1. Letter of CreditIn the era of globalization, international trade is growing rapidly. In most international trade, letter of credits are regularly used as method of payment. Letter of credit means An instrument under which the issuer (usually a bank), at a customer's request, agrees to honor a draft or other demand for payment made by a third party (the beneficiary), as long as the draft or demand complies with specified conditions, and regardless of whether any underlying agreement between the customer and the beneficiary is satisfied. In international sales transaction, a contract for the sale of goods is usually executed in conjunction with a banker's documentary credit to secure the prompt payment of the contract price . The arrangement to pay through banker's documentary credit is called letter of credit.
The standard letter of credit is not very common in purely domestic transaction as a form of payment. The cost and the lengthy process make the letter of credit an unattractive form of payment for domestic transaction . In contrast, the popularity of letter of credit, as a tool of payment in international business transactions, increased because it is relatively safe and speedy method of payment in lake of unified law. Additionally, the International Chamber of Commerce (ICC) is actively participating in unifying the rules regarding the letter of credit. Today, the 6th edition of Uniform Customs and Practice for Commercial Documentary Credit (UCP 500), published by ICC, is widely recognized to regulate the transactions involving letter of credit.
Before talking more about letter of credit, let's look at broader picture of international trade. In international trade different sets of actor perform its part of role. According to present international trade practice there are minimum four legal relationships involved-
(1) legal relationships between parties who sell and buy goods from each other (contract of sale of goods; covered by contract law of either one of the country or CISG);
(2) their relationships with persons willing to carry the goods from one place to another (carriage service contract; probably covered by COGSA);
(3) the arrangements they have with insurers to protect the goods in the event of loss or damage, and (insurance contract; covered by insurance law of either country) ;
(4) financing or payment agreements with banks or financial institutions (payment contract). Letter of credit falls in the 4th of above stated relationships.
2 Financing Trade
2.1 Needs of letter of creditThe letter of credit promotes international trade by assuring sellers that they will receive prompt payment for goods they ship overseas to unknown buyers. In international trade neither seller nor buyer knows credibility of each other. How buyer, when placing order of goods over the seas, be assured that the goods is according to his need And how seller, when shipping goods over the seas, be assured that he will get payment In such contract the question is who will perform his obligation of contract first - should buyer pay first or should seller ships the goods first. Here the role of financial institutions and banks comes to focus. Usually information about credibility of financial institution and banks are easily available across the world. So instead of relying on credibility of contracting party, it is safer to rely on credibility of foreign banks and financial institutions.
2.2 Sets of transactionsWhen the letter of credit is used as a form of payment, in international business transaction, minimum three different agreements are involved.
1. One transaction is between the party applying for the letter of credit (the Applicant) and the party who under the terms of the letter of credit is entitled to have its complying presentation honored (the Beneficiary). In that transaction, the Applicant agrees, among other thing and subject to the terms and conditions of the agreement between the Applicant and the Beneficiary, to pay money (or to deliver an item of value) to the Beneficiary . The addition of a letter of credit clause to the transaction does not alter the contractual rights and duties of party lay down under the contract.
2. Another transaction is between the Applicant and the financial institution or bank (the Issuing Bank). Under the agreement between the Applicant and the Issuing Bank, the Applicant applies to the Issuing Bank for a letter of credit described therein and agrees to reimburse the Issuing Bank for amounts paid by the Issuing Bank to the Beneficiary pursuant to the terms of that credit.
3. The third transaction is the letter of credit itself, which is issued by the Issuing Bank to the Beneficiary at the request or for the account of the Applicant (or, in case of a financial institution, to itself or for its own account) in order to support the agreement of the Applicant and the Beneficiary as referred to in first transaction above. It may be possible that issuing banks is different than confirming bank or reimbursing bank which actually pay money to the Beneficiary. A letter of credit constitutes a definite undertaking of the Issuing Bank to pay the Beneficiary the specific amount, provided that the required documents are presented to the Issuing Bank or Confirming bank or the bank nominated in the credit by the Issuing Bank (the Nominated Bank) and that the terms and conditions of the credit are complied.
