ICC Digital Library Forum

T.O.,

To say that I find it difficult to accept your (intellectually provocative) assertion that the credit is not a contract is an understatement. If (and its a big 'if', given the subject matter) I can find a moment in the coming days I shall give my reasons.

Jeremy

Dear Radek

Do not worry much about English, as I never intended to criticize that aspect. After all English is not my mother tongue, despite the fact that it has become my mother-brain.

Just few points to make.

1- Covering letter indicating presentation rules does not constitute an amendment to the L/C terms and conditions and does not infer that UCP requirements, especially under article 14 might be amended.

The issuing bank has to perform his duties in accordance with UCP stipulations for which he has committed himself to. The presentation rules contradicting with the spirit of UCP has to be carefully dealt with by the issuing bank in order to protect its interests under the L/C.

2- a stipulation/instructions on the documentary credit schedule may add fuel to the fire. Although you did not raise this issue, however your suggestion to “contain a specific clause in the presenter’s form” may spark imaginative bankers to adopt, by the same analogy, inclusion of rules/clauses in the presentation schedule that later may be considered a discrepancy by the issuing bank or at least will raise contrasting views that may affect timely payment of L/C:

Examples:

a. Although this credit states that it is available by sight payment, we authorize you to effect payment against acceptance 60 days from bill of lading date.
b. These documents are presented under your L/C No. 150/157/2002, in case of any irregularities detected in documents; you are authorized to treat them under collection.
c. Extraneous documents attached hereto are to be returned to us should you desire not to examine them.
d. Please reimburse us in EURO instead of USD.
e. Since the invoice indicates extra amount in excess to that of the credit, you are not to release documents to the applicant unless he provides a letter of guarantee in favour of a beneficiary undertaking to pay the excess amount on first demand. The guarantee should be confirmed by you or by a local bank.

You may say all above is academic or hypothetical, however it constitutes an apparent deviation from the spirit of UCP. Who can stop that, if we start allowing such clauses to appear in the presentation cover letter which in effect inferring alteration to UCP?

Under ISP98 the issue is taken care of with more clarity. Rule 5.06 (c) (i) states:

“IF THE DOCUMENTS ARE FORWARDED OR IF A WAIVER IS SOUGHT:

THE PRESENTER IS PRECLUDED FROM OBJECTING TO THE DISCREPANCIES NOTIFIED TO IT BY THE ISSUER”

This would require from a beneficiary a great deal of discretion to request the nominated bank to forward documents to the issuer seeking applicant’s waiver on the discrepancies. This may turn to ensnare the beneficiary if the issuer or applicant refuses to accept the presentation.

Despite this ISP requires that such “PRESENTATION REMAINS SUBJECT TO THESE RULES UNLESS DEPARTURE FROM THEM IS EXPRESSLY CONSENTED TO BY THE PRESENTER”

And most importantly:

“(i) THE ISSUER IS NOT RELIEVED FROM EXAMINING THE PRESENTATION UNDER THESE RULES.”

“(II) THE ISSUER IS NOT OBLIGATED TO WAIVE THE DISCREPANCY EVEN IF THE APPLICANT WAIVES IT.”

So you can do that under ISP98.

3. Last but not least, if I join the banking profession again, do not be surprised if I accept your proposal, however under a form of irrevocable request that might include statements, covenants, indemnities and other provisions which may satisfy me for doing this job, considering that you are my correspondent bank in the Czech republic. No hurry, we can workout that later.

Best regards

T.O.

My personal opinion is that a DC is like a service contract. There is offer, acceptance and consideration, but acceptance is based on performance.

The banks perform a service by examining presentations in the context of the DC details & the UCP.

OFFER
The offer is made when the DC is opened and advised to the bene. The bene does not have to accept this offer. He can refuse to make presentations against it; he can make counter-offers by requesting amendments.

ACCEPTANCE
The bene indicates acceptance by performance in whole or in part. The performance I refer to is the presentation, not the performance of an underlying contract. This is also reflected in the fact that, in the absence of a prior acceptance of amendments, presentation is acknowledged as acceptance of such amendments, unless refuted by the bene. The absence of presentation during the life of the DC (contract) is an indication of a refusal of acceptance by the bene of the contract.

CONSIDERATION
Consideration is determined by the value of the DC, whether or not partial shipment is allowed, and factors governing the date of payment. The life of the contract is determined by the expiry date.

