Экзамен зачет учебный год 2023 / The independence principle of letters of credit and demand guarantees (1)

The N ature o f Letters o f Credit

2.14Where the bank fails to pay not because of insolvency but because it wrongly rejects the documents as not conforming to the requirement of the credit, judicial opinion seems divided as to whether the seller is entitled to look to the buyer either for the price agreed in the contract or for damages for breach of his contractual promise to pay by letter of credit. One view is that the seller is not entitled to sue the buyer.22 The other view is in favour of such a claim.23 It is submitted that, since the letter of credit is a conditional payment, if the bank refuses to pay, then the condition has failed, and therefore the buyer’s liability under the contract to pay the price should be revived. If the bank wrongly refuses to pay then the buyer has failed to provide a reliable paymaster.2425For, as Stephenson L.J. said in WJAlan & Co Ltd v. El Nasr Export and Import Co,15 ‘the buyers promised to pay by letter of credit, not to provide by letter of credit a source of payment which did not pay’.26

2.15 The question whether a credit is to be regarded as absolute payment of the price or as conditional payment of it is a matter of construction of the contract of sale between the seller and the buyer. However, the contract will rarely contain a clear term on the matter, in which case the intention of the parties must be determined from the terms of the contract and the surrounding circumstances. In the ordinary case where a contract of sale provides for payment by confirmed irrevocable letter of credit, it is assumed that the parties intended the credit to be conditional payment only.27 In WJAllan &Co v. ElNasr Export2*Lord Denning M.R. said that ‘a letter of credit is not to be regarded as absolute payment, unless the seller stipulates, expressly or impliedly, that it should be so. He may do it impliedly if he stipulates for the credit to be issued by a particular banker in such circumstances that, it is to be inferred that the seller looks to that particular banker to the exclusion of the buyer.’ However, the fact that a seller has agreed on the identity of the issuing bank is not conclusive. It is only one factor to be taken into account when considering whether there are circumstances from which it can be inferred that the seller looks to that particular bank to the exclusion of the buyer.29

II.UNIFORM CUSTOMS AND PRACTICE

I.UCP

A.Development

2.16 Since letters of credit are widely used in international trade it has been necessary to standard­ ize the terms on which parties assume responsibilities under letter of credit transactions.

22 Soproma SpA v. Marine andAnimalBy-Products Corporation [1966] 1 Lloyd’s Rep. 367 at 368.

23WJ Alan & Co Ltd v. El Nasr Export and Import Co [1972] 2 QB 189, 219 (Megaw L.J.) and 220 (Stephenson L.J.).

24The fact that the seller has a remedy against the bank should not exonerate the buyer from this liability.

25[1972] 2 QB 189 at 220.

26Emphasis in the original.

27WJAlan & Co Ltdv. ElNasrExportandImport Co [1972] 2Q B 189; Maran RoadSaw Millv. Austin Taylor

& Co Ltd[ 1975] 1 Lloyd’s Rep. 156; ED and F Man Ltd v. Nigerian Sweets and Confectionary Co Ltd [1977] 2 Lloyd’s Rep. 50.

28[1972] 2 QB 189 at 210.

29ED and F Man Ltdv. Nigerian Sweets and Confectionary Co Ltd \1977] 2 Lloyd’s Rep. 50 at 56.

1 2

parties in connection with the credit. Certain matters, such as the consequences of fraud, unconscionable conduct or illegality, are not dealt with by the UCP and are left to be resolved

30ICC No. 151.

31ICC No. 222.

32ICC No. 290.

33ICC No. 400.

34ICC No. 500.

35ICC No. 680.

36Form Bank SA/NVv. Indian Overseas Bank [2010] EWHC 84 (Comm) at [44].

37Royal Bank o fScotlandPic v. Casa di Risparmio delle Provincie Lombarde [1992] 1 Bank LR 251 at 256.

38M. Golodetz dr Co Inc v. Czarnikow-Rionda Co Inc [1980] 1 WLR 495 at 509, 517.