4. If contract is for confirm letter of credit then the fourth transaction often exists between the Beneficiary and the confirming bank. Under this agreement the confirming bank undertakes to pay the specific amount to the Beneficiary, provided that the required documents are presented according to the terms and conditions. In that case the third transaction stated above will be changed into agreement between two financial institutions or banks, in which the Issuing bank will agree to pay the Confirming bank, the specific amount, provided that the required documents are presented to the Issuing Bank and that satisfy the terms and condition of the credits.
It is not necessary that Emitting bank, Issuing bank, Advising Bank, Confirming Bank and Reimbursing Bank are branches of the same bank. Therefore there need to be some cooperation between those banks. There must be an agreement that the issuing bank will pay money (through channel of advising bank and confirming bank) to reimbursing bank provided that the required documents are presented to the Issuing Bank.
2.3 Types of Letter of CreditsThere are two main categories of letters of credit in practice. (i) Commercial Letter of Credit; and (ii) Standby Letter of Credit or Bank Guarantee
(i) Commercial Letter of Credit: A letter of credit used as a method of payment in a sale of goods (esp. in an international transaction), with the buyer being the issuer's customer and the seller being the beneficiary, so that the seller can obtain payment directly from the issuer instead of from the buyer. This type of letter of credit is mostly used in sale of goods where parties have to perform for each other at one time i.e. Payment against goods etc. In this buyer arranges to issue letter of credit in favor of seller to pay for underlying contract and ultimately seller gets payment under it when seller perform his duty. The purpose of this letter of credit is to provide surety to seller that buyer is able to pay the amount for the goods he is selling to him.
(ii) Standby Letter of Credit or Bank Guarantee: A letter of credit used to guarantee either a monetary or a no monetary obligation (such as the performance of construction work), whereby the issuing bank agrees to pay the beneficiary if the bank customer defaults on its obligation. -- Abbr. SL/C. -- Also termed guaranty letter of credit . This type of letter of credit is mostly used in service contract or where parties have to perform in future in timely manner, for example in construction contract or outsourcing. In this seller arranges to issue letter of credit in favor of buyer to pay back if seller fails to perform and ultimately buyer gets payments under it on seller's failure. The purpose of this letter of credit is to give surety to buyer that seller is able to perform his work for which buyer is going to pay him.
Apart from these two main categories, there are several other types of letter of credits, depending on what the terms and conditions are included in letter of credit agreements.
Clean Letter of Credit / Suicide Letter of Credit: A letter of credit that is payable on its presentation. No document needs to be presented along with it.
Documentary Letter of Credit: A letter of credit that is payable when presented with another document, such as a certificate of title or invoice. -- Abbr. DL/C.
Open Letter of Credit: A letter of credit that can be paid on a simple draft without the need for documentary title.
Confirmed Letter of Credit: A letter of credit that directly obligates a financing agency (such as a bank) doing business in the seller's financial market to a contract of sale.
Export Letter of Credit: A commercial letter of credit issued by a foreign bank, at a foreign buyer's request, in favor of a domestic exporter.
Import Letter of Credit: A commercial letter of credit issued by a domestic bank, at an importer's request, in favor of a foreign seller.
General Letter of Credit: A letter of credit addressed to any and all persons without naming anyone in particular.
Special Letter of Credit: A letter of credit addressed to a particular individual, firm, or corporation.
Straight Letter of Credit: A letter of credit requiring that drafts drawn under it be presented to a specified party.
Irrevocable Letter of Credit: A letter of credit that complied with all this elements. 1. A letter of credit that the issuing bank guarantees will not be withdrawn or canceled before the expiration date. 2. A letter of credit that cannot be modified or revoked without the customer's consent. 3. A letter of credit that cannot be modified or canceled without the consent of all parties.
Revocable Letter of Credit: A letter of credit in which the issuing bank reserves the right to cancel and withdraw from the transaction upon appropriate notice. The letter cannot be revoked if the credit has already been paid by a third party.
Negotiation Letter of Credit: A letter of credit in which the issuer's engagement runs to drawers and endorsers under a standard negotiation clause.
Transferable Letter of Credit: A letter of credit that authorizes the beneficiary to assign the right to draw under it.
Revolving Letter of Credit: A letter of credit that self-renews by providing for a continuing line of credit that the beneficiary periodically draws on and the bank customer periodically repays. A revolving letter of credit is used when there will be multiple drafts under a single transaction or multiple transactions under a single credit. -- Abbr. RL/C.