Laurence

Laurence,

OVERSIMPLICATION IS DANGEROUS

We have already pointed out in our last posting that according to the legal experts the ¡§offer and acceptance¡¨ theory does not work with DC. So for a problem that the legal experts cannot resolve, we do not think we, being not legal experts, can resolve it so easily and readily in the Discussion Forum.

You seem to have fallen into the trap of trying to legalize the DC, which many legal experts and scholars have attempted and failed. We are afraid that your offer, acceptance and consideration explanation is rather superficial and taken too hastily without giving a deep thought over the related side issues.

Let us share with you and Jeremy a page in our handout for this subject for you to re-consider the side issues:

QUOTE

The Offer and Acceptance Theory

The credit is considered as an ¡§offer¡¨ from the issuing bank to the beneficiary. The presentation of documents from the beneficiary is considered as an ¡§acceptance¡¨.

However, as an offer without consideration can be revocable in Common Law, this theory cannot fit in with the irrevocable credits. Although some scholars may argue that the applicant has provided the consideration, however, in the law of England, consideration cannot be provided by a third party.

Preparation for shipment is not an obligation unless the terms and conditions of the credit and the underlying sales contract are matched.

Therefore some scholars argue that the presentation of documents by the beneficiary is by itself a consideration. This doctrine has been reflected by the following cases:

Urquhart Lindsay & Co. Ltd. V Eastern Bank Ltd (1922) 1 KB 318
Dexter Ltd. V Schenker & Co. (1923) 14 Ll L Rep 586
Moss v Old Colony Trust Co. 140 NE 803

The weakness of this theory lies in the fact that, in practice, if the beneficiary presents the discrepant documents, it is not considered as a breach of contract.

UNQUOTE

A DC REMAINS AN OFFER UNTIL PRESENTATION IS MADE

We would also wish to remind you that according to the ¡§offer and acceptance¡¨ theory, the DC is NOT a contract until a presentation is made. Otherwise it remains to be an ¡§offer¡¨ only. An offer is not a contract until it has been accepted.

This supports our opinions that the DC is a bank¡¦s payment undertaking and nothing more. It works both before and after presentation, whether compliant or discrepant.

DC PRACTICES HAVE CONFLICTS WITH LAW OF CONTRACT

If the DC is a contract, then how come it can be cancelled unilaterally by one party in the case of a REVOCABLE credit?

If the REVOCABLE DC is also a contract, then how come the offer can be withdraw unilaterally by one party, the issuing bank?

If the DC is a contract, then how come a REVOLVING credit can be reinstated or terminated by one party alone, the issuing bank?

Frankly speaking, when I was first introduced to DC forty years ago, I also thought that it was a contract. But after many years of studying and after reading all the arguments by legal experts and scholars, I then come to realize that it should not be a contract. It is not right and it is also not possible to legalize a document created by the laymen that may not fit in any of the legal doctrines completely.

We are fully aware that our statement is a shock here and may not be accepted by members who are often told that the DC is a contract, such as in the textbooks. However, it is now time to find out the truth. And it is a very good topic to heat up the Discussion Forum.

www.tolee.com

[edited 2/27/02 2:46:11 PM]

T.O.

ASSUMPTION IS AS DANGEROUS AS OVERSIMPLIFICATION
You have assumed that consideration comes from the applicant. At no point did I suggest that. In fact I did not specifically state that consideration came from the issuing bank, because I thought it was obvious in the context of the issue of any DC.

I have not claimed to be a legal expert, nor have I tried to legalise the DC. In fact the first sentence of my previous posting indicates specifically that it is my opinion. Nothing more;nothing less.

Your statement that " Preparation for shipment is not an obligation unless the terms and conditions of the credit and the underlying sales contract are matched." seems to fly in the face of Article 4.

I do not consider presentation of documents by the bene to be by itself a consideration. Neither do I consider presentation of discrepant documents to be a breach of such contract. If you read my previous posting carefully, you will note that I consider the contract only to be established upon performance by the bene. If the bene presents discrepant documents, he has not performed, i.e. there is no contractual relationship with the bank. Let me give you an example from real life :

Many years ago I received a DC advised through two banks -first a UK & then an Irish bank. When documents were presented to the Irish bank, they rejected. I don't remember the full details which are not important, but their interpretation of the UCP (probably 290) was completely misinformed. When I told them that unless they corrected their opinions, I would negotiate at another bank, they said that I was not allowed to do this. This further proved that it was not worth trying to educate them, so I negotiated the unchanged documents through the UK bank without difficulty. In this case I would regard the presentation to the Irish bank as not establishing contractual relationships because the Irish bank did not accept that there was performance of the contract (presentation of docs in order), whereas the UK bank in accepting docs in order indicated their agreement that performance of the contract on the part of the bene had been established. Performance on the part of the bank depended on payment by the bank (nothing to do with the applicant).

