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DRAFTING LETTERS OF CREDIT: BASIC ISSUESUNDER ARTICLE 5 OF THE UNIFORM

COMMERCIAL CODE, UCP 600, AND ISP98

JEFFREY S. WOOD

This article compares the treatment of various letter of credit issues underArticle 5 of the New York Uniform Commercial Code (“Article 5”), theUniform Customs and Practice for Documentary Credits 2007 Revision,

International Chamber of Commerce Publication No. 600 (“UCP 600”), andthe International Standby Practices (“ISP98”) published by the Institute forInternational Banking Law and Practice, and outlines some considerations rele-vant to those drafting letters of credit, particularly standby letters of credit andrelated issuance or reimbursement agreements. The discussion is intended pri-marily for those who are not experienced letter of credit practitioners, and doesnot extend to the kinds of issues that may arise when a letter of credit involvesmultiple banks — for example, when one bank issues a letter of credit, a secondbank confirms the credit (thus becoming independently liable to the beneficiary)

and a third bank advises the credit to the beneficiary.

Letters of credit normally fall into one of two broad types, known as“commercial” letters of credit and “standby” letters of credit.1 The dis-tinction is based primarily on the business purpose served and not on

the applicable legal principles or form. Commercial letters of credit, which

Jeffrey S. Wood, of counsel to Debevoise & Plimpton LLP, can be reached [email protected]. The author expresses special thanks to Carlos Gouveaof Debevoise & Plimpton LLP for his assistance in the preparation of this article.

Published in the February 2008 issue of The Banking Law Journal. Copyright ALEXeSOLUTIONS, INC.

in concept date back hundreds of years, are used primarily to ensure paymentof the purchase price for goods moving in international trade — a buyerarranges a letter of credit in favor of a seller, who can draw on the letter ofcredit by delivering evidence that the goods have been shipped (such as a car-rier bill of lading, an independent inspection report covering the goods, andevidence of insurance of the shipment). By contrast, standby letters of cred-it, which have come into use in the last forty years or so, are used primarilyto provide third-party credit support for specific financial obligations of per-sons (such as the obligation of a contractor to make liquidated damage pay-ments if a completed project underperforms).2 The term “credit” is used inthis article to refer generically to any type of letter of credit, while commer-cial letters of credit are referred to as “commercial credits” or “trade credits”and standby letters of credit are referred to as “standbys” or “standby cred-its.”3

By its terms, Article 5 of the Uniform Commercial Code is applicable toall types of letters of credit. In its present form, Article 5 dates from 1995,and has been adopted by all States and the District of Columbia. It becameeffective in New York on November 1, 2000.4 The revision notes to Article 5indicate that the revision sought:

(1) to emphasize the independence principle5 and to conform the Article tocurrent domestic and international customs and practices,

(2) to accommodate evolving technology, particularly the use of electronicmedia,

(3) to maintain letters of credit as inexpensive and efficient instruments, and

(4) to resolve conflicts among existing decisions.

UCP 600 is a 2006 revision of the rules of practice for letters of creditprepared under the auspices of the International Chamber of Commerce (the“ICC”) that became effective on July 1, 2007. It replaced UCP 500, releasedin 1993.6 The creation and adoption of UCP 600 seems to have been trig-gered, in large part, by a high frequency of excessively technical rejections ofdocuments7 presented under UCP 500 commercial credits. The ICC draft-ing committee responded to this by significantly reorganizing the text of the

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rules, adopting new, more comprehensive definitions and interpretations andchanging the rules for examination of documents presented. Although UCP600, like UCP 500, states that it is applicable to all forms of letter of credit,its focus is commercial credits, where payment is typically made against thepresentation of documents that may include complex bills of lading, productinspection reports, insurance documents and other documents common ininternational trade.8

ISP98 is a product of the Institute of International Banking Law andPractice and became effective on January 1, 1999. As its full name indicates,ISP98 deals exclusively with standby credits. ISP98 is primarily the productof American bankers and lawyers operating through the U.S. Council onInternational Banking (the predecessor of the International FinancialServices Association), and its style does seem to reflect the fact that morelawyers were involved in its drafting than in the drafting of UCP 600.9

However, because it is generally issuer-favorable, many non-US banks todayprefer to issue standby credits pursuant to Article 5 (or another defined locallaw) and ISP98.

THE “INDEPENDENCE PRINCIPLE”

The most important component of modern letter of credit practice is the“independence principle” — the principle that payment under a credit willbe made solely against receipt by the issuer10 of the documents called for inthe credit, without regard to the relationships between and the relative rightsand obligations to each other of (i) the beneficiary and the party who pro-cured the issuance of the credit (normally known as the “applicant”), or (ii)the issuer and the applicant. The independence principle is embedded in allthree sets of rules: UCC 5-103(d),11 UCP 600 Arts 4(a) and 5,12 and ISP98Rule 1.06(c) and 1.07.13 In essence, the letter of credit issuer is saying “if yougive me the following pieces of paper14 that say the following things then Iwill pay you the stated amount without regard to the terms of my agreementswith the applicant or your agreements with the applicant.” The issuer is nei-ther expected nor entitled to look behind the pieces of paper to determinewhether the statements they contain are true, or to determine whether underits agreements with the applicant, the beneficiary has the right to make

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demand under the letter of credit.From the viewpoint of the beneficiary, the “independence principle”

makes a letter of credit superior to a normal surety bond or guarantee, inwhich the surety’s or guarantor’s liability (i) doesn’t arise until the liability ofthe person whose obligations are supported by the bond or guarantee hasbeen proved or admitted, and (ii) may be subject to defenses based on actionsor lack thereof on the part of such person or the beneficiary.

The independence principle is not, however, absolute. Although it is theindependence principle that makes letters of credit superior (from the view-point of the beneficiary) to ordinary guarantees or surety bonds, the relianceon documents inherent in letter of credit practice carries with it the clear riskof fraud or forgery. A serious discussion of the issues involved in balancingthe independence principle against the risk of documentary fraud is beyondthe scope of this article, but a basic outline appears below.

APPLICABILITY OF ARTICLE 5, UCP 600, AND ISP98

One must begin by keeping in mind the difference between Article 5, onthe one hand, and UCP 600 and ISP98, on the other. Article 5 is the law ofeach jurisdiction that has adopted the UCC, and thus will be applicable toany credit that is subject to the laws of such jurisdiction. UCP 600 andISP98 are not law, but rather private compilations of generally agreed-uponrules, and by their terms are applicable only if the parties agree that they areapplicable.15 However, an agreement by the parties to make UCP 600 orISP98 applicable to a credit otherwise governed by Article 5 has results thatcan easily be overlooked by a beginner.

This comes about through the operation of UCC 5-116(3)(c), whichprovides that if “the liability of an issuer” is governed by Article 5, if the cred-it incorporates rules of custom or practice (such as UCP 600 or ISP98), andif there is conflict between Article 5 and the incorporated rules of custom orpractice, then the rules of custom or practice will prevail over Article 5,except as to certain non-variable provisions identified in UCC 5-103 and dis-cussed below.16

The potential impact of this provision is significant. For example, UCC5-108(a)17 requires that documents presented under the credit “strictly” com-



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ply with the terms of the credit. However, UCP 600 Art 14 does not use theterm “strict” and contains a number of provisions designed to make it moredifficult for issuers to dishonor a presentation containing insignificant incon-sistencies or errors. Thus, if the credit simply says it is subject to Article 5and UCP 600, the standard of UCP 600 Art 14 should trump the standardof UCC 5-108(a).

If the drafter of a credit wants UCP 600 or ISP98 to supplement, ratherthan supplant the provisions of Article 5, care must be taken in the govern-ing law clause. Consider the following governing law formulation, which theauthor has seen in several credits: “This standby letter of credit is subject toand governed by the laws of the State of New York and UCP 600 and in theevent of any conflict the laws of the State of New York will control.”

The trouble with this formulation is the precise language of UCC 5-116(3), which effectively states that if the credit has adopted UCP 600, thenin the event of any conflicts UCP 600 shall control. One can easily arguethat because of the language of UCC 5-116(3), there cannot be a conflictbetween Article 5 and UCP 600 because as a matter of law Article 5 itself pro-vides that all conflicts (other than those relating to the non-variable provi-sions of Article 5) must be resolved in favor of UCP 600.

If the parties want the provisions of Article 5 to supersede all inconsis-tent provisions of UCP 600, it would be better to have the governing lawclause remove any ambiguity as to the impact of UCC 5-116(3). This couldbe done, albeit somewhat verbosely, as follows: “This standby letter of cred-it is subject to and governed by the laws of the State of New York and UCP600. For all purposes of this standby letter of credit, any provision of UCP600 that, if applied, would conflict with Article 5 of the New York UniformCommercial Code but for the application of Section 5-116(3) of suchArticle 5 shall be deemed excluded from UCP 600.”18

In addition, each of UCP 600 and ISP98 contains provisions that arepurportedly binding on applicants if the credit is issued subject to UCP 600or ISP98. ISP98 Rule 1.04 states this explicitly: “These Rules apply as termsand conditions incorporated into a standby, confirmation, advice, nomina-tion, amendment, transfer, request for issuance, or other agreement of (i) theissuer, (ii) the beneficiary, to the extent it uses the standby…and (vi) theapplicant who authorizes the standby or otherwise agrees to the application


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of these Rules.”19 UCP 600 is not so explicit, stating that if a credit express-ly indicates that it is subject to these rules, it is “binding on all parties there-to,” leaving open the question of the extent to which the applicant is a“party.” But the clear expectation of each of UCP 600 and ISP98 is that theapplicant will be bound by its provisions, insofar as they purport to assignobligations or liabilities to the applicant.

In each case one can wonder about the extent to which an applicant maybe bound by the relevant set of rules if its agreement with the issuer did notspecify any governing rules beyond New York law and the issuer unilaterallyissues the credits subject to ISP98 or UCP 600.20 Rather than worry aboutthe outcome of litigation, however, it makes more sense for an applicant toagree with the issuer on the use or non-use of one of these supplementary setsof rules, and then decide whether selective exceptions to the applicability ofthe selected rules must be negotiated. Below, this article discusses this issueas it relates to indemnification obligations purportedly imposed on appli-cants by UCP 600 and ISP98.21

THE PROTECTED PROVISIONS OF ARTICLE 5

Under UCC 5-103(c), the parties to an Article 5 credit may vary the pro-visions of Article 5 by agreement (and as noted above will be deemed to haveagreed to vary them to the extent necessary to give effect to UCP 600 orISP98 if those rules are made applicable to the credit), except that they maynot vary:

• 5-103(c) itself;

• 5-102(a)(9) (definition of “issuer”);22

• 5-102(a)(10) (definition of “letter of credit”);23

• 5-103(a) (statement that Article 5 applies to letters of credit and certainrights and obligations arising out of transactions involving letters ofcredit);

• 5-103(d) (statement of the “independence” principle);

• 5-106(d) (when a letter of credit stated to be perpetual expires as a mat-



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ter of law); and

• 5-114(d) (no obligation to consent to assignment of proceeds, but pro-hibition of unreasonable refusal in certain cases).

UCC 5-103(c) also provides that the parties cannot modify by agree-ment the prohibition in UCC 1-102(3) of any disclaimer of the obligationsof good faith, reasonableness, diligence, and care prescribed in the UCC24 orthe limitation on rights of subrogation under UCC 5-117(d).