Time Letter of Credit: A letter of credit that is duly honored by the issuer accepting drafts drawn under it.- Also know as Termed Acceptance Credit
Traveler's Letter of Credit: A letter of credit that complies with all these elements. 1. A letter of credit addressed to a correspondent bank, from which one can draw credit by identifying oneself as the person in whose favor the credit is drawn. 2. A letter of credit used by a person traveling abroad, by which the issuing bank authorizes payment of funds to the holder in the local currency by a local bank. The holder signs a check on the issuing bank, and the local bank forwards it to the issuing bank for its credit.
Let's understand who the players are in letters of credit agreements.
2.4 Understand the players
In letter of credit there are many contractual relations between different entities from which disputes can be arises. We can divide those entities among two categories: (i) Financial Institution and (ii) Non-financial Institution.
(i) Financial Institutions: In letters of credit agreements financial institutions are mainly banking institution that supports sales transaction by providing credits. But it is not necessarily banking institution. This institution may be Non Banking Financial Institution (NBFI). In letters of credit it may be in the form of
1. Emitting Bank
The emitting bank is the financial institution who issues the letter of credit, and whose duty it is to make payment .
2. Issuing Bank
The issuing bank is the bank authorized by the emitting bank to check the correctness of the documents and monetary transfer .
3. Advising Bank
The advising bank is the bank informing the beneficiary about the opening of the letter of credit account .
4. Confirming Bank
The confirming bank is the bank that shares the responsibility of payment with the issuing bank to the beneficiary .
5. Reimbursing Bank
The reimbursing bank is the bank which in fact makes the process of monetary transfer on the account of the beneficiary.
(ii) Non-financial institution: Entities falls in this categories are the entities who take support of financial institutions listed above to do trade with each other. In letters of credit agreements these entities are recognized as
The applicant is the entity who initiates the transaction and applies to
open a letter of credit from financial institution. In commercial letters
of credit agreement the applicant is a buyer who is purchasing the goods.
In stand by letters of credit agreement or bank guarantee agreement the
applicant is seller who needs to provide buyer a guarantee that he is
trusted entity and it will perform in time its duty or obligation under
their contract of service or sale of goods. Standby letters of credit or
bank guarantee agreement is mainly used when buyer is paying before the
performance of their main contract is performed.
2. BeneficiaryThe beneficiary is a person, for whom the letter of credit account is opened. In commercial letter of credit beneficiary is the seller in the underlying contract. In standby letter of credit or bank guarantee agreement beneficiary is the buyer who will be paid if seller failed to perform its duty or obligation in timely manner.
3 Who have jurisdiction to decide the dispute3.1 Comparative analysis of General Jurisdictional law in different continent
Jurisdiction, used in its widest sense, refers to the question whether a court will hear and determine an issue upon which its decision is sought . Most of the time, in any sale of goods or service agreement, some sort of choice of court and choice of law clause is included in contract. But what if choice of court clause is not included in agreement? Or what if in battle of forms, terms on the issue written by both the parties are different?
In the case of conflict, the question rises not only about the applicable law but also about jurisdiction because the choice of law clause is not imposed by law of all the countries. The court may also exercise the doctrine of forum non convenience. The court may refuse to entertain the case on the ground of forum non convenience where contract is having choice of law clause which suggests the applicability of law of the other country. But not every country recognizes and enforces doctrine of forum non convenience. There is little uniformity among countries on the issues of jurisdiction. Though there are some international conventions, but not applies to all countries. Now let's discuss what the laws of jurisdiction in different countries are and how it is decided which court will hear the dispute.
3.1.1 Jurisdictional Law of USAThere are no specific written laws which decide the issue in USA. The first case in which the Court gave detailed analysis is International Shoe Co. v. Washington. The Court has interpreted the constitution and several other laws deciding the case. The law determining personal jurisdiction in USA is little ambiguous.
