Lloyd's Maritime and Commercial Law Quarterly
DISREGARDING NON-DOCUMENTARY CONDITIONS IN LETTERS OF CREDIT: IS IT AS EASY AS IT APPEARS TO BE?
Dr Jingbo Zhang *
This paper discusses how to treat the problematic existence of a non-documentary condition within a letter of credit that does not specify a required document to evidence its compliance. While the current Uniform Customs and Practice for Documentary Credits (UCP) simply direct banks to disregard such non-documentary conditions in the process of document examination, neither consistent interpretation has been provided to this rule, nor a precise scope of non-documentary conditions given for the past two decades. Through analysing judicial applications of the UCP disregard rule under the common law system, this paper submits that the UCP disregard rule does not achieve its desired effect to eradicate non-documentary conditions. It is further argued that the disregard approach frustrates the commercial parties’ expectations and does not work as an effective method to resolve the non-documentary problem for banks. An alternative is submitted for consideration herein, based on the “evidence” approach adopted by English common law which effectively turns the non-documentary condition into documentary proof, such that it can meet the commercial expectations of all parties while keeping the independent feature of letters of credit intact.
I. INTRODUCTION
The letter of credit, an instrument traditionally facilitating and financing international commercial transactions, alleviates risk borne by commercial parties by providing an autonomous and predictable system for payment.1 A distinguishable feature of letters of credit, as well as of other varieties of banks’ independent payment undertakings, lies in that
* Lecturer in Commercial and Maritime Law, University of Southampton. The author is very grateful to Professor James Davey and Professor Paul Todd, University of Southampton, for their constructive comments on an early draft. Special thanks to Distinguished Professor John Dolan, Wayne State University, for his help of collecting the US resources, and to the anonymous reviewer for providing useful suggestions to improve this paper. All errors and omissions are my own.
1. According to the International Chamber of Commerce 10th Annual Global Survey 2018, the value of traditional trade finance provided by respondents was over US$4.6 trillion in 2017. Among the portfolio of traditional trade finance, commercial letters of credit counted to 49% and standby letters of credit took up to 11%. The survey also showed that 72% of banks based in Africa preferred commercial letters of credit and banks in the Asia Pacific region issued more than three million letters of credit in 2017. See International Chamber of Commerce, Global Trade—Securing Future Growth (ICC Publication No.890E, Paris, 2018), https://iccwbo.org/publication/global-survey-2018-securing-future-growth/, 41–74. Even in the Americas, where the proportion of traditional trade finance is somewhat lower than other parts of the world, totals for the top 600 US banks on letters of credit activities in the first quarter of 2018 were still US$382 billion. See quarterly figures reported in “Statistics: US Banks” (2018) 22(7) Documentary
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