Gutteridge and Megrah's Law of Bankers' Commercial Credits

Richard King

• Publisher: Routledge
• Year: 2003
• eBook ISBN:
  9781135356941
• Topic: Law
• Index: Law

Presents a systematic study of the law of bankers' commercial credits.
Bringing together materials which are to be found scattered throughout the various series of English law reports, this title presents a systematic study of the law relating to commercial credits as applied today. It also contains a detailed exposition of the ICC's Uniform Customs and Practice for Documentary Credits.
Contents
* Provides information on the mechanism, operation and types of credits
* Analyses in detail the contractual relationships arising out of issue of credits; the law and practice in relation to transfer of credits; jurisdiction and conflict of laws, etc.
* Details the ICC's Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits and the ICC's International Standby Practices, ISP98
* Assesses the impact of the Rome Convention and the Brussels and Lugano Conventions in relation to applicable law and jurisdiction.

Chapter 1

COMMERCIAL CREDITS MECHANISM AND OPERATION

Introduction

1–01 The main object of a commercial credit (now more commonly referred to as a “documentary credit” or “letter of credit”)¹ is to provide a means of payment for goods and services supplied by a seller to a buyer, usually to facilitate dealings between merchants in different countries, by ensuring payment to the seller for the contract goods or services on the one hand and their delivery to the buyer on the other. A trader requiring finance for such a transaction may ask his bank to issue a credit pursuant to which the bank agrees to pay the seller against the presentation of documents representing the goods.

1–02 For domestic transactions in the United Kingdom a trader may obtain credit in the form of a loan or overdraft or on the discount of his trade bills of exchange. It is in overseas commerce that the commercial credit plays a leading part. When trader has confidence in trader, foreign trade tends to be financed more on the basis of the collection of a bill of exchange, which may be cheaper. Nowadays traders often prefer to rely on the credit of a bank and trade is then financed by irrevocable² documentary credit.

1–03 A documentary credit transaction presupposes the case of a purchaser who is not sufficiently well known in markets other than his own to enable him to rely solely on his reputation for solvency and honest dealing. It may be essential that he should be able to purchase on credit, if he cannot afford to be deprived of the use of his capital during the period which must of necessity elapse between the shipment of the goods and their receipt and resale by him in the home market or elsewhere. Similarly, the exporter also may be in need of credit, for he may not be able to afford to lock up capital that is required in his own business pending the receipt of payment for his goods. Thus a mechanism is necessary which, on the one hand, enables the exporter to obtain prompt payment, while allowing the importer to postpone payment until such time as he has been able to market the imported goods. The mechanism that has developed to satisfy these requirements is the documentary credit.

1–04 Commerce has at times been carried on in new channels, and not always with persons of unblemished repute. Moreover, exporters of goods have suffered losses as a result of fluctuations in rates of exchange and devaluation of currencies. For these reasons there has been a marked disinclination for exporters to rely on the individual credit of buyers, and an increasing tendency for them to stipulate in contracts for the sale of goods that a bank undertake responsibility for payment of the price.³ Even if importers and exporters are of good repute it may be preferable to finance a transaction by means of a documentary credit, for in times which are uncertain by reason of hostilities or the chance of hostilities, or, again, political interference, payment may be more easily forthcoming, as banks maintain accounts with each other which may not so readily be liable to foreign governmental control or interference.

1–05 Although the obligation of the bank issuing a documentary credit to pay under it has assumed different forms,⁴ it has historically been based on the bank’s promise to accept⁵ or honour bills of exchange if drawn on it or the bank’s guarantee of payment if bills of exchange are drawn on the buyer,⁶ security for the payment, acceptance or guarantee residing—in part, at any rate—in the pledge of the documents of title to the goods exported and in the special property thus obtained. Now much of the finance of foreign trade by documentary credit entails payment on the security of the documents of title either against a demand or sight draft or merely against documents.⁷

The essentials of documentary credit transactions

1–06 A documentary credit is defined in the latest revision of the Uniform Customs and Practice for Documentary Credits formulated by the International Chamber of Commerce,⁸ to which most credits are made subject, as

any arrangement, however named or described, whereby a bank (the “Issuing Bank”), acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf,

(i) is to make a payment to or to the order of a third party (the “Beneficiary”), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or

(ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or

(iii) authorises another bank to negotiate,

against stipulated documents(s), provided that the terms and conditions of the Credit are complied with.⁹

It follows that documentary credit transactions involve at least three parties: the buyer (the applicant for the credit), the seller (the beneficiary under the credit) and the bank issuing the credit (the issuing bank). Usually there are four parties, with the introduction of a second (intermediary) bank.¹⁰