220.127.116.11 When contract specify forumIf the contract has forum selection agreement then that court would have personal jurisdiction to hear the dispute arising out of that contract. Most of the time courts in USA enforce forum selection clauses. In Berry v. Soul Circus Inc. the court stated that forum selection clauses in contracts are prima facie valid and should be enforced unless is shown by resisting party to be unreasonable under the circumstances; such enforcement is unreasonable only when
(1) agreement to forum selection clause was induced by fraud or overreaching,
(2) enforcement would contravene strong public policy of the forum in which suit is brought, or
(3) trial in contractual forum will be so gravely difficult and inconvenient that the complaining party will for all practical purposes be deprived of his day in court . Also the courts look for evidence of intention of the parties. If the forum selection clause in contract is negotiated before performance of contract then court will enforce the agreement. But what if there is no agreement on forum selection:
18.104.22.168 When contract does not specify forumIn absent of choice of court agreement, law of personal jurisdiction in USA is driven by four theories .
(1) Presence - being served with a copy of the summons and complaint while physically present in the forum jurisdiction.
(2) Domicile - a person may always be sued for all claims, regardless of where they arise, in their state of permanent residence or in the case of a corporation, the state in which it is incorporated
(3) Consent - A defendant who has not been personally served in the jurisdiction can nevertheless voluntarily appear and submit himself to jurisdiction. In such cases defendant is said to have "consented" to jurisdiction
(4) Minimum Contact Test - Having sufficient dealings or affiliations with the forum jurisdiction which make it reasonable to require the defendant to defend a lawsuit brought in the forum state.
The minimum contact test have four principle came out of case laws
1) Jurisdiction is permissible when the defendant's activity in the forum is continuous and systematic and the cause of action is related to that activity.
2) Sporadic or casual activity of the defendant in the forum does not justify assertion of jurisdiction on a cause of action unrelated to that forum activity.
3) A court may assert jurisdiction over a defendant whose continuous activities in the forum are unrelated to the cause of action sued upon when the defendant's contacts are sufficiently substantial and of such a nature as to make the state's assertion of jurisdiction reasonable. ("general jurisdiction")
4) Even a defendant whose activity in the forum is sporadic, or consists only of a single act, may be subject to the jurisdiction of the forum's courts when the cause of action arises out of that activity or act. ("specific jurisdiction")
3.1.2 Jurisdictional Law of European UnionThere have been notable successes in harmonizing rules as to jurisdiction in European Community and EFTA bloc under the Brussels Convention and parallel Lugano Convention . Law of jurisdiction in European Union is governed by conventions agreed between them. They only apply to civil and commercial matters and, in broad terms require the defendant to be domiciled in a European Community or EFTA State. In other cases each member state will apply its traditional national rules on jurisdiction. As far as commercial matter concern, there are three main conventions that govern the issue.
(1) Convention on the law applicable to contracts for the International Sale of Goods (The Hague Convention, 1955)
(2) Convention on Jurisdiction and Enforcement of Judgments in Civil & Commercial Matter (The Brussels Convention, 1968)
(3) Convention on Jurisdiction and Enforcement of Judgments in Civil & Commercial Matter (The Lugano Convention, 1988)
The Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters was concluded on 27 September 1968. The rules of the Convention were extended to the States belonging to the European Free Trade Association [EFTA] by the Lugano Convention, signed on 16 September 1988. The Brussels Convention was extended successively to all the new Member States of the European Union and, most recently, by the Accession Convention of 29 November 1996 to Austria, Finland and Sweden. A consolidated version of the Convention was published in 1998. Work on the revision of the Brussels and Lugano Conventions led to political agreement in the Council on 27 May 1999. The proposal for a Regulation took account of the entry into force of the Amsterdam Treaty and the inclusion of judicial cooperation in civil matters within the Community framework. Following the political agreement reached at the Justice and Home Affairs Council on 30 November 2000, the Council formally adopted the Brussels I Regulation.
The EU law will only apply when all the parties are from EU member states. If all parties are not nationals of the member states then jurisdictional law of that member state will apply .
22.214.171.124 When contract specify forumUnder EC regulations prorogatory agreements are enforceable if the dispute is between business entities. No prorogatory agreements are enforceable if the dispute is between business entity and consumer. Under EU laws consumer is entitled to bring legal proceedings against supplier of goods or services or a creditor in the state where the consumer himself is domiciled. The consumer provisions cannot be set-aside by means of prorogatory agreements. That means even if there is choice of court agreement before the performance of the contract, it cannot be enforceable. A business entity can only bring proceedings against consumer in the country where the consumer is domiciled . But there are exception provision given in the convention. In three conditions prorogatory agreements are enforceable.
1. When such agreement is entered into after the dispute has arisen, or
2. When such agreement allows the consumer to bring proceedings in the courts other than those where either party is domiciled.
