Academic journal article Texas International Law Journal

Negotiation in Letter of Credit Practice and Law: The Evolution of the Doctrine

Academic journal article Texas International Law Journal

Negotiation in Letter of Credit Practice and Law: The Evolution of the Doctrine

Article excerpt

ABSTRACT

The concept of negotiation in letter of credit practice and law has evolved from being an appendage of the law of negotiable instruments to an independent discipline that often alters basic assumptions of negotiable instruments law. From playing a central role in the letter of credit process, the draft or bill of exchange has become incidental and atrophied. Indeed, with respect to banks nominated in the letter of credit to "negotiate," negotiation can occur without there being a draft or bill of exchange. Nonetheless, negotiation, as used in letters of credit, is an important aspect of letter of credit practice, enabling it to serve as a means of trade facilitation and finance. The latest revision of the Uniform Customs and Practice for Documentary Credits, UCP600, reflects the currency of this concept in its attempts to define "negotiation" and to clarify its role in letter of credit practice.

This paper surveys and compares the concept of negotiation in both fields. It summarizes the law of negotiable instruments (Part I), studying, analyzing, and comparing negotiation in letter of credit practice (Part II). It then considers important issues that arise in the negotiation of LCs, such as the requirement of a draft, formalities, recourse, and letter of credit fraud (Part III), and ends by suggesting an approach to the definition of "negotiation" in letter of credit practice and law (Part IV).

It suggests that negotiation - whether by a bank that undertakes to do so in its letter of credit undertaking or by a bank nominated to do so without having made such an undertaking - gives rise to a basis of liability that is separate and preemptive from, if sometimes parallel to, that which arises on negotiable instrument that may be involved. Although the letter of credit concept of negotiation readily borrows from the law of negotiable instruments with respect to protection of the right to a protected status, important differences arise based on the nature of the letter of credit undertaking. Where there is a letter of credit undertaking to negotiate, negotiation is the means by which the bank honors its letter of credit obligation to the beneficiary, taking up the documents presented and any draft, and discounting the amount due to present value in the event of a time obligation without any right to seek recourse against the beneficiary. Where there is no undertaking, a bank that negotiates pursuant to a nomination is the transferee of the right to the proceeds of the letter of credit.

I. SURVEY OF NEGOTIATION OF DRAFTS IN THE LAW OF NEGOTIABLE INSTRUMENTS'

Negotiation in the law of negotiable instruments is a special transfer of intangible rights in a negotiable instrument, which entitles the transferee to claim under the instrument as if it were payable directly to it, transfer it in a similar manner to others, and claim under appropriate circumstances that it takes free of certain defenses that could have been raised against the drawer or prior transferees.2

While there are differences as to how one becomes entitled to exercise these rights, these differences have little practical significance in discussing negotiability in connection with letters of credit, and the common law and civil law identify this person as a "holder."3

Negotiation in the law of negotiable instruments has certain formal prerequisites. Not just any promise or order to pay can be negotiated. To be negotiated, it must be in the form of a negotiable instrument-it must meet certain formal requirements, which include being unconditional.4

Because the concept of negotiation necessarily involves the use of abstract terminology drawn from the major legal regimes, it is easier to explain how negotiation occurs than what it is. Negotiation of a negotiable instrument always entails the delivery of the instrument to an entity who becomes a holder. Where the instrument is issued in bearer form or indorsed in blank or to bearer, only delivery is required to effect a negotiation. …

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