Alford, Lindsey --- "Jack, Malek and Quest: Documentary Credits - The Law and Practice of Documentary Credits Including Standby Credits and Demand Guarantees " [2003] IntTBLawRw 20; (2003) 8 International Trade and Business Law Review 437

By Raymond Jack, Ali Malek and David Quest, Documentary Credits—The Law and Practice of Documentary Credits Including Standby Credits and Demand Guarantees, Butterworths, UK, 2001

This third edition, eight years after the previous one, introduces two new authors and substantial re-writing in the areas of fraud, electronic credits, originality, standby credits, and conflicts of law.

The terms ‘documentary credits’ and ‘letters of credit’ are both in current use and no distinction need be made between them. ‘Standby letter of credits’ have a different function and a chapter is devoted to them. The International Chamber of Commerce (ICC) Uniform Customs and Practice (UCP) set the international banking standards. Documentary credits facilitate international transactions providing a promise by a bank of immediate or future payment against the presentation of document to the bank or its agent, most commonly in the sale of goods.

The authors point out that the UCP are accepted by banks in over 160 countries, including Commonwealth countries, making their application to credits almost universal.

With the incorporation by banks of the UCP into the contracts in connection with credits, a code can provide uniformity in the rights and obligations to which those contracts give rise. The authors urge the courts to adhere to the code, where incorporated, providing it is not in conflict with an express provision, and in conflict with common law precedents prior to the 1993 revision.

Although this book covers the English law, it makes greater use of Commonwealth and US materials. This overseas material is particularly important in considering an area of law where the principles are common to many jurisdictions.

The authors again highlight the remarkable statistic that over half of all documents presented are discrepant on first presentation. To assist students and practitioners, the ICC’s Position Papers 1 to 4, the UCP (1993 Revision) and the ICC Uniform Rules for Demand Guarantees are appended. To assist students to familiarise themselves with the documents commonly used, Lloyds TSB Bank plc has allowed publication of their specimen forms in the appendices.

The authors postulate that as a consequence of the risks associated with the acceptance of commercial documents, standby credits, demand guarantees and performance bonds have become increasingly popular. This edition devotes considerable space to the major development in this area: the introduction of a new set of rules, International Standby Practices 1998 (ISP98). They believe that as the ICC endorses ISP98 it is to supplant the use of the UCP for standbys.

Unlike commercial credits, where the bank pays against a bill of lading or other transport document evidencing shipment of goods, the purpose of a standby credit or independent guarantee is usually to give security against the applicant’s breach of contract, not to enforce performance. Thus, in Bachmann Pty Ltd v BHP Power New Zealand Ltd, Booking JA stated on 11 September 1998, Supreme Court of Victoria Court of Appeal (unreported):

International trade is facilitated by traditional credits, which provide a mechanism for performance of contracts of sale. Standby credits are a safeguard which comes into play where there is a suggestion that contracts (whose subject-matter can vary widely) have been broken.

For example, the seller/beneficiary will call on a commercial credit whenever the goods are shipped, but an employer/beneficiary will (or should) call on a standby credit or independent guarantee only if he believes that the contractor/ applicant is in breach.

The other batch of instruments, variously called demand guarantees, performance bonds, etc, is fully explained under the general term ‘independent guarantees’. The House of Lords considered performance bonds in Trafalgar House v General Surety Co (1996), but the confusing terminology in use may still lead to difficulties in construing particular instruments.

The work is comprehensive in bringing the profession up to date with electronic credits. As a documentary credit is a written record and a not physical good, it appears eminently suitable for implementation in electronic form. However, as it is only one element in the international sale transaction, an electronic credit must be part of an overall system for electronic trade. Mindful of the security risks of the interception, accidental corruption, forgery, or deliberate modification of messages en route, the authors believe that with a reliable system of authentication, electronic messages potentially provide a much more secure method of communication.

Whilst the regular use of such instruments as part of international trade is still a little way off, the authors deal with initiatives under development and examine the legal problems which will be encountered with electronic documents. They advise on the impact of the Electronic Communications Act 2000.

The extensive revision on fraud and injunctions takes account of recent cases on the right or obligation of the bank to refuse payment where there is evidence of fraud. Fraud is an exception to the principle of autonomy which requires the credit to be treated as a transaction independent from the underlying contract between applicant and beneficiary, and unaffected by disputes on that contract. It is also an exception to the rule that a bank deals in documents alone, and is obliged to pay against documents which are conformant on their face without regard to their accuracy or genuineness. The foundation stone of English law in this area is a United States case, Sztejn v Henry Schroder Banking Corp (1941). This is authority that the court may interfere to prevent a bank paying against documents, and that the same fraud would entitle the bank of its own motion to refuse to pay. Important new decisions covered in the text include Themehelp v West (1996) and Czarnikow-Rionda Sugar Trading Inc v Standard Bank London (1999) on injunctions, and Banco Santander SA v Banque Paribas (2000) on discounting of deferred credits. The authors note that the Commonwealth authorities have made an important contribution to the development of the law in this area.

As documentary credit disputes almost always have an international element to them, the chapter on ‘Conflicts of Law and Illegality’ looks in greater detail at jurisdictional and choice of law issues, including the Brussels and Rome Conventions.

Since the previous edition, the area of greatest controversy has been the debate over original and copy documents, sparked by the decision of the Court of Appeal in Glencore v Bank of China (1996), and fanned by that in Kredietbank Antwerp v Midland Bank (1999). This decision represented a loosening of the rule of strict compliance which the authors suggest goes too far. Whilst the ICC issued a policy statement intended as a ‘clarification’ of Article 20 (ambiguity as to the issuers of documents) of the UCP, the authors are convincing in their view that it is difficult to reconcile with either of the two court decisions. The English law will have to clarify this ‘unsatisfactory’ matter, prior to the next edition.

Lindsey Alford JD