The letter of credit has undergone a renaissance in the last decade. International Bankers in 175 countries operate letters of credit under the Uniform Customs and Practice for Documentary Credits (UCP) sponsored by the International Chamber of Commerce (ICC). The UCP has been developed by the ICC in response to the needs, practices and usages of the commercial parties involved. The latest revision of the UCP was finalised in 1993. For the first time the ICC will undertake supplementary revision to incorporate unique nuances raised by electronic commerce. The revision is abbreviated to eUCP and commences in 2002. On 1 January 1999 the International Standby Practices (ISP98) commenced to provide a distinct option for bankers issuing standby letters of credit. Article 5 of the US Uniform Commercial Code 5 dealing with letters of credit was revised in 1995 and has been adopted by the majority of US states. The United Nations Convention on Independent Guarantees and Standby Letters of Credit (Convention) was acceded to or ratified by the required minimum number of member nations and commenced on 1 January 2000. It is due to this renaissance that this thesis specifically refers to the neoteric letter of credit and examines the advances made in the last decade.
Historically the merchants rather than the law have developed particular methods of payment in an attempt to reconcile the various economic interests of the parties. The law has followed the lead of the merchants and given force to their practice. The courts take particular note of the lex mercatoria and international practice to treat certain documents and transactions like cash and notably often exclude the application of certain usual legal principles.
Banks are frequently interposed on specific instructions, relying on the principle of autonomy of the letter of credit and the doctrine of strict performance. The purpose of utilising banks is to secure:
mutual advantage to both parties - of advantage to the seller in that ... he is given what has been called in the authorities a 'reliable paymaster'... whom he can sue, and of advantage to the buyer in that he can make arrangement with his bankers
The principle of the autonomy is now enshrined in the neoteric letter of credit rules such as the UCP, UCC article 5, ISP98 and the United Nations Convention. According to Lord Denning:
It is vital that every bank which issues a letter of credit should honour its obligations. The bank is in no way concerned with any dispute that the buyer may have with the seller... It ranks as cash and must be honoured.
The management of international business is nothing more or less than the management of international risk. The development of the various steps and methods in the financing of international business has been directed with this "risk" concept in the minds of the merchants.
It is "astonishing how frequently discrepancy situations arise" in letter of credit transactions,'* and it is a credit to the commercial parties that the letter of credit thrives. In practice the merchants and the bankers are typically even stricter than lawyers in the application of the principles of autonomy and the doctrine of strict performance. The courts have had occasion to ignore the underlying principles for example proclaiming that this area of law "is too multiform to admit generalisation ... The search for a general principle underlying all (the) cases would be fruitless". However, the merchants and bankers adhere to such principles in their day to day management of international trade.
In the 1920s bankers from the USA, Germany, France, Norway, Czechoslovakia, Italy, Sweden, Argentina, Denmark and the Netherlands independently promulgated a set of regulations for Banks in the financing of international trade. At the initiative of the American Chamber of Commerce, the International Chamber of Commerce (ICC) proceeded to draw up uniform regulations in the late 1920s.
The first substantive international standardisation of documentary credits by the ICC culminated in Amsterdam in 1929, however only bankers in Belgium and France adopted the regulations. At the next attempt in 1933 the 7th Congress of the ICC in Vienna established the Uniform Customs of Practice for Documentary Credits (UCP). It was adopted by bankers in 40 countries including several European countries and some individual U.S. banks. The UCP has been systematically revised and correspondingly adopted by the wider international trading and banking community. The latest incarnation, the UCP 500, the 1993revision, is regarded as the most successful international attempt at unifying law. The UCP has substantially universal acceptance and effect, and has grown "from a set of practices followed only by the most important banks in western countries to a truly universal normative usage".
This thesis analyses the circumstances under which banks may or will dishonour the neoteric letter of credit. The central theme focuses on the development of the principle of autonomy of the credit. The approach includes a study from a comparative and historical point of view, involving consideration of relevant Australian, American, English and Canadian developments. The International Chamber of Commerce is examined, as are the theoretical and practical concerns of the commercial parties. This thesis places the UCP in context with particular attention to the affect on the commercial parties and of the impact of electronic commerce on the letter of credit product. Current articles relevant to the discussion of the revision are examined. The thesis does not deal with general concepts of letters of credit. The recent developments of the revised UCC Article 5, ISP98, eUCP, the United Nations Convention and the Uniform Rules on Independent Guarantees are examined in context.
This thesis concludes that the 1993 revision of the UCP and the eUCP meet the practical and legitimate concerns of commercial parties and that as a fluid and functional commercial document the UCP must be reviewed at regular intervals with vigilance by the ICC to ensure that the needs of the commercial parties remain paramount for the commercial good of not only the parties but also the community. The ISP98 concisely addresses the need for the increasing use of standby letters of credit, whilst preserving the underlying principle of autonomy and doctrine of strict compliance. Suggestions for reform are made.