GOVERNING LAW

The choice of law applicable to a credit may be of critical importance toboth applicants and beneficiaries, particularly when questions of fraud orforgery arise. Some jurisdictions — generally not significant commercial lawjurisdictions — have perhaps been overly free in responding favorably toapplicant claims that a purported draw is fraudulent. England, on the otherhand, has for the most part been reluctant to allow fraud or forgery claims tointerfere with the independence principle.25

UCC 5-116(a) contains a very flexible choice of law provision: the par-ties are free to choose any law at all as the governing law of the credit by iden-tifying the governing law in the credit instrument or in a suitably authenti-cated or signed agreement among the affected parties.26 It also expressly pro-vides that the chosen jurisdiction “need not bear any relation to the transac-tion.”

This rule deserves careful thought in the context of an internationaltransaction if a possible party to any litigation concerning the credit mayreside (and may try to bring suit) in a jurisdiction in which the UCC 5-116choice of law provision could be viewed as being against local public policy.

Thought is also required if a party to the transaction wants to choose thelaws of a non-UCC jurisdiction, because most jurisdictions do not have aseparate body of letter of credit law with either the breadth or depth ofArticle 5. First, the results of litigation under the laws of such a jurisdictionwill probably be less predictable. Second, because Article 5 contains provi-sions relating to the rights of applicants vis-à-vis the issuer as well as the


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rights of beneficiaries vis-à-vis the issuer, the applicant and the issuer willeach want to think carefully about the potential consequences of using anylaw other than New York law in any separate reimbursement agreement if thecredit itself will be governed by New York law.27 Third, if the governing lawis not Article 5, inconsistencies between the terms of UCP 600 or ISP98 onthe one hand, and the requirements of governing law, on the other hand,may be resolved across the board in favor of the governing law, in completecontrast to the subordinate status of Article 5 under UCC 5-116(c)(3). Forexample, ISP98 Rule 3.10 excuses an issuer from any duty to notify theapplicant of a draw under a credit, but German law may require such a noti-fication.28

If the parties fail to specify a choice of law, UCC 5-116(b) provides thatthe liability of an issuer, a nominated person (e.g., a confirming bank) or anadvising bank “is governed by the law of the jurisdiction in which [such] per-son is located,” and that for the purposes of determining jurisdiction andchoice of law, each branch of a bank is to be viewed as a separate juridicalentity.29 Under this rule, it seems that a New York court would have to applyDutch law to a credit issued by and to be presented at the home office of aDutch bank if no choice of law was stated in the credit, even if the credit wasnegotiated with personnel from the bank’s New York branch and the creditwas delivered to the beneficiary through the New York branch. Further, ifthe credit was later confirmed by a branch of the issuer located in HongKong, again without any stated choice of law, the liabilities of the issuerwould be determined under Dutch law, but the liabilities of the confirmerwould be determined under Hong Kong law.

UCP 600 and ISP98 do not have default choice of law rules, which isappropriate, as each of them represents a commercial agreement on termsand conditions of a contractual relationship rather than a body of law. Eachof them, however, attempts to shield an issuer from economic harm if thecredit is structured to be subject to, or is determined by a court to be subjectto, the laws of a jurisdiction other than the jurisdiction in which the issuer islocated. UCP 600 Art 37(d) requires the applicant to indemnify the issuer“against all obligations and responsibilities imposed by foreign laws andusages.” ISP98 Rule 1.08(d) provides that “[a]n issuer is not responsiblefor…observance of law or practice other than that chosen in the standby or



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applicable at the place of issuance,” and ISP98 Rule 8.01(b)(i) requires theapplicant to indemnify the issuer against all claims arising out of “the impo-sition of law or practice other than that chosen in the standby or applicableat the place of issuance.”30

In considering the choice of law implications for the prospective liabili-ty (and in determining the actual liability) of parties to a credit, it is also nec-essary to keep in mind UCP 600 Art 3, which states that branches of a bankin different jurisdictions are considered to be separate entities, and ISP98Rule 2.02, which states that if a branch, agency or other office of a bank isacting under a credit in a capacity other than issuer, then it is deemed a dif-ferent person from the issuer, without regard to the jurisdiction in which itis located. While these are not in themselves choice of law clauses, they willundoubtedly be used to complicate any choice of law questions that mayarise in litigation concerning a credit involving multiple parties.

Finally, drafters may occasionally be told by letter of credit technicianswho are not lawyers that a letter of credit does not require a governing lawclause if it incorporates UCP 600 or ISP98. This is a bad idea, because UCP600 and ISP98 are not complete. If the letter of credit is subject only toUCP 600 or ISP98, without a governing law clause, and litigation arisesrelating to matters not spelled out in the applicable set of rules (such as therights of an applicant and an issuer when a presentation appears to be taint-ed by fraud or forgery, the applicable statute of limitations, the scope ofremedies, or, in the case of UCP 600, transfers of credits by operation of lawor assignments of proceeds), a court will need to determine and apply anappropriate body of law.

In summary, the drafter of a credit representing the applicant or the ben-eficiary should ensure that a sensible choice of law is made, reflect that choicein the documentation of the credit, and make sure that the courts of thejurisdiction in which each potentially adverse party is located (as that may bedetermined under the law chosen) will give effect to that choice of law.


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MODIFICATION OF UCP 600 AND ISP98

UCP 600 Art 1 provides that if a credit is subject to UCP 600, its rules“are binding on all parties thereto unless expressly modified or excluded bythe credit.” ISP98 Rule 1.01(c) provides that “[a]n undertaking subject tothese Rules may expressly modify or exclude their application.”

How “express” must a modification or exclusion be? UCP 600 does notpurport to answer that question, and the question probably is not relevantwhen the drafter of a credit seeks to eliminate a single specific provision ofthe relevant set of rules, as it will be difficult to do so without being “express.”

The question could become significant if a more general (or less obvious)form of modification is used. An applicant will normally consider that itsagreement with the issuer providing for issuance of the credit is the docu-ment that sets forth the relative rights and obligations of the applicant andthe issuer. But UCP 600 contains provisions defining the rights and obliga-tions of the issuer and the applicant. Will issuance agreement provisionsinconsistent with UCP 600 override UCP 600 (i) if the issuance agreementaccepts that the credit will be issued subject to UCP 600 but does not specif-ically provide that UCP 600 is subordinate to the issuance agreement insofaras it purports to govern the relative rights and obligations of the issuer andthe applicant, or (ii) if the issuance agreement is silent as to the role of UCP600, but the issuer elects to issue the credit subject to UCP 600?

ISP98 has even more “underbrush” to complicate themodification/exclusion issue. Note that Rule 1.11(d), which distinguishesbetween the phrases “unless a standby otherwise states” and “unless a stand-by otherwise expressly states.” According to Rule 1.11(d), the latter phrasemeans that the rules of ISP98 “should be excluded or modified only by word-ing in the standby that is specific and unambiguous.” Moreover, Rule1.11(d) also distinguishes between the phrases “stated in the standby” and“provided in the standby”: as used in ISP98, the latter is to be interpreted toincorporate both the text of the standby and the Rules (except to the extentexcluded by the express terms of the standby), while the former refers only tothe express text of the standby. Finally, the ISP Commentary notes that anattempt to vary a specific Rule of ISP98 should be treated as an attempt tomodify the terms of the Rule rather than a total exclusion of the Rule unless



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the text clearly indicates an attempt to exclude the entire Rule.31 These pro-visions will undoubtedly benefit issuers intimately familiar with ISP98 at theexpense of less familiar applicants and beneficiaries.

The most sensible drafting approach is to specify in the issuance agree-ment what rules (if any) the issuer will incorporate in the credit, and to makeall intended exclusions from those rules “express and unambiguous.”

INCORPORATION OF UCP 600 OR ISP98 PRACTICESWHEN NOT EXPRESSLY APPLICABLE TO THE CREDIT

If you are litigating rather than drafting a letter of credit and related doc-umentation and Article 5 is the governing law, it is worth remembering thatUCC 5-108(e) provides an opening for reading into Article 5 elements ofUCP 600 or ISP98 without specifying either in the documentation. The sec-tion states that an issuer shall observe “standard practice of financial institu-tions that regularly issue letters of credit.”32 This language makes it possibleto argue that basic operating rules of UCP 600 (for example, implementa-tion of transfers of credits, reimbursement of confirming banks, advising ofamendments and document examination procedures), or their parallels inISP98 if a standby credit is involved, are imported by this language intoArticle 5 at least to the extent those operating rules can be shown to repre-sent “standard practice.”33

WHO MAY ISSUE A LETTER OF CREDIT

The three sets of rules are not consistent in identifying who may issue acredit. Article 5 clearly contemplates that almost anyone may issue a letterof credit, with two exceptions. First, UCC 5-102(9) excludes from the cat-egory of “issuer” an individual who makes an engagement for “personal, fam-ily or household purposes.” UCC 5-102(9) is one of the non-variable pro-visions, so a proposed issuance of a credit by an individual should be handledwith great caution because of the difficulty in establishing whether a credit isfor “personal” purposes. Second, UCC 5-102(10) excludes from the definedterm “letter of credit” a credit issued for its own account by an entity that is


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not a “financial institution.”UCP 600 on its face appears to be applicable only to bank issuers, as it

expressly refers to the issuers of credits as “issuing banks”34 and uses the moregeneric term “issuer” throughout to refer more generally to any entity thatissues a document required for presentation under a credit. But UCP 600Art 1 states that the parties are free to modify UCP 600, which presumablymeans that if they expressly so provide, they could make UCP 600 applica-ble to a non-bank issuer notwithstanding the definition of “issuing bank.”

ISP98, on the other hand, does not even define “issuer,” and althoughthe drafters seem to have assumed that an “issuer” would be a bank, there isnothing within ISP98 that is inconsistent with the notion that a non-bankmay issue a standby credit subject to ISP98.

It is very important to remember, though, that a non-bank issuer is notlikely (unless it is someone like General Electric Capital Corporation) to havein-house staff familiar with the rules for issuance and administration of cred-its, particularly the rules covering examination, honor and dishonor of pre-sentations under the credit. If the issuer lacks such experience, there is a realpotential for costly mistakes when the time comes for the issuer to honor ordishonor a presentation under the credit.

WHEN A LETTER OF CREDIT IS ISSUED

Under UCC 5-106(a), a credit is enforceable when “transmitted” by theissuer to the beneficiary or a person requested to advise it to the beneficiary.Under UCP 600 Art 7(b), the credit is enforceable against the issuer “as ofthe time it issues the credit.” Under ISP98 Rule 2.03, the credit is bindingon the issuer when it “leaves the issuer’s control unless it clearly specifies thatit is not then ‘issued’ or ‘enforceable.’”35 Under each of these formulations, aSWIFT-transmitted credit is issued when the issuer punches the computerbutton to send it to an advising bank with instructions to advise it to the ben-eficiary, even if the beneficiary may not become aware of the issuance for sev-eral days, or even longer. Each of these formulations may require a littlethought in a complicated multi-location closing, or in the negotiation of acomplex standby credit, particularly when drafts may be passing back andforth through SWIFT.



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ISSUER DISCRETION IN SETTING THE TERMS OF THECREDIT

UCP 600’s related document, ISBP No. 681, contains the following pro-vision in ¶2: “The applicant bears the risk of any ambiguity in its instructionsto issue or amend a credit. Unless expressly stated otherwise, a request to issueor amend a credit authorizes an issuing bank to supplement or develop theterms in a manner necessary or desirable to permit the use of the credit.” Thisclause, while commercially logical (most applicants don’t know as much aboutthe technical details of credits as most issuers), could yield unanticipated resultsin a case in which an applicant wishes a credit to serve an unusual purpose butdoes not discuss fully with the issuing bank how the credit is to be drafted toreflect that particular purpose.36 Counsel for such an applicant must make surethat the details of a credit in non-customary form or for a non-customary pur-pose are reflected in the context of the issuer’s agreement to issue the credit (orthat the applicant and its counsel will have the opportunity to review the actu-al terms of the credit prior to its issue).37

CONSENT OF BENEFICIARY TO AMENDMENT OF ACREDIT

UCP 600, ISP98, and Article 5 each deal differently with amendmentsto a credit.

