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1. Introduction: Letter of
Credit
In 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 credit
The 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 transactions
When 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 Credits
There 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
1. Applicant
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. Beneficiary
The 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 dispute
3.1 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 USA
There 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.
3.1.1.1 When contract specify forum
If 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:
3.1.1.2 When contract does not specify forum
In 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 Union
There 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 .
3.1.2.1 When contract specify forum
Under 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.
3.1.2.2 When contract does not specify forum
In 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 India
Laws 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.
3.1.3.1 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.
3.1.3.2 When contract does not specify forum
Primarily, 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 dispute
Wherever 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 credits
There 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
countries
Only 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 Conclusion
As 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.
Bibliography
Books Resources
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
Internet Resources
9. Westlaw Database
10. Lexis Database
11. Google Search
12. Wikipedia the free encyclopedia
13.
http://www.west.net/~smith/jurisdiction.htm
14.
http://www.privacyexchange.org/iss/confpapers/lindberg.html
15.
http://europa.eu.int/scadplus/leg/en/lvb/l33054.htm
16.
http://indiacode.nic.in/
17.
http://www.uncitral.org/uncitral/en/index.html
18. http://www.iccwbo.org/
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Jurisdiction
in International Letter of Credits
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