Documentary Credits and Governing Laws
Gabriel Sham
Principal at Gabriel Sham Consulting, formerly Director, Head Trade Services Asia, GTS Product at Royal Bank of Scotland
A view from a commercial perspective
Imagine you are a trade product manager of a bank in charge of documentary credits (“LCs”), and you just received from your in-house legal counsel a recommendation to impose a mandatory requirement that all LCs must contain an explicit governing laws clause. What would be your response?
While I had been a product manager in global, regional and local capacities, let me share my view from a commercial perspective.
It is an undeniable fact that LCs are widely acceptable as a trade finance and payment instrument, especially for cross-border transactions. A critical factor that makes LCs so widely acceptable is the UCP, the set of rules subject to which LCs are issued. (“UCP” stands for the Uniform Customs and Practice for Documentary Credits, published by the International Chamber of Commerce, with the latest version being the UCP600.)
You might have come across questions as to whether a certain country is subscribing to (or legally recognizing) the UCP. This kind of questions probably stems from a misunderstanding that UCP are laws, while in fact they are rules. For an LC that is issued subject to the UCP, the UCP rules are incorporated into the LC. By making a choice to act on an LC that is subject to the UCP, parties to the LC (e.g., the issuing bank, the beneficiary, the confirming bank) agree to be bound by the UCP rules.
Having clarified that the UCP are rules and not laws, let us be clear that LCs are nonetheless governed by national or state laws. For LCs that are silent on governing laws and which are the subject of legal proceedings, there are certain rules by which courts would determine the applicable governing laws.
To safeguard the bank’s interests and for the sake of clarity, it is understandable why a bank’s legal counsel would recommend for LCs to explicitly stipulate the choice of law. However, from a commercial perspective there are a number of factors to be considered: (1) It is not industry practice. (2) It is commercially challenging to implement for own LCs (import LCs), and almost impossible to achieve for LCs issued by other banks (export LCs). (3) LCs involving legal proceedings are few and far between.
In case the legal counsel’s recommendation is not implemented across the board, there are ways to manage the pertinent risk.
By Gabriel Sham, Principal, Gabriel Sham Consulting
Trade finance consultant SADC region
6yAs UCP rules require an issuing bank to stipulate where and with whom the documentary credit is available. If the LC is established with availability in the country of the beneficiary then it follows, in my view, if this nomination is taken up, that the laws of that country would be applicable. Conversely if the LC was issued with availability restricted to the counters of the issuing bank, then, in my view, the laws in the country of the issuing bank / applicant would apply.
Dresdner Kleinwort Benson/United Overseas Bank/CIMB/SCATF Consulting/Seabridgetfx.com
6yIt's a well written article and I wish to add that given the fact that there are several parties involved in the Doc LC, it is not always possible and acceptable to every party to impose unilaterally the choice of law and jurisdiction in the Doc LC . Notwithstanding the absence of the choice of law and jurisdiction being stated in the Doc LC, in the event of disputes , the governing law and jurisdiction will be determined by the place where the Doc LC is available for negotiation , acceptance or payment as the case may be. It is for the court to decide if the forum of that jurisdiction is appropriate to hear the case . Unlike Doc LC, I do see quite often the choice of law and jurisdiction being stated in Standby LC.
Good article. Law will always prevail.