1–07 In Guaranty Trust Company of New York v Hannay,¹¹ Scrutton LJ described the operation of a banker’s commercial credit in the following words:

The enormous volume of sales of produce by a vendor in one country to a purchaser in another has led to the creation of an equally great financial system intervening between vendor and purchaser, and designed to enable commercial transactions to be carried out with the greatest convenience to both parties. The vendor, to help the finance of his business, desires to get his purchase price as soon as possible after he has despatched the goods to his purchaser; with this object he draws a bill of exchange for the price, attaches to the draft the documents of carriage and insurance of the goods sold and sometimes an invoice for the price, and discounts the bill—that is, sells the bill, with the documents attached, to an exchange house. The vendor thus gets his money before the purchaser would, in ordinary course, pay; the exchange house duly presents the bill for acceptance, and has, until the bill is accepted, the security of a pledge of the documents attached and the goods they represent. The buyer, on the other hand, may not desire to pay the price till he has resold the goods. If the draft is drawn on him, the vendor or exchange house may not wish to part with the documents of title till the acceptance given by the purchaser is met at maturity. But if the purchaser can arrange that a bank of high standing shall accept the draft, the exchange house may be willing to part with the documents on receiving the acceptance of the bank. The exchange house will then have the promise of the bank to pay, which, if in the form of a bill of exchange, is negotiable and can be discounted at once. The bank will have the documents of title as security for its liability on the acceptance, and the purchaser can make arrangements to sell and deliver the goods. Before acceptance the documents of title are the security, and an unaccepted bill without documents attached is not readily negotiable. After acceptance the credit of the bank is the security…

This was over eighty years ago, when documentary credits were less used than they are today; but the statement is basically still accurate—substituting “ntermediary (or correspondent) bank” for “exchange house” and “issuing bank” for “bank” and subject to the fact that (as noted above) credits now commonly provide for sight or deferred payment ¹² without presentation of a bill of exchange.

1–08 When parties intend that payment will be made by documentary credit, the contract for the sale of the goods usually includes a provision that payment of the price is to be made by a bank pursuant to a documentary credit, preferably (from the seller’s point of view) a bank carrying on business in the country of export. Upon the credit being issued, the issuing bank, acting on behalf of the buyer and either directly with the beneficiary or through the intervention of a correspondent bank in the seller’s country, assumes liability for payment of the price, in consideration for a commission and the buyer’s promise of reimbursement. Between payment by the issuing bank and reimbursement by the buyer, the issuing bank usually has security afforded by the implied pledge of the documents of title presented in compliance with the terms of the credit and may take express security from the buyer.

1–09 The act by which the beneficiary of an irrevocable documentary credit becomes entitled to “payment”¹³ according to the promise embodied in the credit is the presentation by him within the validity period of the credit of documents complying in all respects with the terms and conditions of the credit.

1–10 The means by which payment may be made are stated in the UCP definition of a documentary credit set out above. ¹⁴ The particular method of payment will be stipulated in the credit. Historically the normal,¹⁵ though by no means the exclusive, operation of a credit took the form of payment or negotiation (or possibly acceptance) of bills of exchange (drafts) by a correspondent bank in the country from which the goods emanated, acting on behalf of the bank issuing the credit or perhaps for itself. Alternatively, the credit would call for drafts on the issuing bank or on the buyer and be available for negotiation by either a specified, or any, bank. These methods of payment are still used, but sight or deferred payment terms are also common. Except where the same bank is operating in both the country of export and the importing country, almost invariably two banks are concerned in documentary credit transactions.¹⁶

The Uniform Customs and Practice for Documentary Credits

1–11 The conditions on which banks are prepared to issue and to act on documentary credits have been standardized. The Uniform Customs and Practice for Documentary ...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Preface to Eighth Edition
• Preface to First Edition
• Preface to Second Edition
• Preface to Seventh Edition
• Contents
• 1 Commercial Credits-Mechanism and Operation
• 2 The Types of Credit
• 3 The Relationship Between Buyer and Seller
• 4 The Contractual Relationships Arising under a Credit
• 5 Transmission of the Benefit of a Credit
• 6 The Duty of the Parties upon Presentation of Documents under a Credit
• 7 Documentary Compliance
• 8 The Bank's Security
• 9 Damages
• 10 Jurisdiction and Conflict of laws
• Appendix1 Uniform Customs and Practice for Documentary Credits (UCP500)
• Appendix2 International Standby Practices (ISP98)
• Appendix3 ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR525)
• Appendix4 Form of Application for Opening of a Letter of Credit Used by HSBC Bank PLC
• Appendix5 Extracts from the Eighth Edition on the Legal Aspects of the Contracts Created by the Issue of a Credit
• Index