Under UCP 600 Art 10, an amendment is binding on the issuer “as ofthe time it issues the amendment” but the beneficiary continues to be enti-tled to the benefit of the original letter until it has accepted the amendment.ISP98 Rule 2.06 is similar: the amendment is binding on the issuer when it“leaves the issuer’s control,” and the beneficiary is not bound by the amend-ment until it consents to it. UCC 5-106(b) simply states that the rights ofthe beneficiary are not affected by an amendment to which it has not con-sented, and does not provide for any form of deemed consent.

There is a built-in beneficiary “trap” in UCP 600 Art 10(c). That arti-cle deems the beneficiary to have consented to an amendment if the benefi-ciary makes a presentation that complies with the original credit and withany not yet accepted amendment. While it may be true that most amend-


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ments to a commercial credit will end up affecting the terms of any presen-tation by the beneficiary, it is unfortunately easy to think of an amendmentto a standby credit that (i) is unfavorable to the beneficiary and (ii) wouldnot change the presentation requirements.38 Note that because UCC 5-106is not one of the non-variable provisions of Article 5 specified in UCC 5-103,the incorporation of UCP 600 into an Article 5 credit will result in the UCPArt 10 “deemed consent” provision superseding the amendment provisionsof UCC 5-106.

ISP98 avoids (or at least minimizes) the whole problem by providing inRule 2.06(c) that the beneficiary is deemed to have accepted an amendmentby making a presentation complying with the amendment only if the presen-tation, as made, would not have complied with the original standby.

Both ISP98 Rule 2.06(a) (in many words) and UCC 5-106(b) (in fewwords) clearly permit so-called “automatic amendments” (i.e., provisions fre-quently found in standbys increasing or decreasing amounts available withthe passage of time or upon the occurrence of stated events, or extendingexpiration dates) without the consent of the beneficiary if the credit express-ly permits such amendments. UCP 600 contains no such provision, and ifan applicant wants an automatic amendment provision in a UCP 600 cred-it that is not also subject to Article 5, one must consider whether applicablelocal law is receptive or hostile to automatic amendments.

Both ISP98 and UCP 600 provide that partial consent to an amendmentis not permitted. Because the amendment as a whole is binding on the issuerfrom the time it is issued or leaves the issuer’s control, it is inappropriate topermit the beneficiary to pick and choose among the desirable and undesir-able portions of the amendment.39 Although Article 5 is silent on this point,a New York court ought to find this rule (which also appeared in UCP 500)to be standard letter of credit practice and apply the rule under UCC 5-108(e)40 even if the credit did not incorporate any of those rules of practice.41

CONSENT OF APPLICANT TO AMENDMENT OF A CREDIT

UCC 5-106(b) provides that the rights and obligations of an applicantare not affected by an amendment to which the applicant has not consented.Although both UCP 600 Art 10(a) and ISP98 Rule 2.06(c)(iii) are silent as



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to the impact of an amendment on the applicant, the ISP Commentaryclearly states that the rights and obligations of the applicant vis-à-vis theissuer are not affected by an amendment to which the applicant has not con-sented,42 and consideration of the implications of the independence principleindicates that this should be the result for a UCP 600 credit as well.

NON-DOCUMENTARY CONDITIONS IN A CREDIT

A “non-documentary condition” exists when a credit sets forth a condi-tion to be satisfied before the beneficiary may draw upon the credit but doesnot set forth a document to be delivered to the issuer to establish the satis-faction of the condition.

UCC 5-108(g) and UCP 600 Art 14(h) both state flatly that if a creditcontains a condition without identifying the document to be delivered toestablish compliance with the condition, the condition will be disregarded.ISP98 Rule 4.11 similarly provides that non-documentary conditions mustbe ignored, but goes on to qualify this by excluding from the category of“non-documentary conditions those conditions the existence of which can bedetermined by the issuer from the issuer’s own records or within the issuer’snormal operations” and goes on to make it clear that this exclusion includesconditions the existence of which can be determined through the consulta-tion of “published indexes.”43

Application of the rule that non-documentary conditions must beignored could be devastating to an applicant that had assumed a materialnon-documentary condition would be satisfied prior to the credit beingdrawn. The correct approach is to avoid non-documentary conditionsentirely (except, in an ISP98 credit, those falling within the Rule 4.11 exclu-sion and carefully discussed with the issuer).

But if the applicant (or the issuer) has been careless and a significantnon-documentary condition has slipped through, there is some US case law44

to the effect that if an instrument purports to be a “letter of credit” but con-tains non-documentary conditions that are fundamental to the businessintent of the parties, a court will not allow the issuer to treat the instrumentas an Article 5 letter of credit and ignore the existence of that condition, butwill instead treat it as an ordinary contract of suretyship or a contract of guar-


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antee rather than a letter of credit.45 In that case, the obligation of the issuerremains alive and the beneficiary is free to demonstrate satisfaction of the rel-evant condition as a matter of ordinary contract law. This result protects theexpectations of the applicant, but may, of course, frustrate the beneficiarywho now must prove the satisfaction of the condition to be able to claimunder the instrument, and whose right to claim is subject to all of the col-lateral challenges to which an ordinary guarantee may be subject.

TIME FOR EXAMINATION/NOTICE OF DISHONOR/NOTICEOF EXPIRY

Under UCP 600 Art 16, notice of discrepancies must be given no laterthan the close of the fifth banking day following the day of presentation, andmust be given by telecommunication or, if that is not possible, by other“expeditious” means. Under Art 16(c), the issuer must give notice of dis-crepancies “when” it decides not to “honor,” and under Art 15(a) the issuermust honor “when” it determines that there are no discrepancies. This lan-guage is intended to prevent the issuer from deciding to honor or dishonorand then waiting until the end of the five-business day period to honor orgive notice of dishonor.

Under ISP98 Rule 5.01(a), notice of dishonor must be given within atime after presentation of documents “which is not unreasonable,” withnotice given within three business days following the date of presentationbeing deemed not unreasonable and notice given beyond seven business daysbeing deemed unreasonable. Like UCP 600 Art 16(d), ISP98 Rule5.01(b)(i) requires that notice of dishonor be given by telecommunication,or if not possible, by other “prompt” means. However, ISP98 contains noprovisions similar to UCP 600 Art 15(a) and 16(c), and indeed seems tolimit the scope of the “reasonableness” requirement by stating, in Rule5.01(a)(iv), that the issuer has no obligation to accelerate its examination ofdocuments within the seven day period unless the credit specifies a shortenedtime for the giving of notice of dishonor.46

Under UCC 5-108(b), the issuer has a reasonable time after presenta-tion, but not beyond seven business days after the day upon which it receivesthe documents, to give notice of discrepancies in the presentation. While



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there are no provisions in Article 5 comparable to UCP 600 Art 15(a) or16(c), but because Article 5 has no parallel to ISP98 Rule 5.01(a)(iv), wait-ing until the sixth business day to complete document examination couldwell be deemed unreasonable under all the facts and circumstances.47

None of Article 5, UCP 600, or ISP98 requires that notice of dishonorbe given to any person other than the “presenter” unless otherwise requestedby the presenter.48 If the presenter will be a third party acting on behalf ofthe beneficiary (as could happen in a multi-jurisdictional transaction) thebeneficiary may wish to provide in the credit that any notice to a presentermust be given concurrently to the beneficiary (and to take such steps as it canto make sure that the presenter refers to this requirement in any presenta-tion).

Each of Article 5, UCP 600, and ISP98 requires the issuer to include alldiscrepancies in its notice of discrepancy. Issuers must understand that oncethe notice is given, new discrepancies cannot be raised on the same docu-ments.49 Thus if an issuer, when presented with both an obviously incom-plete presentation and one or more presented documents that themselvescontain discrepancies, rejects the presentation solely on the grounds that it isincomplete, the issuer will thereafter be barred from raising the documentarydiscrepancies when the beneficiary makes a future complete presentation.

There are certain exceptions to the rules outlined above. UCC 5-108(d)and ISP98 Rule 5.04 permit an issuer to give at any time notice that a pre-sentation was discrepant because it was made after the expiration of the lastdate for presentation (or after the expiry of the credit). UCC-5-108(d) alsogives the issuer a similar right if honor is excused by fraud or forgery.

LAST DATE FOR PRESENTATION FALLING ON A NON-BUSINESS DAY

Article 5 is silent as to what happens if the last day for presentation fallson a non-business day. ISP98 Rule 3.13 provides that if the expiration dateor the last day for presentation stated in a standby is not a business day50 ofthe issuer, the presentation is deemed timely if made on the first followingbusiness day. UCP 600 Art 29(a) is similar, providing that if on the expira-tion date or last day for presentation the issuer is closed for reasons other than


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force majeure (as described in UCP 60 Art 36) the presentation is deemedtimely if made on the first following banking day.51

Counsel representing a beneficiary in a credit not subject to ISP98should consider incorporating the substance of Rule 3.13 in a credit subjectonly to Article 5, or eliminating the force majeure exception in Art 29(a) ina UCP 600 credit.

ISSUER CLOSED ON ACCOUNT OF FORCE MAJEURE

Article 5, ISP98 and UCP 600 deal with force majeure in very differentways. Article 5 is silent as to the impact of a force majeure event that causesan issuer’s offices to be closed on the last day for presentment of documents.Presumably, applicable local law will govern if specific provision is not madein the credit.

ISP98 Rule 3.14(a) is highly favorable to beneficiaries: “If on the lastbusiness day for presentation the place for presentation stated in a standby isfor any reason closed and presentation is not timely made because of the clo-sure, then the last day for presentation is automatically extended to the dayoccurring thirty calendar days after the place for presentation reopens forbusiness, unless the standby otherwise provides.”52

By contrast, UCP 600 Art 36 absolves the issuer from any responsibilityfor a force majeure event that prevents presentation from occurring, and goeson to provide that upon the reopening of the issuer’s business, the issuer willnot accept a presentation made under a credit that expired during the periodof interruption.

Counsel representing a beneficiary under a standby credit not subject toISP98 will normally seek to exclude Art 36 (if it is a UCP 600 credit) and toinclude something along the lines of the more favorable language of ISP98Rule 3.14(a).53

STANDARD OF DOCUMENT EXAMINATION

There are significant differences in the document review standardsapplicable under the three systems. UCC 5-108 arguably sets the strictest



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review standard. It provides that “an issuer shall honor a presentation that,as determined by the standard practice [of financial institutions that regular-ly issue letters of credit]…, appears on its face strictly to comply with the termsand conditions of the letter of credit,” subject to the provisions relating tofraud and forgery under UCC 5-109. [Emphasis added.]

Under UCP 600 Art 14(a), “the issuing bank must examine a presenta-tion to determine, on the basis of the documents alone, whether or not thedocuments appear on their face to constitute a complying presentation.”The comparable provision of UCP 500 (Art 13.A) included the words “withreasonable care” after “examine a presentation,” and an applicant with bar-gaining power may want to consider seeking reinsertion of those words in aUCP 600 credit.

