Letters of Credit and Copies of Documents

来源: CHINA FOREX 2017 Issue 4
By Chang-Soon Thomas Song

Recently I received a call from a bank manager who handles company reorganizations, and he asked whether a bank could issue a letter of credit that requires a copy of a bill of lading instead of the original document. He added that it was related to a bonded warehouse transaction.

He also said there was a special condition for the letter of credit in the application. It said “all discrepancies are acceptable.”

Although I was not familiar with how a letter of credit would be used in a bonded warehouse transaction, I found this curious and told the bank manager that such a letter of credit would not be possible.

I then gave the matter a bit more thought, and the following points came to mind. A copy of a document is not used in letter of credit transactions and usually not in other commercial transactions. For all documents required in the use of a letter of credit, even if they are not specified as original documents, it is expected that they are originals.

A discrepancy notice would be sent by the issuing bank on two points: one is where a given document has not been presented. Thus if all discrepancies are acceptable, this would be an absurd situation. The second is where the contents of the documents do not comply with the specifications of the letter of credit.

In the case of a discrepancy, a discrepancy notice would be sent by the issuing bank to the beneficiary so that the beneficiary could cure r correct the discrepancy and re-present the documents to the issuing bank.

If “all discrepancies are acceptable,” this normal letter of credit banking procedure is effectively annulled for no good reason. In one famous fraud case, the above special condition that “all discrepancies are acceptable” was used. Thereafter, banks have avoided such language.

The Uniform Customs and Practice for Documentary Credits (UCP) explains the international letter of credit transaction handled by bankers in detail. It is not a law passed by a parliament of any country. Rather, customary law would be a closer description of its nature.

Whenever there is a dispute over a letter of credit, the said rule is reviewed to see whether an answer to the issue in question can be found.

Most of the time, there are no such answers. But by using the rules, we interpret their provisions to provide an answer to the issue at hand. If the interpretation is in line with international banking practice, then it would be a good interpretation.

Interpretation of rules with the context in mind is in general the best method of interpreting and applying rules to the facts of a case. It is the same with the UCP.

Bill of Lading
So what does the UCP say about a copy of a bill of lading in a letter of credit?

First, there is an article dealing with originals and copies. One might think that because there is such an article, a copy document is a legitimate part of shipping documents presented under a letter of credit.

When we read that same article, however, we find that it is concerned with how a banker would distinguish an original document from a copy. When the banker determines that a presented document is a copy,  that fact becomes the basis of a discrepancy notice to the beneficiary. The discrepancy notice would say “copy document presented instead of an original.”

In the famous English case of Glencore vs the Bank of China in 1996, the English Court of Appeal ruled that under the UCP 500, a beneficiary certificate which had been manually signed and then presented was a copy document because it did not have the word “original” stamped on the face of the document.

The famed justice Lord Mansfield consulted a group of merchants when he was adjudicating commercial cases and the law merchant (practice of international merchants) was incorporated into English common law. Even now, international contracts are based on English law and disputes are subjected to the jurisdiction of the English courts even if the transaction has nothing to do with the UK and the claimant and the defendant are both foreigners. The famed Lord Denning welcomed such a state of affairs, proud that the English courts could play a useful role in international trade.

Despite this illustrious legal history, English judges of more recent times have come to rely more on their understanding of international trade transactions than on any expert opinions presented by the parties. Such opinions can be in conflict just as the arguments of both parties conflict as they provide a judge with a clear picture of the issues and their context.

The relevant article in UCP 500 20(b) -- when interpreted -- would follow the ruling of the judge in the Glencore case. One problem with the interpretation in this case was that it completely ignored the context of the said rule in international letter of credit transactions. Furthermore, the judge ignored the expert opinions, saying that it was a simple provision which he could interpret without the assistance of these expert opinions.

Expert Opinions
Expert opinions do not tell a judge how to rule in a case. That is the judge's decision after considering all circumstances of the case, including the relevant article in the UCP 500 and the context in which the article applies in international letter of credit transactions.

Without the expert opinions, I do not understand how the judge can say that he understands the context of the international letter of credit transactions based solely on the text of the UCP 500 -- which is a distillation of international banking practice in letters of credit. And the judge ruled that based on the relevant article in the UCP 500, the presented beneficiary certificate, although signed manually, was a copy document because it did not have the word “original” stamped on the document's face.

