Banks play an essential role in facilitating international trade activities. This takes place through financing documentary credits requested by customers.
Almost, all exports and imports between countries is financed through letters of credit (LCs) also known as documentary credits. The UCP 600, issued by the International Chamber of Commerce (ICC) is the catalyst between exporters and importers and their banks in different countries.
Rules of documentary credits, as provided in UCP 600, direct banks to pay on presentation of documents. This means, no relation whatsoever between paying banks and the contract signed between the exporters and importers. This legal stand comes from the fact that documentary credits contract is of autonomy nature. In other words, it is an independent contract from the main trading contract.
Based on the autonomy nature of the documentary credits contract, the bank never looks at the main trading contract between the parties, but, looks for documents confirming the shipment of traded items. Once, the bank receives such documents it is obliged to release payment. This is why it is called documentary credits or LCs.
In international trade, many issues of fraud could arise, such as, shipment of bad items, out-of-date materials, contrary to specifications, shipping different items, etc. Such things could happen due to bad faith and fraud intention. However, this is not the responsibility nor duty of the paying bank as per UCP 600 provisions.
Herein, some English courts decreed that a bank may not pay on presentation of documents if it came to their notice that there is a fraud related to the main contract. The judicial precedents are of different stand from UCP 600, which provides for payment on presentation of docs irrespective of other matters that could affect the validity of the trading contract between the parties concerned.
Due to decisions from courts there is need for the ICC to relook into the matter and find suitable alternatives to resolve this important issue for the banking industry and its relation to international trade.
After due consideration and consultation between ICC and major banks in LCs and documentary credits, we believe, adding some specific guidelines to deal with fraud would be of great help to all parties. After all, fraudsters shall not rejoice at the cost of certain provisions from which they could penetrate for illegal purposes.
Banking industry must always continue to be fair, just and clean.
The author is a legal consultant