But the bigger change in UCP 600 was the elimination of the requirementin UCP 500 Art 13.A that “[d]ocuments which appear on their face to beinconsistent with one another will be considered as not appearing on their faceto be in compliance with the terms and conditions of the Credit” — a require-ment believed by the drafters of UCP 600 to have resulted in an excessive num-ber of presentations being dishonored for essentially trivial inconsistencies.The offending language was replaced by four new provisions designed to limitthe role played by immaterial inconsistencies or errors in a presentation:54

• Data in a document, when read in context with the credit, the documentitself and international standard banking practice, need not be identicalto, but must not conflict with, data in that document, any other stipu-lated document or the credit. (Art 14(d))55

• In documents other than the commercial invoice, the description of thegoods, services or performance, if stated, may be in general terms notconflicting with their description in the credit. (Art 14(e))

• If a credit requires presentation of a document other than a transportdocument, insurance document or commercial invoice, without stipu-lating by whom the document is to be issued or its data content, bankswill accept the document as presented if its content appears to fulfill thefunction of the required document and otherwise complies with sub-article 14(d). (Art 14(f ))


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• When the addresses of the beneficiary and the applicant appear in any stip-ulated document, they need not be the same as those stated in the creditor in any other stipulated document, but must be within the same coun-try as the respective addresses mentioned in the credit. Contact details(telefax, telephone, email and the like) stated as part of the beneficiary’sand the applicant’s address will be disregarded. However, when the addressand contact details of the applicant appear as part of the consignee or noti-fy party details on a transport document subject to articles 19, 20, 21, 22,23, 24 or 25, they must be as stated in the credit. (Art 14(j))

By contrast, under ISP98 Rule 4.01(b) the issuer must “examin[e] thepresentation on its face against the terms and conditions stated in the stand-by as interpreted and supplemented by these Rules which are to be read inthe context of standard standby practice.” This standard leaves both benefi-ciaries and applicants a little up in the air. Applicants may fear that the issuerwill overlook material inconsistencies. Beneficiaries may fear the applicationof a “strict compliance” rule.56

In addition, ISP98 Rule 4.03 expressly disavows any requirement toexamine documents for inconsistency except to the extent required by theterms of the standby.57 It is reasonable to expect that banks will resist anyrequirement in a credit relating to documentary consistency, but the omis-sion of a consistency review should not be of major concern to applicants forstandby credits when the documentation to be presented to draw under thecredit is spelled out in detail in the credit.58

Remember that under UCC 5-116(c)(3), if the credit is subject to UCP600 or ISP98, the UCP 600 or ISP98 document review standard will replacethe UCC 5-108 standard unless the appropriate exceptions to UCP 600 orISP98 are built into the credit.59

NON-OBVIOUS OPERATIONAL RULES

Both UCP 600 and ISP98 contain general rules relating to the natureand form of documents presented. Applicants and beneficiaries alike shouldmake sure at the time the credit is first issued that these rules are not counterto their expectations for the form or content of a particular document the



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presentation of which is required for a draw under the credit. Further, anybeneficiary making demand under a credit (other than under a simple stand-by credit with fully defined presentation documents) would be well advisedto review the applicable rules prior to making a presentation.60

Under UCP 600:

• A document may be signed by handwriting, facsimile signature, perfo-rated signature, stamp, symbol, or any other mechanical or electronicmethod of authentication. (Art 3)

• A requirement for a document to be legalized, visaed, certified, or simi-lar will be satisfied by any signature, mark, stamp, or label on the docu-ment which appears to satisfy that requirement. (Art 3)

• If a credit requires a document (other than a transport or insurance doc-ument or commercial invoice), and does not specify issuer or content,banks will accept the document if its content appears to fulfill its func-tion and it otherwise complies with Art 14(d). (Art 14(f ))

• Terms such as “first class,” “well known,” “qualified,” “independent,”“official,” “competent,” or “local” used to describe the issuer of a docu-ment allow any person except the beneficiary to issue that document.(Art 3)

• Unless required to be used in a document, words such as “prompt,”“immediately,” or “as soon as possible” will be disregarded. (Art 3)

• The expression “on or about” or similar will be interpreted as a stipula-tion that an event is to occur during a period of five calendar days beforeuntil five calendar days after the specified date, both start and end datesincluded. (Art 3)

• The words “to,” “until,” “till,” “from,” and “between” when used todetermine a period of shipment include the date or dates mentioned,and the words “before” and “after” exclude the date mentioned. (Art 3)

• The words “from” and “after” when used to determine a maturity dateexclude the date mentioned. (Art 3)

• At least one original of each document stipulated in the credit must bepresented. (Art 17(a))61


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• A bank shall treat as an original any document bearing an apparentlyoriginal signature, mark, stamp, or label of the issuer of the document,unless the document itself indicates that it is not an original. (Art 17(b))

• Unless a document indicates otherwise, a bank will also accept a documentas original if it: (i) appears to be written, typed, perforated or stamped bythe document issuer’s hand; (ii) appears to be on the document issuer’soriginal stationery; or (iii) states that it is original, unless the statementappears not to apply to the document presented. (Art 17(c))

• If a credit requires presentation of multiple documents by using termssuch as “in duplicate,” “in two fold,” or “in two copies,” this will be sat-isfied by the presentation of at least one original and the remaining num-ber in copies, except when the document62 itself indicates otherwise.(Art 17(e))

ISP98 has a number of similar specific documentary presentation rules.For example:

• A presentation that fails to identify the standby under which the presen-tation is made is not deemed presented until the date on which the issueris able to match the presentation to the correct standby. (Rule 3.03(c)63

• Any government-issued document forming a part of a presentation mustbe originally certified or authenticated by an official of the issuingagency. (Rule 4.19)

• All presented documents must be “originals” unless the standby specifiesthat a copy is permissible. (Rule 4.15)64

• The language of each document issued by the beneficiary must be in thelanguage of the standby. No such requirement is applicable to thirdparty documents, but examiners of presentations under standbys have noobligation to translate documents not in the language of the standby.(Rule 4.04, and Comments 2 and 4 to Rule 4.04 in the ISPCommentary)65

• A presentation must include a documentary demand for payment evenif the standby is silent on the subject. (Rule 4.08)



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• If the standby requires a certificate of default and does not specify content,the certificate must contain a representation that payment is due becausea drawing event described in the standby has occurred.66 (Rule 4.17)

• Wrongful dishonor of a complying presentation does not constitute dis-honor of any other presentation. (Rule 3.07(b))67

• If the discrepancy is apparent on the face of the documents, an applicantmust timely object (using “prompt” means) to an issuer’s honor of a non-complying presentation, or forfeit the opportunity of objecting. (Rule5.09)68

• A required document need not be signed unless the credit or standardstandby practice so requires. (Rule 4.07)

• If the credit requires computations under a formula, the issuer has noobligation to verify the beneficiary’s calculations unless the standby sorequires. (Rule 4.11(d))

• Each required document must be issued by the beneficiary unless thestandby otherwise states or standard standby practice requires that it beissued by a third party. (Rule 4.05)

In actual practice, if the forms of documents to be presented to the issuerunder a standby credit are carefully described and set forth in exhibits to thecredit, there are unlikely to be serious questions arising under the above pro-visions (unless the drafters erred in preparing the forms). And even in thecontext of a commercial credit facility, under which multiple credits, for dif-fering commercial and/or standby purposes, may be issued over an extendedperiod of time, it would not be difficult (if the issuer is somewhat flexible) tobuild specific documentary requirements into the credit when the defaultrules of UCP 600 or ISP98 are inconsistent with the applicant’s reasonableexpectations.

WAIVERS OF DISCREPANCIES IN PRESENTATIONS

UCP 600 and ISP98 have decidedly different approaches to waiver bythe applicant of discrepancies in a presentation, and Article 5 does not deal


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with waivers at all.Under UCP 600 Art 16, an issuer receiving a non-complying presenta-

tion may, but is not required to, seek a waiver from the applicant. The arti-cle also appears to give the issuer full discretion as to whether it will acceptthe waiver and honor the presentation, or reject the waiver and dishonor thepresentation.69 ISP98 deals in considerably more detail with waivers, but isbased on the same principle: the issuer is not obligated to seek a waiver, evenif requested by the presenter, and is not obligated to waive non-complianceeven if the applicant grants the waiver.70

Beneficiaries under an ISP98 credit also need to remember that if theissuer dishonors a presentation and the beneficiary then requests the issuer toseek from the applicant a waiver of the non-complying document, the bene-ficiary is deemed under Rule 5.06(c)(i) to have waived any right it might oth-erwise have had to claim that the dishonor was improper under the terms ofthe credit.

ISP98 is further complicated by Rule 3.11, which identifies certainISP98 Rules that may be waived by the issuer without the consent of theapplicant. Certain of these Rules, such as Rule 4.04, requiring that docu-ments submitted in a presentation be in the language of the standby, Rule4.05, barring post-dated documents and Rule 3.05(b), providing that a pre-sentation after the close of business be deemed received on the next businessday, could be of concern to an applicant;71 If an applicant wished to protectitself against a waiver of Rule 3.05(b) (which could in effect give the benefi-ciary the benefit of an extra business day to draw under the credit), it wouldhave to obtain the agreement of the issuer not to exercise that right or requirea provision in the credit stating that any presentation must be received by atime certain on the credit expiration date that is prior to the close of businessof the issuer.72

Finally, ISP98 Rule 3.12 also permits the issuer to waive any requirementthat the original be presented as a condition to honoring the standby. Thisis of potential significance to an applicant as presentation of the original let-ter of credit is one level of protection against the occurrence of a draw undera credit instrument based on forgery.73



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DISHONOR BASED ON FRAUD OR FORGERY

More often than not, letter of credit litigation seems to involve allega-tions of fraud or forgery, and often delves deeply into the relationshipbetween public policy notions that fraud should not be tolerated and thedesire to protect the independence principle that underlies the commercialutility of letters of credit.74

UCC 5-109(a) sets out express, narrowly limited rules as to the circum-stances under which an issuer may dishonor on the grounds of fraud or forgery.The section first identifies instances in which the issuer must honor in spite offraud or forgery (basically, cases in which a prior actor, such as a confirmer act-ing in good faith or a holder in due course of a draft issued under a credit, hasgiven value in connection with the credit), and then provides that in othercases, the issuer, acting in good faith, may honor or dishonor a presentationtainted by forgery or material fraud. UCC 5-109(b) further recognizes theright of an applicant or an issuer to seek, under narrowly limited circum-stances,75 injunctive relief against a beneficiary to block a payment tainted byforgery or facilitated by a material fraud by the beneficiary.

ISP98 Rule 1.05(c) affirmatively states that ISP98 does not provide fordefenses to honor based on fraud, abuse, or similar matters, and that thesematters are left to local law.76 By contrast, UCP 600 does not (and UCP 500did not) contain any mention of fraud or forgery or any reference to locallaw. According to Professor Dolan, some lawyers used the silence of UCP500 to argue that a credit governed by Article 5 and subject to UCP 500eliminated the ability of an issuer to take advantage of fraud or forgery as abasis for dishonor, on the theory that UCC 5-109 is not one of the non-vari-able provisions of Article 5 identified in Article 5-103(c), and that the silenceof UCP 500 on the fraud/forgery issue should be construed under UCC 5-116(c)(3) as an intent to override the provisions of UCC 5-109. He con-cludes, however, that the better reading is simply that UCP 500 (which is not“law”) is silent as to the fraud or forgery question, and that applicable locallaw continues to govern.77

Although ISP98 clearly seeks to preserve whatever rights the issuer andapplicant may have under local law in case of fraud or forgery in a presenta-tion, it also seeks to limit any duty of the issuer to consider whether a draw-


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ing is tainted by forgery or other fraud and requires the applicant to bear anycosts attributable to fraudulent or forged documents:

• Rule 1.08(b) states that an issuer is not responsible for the “accuracy,genuineness, or effect of any document presented under the standby.”