39ForestallMimosa Ltd v. Oriental Credit Ltd [1986] 1 WLR 631.

40ForestallMimosa Ltd v. Oriental Credit Ltd [1986] 1 WLR 631. cf. Royal Bank ofScotland pic v. Casadi Risparmio dcllc Provincie Lombarde [ 1992 ] 1 Bank LR 251 at 256. See also Kumgai-Zenecon Construction PteLtd

v.Arab BankLtd{\997] 3 SLR 770.

41Art. U U C P600.

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1

The N ature o f Letters o f Credit

according to national law. For this reason, much of the discussion in this book is not affected by the provisions of the UCP, since the book is mainly concerned with the extent to which the courts can, on the basis of national law, interfere with the operation of the credit on the ground of wrongful conduct not affecting the validity of the credit itself. This includes conduct such as fraud, in Chapter 5, unconscionable conduct, discussed in Chapter 7 or illegality, discussed in Chapter 8.

2.Other International Materials

2.19Prior to the publication of UCP 600, to facilitate the electronic presentation of documents under letters of credit, the ICC published tht Supplement to the Uniform Customs and Practice

for Documentary Credits for Electronic Presentation (eUCP version 1.0) which came into effect on 1 April 2002. However, industry did not show great enthusiasm for electronic presentation. During the drafting of UCP 600 it was agreed that, due to the limited usage of electronic presentation, the eUCP should remain as a supplement to the UCP. As a result, eUCP version 1.0 was revised to reflect the changes made in UCP 600. 'The current version of eUCP, version 1.1, is consistent with UCP 600. The purpose of eUCP rules is, as Article el.a states, to accommodate presentation of documents in electronic form (‘electronic records’) alone or in combination with paper documents. The eUCP articles are numbered with an ‘e’ preceding each article. This is to avoid confusion between the articles of the UCP and those of the eUCP. The eUCP, like the UCP, applies to a credit if it is incorporated into it. Article el .b of the eUCP also provides that the eUCP shall apply ‘where the credit indicates that it is subject to eUCP’.

2.20 There are other international documents relating to the letter of credit. In 2002 the ICC approved publication of the International Standard Banking Practice for the Examination

o f Documents under Documentary Credits (ISBP)42 to help reduce the high percentage of documents rejected on first presentation for non-compliance. Following the approval of UCP 600 it was necessary to update the ISBP and a revised version was published in 2007. The 2007 Revision for UCP 60043 explains how the practices set out in UCP 600 are applied by documentary practitioners. In the Introduction,44 parties are discouraged from incorporating the terms of the 2007 Revision into the letter of credit, ‘as UCP 600 incor­ porates international standard banking practice, which includes the practices described in’ the ISBP.

2.21A further set of rules which may be mentioned here is the International Standby Practices

(ISP98), adopted by the ICC in 1998. This code is designed specifically for standby credits. For it to apply to a standby credit the parties must incorporate it into the credit. Like the UCP, it is not a comprehensive code and it expressly does not deal with matters such as fraud or abuse. These matters are left to the applicable law.45

42ICC No. 645.

43ICC No. 681.

44At 12.

45Rule 1.05c.

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III.Use ofBills o f Exchange

III.USE OF BILLS OF EXCHANGE

1.Nature of Bills of Exchange

Letters of credit are sometimes issued to be available by a bill of exchange, also known as a draft. A bill of exchange is a payment instrument.46 It is defined in section 3 of the Bills of Exchange Act 1882 as an unconditional order in writing, addressed by one person (known as the ‘drawer’) to another (known as the ‘drawee’), signed by the person giving it, requiring the person to whom it is addressed (the drawee) to pay on demand or at a fixed or determin­ able future time a sum certain in money to, or to the order of, a specified person (known as the ‘payee’), or to bearer. The drawee is not bound by the order in the bill until he signifies his assent to the order in the bill by accepting it. He may do so simply by signing the bill.47 Once the drawee accepts the bill (and becomes the ‘acceptor’) he is bound to pay it according to the tenor of his acceptance.48

