Article

by Peter Sproston LLM, BSc (Hons), ACIB, MIEx (Grad)

I read with some interest the article on "Negotiation and the law of contracts" written by R. Bose in the April-June 2010 issue of DCInsight. With all due respect I feel obliged to take issue with some of the statements made, in particular the first sentence of the last section viz.

"Consequently, in my view negotiation has nothing to do with financing." This is a striking repudiation of the very essence of negotiation as under stood by most bankers of my acquaintance1.

One will, I believe, find the roots of both the concept and the word itself in the treatment of negotiable instruments2 .

Restricting the focus to letters of credit, bills of exchange (BoE) and shipping documents for the purpose of this response, clearly bills of exchange are by legal definition negotiable instruments. To the extent that BoEs have been superseded by deferred payment L/Cs one could say that such L/Cs can also be the object of negotiation with regard to the shipping documents presented thereunder.

One of the functions of international banks engaged in trade finance is to provide finance to its clients, one element of which is to advance funds under L/Cs by means of negotiating (giving value for, i.e., buying same from the beneficiary) documents which, in the opinion of the paying bank, conform with the terms and conditions of the underlying L/C. Recourse to the beneficiary will generally only obtain to a bank which has not confirmed an L/C 3 , e.g., if the negotiating bank were other than the advising and/or confirming bank, in which case it might well obtain recourse on the beneficiary by mutual agreement or otherwise4 .

To confuse the basic service made available by banks to finance L/C business as outlined above with "performance" or "compliance" with an L/C serves only to obfuscate. Performance as a concept is probably more properly restricted to the underlying contractual obligations of buyer and seller which, as UCP makes very clear, are separate and different from the UCP framework and the process of obtaining payment as consideration for the presentation of compliant documents under an L/C.

Whilst acknowledging that all parties involved in the L/C processing chain are required to "perform", i.e., execute certain acts or fulfil given tasks, this is not the same as the act of advancing, or promising to advance, funds to the beneficiary by a bank "negotiating" a draft and/or documents at the beneficiary's behest.

Another statement made by Mr Bose, i.e., "5. By confirming a credit, a confirming bank steps into the shoes of the issuing bank" is quite simply wrong. The confirming bank's payment under taking, if given, is in addition to, and not in replacement of, that implicit in the issuing bank's decision to issue an irrevocable L/C. Nothing any other bank in the L/C chain does, or fails to do, obviates or voids the issuing bank's ultimate payment obligation in the event that com pliant documents are presented in accordance with its instructions.

It is my personal opinion that ICC should expunge all reference to bills of exchange from UCP and indeed expressly forbid their use. In part, this is because such bills are rarely, if ever, accepted by the drawee and thus lose their efficacy as a means of obtaining, or securing, non-recourse payment for the beneficiary/drawee5. Because an accepted Bill of Exchange represents an abs tract (i.e. separate from and in addition to the L/C) means of payment, it both detracts from and competes with the L/C as the sole means of providing payment to the beneficiary.

Whilst I can understand and sympathize with Mr Bose's desire to eliminate "negotiation" as a function, term and concept from UCP, he does the trade finance community no favours by proposing a definition of the term which fails to impart its true source and purpose.

Peter Sproston's e-mail is sproston@bluewin.ch

1. Refer to M. Bridge, The International Sale of Goods Law & Practice, 1st ed. 1999 (oxford University Press), Art. 6.12 for an example of negotiation (of a bill of exchange).

2. Refer to Chitty on Contracts, Vol. i, 29th ed. 2004 (Sweet & Maxwell, London), Art. 19-084 for a definition of negotiable instruments.

3. Drawee could exclude this and mark the bill "without recourse" as per Bills of Exchange Act 1882, s 16 (1).

4. Refer to R. Jack, Documentary Credits, 2nd ed. 1999 (Butterworths) Art. 7.9 ff on this topic.

5. Bills of Exchange Act 1882, s 55