• Rule 4.13 states that the issuer has no obligation to the applicant toascertain the identity of any person making a presentation or anyassignee of proceeds unless the standby requires presentation of an elec-tronic record,78

• Rule 8.01(b) states that the applicant must indemnify the issuer againstthe consequences of the “fraud, forgery or illegal action” of others.79

If a credit is to be issued subject to ISP98, these provisions could betreated as independent obligations of the applicant (or independent limita-tions on the duties of the issuer) that could be used by an issuer to avoid lim-itations or restrictions on the applicant’s indemnification obligations negoti-ated in the applicant’s agreement with the issuer.

UCP 600 does not contain a similar indemnification provision, but itdoes provide, in Art 34, that the issuer “assumes no liability or responsibilityfor…[the] genuineness [or] falsification of any document.” This clause issimilar to ISP98 Rule 1.08(b) and might also operate, in a credit made sub-ject to UCP 600, to end-run limitations on the applicant’s indemnificationobligations under its agreement with the issuer.

TRANSFERS OF CREDITS

Letter of credit law generally distinguishes between the transfer of a creditand an assignment of proceeds payable under a credit. The former includes atransfer of the right to draw under the credit; the latter transfers only the rightto receive payment under a credit when the beneficiary draws under the credit.

Each of Article 5, UCP 600, and ISP98 provides that a credit is nottransferable unless it so states.80 UCC 5-112 imposes no limit on the num-ber of times a credit may be transferred, and does not set out proceduresapplicable to transfers, other than making credits non-transferable unless



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they state they are transferable.UCP 600 Art 38 has a similar requirement, goes on to provide detailed

procedures for transfer, but permits only one transfer. This could create a trapfor standby credits issued to trustees under long term debt instruments,because the identity of a trustee could change several times over the life of thedebt issue. UCP 600 Art 38 also permits transfer of a transferable credit inwhole or in part. It would be rare in the standby world to permit a credit tobe transferred in part.

Finally, UCP 600 Art 38(h) and (i) contain provisions relating toretained rights of the first beneficiary following a transfer to a second bene-ficiary that are confusing in the context of standby credits (although theymake sense to those dealing regularly with commercial credits).

For all these reasons, a transferable standby otherwise subject to UCP600 probably should spell out the terms of permissible transfers, excludeother transfers, and take exception to the whole of UCP Art 38.

ISP98 Rule 6.02 permits multiple transfers but prohibits partial transfersunless the underlying credit expressly provides otherwise — a structure morein tune with the standby credit market than UCP 600. Rule 6.03 gives theissuer significant ability to define the conditions applicable to a transfer, tothe extent not otherwise specified in the standby, although any conditionsbeyond those expressly set forth in Rule 6.03 (limited to predictable transferconditions) must be “reasonable.”81

In standby practice, the form of the credit is usually agreed in advanceand the transfer provisions (if deemed necessary) are laid out in detail in thecredit. But if a bank will be issuing multiple standby credits pursuant to aletter of credit facility where the scope and purpose of each credit may differ,the applicant should ensure that it retains some ability to tailor the transferprovisions of each credit to the purposes of the credit.

Both ISP98 Rules 6.11 through 6.14 and UCC 5-113 make specific pro-vision for transfers of the rights of a beneficiary under a credit by operationof law. UCP 600 contains no such provisions, and, as in the case of fraud orforgery, those matters would be decided under a UCP 600 credit by recourseto applicable law.

UCC 5-114 and ISP98 Rules 6.06 - 6.10 also deal at some length withassignments of proceeds under a credit, and should be consulted at the time


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of drafting of a credit if they are applicable to the credit and assignments ofproceeds are expected to occur. By contrast, UCP 600 Art 39 simply refersassignment of proceeds issues to applicable law.

LOST, STOLEN, MUTILATED, OR DESTROYED CREDITS

It is common for the terms of a credit to require the return of the origi-nal credit instrument as a condition for drawing under the credit or as a con-dition to transfer of the credit. Moreover, even if the terms do not require areturn of the original instrument, each of ISP98, UCP 600, and Article 5requires, or can be construed to permit issuers to require, return of the orig-inal instrument as a condition to transfer.

ISP98 Rule 6.03(b)(ii) expressly requires presentation of the originalcredit as a condition to transfer, and ISP98 Rule 3.12 states that the issuer isunder no obligation to replace a lost, stolen, mutilated, or destroyed credit orto waive any requirement that the original of the credit be presented with anydraw under the credit. UCP 600 Art 38 provides that “[a] bank is under noobligation to transfer a credit except to the extent and in the manner express-ly consented to by that bank,” which clearly authorizes the issuer to imposea return requirement. Article 5 merely permits the issuer to impose condi-tions to transfer of a credit “reasonable under the circumstances” but onecould not count on a court finding an issuer “unreasonable” in demandingthe return of the original instrument as a condition to transfer.82

As a consequence, the beneficiary under a credit that is intended to betransferable, or under a credit that requires presentation of the original cred-it as a condition to draw, may fairly seek the issuer’s agreement to provisionscomparable to customary provisions for the replacement of lost, stolen, muti-lated, or destroyed securities.

PARTIAL DRAWINGS AND MULTIPLE DRAWINGS; UCP600 ISSUE FOR STANDBY CREDITS AVAILABLE ININSTALLMENTS

Article 5 contains no rules dealing with credits under which partial or



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multiple drawings may be made. ISP98 Rule 3.08 recognizes that a standbymay provide for partial and multiple drawings, and sets forth certain rulesthat should be consulted if the credit will permit partial or multiple drawingsand will be subject to ISP98.

The UCP 600 situation is more complex, and, in one aspect, potential-ly troublesome. UCP 600 contemplates partial drawings (Art 31(a)) as wellas multiple drawings (Art 32), but goes on in Art 32 to state that if drawingsby instalments within given periods are stipulated in the credit and an instal-ment is not drawn within the period allowed for that instalment, then “thecredit ceases to be available for that and any subsequent instalment.” A stand-by credit that is not a “direct pay” credit supporting, e.g., an owner’s liabili-ty to make periodic progress payments to a contractor or a lessee’s obligationto make payments to a lessor, might well fall under the rule of UCP 600Art 32, resulting in the frustration of the legitimate business expectations ofthe applicant and the beneficiary. Accordingly, any credit subject to UCP600 that provides for multiple payments must be drafted in a manner thateliminates any conflicting provisions of Art 32.

ACCURATE RENDITION OF DOCUMENT FORMSATTACHED TO A CREDIT OR DESCRIBED IN THE TEXTOF THE CREDIT

UCP 600 and Article 5 are silent as to how accurate the rendition of anattached form must be, but ISP98 Rule 4.09 could surprise beneficiaries (orinsufficiently cautious issuers). It provides (in great detail) that if the formattached is required to be presented in “exact” or “identical” form by thecredit, it must be “exactly reproduced,” including typographical errors, punc-tuation, spacing and blank spaces, but if there is simply a reference to a doc-ument “in the form of” an attachment to the credit, typographical and sim-ilar errors in the form that are apparent when read in context may be cor-rected and spacing may be adjusted. Beneficiaries will want to make surethat the magic words “exact” or “identical” are not used to describe docu-ments the forms of which are incorporated in or attached to the credit.83


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INDEMNIFICATION OF AND PAYMENT OF COSTS ANDEXPENSES OF THE ISSUER BY THE APPLICANT

Article 5 is silent as to the financial obligations of an applicant to theissuer. UCP 600 and ISP98 both contain provisions requiring the applicantto hold the issuer harmless for costs and expenses it incurs in the issuance andadministration of the credit, and to indemnify the issuer for costs it incurs incompliance with foreign laws, although they do so in different ways and withdifferent effects.

UCP 600 Art 37(a) states that “[a] bank utilizing the services of anotherbank for the purpose of giving effect to the instructions of the applicant doesso for the account and at the risk of the applicant,” and Art 37(c) states that“[a] bank instructing another bank to perform services is liable for any com-missions, fees, costs or expenses…incurred by that bank in connection with itsinstructions.” The net effect seems to be that all costs and expenses of any bankin the chain of financial institutions incurred “in connection with its instruc-tions” under a particular credit are first passed back to the issuing bank underArt 37(c) and then passed on to the applicant under Art 37(a).

The only other provision of UCP 600 dealing overtly with the financialobligation of the applicant to the issuer is Art 37(d), which states that the appli-cant must indemnify the issuer against “all obligations and responsibilitiesimposed by foreign laws and usages.” An issuer can be expected, in adverse cir-cumstances, to argue that this provision applies even if the credit specifies for-eign law as the governing law, and even if the results of the application of for-eign law do not differ materially from the application of domestic law.

Overall, ISP98 reflects a significantly greater concern with the rights ofthe issuer against the applicant than does UCP 600. Initially, that might notseem to be the case, as the ISP98 provision that is parallel to UCP 600 Arts37(a) and (c), Rule 8.02(a) provides only that the applicant “must pay theissuer’s charges and reimburse the issuer for any charges that the issuer isobligated to pay to persons nominated with the applicant’s consent to advise,confirm, honour, negotiate, transfer, or to issue a separate undertaking.”While similar to combined Art 37(a) and Art 37(c), Rule 8.02(a) is limitedto the “charges” of other persons (which is undefined but seems most likelyto mean stated or customary fees and similar items of nominated persons),



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and to persons nominated “with the applicant’s consent,” and thus is quite abit narrower than the corresponding provisions of UCP 600.

But Rule 8.01(b), the ISP98 indemnification provision, goes wellbeyond UCP 600 Art 37(d), providing that the applicant must indemnifythe issuer for all claims (including attorney’s fees) arising out of “(i) the impo-sition of law or practice other than that chosen in the standby or applicableat the place of issuance; (ii) the fraud, forgery, or illegal action of others; or(iii) the issuer’s performance of the obligations of a confirmer that wrongful-ly dishonours a confirmation.” While clause (i) is somewhat narrower thanthe corresponding UCP 600 provision, because it excludes indemnificationfor foreign law if the standby designates foreign law, clauses (ii) and (iii) haveno parallel in UCP 600.

Moreover, Rule 8.01(c), which states that Rule 8.01 “supplements anyapplicable agreement, course of dealing, practice, custom or usage providingfor reimbursement or indemnification on lesser or other grounds,” is clearlyintended to make the Rule 8.01(b) indemnification obligations additional toany separate indemnification and expense reimbursement agreement negotiat-ed by the issuer and the applicant. No such express statement is found in UCP600.

From the applicant’s perspective, however, more important than thequestion whether the credit utilizes UCP 600 or ISP98 indemnification andreimbursement provisions is the relationship between those provisions andthe expansive indemnification and expense reimbursement provisions thatwill inevitably appear in the agreement between applicant and issuer provid-ing for issuance of the credit. Those obligations will normally be more all-encompassing than either UCP 600 or ISP98, so that the task for the appli-cant will be to make sure that the specific limitations and exclusions that theapplicant might negotiate in the contractual indemnification and expenseprovisions are not inadvertently contradicted by the provisions of UCP 600or ISP98 noted here.

SALE OF PARTICIPATIONS BY AN ISSUER

Article 5 and UCP 600 are silent as to syndications and participations,but Rule 10.02 of ISP98 could surprise an applicant. It permits an issuer


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(unless otherwise agreed with the applicant) to sell participations in its reim-bursement rights against the applicant, and to disclose “in confidence” infor-mation about the applicant to potential participants, all without the consentof or notice to the applicant.