Where a bill of exchange is used in a letter of credit transaction, the terms of the credit should specify the parties to the bill and their role. Normally, the drawer is the beneficiary of the credit (the seller), the drawee is either the bank (issuing or confirming) or the applicant,49 the amount of the bill is the same as that of the credit and the payee is either the beneficiary or his bank. Since the bill of exchange gives rise to rights and liabilities between the parties to the bill, when it is used in a letter of credit transaction it creates, as between the parties to the bill, rights and liabilities apart from those arising from the undertaking of the issuing bank under the credit to pay against complying documents. The process is that the beneficiary tenders to the bank the bill of exchange together with the other documents for acceptance or payment.50 The bill may be drawn on the bank (issuing or confirming) or on the buyer, the applicant.

2. Where the Bill is Drawn on the Bank

Where the bill is drawn on the bank its obligation is to accept it and pay at maturity.51 The bank may refuse to accept the bill of exchange if it fails to comply with the requirements of the credit.52 But the credit must be scrutinized with care to determine what it actually requires. Thus in Credit Industrielet Commercial v. China Merchants Bank,53 where the issu­ ing bank undertook that, on receipt of the ‘documents’ it would accept the bill of exchange,

48Ibid, s 54(1).

49However, in the case of a credit subject to the UCP 600 this is not permissible (Art. 6.c).

50In practice the beneficiary will give the bill together with the required documents to his own bank for the bank to present it to the drawee bank and collect payment, in a manner similar to collection of payment on a

cheque.

51Art. 7.a.iv, UCP 600.

52For example, if the credit requires the bill to be signed by two named persons, it must be signed by both:

Elder DempsterLines Ltd v. Ionic ShippingAgency Inc [1968] 1 Lloyd’s Rep. 529. See also Astro Exito Navegacion SAv. ChaseManhattan Bank, TheMessiniakiTolmi{\986\ 1 Lloyd’sRep. 455, where no draft was tendered even though the credit required drafts drawn on the bank.

53 [2002] EWHC. 973 (Comm); [2002] 2 All ER (Comm) 427.

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The N ature o f Letters o f Credit

it was held that a term in the credit requiring ‘all’ documents to be in English, referred only to the commercial documents, which would be passed on to the applicant, and so did not include the draft. Consequently the issuing bank was bound to accept a draft in French.

2.25Once the bill of exchange has been accepted by the issuing bank, the beneficiary need not wait for the maturity date in order to get cash. Fie can negotiate the bill to another bank or finance house in order to raise immediate cash.54 The bank that negotiates (or buys) the bill from the beneficiary usually becomes a holder in due course and is entitled to enforce the bill against the acceptor bank.55 Such a bank is protected because defences which the acceptor bank may have against the drawer (the seller) are not normally available against the bank that has purchased the bill and become a holder in due course.56 A key function of drafts in a letter of credit is to put the obligation on the bank to pay in a readily marketable form and thereby to enable the seller to go into the market and cash it.57 Under UCP 600, where a draft is used in a letter of credit, a nominated bank can purchase from the beneficiary either drafts (drawn on a bank other than the nominated bank) or documents tendered under the credit.58 In either case the issuing bank is bound to reimburse the nominated bank. Since, in such a case the nominated bank is entitled to reimbursement whether it purchased the draft or the documents, it might be asked whether including a draft serves any purpose.

2.26The answer seems to be that including a draft may nevertheless be useful because it gives the beneficiary the benefit of a wider market for the obligation of the issuing bank. Since under UCP 600 the issuing bank’s obligation to reimburse a bank that has purchased the docu­ ments extends only to a nominated bank,59 the beneficiary cannot market that obligation to a bank other than a nominated bank. Where only a single bank ora few banks are nominated banks under the credit, this can be a real disadvantage. Flowever, where a draft is used, once it is accepted by the issuing bank, the bank becomes bound to honour it. Since the bill of exchange is a negotiable instrument, it may be negotiated by any bank, not only a nominated bank. In other words, as indicated above, the issuing bank is bound to pay any bank that has negotiated the bill of exchange and has become a holder in due course. This means that the beneficiary can sell the bill of exchange to banks other than the nominated bank or banks.