3. When an agreement is entered into by the consumer and the other party to the contract, both of whom are at the time of conclusion of the contract domiciled or habitually resident in the same member sate, and which confers jurisdiction on the courts of that member state, provided that such an agreement is not contrary to the law of that member state.
126.96.36.199 When contract does not specify forumIn the absence of specific agreement the default provision for jurisdiction is given in the EC regulations No.44/2001.
Law of jurisdiction in EU in commercial matter differs on the basis of the nature of contracts. It is different for Business to Business contract and Business to Consumer contract. Under the EC regulation rule of jurisdiction are given.
(1) In the matters relating to contract a person may be sued in the courts of the country where the obligation should be performed, or where the goods to be delivered or where the services to be provided.
(2) In the matters relating to maintenance, the court of place where the maintenance creditor (or beneficiary) is domicile or habitually resident.
(3) As regards a dispute arising out of the operations of a branch agency or other establishment, a person may be sued in the courts of the place where the branch etc. is situated.
(4) EU has laid down exclusive jurisdiction rules in certain types of contracts.
(5) Rules related to prorogatory agreements.
By enlarge EU laws of jurisdiction is very near to the law of USA's minimum contact test law. But the EU laws are far clear and consumer protective as opposite to USA's laws.
3.1.3 Jurisdictional Law of IndiaLaws in India are straight forward and give limited freedom for forum selection. Parties can not decide their choice of court arbitrarily. Laws regarding personal jurisdiction are codified in India.
188.8.131.52 When contract specify forum
In India, forum selection agreements are enforceable only if selected forum is one of the forums given by Indian law in face of the facts. Otherwise no prorogatory agreements are enforceable. To understand that you will need to look into two laws, (1) Section 28 of Indian Contract Act, 1872 and (2) section 20 of Code of Civil Procedure of India.
Indian Contract Act, 1872, Section 28 "Agreements in restraint of legal proceedings void) - "Every agreement, -
(a) * * *
(b) Which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent."
Indian Code of Civil Procedure 1908, Section 20 - "Every suit shall be instituted in a Court within the local limits of whose jurisdiction -
(a) The defendant, or each of the defendants where there are more than one, at the time of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain; or
(b) Any of the defendants, where there are more than one, at the time of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such case either the leave of the Court is given, or the defendants who do not reside, or carry on business, or personally work for gain, as aforesaid, acquiesce in such institution; or
(c) The cause of action, wholly or in part, arises"
If contract have forum selection agreement on such forum and it is one of the forum given by the law only then and then such agreement is enforceable. If forum selection agreement is of the third forum, then it is not enforceable.
For example A from Ahmedabad entered into a contract with B from Mumbai, containing choice of court agreement. If A sue B and if agreed choice of court is Ahmedabad or Mumbai then such agreement is enforceable, but if agreed choice of court is Delhi then it is not enforceable, because Delhi is not an option given by Indian Code of Civil Procedure.|
184.108.40.206 When contract does not specify forumPrimarily, Indian Code of Civil Procedure 1908, (C.P.C) which is applicable to whole of India, governs the Jurisdictional Law.
The laws in India says that any person has to go to the court of jurisdiction in which either
(1) opposite party or defendant is doing business or in absent of place of business, a residence or
(2) where the cause of action arises. The place of business includes any branch of the business entity.
The cause of action arises where the exchange of goods took place or where the services to be provided. In India plaintiff have to chose where he wants to sue defendant from the options given by Code of Civil Procedure, in lieu of contrary agreement.
3.1.4 Differences at large
There is a tremendous variety in the bases of jurisdiction adopted in different states. The jurisdiction law may contain in codified statute, case laws, bilateral or multilateral treaties or international conventions.
In deciding jurisdiction, in the common law States like Britain and United States where bases of the law is case laws, the courts may take into consideration the doctrine of forum convenience or forum non convenience. Forum convenience can be defined as a court taking jurisdiction on the ground that the local forum is the appropriate forum for trial or that the forum abroad is inappropriate. It is a positive doctrine, unlike the doctrine of forum non convenience which is negative doctrine concerned with declining jurisdiction . Forum non convenience can be defined as a general discretionary power for a court to decline jurisdiction on the basis that the appropriate forum for trial is abroad or that the local forum is inappropriate. There is not a single doctrine of forum convenience or forum non convenience . The States which have adopted the doctrines have their own version of it . In exceptional cases like Quebec and The Netherlands, doctrine of forum non convenience is codified under the State law.