ELECTRONIC PRESENTATION OF DOCUMENTS

ISP98 Rule 3.06(a) and (b) permit a document to be presented only inthe medium specified in the credit; and if the credit does not specify a medi-um, the document must be presented as a paper document. Rule 3.06(c)specifies that a document is not a “paper document” if it is communicated byelectronic means even if the issuer receiving it generates a paper documentfrom it, thus excluding documents created from PDF files or facsimile trans-mitted to the issuer, and Rule 3.06(d) provides that if presentation by an“electronic medium” is indicated in the credit, the document must be pre-sented as an “electronic record.” ISP98 Rule 1.09 contains an extensive def-inition of “electronic record,”84 and effectively limits the category to onlythose records that can be delivered through SWIFT or other similar systemscapable of electronically verifying/authenticating the integrity of the docu-ment at the receiving end.85

On the other hand, Rule 3.06(a) seems to leave an issuer and a benefi-ciary free to agree on the medium in which a document may be presented,so a facsimile or PDF presentation should be permitted if specifically autho-rized by the credit.86

Article 5 uses the term “electronic” only in the definition of “record” inUCC 5-102(14), which is defined to mean “information that is inscribed ona tangible medium, or that is stored in an electronic or other medium and isretrievable in perceivable form.” Because the definition does not embody theauthentication concept contained in ISP98, it seems that a fax or PDF filewould constitute a “record.”

But the Article 5 definition of “document” (which is what must be pre-sented to draw under a credit) includes a “record” only if it is presented as awritten medium, in a medium permitted by the credit, or by the “standardpractice of financial institutions that regularly issue letters of credit.” While“standard practice” is of course a moving target, as of the fall of 2007 it does



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not appear to be standard practice to accept electronic documents (exceptperhaps under standbys with simple drawing requirements issued to respon-sible financial institutions and similar beneficiaries). Prudence thus indicatesthat any form of electronic presentation, such as facsimile or SWIFT shouldbe authorized by the express terms of the credit.

UCP 600 is silent as to electronic documents, using the term “electron-ic” only in Art 3 in reference to the authentication of signatures, and its treat-ment of “original documents” in Art 17(b) focuses on paper documents,reflecting UCP 600’s focus on trade finance, with its emphasis on bills of lad-ing and other documents that are typically issued in tangible form. However,UCP 600 was published together with what is called the “Supplement toUCP 600 for Electronic Presentation.” This document was originally pub-lished by the International Chamber of Commerce in 2002 as a supplementto UCP 500 to facilitate the electronic presentation of documents undercommercial credits, and seems to have been carried over with no significantchanges to UCP 600. The scope of the supplement is beyond the scope ofthis article; the curious reader should consult the ICC’s Guide to the eUCP,by James Byrne and Dan Taylor.87

SUBROGATION

While neither UCP 600 on ISP98 deals with rights of subrogation aris-ing out of payments under credits or reimbursements of payments undercredits, UCC 5-117 sets out such rights in considerable detail. Those rulesare beyond the scope of this article, and their application in practice is com-plex. Worth noting here is the fact, relevant in the context of an insolventissuer or applicant, that UCC 5-117(d) expressly provides that no such rightsof subrogation arise until a payment or reimbursement has actually occurred,and that until such time no rights arise under UCC 5-117 that can form thebasis of a claim, defense, or excuse.88


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OTHER RULE SYSTEMS

UN Convention on Independent Guarantees and Stand-byLetters of Credit (the “Convention”)

The Convention, so far ratified by only a few countries (Belarus,Ecuador, El Salvador, Gabon, Kuwait, Liberia, Panama and Tunisia as ofOctober 2007), is generally similar in substance to Article 5 and the UCP.89

The Convention came into effect in the late 1990s, but is little used. By itsterms, it applies only to international independent guarantees90 and standbycredits issued by an institution in a state that has ratified the Convention, orif choice-of-law rules operative in a proceeding involving a credit issued inanother jurisdiction operate to invoke the laws of a ratifying state. It has thestatus of law where effective but by its terms it does not apply to an ordinarycommercial credit unless the credit undertaking expressly makes it applica-ble, and it expressly permits a credit undertaking to opt out from the con-vention if it would otherwise be applicable. It also contains provisions deal-ing with the right of applicants to block payment under a credit for fraud-related reasons that appear more favorable to applicants than the corre-sponding provisions of UCC 5-108.91

The Convention has seen little use and it is probably reasonable for ben-eficiaries to fear that, even without the applicant-favorable language of theConvention, courts of the jurisdictions that have ratified the Convention willnot apply the independence principle as rigorously as would the courts ofcommercially developed jurisdictions, particularly if the applicant or issuer isa resident of such a jurisdiction and the beneficiary is a non-resident.Accordingly, it may be easier, if a transaction involves an issuer or a benefi-ciary based in a ratifying state or has such a connection to a ratifying statethat the application of choice of law rules in another relevant jurisdictionmay point to the laws of that ratifying state, to obtain the agreement of therelevant parties to the inclusion of a formal disclaimer of the application ofthe Convention rather than to spend time considering specific provisions of,or the likely jurisdiction of enforcement of, the Convention.92



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ICC Uniform Rules for Demand Guarantees

In 1992, the ICC released its Uniform Rules for Demand Guarantees,ICC Publication No. 458 (the “URDG”). The “demand guarantee”described in the URDG is basically the same thing as the “independent guar-antee” covered by the Convention, and thus is equivalent to a standby cred-it:93 the independence principle applies and payment is based solely uponreview of documents presented against the requirements of the underlyinginstrument. According to one English commentator, the demand guaranteewas primarily developed in the context of construction contracts and ininternational contracts for the sale of goods (in each case to safeguard thebeneficiary against non-performance or late performance by a contractor orsupplier), whereas standby credits constitute “an all-purpose financial sup-port instrument embracing a much wider range of uses than the normaldemand guarantee.”94

The origin of the 1992 URDG lies in the ICC’s 1978 Uniform Rules forContract Guarantees. The 1978 rules were little used95 because they were notbased on the independence principle but instead required as a condition tothe beneficiary’s right to payment under a “contract guarantee” the submis-sion of a judgment or arbitral award evidencing right to payment.96 Anobligation issued under the 1978 rules was thus little better than an ordinaryguaranty or a surety bond. By contrast, UCP 400, published in 1983,extended the coverage of the Uniform Customs and Practices to standbycredits, which perhaps gave an incentive to their use in transactions in whichcustom might have dictated the use of a demand guarantee. With this back-ground, the 1992 URDG can be seen as a somewhat belated attempt to cre-ate a set of rules in which demand guarantees would be placed on the same“independence” footing as standby credits subject to the UCP.97

NOTES1 A quick general introduction to the origin and basics of letters of credit may befound in Gao Xiang and Ross C. Buckley, The Unique Jurisprudence of Letters ofCredit: Its Origin and Sources, 4 SAN DIEGO INT’L L. J. 91 (2003).2 Standby credits were a U.S. invention, developed to allow banks to provide thefunctional equivalent of guarantees without violating regulatory restrictions on the


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issuance of guarantees. To maintain the distinction from guarantees, they took thesame form as commercial credits, with payment based solely on the presentation ofdocuments, and the rights of the beneficiary independent of the contractual arrange-ments between the beneficiary of the credit and the party who caused the credit tobe issued. A useful discussion of the nature of standby credits and the differencebetween a standby credit and a conventional guarantee or surety bond can be foundin John F. Dolan, LETTERS OF CREDIT (A.S.Pratt, 4th Ed., 2007) (hereinafter“DOLAN”), at ¶1.05, pp 1-31.3 Most standbys seem to fall into one of three general categories: those that securepayment due on the failure of a person to complete performance of an obligation,those that secure payment due on the occurrence of a financial default and those thatprovide for the payment of amounts coming due on debt instruments in lieu of pay-ment by the obligor on the debt (so-called “direct pay” credits). There is one majorpractical difference between standby credits and commercial credits: the partiesinvolved with a commercial credit generally expect that the credit will be drawnupon, but in the case of a standby credit (other than a direct pay credit), the partiesexpect (or at least hope) that the event triggering the right to draw is a contingencythat will not occur.4 All citations in this article to Article 5 or to sections thereof are to the New Yorkversion of Article 5. Keep in mind that the New York text is not identical to the1995 Official Text of Revised Article 5. Significant changes appear (i) in UCC 5-111, where New York dropped ¶(e) of the Official Text (providing for the mandato-ry award of attorney’s fees for the prevailing party in an action in which a remedy issought under Article 5) and (ii) in UCC 5-108(e), where New York dropped the lasttwo sentences of the Official Text: “Determination of the issuer’s observance of stan-dard practice is a matter of interpretation for the court. The court shall offer the par-ties a reasonable opportunity to present evidence of the standard practice.”5 See the discussion below.6 UCP 600 is supplemented by International Chamber of Commerce PublicationNo. 681 (2007) entitled “International Standard Banking Practice for theExamination of Documents under Documentary Credits” (hereinafter “ISBP No.681”), which updated a similar ICC-published companion to UCP 500. WhileISBP No. 681 deals primarily with the examination of the kinds of documents cus-tomarily associated with commercial credits, it contains some principles of generalapplication (one of which is discussed below), as well as some additional interpreta-tive provisions of the kind contained in UCP 600 Art 3.7 A “document,” in the letter of credit world, is an item required to be presented todraw under a credit. The extent to which these can be other than paper “documents”is briefly discussed below.



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8 The Uniform Customs and Practices first purported to cover standby credits inUCP 400, promulgated in 1983.9 ISP98 is characterized by Professor Dolan as “different in form and subtly differ-ent in substance from other ICC publications in the realm of abstract undertakinglaw…. ISP98 [is] filled with detail, and no issuer, beneficiary or applicant shoulddeal with a standby subject to these rules without studying them.” DOLAN, supranote 2, at ¶4.09(4), p 4-109.10 This article uses “issuer” in a generic way, to mean the person issuing a credit. Seebelow as to who may issue a credit.11 UCC 5-103(d): “Rights and obligations of an issuer to a beneficiary or a nomi-nated person under a letter of credit are independent of the existence, performance,or nonperformance of a contract or arrangement out of which the letter of creditarises or which underlies it, including contracts or arrangements between the issuerand the applicant and between the applicant and the beneficiary.”12 UCP 600 Art 4(a): “A credit by its nature is a separate transaction from the saleor other contract on which it may be based. Banks are in no way concerned with orbound by such contract, even if any reference whatsoever to it is included in the cred-it. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil anyother obligation under the credit is not subject to claims or defences by the applicantresulting from its relationships with the issuing bank or the beneficiary.“A beneficiary can in no case avail itself of the contractual relationships existingbetween banks or between the applicant and the issuing bank.”UCP 600 Art 5: “Banks deal with documents and not with goods, services or per-

formance to which the documents may relate.”13 ISP98 Rule 1.06(c): “(c) Because a standby is independent, the enforceability ofan issuer’s obligations under a standby does not depend on: (i) the issuer’s right orability to obtain reimbursement from the applicant; (ii) the beneficiary’s right toobtain payment from the applicant; (iii) a reference in the standby to any reim-bursement agreement or underlying transaction; or (iv) the issuer’s knowledge of per-formance or breach of any reimbursement agreement or underlying transaction.”ISP98 Rule 1.07: “An issuer’s obligations toward the beneficiary are not affected

by the issuer’s rights and obligations toward the applicant under any applicable agree-ment, practice or law.”14 Some of the pieces of paper may originate with the beneficiary but some may haveto come from third parties, such as consulting engineer certificates, bills of lading orinsurance certificates.15 The relevant provisions of UCP 600 and ISP98 are as follows:“The Uniform Customs and Practice for Documentary Credits, 2007 Revision,