3.Drafts Drawn on the Applicant

2.27A credit may be issued requiring a draft drawn on the applicant as one of the required docu­ ments. In such a case the bank is bound to pay if the documents presented comply with the requirements of the credit.60 Flowever, it is better for the seller to have a credit which involves

54'Ihe beneficiary may also sell the draft before it has been accepted by the drawee bank, but such a bill is not likely to be very attractive in the market.

55See discussion at para 5.93.

56See discussion in paras 5.93 to 5.96.

57A bill that has been accepted by the issuing bank is readily realizable in the market not only because of the promise of the issuing bank to pay but also because if the issuing refuses to pay the bank that has purchased the bill from the drawer, the beneficiary, has a right of recourse against the drawer: ss 43(2) and 47(2) of the Bills of Exchange Act 1882. However, in the case of a credit subject to UCP 600, the negotiating bank is not entitled to recourse if it is a bank that has confirmed a credit available by negotiation.

58Art. 2.

59Art. 7.c.

60 If the credit requires a draft drawn on the applicant, a draft drawn on another person is discrepant: Kydon Cia Naviera SA v. National Westminster Bank Ltd, The Lena [1981] 1 Lloyd’s Rep. 68.

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I V Types o f Letter o f Credit

a draft drawn on the bank rather than the buyer. First, for the seller who needs to negotiate or sell the draft, a draft drawn on the buyer is not as marketable as one drawn on a bank. Secondly, even if the seller can discount (that is to say, sell) a draft drawn on the buyer, if the buyer later fails to pay the bank that purchased the draft from the seller, that bank may have a right of recourse against the beneficiary.61 In any event, since a major purpose of a letter of credit is to substitute the bank’s undertaking to pay for that of the buyer, it is not advisable for the credit issued to be available by a draft drawn on the buyer. Thus, although a credit may be issued requiring a draft drawn on the buyer as one of the required documents, both the UCP 60062 and the ISBP63 state that a credit must not be issued available’ by a draft drawn on the buyer. However, if a credit is so issued, then if the draft and other required documents tendered comply with the requirements of the credit, the bank should pay since its undertaking under the credit is to honour documents including a draft drawn on the applicant.

IV. TYPES OF LETTER OF CREDIT

A variety of obligations can be created by a letter of credit. To this extent a letter of credit is a 2.28 flexible instrument. The particular bundle of rights and obligations created by a specific

letter of credit depend on the terms of the credit. Credits are usually classified according to whether or not they give rise to particular rights or obligations. It may be helpful to introduce the main types of credit here.

1. Revocable and Irrevocable Credits

Article 6 of UCP 500 distinguished between a revocable credit and an irrevocable credit. 2.29 A revocable credit is one which can be amended or cancelled by the issuing bank without

the consent of the beneficiary. By contrast, an irrevocable credit cannot be amended or can­ celled by the issuing or confirming bank without the consent of the beneficiary. In the case of a revocable credit, the issuing bank can cancel the credit even after the seller has started performing the underlying contract of sale. It can do so without giving notice to the seller. Thus a seller may despatch goods to the buyer only to discover, when he presents documents to the nominated bank, that the credit had been cancelled by the issuing bank.64 Since a revocable credit does not offer the seller any real security it is rarely used in practice. Under Article 6 of UCP 500 where a credit failed to specify whether it was revocable or irrevocable, it was deemed to be irrevocable.

UCP 600 has gone further; it only applies to irrevocable credits.65 By issuing a credit subject 2.30 to UCP 600 the issuing bank gives the beneficiary a definite undertaking that it will make payment if complying documents are presented. In the case of a credit subject to UCP, the

61See, e.g. M.A. Sassoon &Som, Ltdv. InternationalBanking Corporation [1927] AC 711.