There are States who have not recognized the doctrine of forum convenience or forum non convenience. There are number of reasons why they did not adopted the doctrines. One is the closed system, under which the law of procedure strictly defines the cases in which the courts have jurisdiction, in principle leaving no room for judicial discretion. This is the system to be found in civil law jurisdictions but India is an exception to this statement. India, being a common law country, the law of jurisdiction is codified in Code of Civil Procedure leaving no room for judicial discretion. But it gives certainty and predictability. Second is in many States forum shopping is not seen as being a problem. Like in Argentina the bases of jurisdiction normally goes with the domicile of the defendant, which prevents persons from bringing actions in Argentina which have no connection with the state. In Finland, it is accepted that a person will have good reasons if that person sues in Finland. In India the bases of jurisdiction is either domicile of the defendant in India or cause of action arises in India. Third is the position of judges. In civil law countries the power of judges has been limited and has no discretionary power as against wide discretionary power of judge in common law countries. The fourth is Absence of cases. The fifth is constitutional problems, like Germany where constitutional provision bared application of doctrine of forum convenience or forum non convenience.
The other situation the jurisdiction law encounter is when the contract has forum selection clause. There is a very clear difference between common law jurisdiction and other states when it comes to the effect given to an agreement conferring jurisdiction on the courts of a foreign state. In common law jurisdiction the court has discretion to decline jurisdiction or accept jurisdiction over the dispute, despite the parties prior agreement on trial abroad. In other States the declining of jurisdiction is compulsory or even more fundamentally, the state may have no jurisdiction .
3.2 Jurisdiction in international letter of credit disputeWherever there are contracts and agreements, there are possibilities of misunderstanding and disputes. And when you are talking about agreements between different entity of different country or continent, possibility of misunderstanding and risk of disputes are more. In domestic transaction, contract law of single nation will apply to any dispute. In international transaction, many times, such applicable laws are not defined and conflict of law takes care of it. In adjudication process the questions first arise are jurisdiction of court and what law will govern the disputes. To understand dispute scenario let's take an example.
A and B, business entities of different country, came into a contract. This is the main contract, in which, A agrees to pay B by letter of credit for performance of contract by B. A an applicant applies to an issuing bank I for letter of credit to be issued in favor of B a beneficiary . A promises to repay I if proper documents are presented. An issuing bank I open a letter of credit as instructed by A in favor of B. Under the agreement, I informed C a confirming bank that I had opened a letter of credit in favor of B . I promise to repay C, the amount under the main contract between A and B, on presentation of proper documents. C informs B of letter of credit is issued. Under the agreement between C and B, C agrees to pay B, the amount of the main contract, against proper documents.
Even though all contracts stated above are in series and interrelated, they all are different in eye of law. Court will look all contracts separate from each other. That means parties in dispute cannot take defense of failure of other related contracts. Also in international payment transaction two branch of the same financial institution working in different countries are considered as different entities.
In above stated letter of credit transactions disputes can be arise between A and B; A and ?I?; ?I? and C; and C and B. Here A and B are non-financial institution and main contracting party. Any dispute between them will not be related to letter of credits. Other transactions stated above are payment transaction and directly related to letter of credits.
3.2.1 Laws governing international letter of creditsThere are mainly two intergovernmental institutions that make rules governing international letter of credits
(1) United Nations Commission on International Trade Law (UNCITRAL),
(2) International Chamber of Commerce (ICC) and National and Local Laws. Guidelines or model law published by intergovernmental institutions are not binding to any of its member states but businesses can adopt this law as governing law.
UNCITRAL is a UN organization specializing in codifying and unifying international trade law . UNCITRAL's business is the modernization and harmonization of rules on international business . In harmonizing process of law regarding letter of credits, UNCITRAL issued very good model laws and treaties.