ICC Publication no. 600 (“UCP”) are rules that apply to any documentary credit


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(“credit”) (including, to the extent to which they may be applicable, any standby let-ter of credit) when the text of the credit expressly indicates that it is subject to theserules.” UCP 600 Art 1.“A standby letter of credit or other similar undertaking, however named or

described, whether for domestic or international use, may be made subject to theseRules by express reference to them.” ISP98 Rule 1.01(b).16 Technically, UCC 5-116(3) only gives priority to those provisions of UCP 600 orISP98 that relate to the “liability of the issuer,” but because questions of whether theissuer did not pay when it should have paid, paid when it should not have, or shouldbe enjoined from making payment dominate letter of credit litigation, the only safeassumption is that incorporation of UCP 600 or ISP98 will result in most if not allconflicts with Article 5 being resolved in favor of UCP 600 or ISP98, as the case maybe, except for conflicts relating to the non-variable provisions of Article 5.17 UCC 5-108(a) is not one of the provisions that is protected by UCC 5-103(c).18 Exactly the same issue, of course, exists if the credit specifies ISP98 instead ofUCP 600: UCC 5-116(3) would give the provisions of ISP98 priority over allinconsistent provisions of Article 5 other than the non-variable provisions.19 See James E. Byrne, THE OFFICIAL COMMENTARY ON THE INTERNATIONALSTANDBY PRACTICES (Institute of International Banking Law and Practice 1998)(hereinafter, the “ISP COMMENTARY”), at Rule 1.04 Comment 4, pp 16-17. TheComment notes that this Rule does not operate to place the applicant in privity withparties other than the issuer. It only operates as a gloss on the relative rights of theissuer and the applicant.20 For example, ISP98 Rule 1.04(vi) says that the applicant is bound if “it authorizesthe issuance of the standby.” A “standby,” under Rule 1.01(d), is defined as a cred-it issued subject to ISP98. Has an applicant who has authorized the issuance of acredit without specifying in its agreement with the issuer whether it is subject toUCP 600 or ISP98 (or indeed without specifying whether it is subject to any bodyof supplemental rules) in fact “authorized the issuance of a standby” within themeaning of ISP98 if the issuer, on its own initiative, has elected to issue the standbysubject to ISP98?21 One caution is in order — although this article identifies a number of areas inwhich UCP 600 or ISP98 may be unfavorable to one party or another in a letter ofcredit transaction, parties should not blindly follow this as a checklist of changes that“ought” be made, but should rather consider their own needs, the likelihood of theissue arising, and the consequence to them of an adverse resolution of the issue.Eliminating the UCP 600 transfer restriction may be critical if the beneficiary is abond trustee and the credit supports a long-term debt instrument, but may be unim-portant if the beneficiary is a single purpose company that is the owner of a con-



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struction project where the contract will be performed over a relatively short periodof time.22 “…a bank or other person that issues a credit, but does not include an individualwho makes an engagement for personal, family or household purposes.”23 “…a definite undertaking that satisfies the requirements of Section 5-104 by anissuer to a beneficiary at the request or for the account of an applicant or, in the caseof a financial institution, to itself or for its own account, to honor a documentarypresentation by payment or delivery of an item of value.”24 “1-102(3): The effect of provisions of this Act may be varied by agreement,except as otherwise provided in this Act and except that the obligations of good faith,diligence, reasonableness and care prescribed by this Act may not be disclaimed byagreement but the parties may by agreement determine the standards by which theperformance of such obligations is to be measured if such standards are not mani-festly unreasonable.”25 See, e.g., Gao Xiang and Ross P. Buckley, The Development of the Fraud Rule inLetter of Credit Law: The Journey So Far and the Road Ahead, 23 U. PA. J. INT’LECON. L. 663 (2002); Gao Xiang and Ross P. Buckley, A Comparative Analysis of theStandard of Fraud Required Under the Fraud Rule in Letter of Credit Law, 13 DUKE J.COMP. AND INT’L L. 293 (2003); and David J. Barru, How to Guarantee ContractorPerformance On International Construction Projects: Comparing Surety Bonds withBank Guarantees and Standby Letters of Credit, 37 GEO. WASH. INT’L L. REV. 51, 82-92 (2005).26 This will normally require appropriate governing law language in both the creditand in the issuance agreement between applicant and issuer, because the beneficiarynormally cannot be said to be a party to any instrument other than the credit, andthe applicant is not a party to the credit.27 This may not be as simple as it seems. The beneficiary may demand a New Yorklaw credit, but if neither the issuer nor the applicant has any particular relation toNew York, the courts of their respective jurisdictions may not be inclined to honora New York choice of law in the reimbursement agreement.28 See Dr. Jens Nielsen and Nicolai Nielsen, Standby Letters of Credit and the ISP 98:A European Perspective¸ 23 BANKING & FINANCE L. REV 163 (2001), at 203. Thisarticle, also available in what appears to be an earlier draft form at www.letterofcred-itforum.com/node/11 (as of November 2007), outlines (among other things) a num-ber of ways in which the authors believe ISP98 conflicts with German law.29 UCC 5-116(a) here refers only to “banks,” although Article 5 elsewhere contem-plates that an “issuer” is not limited to a bank or other financial institution.30 The UCP 600 formulation is less applicant-friendly than the ISP98 formulation.Under the ISP98 version, the applicant’s indemnification obligation arises only if the


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issuer incurs liabilities under foreign law other than the law chosen to govern thecredit. However, the UCP 600 language can be interpreted to require the applicantto indemnify the issuer against foreign law liabilities without regard to the governinglaw stated in the credit — which could be a problem for an applicant if the credit isa UCP 600 credit, the credit is stated to be subject to New York law, and the issueris not located in New York. This and other indemnification issues are discussedbelow.31 See the ISP COMMENTARY, supra note 19, at Rule 1.11 Comment 10.a, p 60.32 While this language appears in the context of a section focusing on the examina-tion and honor or dishonor of a presentation by the beneficiary, there is nothing inthe text or the Official Comments to limit paragraph (e) solely to situations arisingin the course of document examination.33 The Official Text of UCC 5-108(e) reads as follows: “An issuer shall observe stan-dard practice of financial institutions that regularly issue letters of credit.Determination of the issuer’s observance of the standard practice is a matter of inter-pretation for the court. The court shall offer the parties a reasonable opportunity topresent evidence of the standard practice.” The New York version eliminates the lasttwo sentences, presumably to leave the question of what constitutes standard prac-tice to the finder of fact in the case. (A subsidiary question posed by UCC 5-108(e)is whether the relevant time for measuring standard practice is at the time the cred-it was issued or at the time the disputed events occurred.)34 See UCP 600 Art 2.35 There is a potential practice trap here: Rule 2.03 requires the standby to state thatit is not “issued” or not “enforceable.” Statements that the standby is not “available,”“effective” or “operative” do not have the same effect.36 One way this could happen is when an applicant wants an unusual credit issuedunder the terms of a general letter of credit facility originally intended to cover onlyconventional trade credits.37 While UCP 600 does not expressly incorporate ISBP No. 681, the two docu-ments were issued in tandem and the introduction to UCP 600 makes it clear thatthe UCP 600 drafting group expected ISBP No. 681 to be authoritative within itsscope.38 One example: a proposed amendment that reduced the number of future draw-ings permitted under a standby credit supporting principal and interest payments ona debt instrument. A subsequent presentation for the next installment of principaland interest could comply fully with the terms of the credit as originally drafted andas modified, but provides no logical support for the conclusion that the beneficiaryagreed with the amendment or, indeed, had even seen the proposed amendment.39 In the context of commercial credits, amendments are frequently issued in final



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form through SWIFT, and hence are binding on the issuer from the time of trans-mission, which is prior to acceptance by the beneficiary.40 See supra.41 In the unusual case that a complicated amendment to a credit not subject to UCP600 or ISP98 is being tendered to the beneficiary already executed by the issuer butwithout prior agreement of the parties on all of the terms of the amendment, itwould of course be prudent to state in the document that partial consent is not per-mitted.42 See the ISP Commentary, supra note 19, at Rule 2.06 Comment 10, p 84.43 The intent here is to permit conditions such as “the Dow Jones index exceeds10,000 at the close of business on the presentation date” or “the beneficiary has atleast $X on deposit in account #Y maintained at the Z branch of the issuer.” SeeRule 4.11(c)(iv).44 Cf. DOLAN, supra note 2, at ¶4.06(2)(h), p 4-66 and at ¶6.04(7), pp 6-60 to 6-63.45 The argument is as follows: UCC 5-108(g) says that non-documentary condi-tions contained in an undertaking constituting a letter of credit under UCC 5-102(a)(10) are to be ignored. Paragraph (10) defines a letter of credit as an under-taking by an issuer to honor a “documentary presentation.” If the undertaking con-tains a material non-documentary condition, then perhaps it is not a “letter of cred-it” at all under the paragraph 10 definition, even if it is titled “Letter of Credit” andotherwise looks and smells like a credit.46 It is not clear which approach is more favorable to beneficiaries. The stricter noti-fication requirements of UCP 600 substitute the question of “when did the issuerdecide to honor or dishonor” for the question of “what is a reasonable time to reviewand either honor or give notice of discrepancies,” and they limit the ability of theissuer of an about-to-expire credit to delay the notice of discrepancies until such timeas re-presentation is difficult or impossible. On the other hand, the “reasonableness”requirement of the ISP98 time period probably ought to mean, notwithstandingRule 5.01(a)(iv), that the issuer of an ISP98 credit cannot simply put a presentationaside and not review it until just prior to the end of the maximum review period.47 In actual practice, many standby credits — particularly so-called “direct pay”credits supporting the timely payment of debt instruments — provide a much short-er period for examination and honor or dishonor. Periods of less than one workingday are not uncommon in “direct pay” credits, where payment is typically due onpresentation by the beneficiary of a one paragraph certificate as to the amount dueand a sight draft for the amount due.48 UCC 5-108(b)(3); UCP Art 16(c); ISP98 Rule 5.01(c).49 This is commonly referred to as “preclusion.” See UCC 5-108(c); UCP 600


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Art 16(c) and ISP98 Rule 5.02.50 “Business day” is defined in ISP98 Rule 1.09 as “a day on which the place of busi-ness at which the relevant act is to be performed is regularly open.”51 “Banking day” is defined in UCP 600 Art 2 as “a day on which a bank is regular-ly open at the place at which an act subject to these rules is to be performed.”52 But note that the beneficiary, to be eligible for the benefit of Rule 3.14(a), willneed to demonstrate that the presentation was not made “because of the closure.” Abeneficiary could be asked to prove that the documents required for presentationwere all in existence and in the hands of a messenger standing on the doorstep of thebank on the last day for presentation.53 ISP98 Rule 3.14(b) provides that an issuer may authorize another reasonableplace for presentation in the standby or in a communication received by the benefi-ciary if the place of presentation stated in the credit will be closed.54 Dishonors for trivial inconsistencies appears to have been primarily, if not exclu-sively, a problem with commercial credits, rather than standby credits, as can be seenfrom the focus of new Art 14(e) and Art 14(f ), and the last sentence of new Art 14(j).55 This seems to be a negative restatement of a consistency requirement, and in somefuture litigation will undoubtedly spur debate as to when an “inconsistency” is not a“conflict.”56 Note that the specific document review standards of UCP 600 probably cannotbe incorporated into ISP98 through the reference to “standard standby practice”under Rule 4.01(b). Rule 4.20(a) provides that “A document presented under astandby is to be examined in the context of standby practice under these Rules even ifthe document is of a type…for which the Uniform Customs and Practice forDocumentary Credits contains detailed rules.” (Emphasis added.)57 “An issuer or nominated person is required to examine documents for inconsis-tency with each other only to the extent provided in the standby.”58 The ISP COMMENTARY notes that the consistency requirement may be moreappropriate for straight commercial letters of credit covering payment for goods,where all of the submitted documents should be on their face applicable to the sameidentified goods. In a standby credit, the documents to be presented (if they involvemore than a recitation that amounts are due under a debt instrument) may be onlytangentially related to each other, and it would be difficult to determine what mightbe meant by an “inconsistency.” See the ISP COMMENTARY, supra note 19, at Rule4.03 Comment 2, p 146.59 See the discussion supra. Also, drafters of issuance agreements should rememberthat adjustments made in the credit to the applicability of UCP 600 or ISP98 thatare intended to affect the applicant’s rights and liabilities may not bind the applicantunless also included or referred to in the issuance agreement.



