Article

by Glenn Ransier

The heading of this article is sure to illicit some conversation. What comparisons are there between trade professionals and lawyers to substantiate such a title? Let’s first consider the role of a lawyer. Dictionary.net defines a lawyer as "One versed in the laws, or a practitioner of law; one whose profession is to conduct lawsuits for clients, or to advise as to prosecution or defense of lawsuits, or as to legal rights and obligations in other matters (emphasis added)." Surely this definition does not define the role and responsibilities assigned to a day-to-day letter of credit/guarantee (undertakings) trade professional. Trade professionals do not usually have as a goal to have knowledge of local laws - or do they? Generally, trade professionals’ skills assessments and goals are more aligned to knowledge of known international rule sets (rules) such as the UCP or URDG (as they relate to undertakings issued, etc.) or SWIFT rules, adherence to internal policies, etc.

However, consideration must be given to the following questions: does knowledge of the "rules" provide -
a) the best approach for all situations that arise in day-to-day operations?
b) the complete knowledge needed to draft trade undertakings or examine documents, etc., in a comprehensive manner?
c) tips on the best approach to deal with a special, non-everyday client or industry requests?
d) a best course of action when all the parties related to a particular undertaking are purely domestic rather than international?
e) a provision that if all the rules were followed, a party will always avoid litigation?
f ) help when a country seizes documents and/or refuses payments in order to comply with a particular country's compliance regulations?
g) consistent responses among trade practitioners?

The answer, sadly, is no. Moreover, adherence to the rules does not always protect parties from fraud. So what fills the knowledge gap for a trade practitioner when he/she follows all the known rules but that isn't enough? The answer, in part, is that person's knowledge of the laws in his own country and abroad.

Consider the analysis and conclusions of the following ICC Opinions relating to undertakings:

- Official Opinion R 394 (2000/01) where a letter of credit was issued but the issuance itself was contrary to local laws. The ICC Opinion states, in part: "The question as to whether this credit was validly issued [emphasis added) and whether the beneficiary is entitled to any form of compensation is one that cannot be answered by the UCP. The answer lies in the local legal requirements for the issuing bank (emphasis added] in its role as issuer, or in the requirements in respect of the goods for which the issuance has been made." or

- Official Opinion R 385 (2000/01), which states in part: "An issuing bank is perfectly at liberty to issue their letters of credit which are subject to the UCP 500 and to matters not governed therein, to the laws of the country of issuance." [emphasis added] or

- Official Opinion R 264 (1997) which states in part: "The legitimacy of the documentation is not an issue that can be considered by the ICC Banking Commission. It is an issue for each individual bank in conjunction with the laws of the country in which they operate" [emphasis added]

These opinions alert trade practitioners to the fact that knowledge of only the rules is insufficient and that there is a need to know and implement local law in everyday practices and policies/procedures. However, do legal professionals write and/or review each bank's trade procedures? Do those same legal professionals review each undertaking issued or provide a second or third review of documents presented for payment against each undertaking issued? The response is typically "no". These day-to-day issuance/ examination decisions are generally left to trade professionals. Typically, legal professionals only become involved when a transaction is challenged and then only when challenged by a legal response or suit.

Examples

Consider some of these typical examples. You are drafting an undertaking requested to be subject to any of the internationally recognized rules. When creating an undertaking, suppose the issuing parties take differing approaches, such as:

1. follow the logic that the client knows what he is doing and issue the undertaking exactly as requested; or

2. issue it substantially in the form in which it's requested, making adjustments based on policies, local laws and individual knowledge; or

3. issue it only in one of the bank's approved formats. Any deviation must be sent to a manager for approval; or

4. If it is a guarantee or standby undertaking, give it to the legal professionals to draft; if it is a UCP related letter of credit, issue it in accordance/substantially in accordance with bank policies.

In numbers 2 and possibly 3 above, decisions must be made and, more often than not, trade professionals make them. In a perfect world, a clear, concise workable undertaking would be issued, all parties would have a clear understanding of their roles and expectations and a predictable outcome would be achieved. In our imperfect world, where individual knowledge differs - the undertaking's language may differ from the preparer's native language or the issuer's inability to find a suitable standard that satisfies all industries and/or clients, etc. - will have resulted in the issuer's finding itself in a difficult situation.