# 2001 - United Nations Convention on the Assignment of Receivables in International Trade
# 1995 - United Nations Convention on Independent Guarantees and Stand-by Letters of Credit
# 1992 - UNCITRAL Model Law on International Credit Transfers
# 1988 - United Nations Convention on International Bills of Exchange and International Promissory Notes
International Chamber of Commerce (ICC) was founded in 1919 to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital. A year after the creation of the United Nations in San Francisco in 1945, ICC was granted the highest level consultative status with the UN and its specialized agencies . ICC has relation with almost all the countries. ICC is represented by national committee and groups . That way ICC's rules are becoming global rules of business and accepted by all. ICC has contributed to basic legal structure of letter of credits to promote international trade by issuing landmark sets of following rules and model laws.
# Uniform Customs and Practice for Documentary Credits (UCP 500) (new rules of UCP 600 published by ICC in October 2006 but yet to take effect)
# Supplement to UCP 500 for Electronic Presentation (eUCP)
# Uniform Rules for Demand Guarantees (URDG) (ICC Publication No.458)
# International Standby Practice (ISP98)
Apart from these intergovernmental institutions national and local governing laws are very important in deciding issues. Particularly in deciding jurisdiction of court and governing laws, local and national laws are very important factors. Most government allows parties to the contract to decide what law will apply in case of disputes with some restriction and after checking validity of contract. Many governments have made exception laws for certain subject matter of contract that only their law will apply and only their country's court will have jurisdiction . Most governments have enacted their substantive laws based on model law published by ICC and UNCITRAL but differences are large on the issue of governing law and jurisdiction. In spite of many efforts are made to harmonize jurisdictional law, little progress is made. One of the reasons is vast differences on the issue of law among many important nations.
3.2.2 Dispute scenario in different countriesOnly the conflict of law governs the international letter of credit.
Inter governmental institutions have provided provision of governing law for letter of credit but those rules can only enforced if parties to contract have agreed so. In above stated example according to different scenario courts in different country will decide in different way. Below is comparison of legal stand of different countries of choice of law and forum selection clauses in international commercial letter of credit transactions.
Both forum selection clause and choice of law clause is included in transaction If dispute raised and case goes to US court, generally, the court will enforce forum selection clause and choice of law clause. The clause is considered valid unless the court finds it either unreasonable and unjust or invalid due to fraud, overreaching, or in contravention of a strong public policy . Many US court decisions explain doctrine of forum non convenience.
A US court will apply the substantive law designated by the contract unless(1) the chosen state has no substantial relationship to the parties or the transaction, or
(2) application of the law of the chosen state would be contrary to a fundamental policy of the state.
If dispute raised and case goes to Indian court, the court will recognize choice of law clause subject to lawfulness of contract under Indian laws. That includes, but not limited, to make sure that the contract is not forced, there is no fraud; object of contract is lawful according to Indian law etc. Indian Contract Act, 1872, Section 10 defines what agreements are contracts. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. Section 11 of the act defines who are competent to contract , Section 13 of the act defines what consent is , and Section 14 of the act defines free consent that further pointing to section 15 to 22 defining what is not included in free consent, Section 23 defines what consideration and objects are lawful and further from section 24 to 30 of the act defines void contracts . There is not law exists in India that bars enforcement of foreign law so parties can choose what law will govern any dispute between them for that contract. The Indian court will enforce forum selection clause if the selected forum is in accordance with Indian law
If dispute arises between parties of two EU member state, the court will consider Article 23(1) of Council Regulation (EC) No.44/2001 when parties agreed to a specific forum. The issue of choice of law is resolved by Article 3(1) of Rome Convention , when parties to disputes have agreed on choice of law in contracts.
Forum selection clause is included but choice of law clause is not included in transaction If dispute raised and case goes to US court, the court will enforce forum selection clause and if US court retain jurisdiction then court will decide which law will apply. UCC Article 5 Section 5-116(b) says that if parties to a letter of credit transaction fail to select the governing law for disputes, the courts are to apply the law of the issuer's jurisdiction i.e. law of the state where the issuing bank situated.
If dispute raised and case goes to Indian court, the court will enforce forum selection clause provided forum selection was complying with Indian law . Indian Contract Act, 1872, Section 10 defines what agreements are contracts.. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. Section 11 to 30 helps defining enforceable contract under Indian Laws. The Indian court will enforce forum selection clause if the selected forum is in accordance with Section 20 of Indian Code of Civil Procedure, 1908 and Section 28 of Indian Contract Act, 1872. In absence of agreed choice of law, if Indian court retain jurisdiction, the court will apply Indian law.