Second Judge
Thanks to this decision, the next English judge had to consider whether the insurance document, which is usually multi-colored, is again a copy document because it did not have the word “original” stamped on its face. Unlike a bill of lading -- which indicates original, duplicate and triplicate -- insurance documents do not often have the word “original” stamped on their face.

The second judge distinguished this case from the previous case by saying that the relevant article in the UCP 500 need not be applied when the presented document, such as the insurance document, shows that it is an original document. The previous decision was thus not applied in this case.

As English law is based on prior cases binding future cases, banks started to reject documents on the basis that the said documents did not have the word “original” stamped on the face of the document. Thus, a document was deemed a copy despite the fact that the document had been correctly signed.

Banking Commission's Policy Statement
Not wishing to see the confusion continue, the Banking Commission of the International Chamber of Commerce issued a policy statement, providing a clear rule by which an original document and a copy document could be distinguished. The confusion stopped. It is now summarized in the article on originals and copies in the UCP.

Contrary to the initial impression that the UCP recognizes the legitimacy of copy documents (which would be absurd) by including such an article, when we understand the contents of the same article, we come to the conclusion that a copy document is not recognized at all in letter of credit transactions or in the UCP.  

Sometimes letters of credit require copies of documents, but when they do, we find that an original is required with a number of copies in addition. There is no requirement of copy documents alone.

As to the copy bill of lading, there is a further relevant article in the UCP. That is article 14(c) UCP 600 Standard for Examination of Documents, which states “a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.” An original transport document (e.g. bill of lading) is expected to be presented under the UCP. A copy bill of lading has no place here.

Standards for Examining Documents
The UCP is not a law passed by any country's parliament, thus it does not have the force of law. Even if someone violates the articles of the UCP, the violator is neither fined nor jailed.

However, judges in all countries recognize the UCP as the compilation of the law merchant (practice of international merchants, including banks) and accept it as a persuasive authority rather than a binding authority when reviewing cases involving letters of credit (which are subject to the UCP by agreement of all parties to the transaction).

Regardless of whether something is a binding authority or a persuasive authority, there can be an influence on the thinking of a judge as he or she considers the issues in a case. If the case involves the issue of whether a copy bill of lading is a legitimate requirement in the letter of credit, the above articles of the UCP, although not law, would lead a judge to the decision that when a copy bill of lading was required in the letter of credit, something had gone amiss. (Judging by the fact that the case ended up in court, the copy bill of lading had clearly resulted in a problem for the parties). Where to assign blame would be the task of the judge under the circumstances in line with justice and the equity of the case.

In article 17(a) UCP 600 Original Documents and Copies, it is stated that "at least one original of each document in the credit must be presented." One of the reasons for the UCP is to make sure that practices that are outside the normal operations of international letters of credit are made clear so that although the rules continue to develop and embrace further experience in international trade among bankers and traders. Irregular practices are thereby excluded from  international transactions so as to provide safety and confidence in the system for all participants worldwide.

In article 20(a)(iv) UCP 600 Bill of Lading, it is stated that "a bill of lading however named must appear to be the sole original bill of lading or if issued in more than one original, be the full set as indicated in the bill of lading.” This article refers to the requirement of the bill of lading under a letter of credit. The letter of credit only states that the full set of bills of lading is required. The detail of the bill of lading is stipulated in the relevant article of the UCP, and the relevant article in the UCP requires the original bill of lading.

Effectiveness of Documents
The final article in the UCP that I would like to quote is Article 34 UCP 600 Disclaimer on Effectiveness of Documents where it states, “a bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document or for the general or particular conditions stipulated in a document or superimposed thereon; nor does it assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods, services or other performance represented by any document or for the good faith or acts or omissions, solvency, performance or standing of the consignor, the carrier, the forwarder, the consignee or the insurer of the goods or any other person.”

If a copy document has been presented or required by the letter of credit, the above article would be meaningless. A copy of a document is without commercial or legal effect whatsoever. A banker is not liable or responsible under a copy document at all even without the above disclaimer as the copy document is simply not a document recognized as a legitimate document in the letter of credit transaction. Copies of documents are sometimes requested with the original but this does not make such copy documents effective as a document from a commercial or legal point of view.