62Art. 6.c.

63Art. 54.

64CapeAsbestos Co Ltd v. Lloyd’s Bank Zrz/[1921] WN 274.

65See Art. 2, which defines a credit as any arrangement ‘that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

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The N ature o f Letters o f Credit

issuing bank’s undertaking become binding as of the time it issues the credit.66 If the issuing bank cancels the credit without the consent of the beneficiary that constitutes a repudiation of the contract with the beneficiary and entitles the beneficiary to treat the contract as discharged and claim damages for breach of contract. The irrevocable credit is therefore far more advantageous to the seller than the revocable credit.

2.Confirmed and Unconfirmed Credits

2.31Although a letter of credit substitutes a bank’s promise to pay for that of the buyer, and there­ fore gives the seller more reassurance of payment, since the bank that issues the credit will normally be in the buyer’s country, in some cases the seller may require a promise from a bank in his own country. In such a case, the buyer’s bank that issues the credit may request a bank in the seller’s country to add its own promise to that of the issuing bank. If the bank in the seller’s country does so, it confirms the credit and becomes known as the confirming bank. The confirming bank is bound to pay if the beneficiary presents documents that comply with the requirement of the credit. The confirming bank becomes bound as of the time it adds its confirmation.67 This means that the beneficiary is entitled to payment from a bank in his own country. Where the credit is confirmed the beneficiary is entitled to demand payment from either the confirming bank or the issuing bank.

2.32A credit is unconfirmed where the bank in the seller’s country does not add its own undertak­ ing to that of the issuing bank. In such a case, the bank is simply requested to notify the credit to the beneficiary or to receive and examine documents presented by the beneficiary and to pay as instructed by the issuing bank. Where the credit is unconfirmed the bank in the seller s country is only acting as the agent of the issuing bank and has no contract itself with the beneficiary in respect of payment. The beneficiary’s sole contract is with the issuing bank in the buyers country.

3.Sight, Acceptance, and Deferred Payment Credits

2.33Credits may also be classified according to the manner in which payment may be made available to the beneficiary. Article 6.b of UCP 600 provides that a credit must state whether it is available by sight payment, deferred payment, acceptance, or negotiation. A credit avail­ able by sight payment (a sight credit) is one under which payment is due upon presentation of complying documents. The bank is allowed time to examine the documents to determine whether they comply with the credit. Thus with a sight credit the beneficiary is entitled to the amount of the credit as soon as the bank determines that the documents presented are complying.68

2.34 An acceptance credit is one under which the issuing (and, where applicable, the confirming) bank undertakes to accept a draft drawn by the beneficiary and, having accepted the draft, to pay at a future date,69 provided that a complying presentation is made. So, unlike the sight

66Arc. 7.b, UCP 600.

67Art. 8.b, UCP 600.

68Assuming of course that there is no defence to payment.

69Art 2, UCP 600.

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IV, Types o f Letter o f Credit

credit, payment under an acceptance credit is postponed or deferred to a future date, known as the maturity date of the draft. From the point ofview of the beneficiary, the fact that pay­ ment is postponed to a future date is a disadvantage compared to a credit available by sight payment. However, this disadvantage is minimized by the fact that a draft is used in the credit, since this gives the beneficiary a negotiable instrument which enables him to obtain payment before the maturity date by discounting or selling the draft in the forfait market to another bank or finance house. Tire practice is that when a time draft is presented to the issuing or confirming bank together with the documents required by the credit the bank will accept the draft if the documents comply with the credit. Once the draft has been accepted by the issuing or confirming bank and returned to the beneficiary70 it becomes marketable and the beneficiary holding the accepted draft can easily discount it with another bank or with the confirming bank that has accepted the draft.