If dispute arises between parties of two EU member state, the court will consider Article 23(1) of Council Regulation (EC) No.44/2001 when parties agreed to a specific forum. Article 4 of the Rome Convention determines the law governing a contract in the absence of choice by the parties or private international law does not indicate governing law. In independent guarantees or standby letter of credits (bank guarantee), if parties to the contract have agreed to apply model law provided by United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, Article 21 and Article 22 of the law provides that in the absence of contrary agreement, law of the state where the guarantor/issuer has that place of business, will apply to any dispute.
Forum selection clause is not included but choice of law clause is included in transaction. If dispute raised and case goes to US court, the court will decide if that court have jurisdiction or not. When forum is not selected in contract court will decide the jurisdiction based on US Supreme Court decision in International Shoe Co. v. Washington. In deciding forum the court will emphasis on the place of performance and doctrine of forum convenience. If US court retain jurisdiction then generally governing law selected in contract will be applied.
If dispute raised and case goes to Indian court, the court will decide if that court have jurisdiction or not. Section 20 of Indian Code of Civil Procedure, 1908 has provision for law of jurisdiction. If Indian court retain jurisdiction then it will enforce choice of law clause provided lawfulness of contract under Indian law. Indian Contract Act, 1872, Section 10 defines what agreements are contracts.. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents. Section 11 to 30 helps defining enforceable contract under Indian Laws. There is no law exists in India that bars enforcement of foreign law so parties can choose what law will govern any dispute between them for that contract.
If dispute arises between parties of two EU member state, the court will consider Article 5 of Council Regulation (EC) No.44/2001, when parties do not agreed to a specific forum, which provides that jurisdiction of the court of place of performance will be applied. The issue of choice of law is resolved by Article 3(1) of Rome Convention , when parties to disputes have agreed on choice of law in contracts.
None of forum selection clause or choice of law clause is included in transaction If dispute raised and case goes to US court, the court will decide if that court have jurisdiction or not. When forum is not selected in contract court will decide the jurisdiction based on US Supreme Court decision in International Shoe Co. v. Washington. In deciding forum the court will emphasis on the place of performance and doctrine of forum convenience. If US court retain jurisdiction then court will decide which law will apply. UCC Article 5 Section 5-116(b) says that if parties to a letter of credit transaction fail to select the governing law for disputes, the courts are to apply the law of the issuer's jurisdiction.
If dispute raised and case goes to Indian court, the court will decide if that court have jurisdiction or not. Indian code of civil procedure has provision for law of jurisdiction. If Indian court retain jurisdiction, Indian law apply.
If dispute arises between parties of two EU member state, the court will consider Article 5 of Council Regulation (EC) No.44/2001 when parties do not agreed to a specific forum, which provides that jurisdiction of the court of place of performance will be applied. Article 4 of the Rome Convention determines the law governing a contract in the absence of choice by the parties or private international law does not indicate governing law.
4 ConclusionAs we have seen two type of regime one decides jurisdiction issue on basis of doctrine of forum convenience and forum non convenience and second decides jurisdiction issue on basis of codified law. The clash between them may leave grave injustice for some parties. For example if court of both the countries involving parties from different country retains jurisdiction or courts of both the countries reject jurisdiction. However it is the rare situation but there is the need of unified law of jurisdiction in international contract for flourishing global trade. Until now most of the international treaty and model laws tackling jurisdiction issue have keep payment transaction out of its scope. The differences are such a large that even European Union who came up with one jurisdiction law for almost all commercial matter have kept bankruptcy proceedings out of its scope . As letter of credits is one type of payment transaction, there is no international treaty or model laws that specify court of jurisdiction for dispute between financial institutions over payment transaction and in specific, letter of credits. Case laws on letters of credits in US and EU clarify many issues of law.
1. All India Reporter
2. Black's Law Dictionary
3. Law of International Trade, Third Edition, by Jason Chuah
4. International Trade Law, Third Edition, by Indira Carr
5. Declining Jurisdiction in Private International Law, by Fawcett (1995)
6. Bank Guarantee in International Trade, by Roeland F. Bertrams
7. Bank Collection and Payment Transaction, by Benjamin Geva
8. International Civil Litigation in United States Courts, by Gary B. Born
9. Westlaw Database
10. Lexis Database
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