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60 In addition, ISP98 Rule 3.04 contains extensive default rules as to how and wherepresentations should be made if the credit is silent or vague on this point. Best prac-tice is to avoid the application of (or the need to interpret) these default rules bymaking sure the credit clearly indicates where, when, how and to whose attentionpresentation must be made.61 For signed or otherwise authenticated documents, that makes sense, but what if adocument requires evidence that the Dow Jones industrial index was over 10,000 ona particular day? Is there a difference between a photocopy of a page of the WSJ forthat day, and the “original” newsprint page? Ambiguities like this are best avoidedby specifying with precision the nature of the document to be provided in the termsof the credit when the “document” is intended to serve as evidence of an externalevent and not as the statement of the person issuing the document.62 The UCP 600 authors may have meant “the credit” here, and not “the docu-ment.”63 A presentation that does not properly identify the credit thus runs the risk ofbeing dishonored because it is a late presentation.64 See footnote 61.65 This is important for applicants to understand. If there is any likelihood underan ISP98 credit that a third party document will be issued in a foreign language(because, for example, it is issued by a foreign government that will only issue doc-uments in its native tongue) the credit should require as an additional document acertified translation of that document or it should be clear that the issuer will acceptdocuments in the foreign language.66 This is not necessarily the wording that a beneficiary would assume is appropri-ate in a “certificate of default.”67 This Rule appears to be designed to eliminate the ability of a beneficiary or anapplicant to claim that the issuer is guilty of an anticipatory breach of all of its oblig-ations under the credit if one draw under a multiple draw credit is dishonored.Issuers, of course, are worried that the erroneous action of document examiners (whoare generally clerical rather than managerial or legal personnel) could subject thebank to liability as though it had dishonored all subsequent draws.68 There is a significant issue hidden here: Rule 3.10 states that the issuer does nothave to notify the applicant of a presentation, so that the applicant may not find outthat a draw has been made until the issuer presents to the applicant the documentsconstituting the presentation and demands reimbursement (or, more likely, notifiesthe applicant that it has debited the applicant’s account with the issuer by theamount of the draw). An applicant obtaining a standby credit in support, say, of aconstruction contract with complicated contract-related drawing conditions maywant to provide for prompt delivery to the applicant of a copy of each presentation


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received by the issuer. See the ISP COMMENTARY, supra note 19, at Rule 3.10Comment 2, p 122, for an statement of the reasons an issuer might resist assumingsuch an obligation.69 The issuer’s right not to accept a waiver presumably is based on a desire to avoidarguments between an issuer and an beneficiary as to whether the applicant’s waiveris sufficient to protect the issuer.70 See ISP98 Rules 5.05 and 5.06.71 However, the issuer may not waive Rules 4.04 and 4.05 if the substance of thoseRules is contained in the credit itself.72 The Rules waiveable under Rule 3.11 that are not summarized in the text gener-ally deal with the process of submitting a presentation (e.g., how to identify thestandby under which demand is made and where and to whom presentation ismade). Waivers of these Rules are less likely to be of concern to applicants (otherthan an applicant yearning for any circumstance — even one irrelevant to the under-lying business deal — that will cause the issuer to determine that a presentation isnon-complying).73 See also the discussion supra.74 This article does not delve into the circumstances (some of them fascinatinglyimprobable sounding) in which courts have and have not elected to enjoin paymentsunder credits in cases of fraud or forgery. For those who wish to know more aboutthe development of this area of letter of credit law, good starting points are the arti-cles cited in footnote 25 and DOLAN, supra note 2, at ¶7.04, pp 7-59 to 7-129.75 The limitations are (1) a party adversely affected by the relief must be adequatelyprotected against loss that it may suffer if the relief is granted, (2) on the basis of theinformation submitted to the court, the applicant is more likely than not to succeedunder its claim of forgery or material fraud, (3) the person demanding honor is notprotected under UCC 5-109(a)(1), and (4) the conditions entitling the applicant toinjunctive relief under local law have been met. (There are additional limitations ifthe relief requested seeks to block payment under a draft accepted by or a deferredobligation incurred by, the issuer.)76 Rule 1.06(c)(iv), which states that “the enforceability of an issuer’s obligationsunder a standby does not depend upon…the issuer’s knowledge of performance orbreach of any reimbursement agreement or underlying transaction,” seems to be say-ing that the issuer must perform even if it knows of fraud. However, Rule 1.05 andthe ISP COMMENTARY make it clear that applicable law outside of ISP98 (e.g., UCC5-109 in a New York law credit) would govern the issuer’s right to withhold paymentor the applicant’s right to enjoin payment in the case of fraud or forgery. See the ISPCOMMENTARY, supra note 19, at Rule 1.05 Comments 1, 2 and 5, pp 19-21.77 See Dolan, supra note 2, at ¶4.06(2)(e), pp 4-60 to 4-62. The argument, and



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Professor Dolan’s response, apply equally to UCP 600. The text of ¶4.06(2)(e) dis-cusses various cases supporting and opposed to Dolan’s position; Dolan concludesthat recent New York authority supports his view.78 The exception to Rule 4.13 is made because under ISP98 an electronic recordrequires, by definition, authentication of the sender. See Rule 1.10.79 The ISP COMMENTARY, supra note 19, makes it clear that the applicant is intend-ed to bear the risk of double payment (see Rule 4.13 Comments 1 and 2, p 174 andRule 8.01, Comment 7, p 270), justifying this position on the grounds that there areno generally-accepted procedures (other than through a SWIFT-type electronic pre-sentation) through which banks can ascertain the identity or capacity of the presen-ter of documents.80 UCC 5-112(a); UCP 600 Art 38(b); ISP98 Rule 6.02(a). The normal freedomof alienation of personal property is not applied to drawing rights under commercialor standby credits on the grounds that the applicant and the issuer are issuing thecredit as a part of a known commercial relationship in which there is (usually) a sig-nificant element of trust that the beneficiary will not abuse the credit. See the ISPCOMMENTARY, supra note 19, at Rule 6.02 Comment 2, p 232.81 It is not clear how much significance the limitation to “reasonable” conditionsmay have. Rule 6.02(b)(iii) states that the issuer must “agree” to the transfer, with-out reference to conditions, which suggests that unless the terms of the credit clear-ly state that the issuer will transfer on the satisfaction of certain specified conditions,the mere inclusion of conditions to transfer leaves the issuer free to argue that trans-fer is still at the discretion of the issuer.82 See UCC 5–112(b)(2).83 The ISP COMMENTARY states that the “exact” or “identical” formulation should“not be lightly used by applicants or issuers nor lightly acceptable by beneficiaries.”See the ISP COMMENTARY, supra note 19, at Rule 4.09 Comment 7, p 164.84 Rule 3.06(b) makes two exceptions to the general rule set forth above. If the cred-it requires only a demand for payment, (i) it is deemed to comply if presented by abeneficiary that is a SWIFT participant or a bank through SWIFT, tested telex, orother similar authenticated means, and (ii) the issuer may in its sole discretion electto accept a non-paper demand (e.g., a fax or perhaps an e-mailed PDF file) from anyother beneficiary.85 Rule 1.09 requires that any “electronic record” must be capable of being authen-ticated and the definition of “authentication,” requires that it be possible to “assessthe integrity” of the information in any “electronic record” to determine whether the“information has remained complete and unaltered.” Rule 3.06(c) makes it clearthat a document communicated by electronic means (e.g., a fax or a PDF document)is not a paper document even if a paper document can be generated from it.


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86 See the ISP COMMENTARY, supra note 19, at Rule 3.01 Comment 2, p 90.87 International Chamber of Commerce Publication No. 639 (November, 2002).88 See Official Comment 2 to UCC 5-117: “Only one who has completed its per-formance in a letter of credit transaction can have a right to subrogation. For exam-ple, an issuer may not dishonor and then defend its dishonor or assert a setoff on theground that it is subrogated to another person’s rights.” See DOLAN at ¶7.05[2], pp7-135 ff, for a general discussion of subrogation issues in the context of letters ofcredit.89 See DOLAN, supra note 2, at ¶4.01(4), pp 4-5 to 4-12, for a general discussion ofthe Convention. A significant difference is in Articles 19 and 20 of the Convention,which set forth, in much more detail than in UCC 5-109, the circumstances inwhich an issuer may dishonor on the ground of fraud and in which an applicant mayseek to enjoin payment.90 The term “independent guarantee” is typically applied to documents, identifiedas guarantees, issued by non-US banks under which payment is available solely onthe delivery of required documents, and is not conditioned upon any proof that athird party obligation has not been performed. They are based on the same inde-pendence principle as, and are functionally equivalent to, standby credits.91 See Articles 19 and 20 of the Convention.92 But if this course is elected, the drafter should check with local counsel in the rel-evant ratifying state to make sure that the disclaimer will be accepted by the courtsof that state if litigation seeking to apply the Convention is brought in that state.Countries have different rules regarding the legal hierarchy of ratified conventionsand how to solve conflicts between conventions and domestic law.93 Sometimes also called a “first demand guarantee” to emphasize the primary natureof the obligation.94 Roy Goode, GUIDE TO THE ICC UNIFORM RULES FOR DEMAND GUARANTEES,International Chamber of Commerce, Publication No. 510, 1992 (hereinafter“URDG GUIDE”), at p 17. This guide appears to have been replaced by THE USER’SHANDBOOK TO THE URDG, International Chamber of Commerce Publication No631 (2001). Because the URDG does not seem to be widely used, and is not usedat all for instruments issued by US banks because of the regulatory limitations on theissuance by US banks of “guarantees,” this article does not address the substance ofthe URDG.95 Roy Goode bluntly characterized them as a “failure.” URDG GUIDE, p 24.96 At the time the 1978 rules were adopted, public attention had been focused onthe risk of improper calls made under contract guarantees.97 The URDG Guide notes that at the time the URDG was issued, it was assumedthat issuers of standby credits would continue using the UCP, and that the URDG



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was of application only to demand guarantees. As a prediction of the future treat-ment of standby credits, this was wrong, because only a few years later the US bank-ing industry begat ISP98 to differentiate standby credits from commercial credits.And as an assessment of the potential applicability of the URDG, it also seemswrong: the principles embedded in the UDRG would, for the most part, haveworked satisfactorily for standbys as well, if the nomenclature had been broadenough to cover both demand guarantees and standbys (although the UDRG doesimpose a duty on issuers to act with reasonable care and in good faith that is lackingin ISP98). One has to suspect that the English and European drafters of the UDRGaccepted its narrow scope as the price of keeping away from the drafting table the USbankers and lawyers who would have jumped into any drafting project that pur-ported to deal with standby credits.