International Standard Banking Practice
In the International Standard Banking Practice (ISBP), issued by the Banking Commission, paragraph 20 refers to documents for which UCP 600 transport articles do not apply. It states “copies of transport documents are not transport documents for the purpose of UCP 600 articles 19-25 and sub-article 14(c). The UCP 600 transport articles apply where there are original documents presented."

The ISBP is a commentary on the UCP and it explains how the UCP articles are in fact interpreted and applied to the international letter of credit transactions. The ISBP makes clear that the copy bill of lading has no place in normal letter of credit transactions.

So let's review some of the basics.

The original bill of lading is issued by the carrier. It has the word “original” on the face of the document. It is signed by the carrier in various ways, all of them recognized as valid by the UCP articles.

The carrier provides non-negotiable copies of the bill of lading in addition to the original bill of lading.

At times, there is someone who claims that the copy of the bill of lading refers to the only the photocopy of the signed original bill of lading.

Regardless of such a claim, both the first copy as well as the second copy are copies of the bill of lading. And all of them are without commercial or legal effect whatsoever.

A letter of credit presupposes an actual international transaction between an exporter and an importer involving movement of actual goods in international trade. When a copy of a bill of lading is brought into the picture, it simply means that the actual transaction has already been carried out by the parties. By using a copy bill of lading, the parties are trying to use the letter of credit for a purpose which is not what the letter of credit was designed for.

The letter of credit transaction is supported by the banks to help international traders move goods worldwide. But this does not mean that bankers will do anything and everything that the international trader has in mind.

When the copy bill of lading is suggested, the parties are trying to use the normal letter of credit transaction for purposes unknown to the ordinary banker.

The letter of credit transaction is carried out each day all over the world by countless numbers of bankers almost mechanically without thinking about each step in the letter of credit transaction. But do not be fooled. There are procedures in place in each bank to screen out transactions that are not normal. There are laws which underpin the banking transaction and anyone who tries to abuse the system soon finds himself in trouble with the law which is usually not visible to the naked eye.

Supposing the copy bill of lading was somehow presented to the bank despite all of the previous considerations. Let us see what happens.

First the exporter would present the copy bill of lading to his banker so that the banker can negotiate the shipping documents, including the copy bill of lading. He would suddenly find that the banker who normally negotiates shipping documents informs him that the copy bill of lading cannot be negotiated.

The bill of lading is the collateral underlying the letter of credit transaction, ensuring that negotiating bankers and the issuing banker will be able to recover their funds even if payment is not made by the issuing bank and the beneficiary has gone bankrupt after negotiation of the shipping documents. That holds true even if the applicant had also gone bankrupt and although the issuing bank had made payment, and the issuing bank is unable to get reimbursed from the applicant for the funds expended.

Both the negotiating banker and the issuing banker simply take the bill of lading and present it to the carrier for the goods. And the goods are sold to recover the funds that had been expended by the negotiating banker or the issuing banker.

But what do you do with a copy bill of lading?

English Court Interpretation
The following is an excerpt from a book on letters of credit by a sitting English judge, Raymond Jack. Documentary Credits by Ali Malek and David Quest, Fourth Edition Tottel Publishing Ltd. 2009 (Ali Malek and David Quest are English barristers who updated the book which had been written by Judge Jack.)

The basic rule is and always has been that original documents are required. Glencore International AG v Bank of China [1996] 1 Lloyds Rep 135 at 151-- thus the UCP provides in article 17:

Article 17 Original Documents and Copies
a. At least one original of each document stipulated in the document must be presented.

Judge Jack understands that letter of credit law is based on the principles and rules of the UCP. Although the UCP is not law and simply the law merchant summarized by the Banking Commission, by court decisions made by English judges, the principles and the rules of the UCP are interpreted and applied in context to letter of credit cases presented before the English courts.
Hopefully, this somewhat long exposition on the use of a copy of a bill of lading in letter of credit transactions helps bankers as well as traders understand the problems that may arise with such transactions.

The author is the first expert and attorney at the Law Trade and Services Department, KEB Hana Bank, Seoul, Korea

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