Some examples include a 2000 US lawsuit - Nissho Iwai Europe versus Korea First Bank (No. 600891/2000) (N.Y. Sup. Ct. 27 October 2000), where an issuer believed it had limited its undertaking to USD 11,500,000.00, but the court disagreed and awarded USD 150,000,000.00 to the beneficiary - and a Singapore case - Mizuho Corporate Bank versus Cho Hung Bank (2004) SLR 67 (High Court of Singapore) - where the question was whether letter of credit clauses typical to the oil and gas industries allowed the undertaking to be overdrawn.

Or take another example. You may be reviewing documents against an undertaking in which you are a nominated bank. Per the UCP rules, the document examination may be handled in accordance with "international standard banking practice". Suppose that after your payment or commitment to pay was provided, you received a document refusal message from the undertaking's issuer. Would/should that refusal notice prompt immediate attention by a legal professional? One would need to determine who has the better experience with regard to international standard banking practice - the legal professional who's trained and well-versed on the country's laws or the trade professional who must apply these standards on a daily basis.

Let us assume that when all of these undertakings were drafted or documents examined, whether by lawyers or trade professionals, all parties believed they had acted in accordance with international standard banking practice and their local laws.

Unexpected results

In any of these cases, issuers need to consider if it is financially viable to have legal professionals involved in a majority of the questions related to undertakings. For having a legal professional follow the rules and local laws does not provide an ironclad guarantee that a legal issue will be avoided and, if the dispute makes it to trial, that the court will not always provide an expected outcome. This was the case in the English court decision in BNP Paribas v. Banco Santander (2000) 1 All ER (Comm) 776 [England]), where a confirming bank discounted a deferred payment after receiving a message of documentary compliance from the issuing bank.

Unbeknownst to the confirming bank, the shipment was a fraud. While I believe it is/was a standard established practice to discount/prepay a deferred payment, it apparently had not been adequately documented at the time of this particular case, and the courts in England held that the confirming bank that had prepaid prior to maturity was responsible for the loss, because it had performed a task that was "outside" of international standard banking practice. This case, I believe, prompted some of the revisions to UCP 600. Even prior to UCP 600's entering into effect, a variety of trade professionals changed their policies as a result of it. Following the Santander case, some parties involved in court cases having similar circumstances attempted to move their trial to the United States, where differing laws could result in a different decision

Differing interpretations

There are many examples of non-standard issuance and/or differing opinion/interpretations. As is the case with lawyers, many trade professionals attempt to provide advice, and generally they prefer to err on the side of caution. Moreover, trade professionals and lawyers often act similarly in becoming too focused on protection and not always appreciating that there are business rewards that offset potential risks. It is a delicate balance, since it only takes one incorrect assumption to result in a significant loss.

If one attends a session of the ICC Banking Commission meeting where ICC opinions are discussed and debated, he will witness both legal professionals and trade finance professionals acting as Philadelphia Lawyers*. ICC opinions, DOCDEX decisions and international court cases confirm that not all standards are readily understood or applied in a consistent way, nor are there rules/standard practices that cover every possible situation. Often when disputes over undertakings make it to court, there is a need to hire expert witnesses to testify for or against the plaintiff/defendant. These witnesses are often non-legal trade professionals brought in to provide their expert testimony on what standard international banking practice is with regard to a particular undertaking. The party that provides the most reasonable, justified response to the court can win the case.

These issues and others mandate that trade practitioners have a sound knowledge of the rules as well as the ability to interpret and provide reasonable judgments concerning the impact of applicable laws. Everyone needs to understand that often laws overrule the rules/standard banking practice. For these reasons, I maintain that trade professionals need to practise law without a licence.

Glenn Ransier is the Trade Finance Operations Manager for ABN-AMRO Capital USA LLC in New York. He is the author of A Drafter’s Notes to URDG 758 and a memberof the ICC Demand Guarantee Task Force and the BAFT-IFSA National Commercial L/C Committee. His e-mail is glennransier@loc.cc.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of ABN-AMRO, its affiliates or its employees.

*Philadelphia Lawyer, a lawyer knowledgeable about the most detailed and minute points of law, especially one with an exceptional propensity and ability to exploit fine technical points of law for the client's advantage.