Under a deferred payment credit the bank promises to pay at a future date (the maturity date). 2.35

The maturity date is normally expressed in terms of a specified number of days after a desig­ nated event, for example 180 days after presentation ofdocuments71 or 390 days after the date of the bill of lading.72 Since payment is deferred to a future date, the beneficiary, who has pre­ sented complying documents, has to wait for that date before he can receive the money. In this respect the deferred payment credit is similar to the acceptance credit which contemplates pay­ ment at some future date after acceptance by the bank. But the deferred payment credit, unlike the acceptance credit, does not normally provide for the use of a bill of exchange. Indeed it is thought that the deferred payment credit came into use because in certain countries the use of drafts (in acceptance credits) attracted costly stamp duty.73 Yet in the case of deferred payment credits a practice developed of discounting the bank’s promise in the forfait market in a way similar to the discounting ofacceptance credits. This exposed the discounting bank to the risk of the beneficiary’s fraud discovered after discounting but before the maturity date.74 However, under UCP 600 the position of a nominated bank that pre-pays is now more secure.75

4. Straight and Negotiation Credits

given not just to the beneficiary but also to any bank. In such a case, a bank that negotiates the credit can enforce the issuing or confirming bank’s undertaking. Negotiation is normally needed, to allow the seller to raise immediate cash, where the credit is payable at some future date76 (e.g. 90 days) after presentation of documents. Negotiation under UCP 600 can be done by the nominated bank. Negotiation is defined in Article 2 of UCP 600 as ‘the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or

70Bills of Exchange Act 1882, s 21 (1).

71e.g. the credit in Banco Santander v. Banque Paribas 12000) 1 All ER (Comm) 776.

72e.g. the credit in Czarnikoiu-Rwnda v. Standard Bank [ 1999] 2 Lloyds Rep. 187, 193.

73See, e.g. Banco Santander SA v. Banque Paribas [2000] 1 All ER (Comm) 776 at 781.

74The fraud exception is discussed in Chapter 5 below.

75See the discussion in paras 5.100 to 5.105.

76e.g. GulfInternational Bank BSC v. Albaraka Islamic Bank BSC [2003] Ail ER (D) 460, where the credit

was payable 180 days from the date of negotiation.

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The N ature ofLetters o f Credit

documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nomi­ nated bank’. Under UCP 600 a nominated bank is authorized to negotiate the credit by making payment before the date of maturity.77 Article 6.a of UCP 600 states that a credit must state the bank with which it is available or whether it is available with any bank. Thus some credits allow for negotiation by any bank78 or by banks of a particular description79 or by a named bank.80 Under a negotiation credit the undertaking of the issuing bank and, if any, confirming bank addressed to the negotiating bank are independent of the undertaking to the beneficiary.81

2.38 Thus, whereas in the case of a straight credit the undertaking of the issuing and confirming banks give rise to only one contractual relationship with the beneficiary, in the case of a nego­ tiation credit the undertakings of the issuing and confirming banks give rise to two contracts: one with the beneficiary and a separate contract with the nominated bank. A straight credit may be negotiated by the seller’s bank if the bank is prepared to advance finance to the seller. However, if the bank does so, it will have no binding contract with the issuing or confirming bank and must rely for its security on its own arrangements with the beneficiary.82 The same applies in the case of negotiation credit which is negotiated by a bank other than the banks authorized to negotiate. Such a baiik is not entitled to reimbursement from the issuing or confirming bank since it had no authorization to negotiate the credit.

5.Revolving Credits

2.39In some cases a letter ofcredit may be required to finance not just a single shipment but a series of shipments over a period of time, as for example, in the case of shipment by instalments. In such a case the letter of credit may allow for more than one request for payment by the benefi­ ciary, who will present documents and receive payment after each shipment. The credit speci­ fies the maximum amount payable under any single presentation. However, after each payment to the beneficiary the amount of the credit is replenished in full.83 Revolving credits may operate in different ways depending on the precise terms of the particular credit.84

6.‘Red Clause’ Credits

2.40 Under a ‘red clause’ credit the bank undertakes to pay the seller before the goods are shipped on condition that the documents will be presented after shipment. This allows a seller, who needs cash to pay his own suppliers, to obtain the price of his goods in advance. The credit

77Arts 7.c and 8.c, UCP 600.