If, as you say, the DC is a mere bank payment undertaking, the bank can only take instructions to make such payment instructions from the owner of the account concerned. The DC is not paid from the applicant's a/c, but the bank's. The bank is prevented from making reference to the applicant in determining whether or not to make payment. So where does the instruction to make payment come from ? I suggest that it can only come from a contractual obligation of the bank based on establishment of the DC and performance by the bene.


When an offer is made, it is usually made for a limited time period. In the case of an irrevocable DC, that period ends with the expiry date. In the case of a revocable DC, the period is conditional, based on revocation or expiry of the DC before presentation of compliant docs, i.e. before acceptance by performance.

NEWSPAPER DELIVERIES
A revolving credit is like an order (contract) with a newsagent to make deliveries of daily newspapers. I might agree to make payments on a monthly basis, but I do not make separate monthly contracts to do so. The order will continue so long as both parties perform under the contract - deliveries made daily & payments made monthly. If I fail to make payments on time the newsagent is within his rights to cancel the contract. By receiving a monthly payment, he alone makes a decision to reinstate my credit for one month only, similar to a revolving credit decision made by an issuing bank. I am not suggesting that the operation of a Revolving DC is as simple as a newspaper delivery. I am using it to indicate that reinstatement of credit decisions are often taken by one party to a contract.

Merchants are free to contract on any conditions or basis they wish within the law, regardless of whether the law envisaged such conditions or not.

Sorry about the verbosity, but the issue is complex and many-faceted.

Laurence

[edited 2/28/02 4:05:18 PM]

Laurence,

QUOTATION AND SUMMARY ARE NOT OUR ORIGINAL OPINIONS

Please ready our posting carefully. We never try to put words in your mouth. For all those “complaints” from you, we are simply quoting a page in our handouts used for DC training. The words there are not even our original opinions but simply the summary of opinions from certain legal experts in some publications that we happen to have the opportunity to read. We are just doing the summary. Hence those are not your words or our original opinions. Please do not get confused on this.

To avoid confusion, in our last posting, we have already used QUOTE & UNQUOTE to bracket those words but we regret that it does not work out the way we want it. Laurence, please go back to our original text and amend your comments made thereagainst accordingly.

WHY DC CANNOT BE GOVERNED BY LAW OF CONTRACT?

We never believe that DC (or BL if you will) acts and behaves in a way the legal people want it to be. If the DC were a contract, then it should be automatically covered by CISG, the Vienna Convention, (governing the sales of goods) as a kind of contract law or simply by the laws of contract in many countries. Then why country like USA has to make a separate law, the UCC Article 5, for DC operations?

DC AND BL NEED SEPARATE LAWS TO GOVERN THEM

The reason is that they simply cannot apply the law of contract doctrines to DC. Hence they have to make a new law to govern this strange animal. Similarly they make COGSA to govern the BL in UK and USA, as well as in China. The BL is also NOT a contract of carriage (this may sound strange to some of us but it is true and also supported by judicial decisions in UK. As our subject is not BL, so we do not try to elaborate further here. Those interested in this subject may refer to our previous postings in this regard), but a mere evidence that there is a contractual relationship amongst the parties. Laurence, we hope you would agree on this.

OUR AIM IS TO ALERT PEOPLE FOR THE COMPLEXITY OF DC

The purpose of our posting this query is to convey the message that the DC is not as simple as most of us think. It may not be a contract. It is much more than that. We do not expect any member to resolve this problem, which even the legal experts and the learned scholars have arguments amongst themselves.
Laurence, now you begin to say that this is a complex issue, rather than treating the DC as a simple contract. And for this we seem to have achieved our goal. We do not try to convince anybody. Whether the DC is a contract or merely a bank’s payment undertaking? Let the members decide for themselves after seeing the arguments on both sides.

WE ALL LEARN BY DISAGREEMENT

We expect Jeremy to give us some of his opinions which most of the time are different from ours. Hope this time there is no exception. This is the way we want it. Only disagreements would push us all to a deeper level and all of us would benefit form the heated arguments.

www.tolee.com

[edited 2/28/02 5:14:49 PM]

T.O.,

See the separate 'topic' I've started, for convenience.