Nature of the documentary credit

The documentary credit system in the international trade transactions as a method of payment is particularly useful where when the goods of seller who entered into a sales contract with an overseas buyer, will want to be sure that he will received the contract price for shipped goods, and the buyer on the other hand must pay the contract price until the seller has complied with his contractual obligations.

The general procedure is that the bank ( the issuing bank) undertakes the payment made to the beneficiary( the seller) only the presentation of the documents(including the invoice, the bill of lading, the insurance policy etc) by the seller are accordance with the terms of letter of credit which has already been opened by the applicant(the buyer) in time43. Letters of Credit are generally governed by the Uniform Customs and Practice for Documentary Credits( hereafter referred to as the UCP 500), which is a body of articles regulating the implementation and operation of the documentary credit issued by the International Chamber of Commerce.

When the terms of the UCP 500 are incorporated into a documentary credit, the parties' respective rights and duties are regulated by its terms. The rules do not apply under English law unless expressly incorporated by the parties to the credit45. 2) Letters of credit and the standby credit under UCP 500 A standby credit is a special type of letters of credit activated by the tender of documents in accordance with the terms of the credit. 46. In short to say that a standby credit is a form of guarantee for the beneficiary's protection in case of default of the other party to the underlying contract.

The standby credit is subject to the UCP 50047 in the international trade transaction. The credits (including a standby credit) are separate from and independent of the underlying contract of sale between the Applicants(the buyer/seller)and the Beneficiaries(the seller/buyer). Thus, the applicant is not entitled to prevent payment for the beneficiary under the letter of credits48. Under the Article 13(a), when the seller tenders the documents to the bank, the bank must examine all documents with reasonable care to determine whether or not they conform with the credit(s).

The bank also undertakes to look for the correct documents which are consistency between all the documents and that the content of each document is correct. Therefore, in the present case where the issuing bank found that the actual amount shipped (800 tonnes) as reflected in the bill of lading tendered by NT is not inconsistent with two other documents, the buyer is entitled to refuse to accept the documents under Article 14 that documents are not in compliance with the terms and conditions of the credit50.

The obligation of the beneficiary to tender documents exactly compliance with the credit is strict not only under the articles but also under common law51. 3) Summary As far as I have concerned, G will be entitled to claim payment against the standby credit provided he could tender the writing statement to the bank to show that he is not dissatisfied with the performance of NT. The statement made by G must be consistence with the terms of present standby credit for NT's defective performance under article 13, UCP 500.

The bank, accordingly, has obligation to make payment against conforming documents under article 9(A). There is an exception that the bank is entitled to reject a forged document on the grounds that it is a nullity. 52 But I can not find any evidence that G made a forged statement or fraudulently made. Therefore, the bank should pay against the statement made by G which is accord with the terms of the credit.

Furthermore, the credit is separate from and independent of the underlying contract of sale, with the effect, therefore, NT as an applicant for the credit can not prevent the bank from making payment. Overall, whatever types of letter of credits are issued, the bank undertakes to make the payment to the beneficiary only where the documents tendered by the beneficiary is strictly compliance with the letter of credits according to the rules in UCP 500.