78e.g. Trafigura Beheer BVv. Kookmin Bank Co [2005] EWHC 2350 (Comm), at [4].

79e.g. DCD Factors Pic v. Ramada Trading Ltd [2008] Bus I.,R 654, where the credit was available by any bank in Pakistan by negotiation.

80e.g. KBC Bank v. IndustrialSteels (UK) Ltd [200111 All ER (Comm) 409, credit available for negotiation by KBC Bank NV in London.

81Arts 7.c and 8.c, UCP 600.

82Sassoon (MA) & Sons Ltd v. InternationalBanking Corporation [1927] AC 711.

83cf. the umbrella credit’ in Tukan Timber Ltd v. Barclays Bank № [1987] 1 Lloyd’s Rep. 171.

84For example, drawings may be required within specified periods. In such a case, under Art. 32 of UCP 600, if any instalment is not drawn within the period allowed lor that instalment, the credit ceases to be available for that and any subsequent instalment.

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I V Types ofL etter o f Credit

normally requires the seller to present some provisional document such as a warehouse receipt. If the bank pays under the credit it is entitled to reimbursement from the buyer even if the seller fails to ship the goods. This type of credit involves a significant risk for the buyer. It is known as a ‘red clause’ credit because it was traditionally printed in red ink.

7. Transferable and Non-transferable Credits

Under Article 38. b of UCP 600, a ‘transferable credit’ means a credit which specifically states 2.41 that it is transferable. Such a credit may be made available in whole or in part to another beneficiary at the request of the original beneficiary. 'The transfer enables the original benefi­

ciary to use the letter of credit to pay his own suppliers. The documents presented under the transferred letter of credit must meet the requirements of the original credit.85 The second beneficiary will present documents under the transferred credit and will be paid part of the amount. The balance will be paid to the original beneficiary, who will substitute his own invoice for those of the second beneficiaries. Article 38.a of UCP 600 states that a bank is under no obligation to transfer a credit except to the extent and the manner consented to by the bank. Tims the beneficiary does not have a right to have a transferable credit transferred. What he has is the right to request a transfer. The bank may decide not to accept the request to transfer the credit. If the bank accepts to transfer the credit, it is entitled to stipulate the terms on which it agrees to do so.

8. Back-to-Back Credits

An alternative to the use of a transferable credit is for the beneficiary to ask his bank to issue 2.42 a credit in favour of the beneficiary’s supplier, using the original credit, issued by another

bank, as security. In such a case, the two credits are ‘back-to-back’. This will serve the same function as the transfer of a credit. The terms of the new credit are normally similar to those of the original credit, since the seller must ensure that documents received from the supplier (such as certificate of quality or origin) must satisfy the requirements of the original credit. The supplier, the beneficiary of the new credit, will present documents under the new credit and receive payment. The seller, the beneficiary of the original credit, will use the documents to make his presentation under the original credit, having replaced the supplier’s invoice with his own. However, whereas a bank that transfers a transferable credit is acting within its authority contained in the original credit, a bank that opens a new credit in a back-to-back arrangement is not acting under any instructions or authority contained in the original credit. The new credit is a separate contract between the bank that issues it and the benefi­ ciary, who becomes the applicant in relation to the new credit.86 Back-to-back credits are sometimes used in cases where the parties want to conceal the fact that the transaction involves trade between two countries that prohibit trade with each other.87

85With the exception of the invoice, since the amount of the second beneficiary’s invoice will normally be less than the original beneficiary’s invoice and since the beneficiary will not want to disclose to his buyer the identity of his own suppliers.

86See, e.g. Union Bank (UK) Pic v. Pathak [2006] All ER (D) 210, discussed in para 4.27.

87See, e.g. Mannesman HandelAG v. Kaunlaren Shipping Corporation [1993] 1 Lloyd’s Rep. 89, which also

illustrates the risks involved for the second issuing bank.

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