International Commercial Law

Agreed Terms of Contract, Soft Law

and Mandatory Rules in Practice:
Letters of Credit
University of Oslo

Giuditta Cordero Moss, Ph.D., Dr.Juris

Professor, Oslo University

Documentary Credits (L/C Letter of Credit)

DEFINITION of 'Letter Of Credit' A letter from a bank guaranteeing that a buyer's payment to a seller will be received
on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank
will be required to cover the full or remaining amount of the purchase.

Broadly adopted payment mechanism in

international transactions
Protects sellers interest to obtain agreed
price
Protects buyers interest to obtain agreed
goods
Largely used also for other kinds of
payment (e.g., performance bond)

Structure
Applicant Issuing Bank Beneficiary
Applicant Issuing Bank Advising
Bank- Beneficiary
ApplicantIssuing BankConfirming
Bank-Beneficiary

Most important elements

Irrevocable (art. 6 UCP*)

Documents to be presented
Expiry date
Place for presentation
Amount of payment, method of payment
Date of payment
Stale documents
Partial shipments
Acceptance

*Uniform Customs and Practice: The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the
issuance and use of letters of credit.

Most important features

Bank (issuing or confirming) is obliged to pay if
documents on their face conform with
specifications in the instruction
Obligation is autonomous (art. 3, 4 UCP).
Defences based on the underlying transaction
are irrelevant
Documents should have no references to the
contracts regulating the underlying transaction

L/C, UCP 500 and Governing

Law
Customary law: Apply unless parties
exclude them
Standard Conditions: Apply only if parties
refer to them
Art. 6, deemed irrevocable unless the parties
have specified the contrary

L/C and Overriding Mandatory

Rules-I
Payment upon presentation of
documents vs abuse of right
Even if documents were not presented,
Swiss bank had to pay because other
evidence had been provided that the
goods had been delivered

L/C and Overriding Mandatory

Rules-II
Payment upon presentation of documents
vs supervened illegality of payment
The state of the issuing bank prohibits to
effect payment, and the advising bank in
the US is freed from its obligations
(Chuidian)

L/C and Overriding Mandatory

Rules-III
Obligation to issue an L/C and illegality of the payment
obligation
The Central Bank of the buyer refuses to authorise L/C,
and English courts deem payment obligations to be valid
(Toprak)
The state of the issuing bank prohibits to effect payment,
and the advising bank in the US is not freed from its
obligations (Zeevi)

L/C and Ordre Public

Payment upon presentation of documents
vs embargo affecting the underlying
transaction
The US bank is freed from the obligation
to pay

Summing up
Not always UCP 500 apply
UCP 500 may be supplemented by
governing law
Obligations under L/C may be affected by
foreign exchange regulations
Obligations under L/C may be affected by
embargo