Letters of Credit and Copies of Documents
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 persuasi