits on behalf of other banks. The operating procedure might become more complicated in cases where the reissuing is done through other banks or nonbanks, such as trading companies that are subsidiaries of multinational banks. Could these trading companies act as nominated banks?

Of course, there can be a reduction in costs for both parties in the practice: for the applicant, because it can enjoy the fees of a multinational bank rather than having to pay the fees of its own small local bank; for the beneficiary, because it has to present the documents to an entity in its own country.

Apart from the question of costs, I'd like to be able to scrutinize these kinds of re-issuances and to know the contracts they consist of. I suspect I would find that these operations fall outside of UCP 600, which does not foresee a documentary credit with two different issuing banks and just one beneficiary.

The fact that the number of the original documentary credit is maintained does not mean that it remains the same credit. As far as I know, the multinational bank or the trading company does not behave as a simple advising party (which might be perfectly acceptable), nor does it act as a silent confirming party (which is a quite normal practice, even if outside the UCP). From what I have heard, the multinational bank reissues the documentary credit. It might be a good idea to clarify this practice.

It might also be that I have not managed to understand it. If it turns out to be a good practice for everyone and we agree to accept it, then it would only be necessary to recognize and regulate it.

Xavier Fornt Professor at ESCI High School of International Trade Barcelona
E-mail: xavier.fornt@prof.esci.es