Standby letters of credit (SLCs), bonds (for instance performance bonds (PBs)), and bank guarantees (BGs) are different forms but have a similar purpose.^^ However, they also involve mutual distinctions, as follows:
Professor Schmitthoff illustrated such point in following terms: "The difference between these two types o f credit is that in the ordinary letter o f credit arrangement the documents which the beneficiary has to tender, normally, relate to an underlying sales transaction or a similar contract and usually include a transport document, but in a standby letter o f credit the required documents need not include a transport document: a document o f any description may be required, e.g. a demand by the beneficiary o f a statement by him that the other party is in default. The standby letter o f credit is thus often similar in effect to the bank guarantee." [see Schmitthoff, supra (f.n. 1), pp. 363-64]; Int. B.L., supra (f.n. 16), pp. 287-8 & f.n. 79; Weisz, ibid., p. 358, par. 3; UNCITRAL, "2. Independent guarantees and stand-by letters o f credit; discussion of fu rthe r issues o f a uniform law: amendment, transfer, expiry, obligations o f guarantor, lia b ility and exemption: note bv the Secretariat tA/CN.9/W G.IIAVP.681 [O riginal: E n g lis lil". Yearbook o f the United Nations Commission on International Trade Law. V ol.X X II, 1991, pp. 330-339 [hereinafter referred to as UNCITRAL Y.B., 1991, part b.2] at p. 337, para. 54 said: "In considering whether a rigid or a more flexible standard o f compliance would be appropriate, account should be taken o f certain differences between the commercial letter o f credit and the guaranty letter. Firstly, the commercial letter o f credit provides a secured payment mechanism likely to be utilised in the ordinary course o f the transaction, while the guaranty letter is designed to indemnify the beneficiary for the consequences o f a contingency that is unlikely to occure. Secondly, the documents tendered under a commercial letter o f credit (e.g. b ill o f lading) are likely to be merchantable, while the statements or documents required under a guaranty letter are rarely o f such type. Thirdly, the documents required under a commercial letter o f credit tend to be more standardised than those required under a guaranty letter, and they are explained and regulated in detail by the UCP."
"A question may arise that for what reason(s) it is in different name and forms in different legal systems. It is said that: "It can be answered with certainty only for the use o f standby letters o f credit by American banks which had to use the form o f a letter o f credit because it is setteled in the US banking law that ordinaiy guarantees are not legitimate banking business within the meaning o f the National Bank Act. The use o f standby letters o f credit by banks was expressly recognized by rulings o f the Comptroller o f the Currency issued in 1974. The use o f the other two fomis, i.e., o f bonds and o f bank guarantees, can only be explained by the general exprience that lawyers always prefer to employ the legal tools with which they are familiar from their own legal systems. Even international commercial lawyers from continental Europe have
2.1. Standby letter of credit and performance bond
In the Edward Owen case Lord Denning pointed out that "performance guarantees are virtually promissory notes payable on demand."^® However, it has been suggested that SLCs are distinguished from PBs on two grounds; firstly, they are not issued for an existing debt; secondly, SLCs are not negotiable instruments.®®
2.2. Standby letter of credit and bank guarantee
Although SLCs and BGs are similar in function there are several distinctions between them:
2.2.1. P rim ai'y and secondary obligation
Under SLCs the responsibility of a party who issues such a credit is a primary one; while, by contrast, a guarantor's undertaking is a secondary obligation since he promises to pay if the main debtor fails to carry out his duty under the credit contract.'^^
2.2.2. D octrine o f autonom y
A standby letter of credit is separate from its underlying transaction, but, on the other hand, the guarantee arrangement is not independent from its underlying agreement As a result of this distinction a guarantor can use any and all defence
developed the bank guarantee while English lawyers, burdened with the problems o f the doctrine o f consideration have used the well known form o f bond for the new purposes. A growing tendency can now be observed to use standby letter o f credit outside the USA, e.g., by banks in England, Australia, India, Japan, and South Korea." [Marshall, supra (f.n. 4), at p. 267]
[1978] 1 Ll.L.R. 166, at p. 171 stated: "[...] the performance bond is merely one type o f surety contract. As such it is governed by the general principles o f the law o f principal and surety. These contracts do not require the use o f bond, but its employment obviates the need for the consideration moving from the creditor to the surety."; H.J. van der Vaart, "Standby letters o f credit and the problem o f bad faith calls". Yale Journal o f World Public Order, 1981, Vol. 8, No. 1, pp. 36-61, at pp. 42-3 [hereinafter referred to as Vaart]; Williams, supra (f.n. 24), at p. 425.
Vaait, ibid., p. 43.
Banks, supra (f.n. 3), pp. 75-81; Weisz, supra (f.n. 35), pp. 355-84; Richard J. Driscoll, "The role of standby letters of credit in international commerce: reflections after Ira n ". Virginia Journal o f Inter national Law, 1980, Vol. 20, No. 2, pp. 459-504, p. 470 [hereinafter referred to as Driscoll].
that a primary obligor has against a creditor/^ There are two American decisions opposed to one another. In the first case the Federal court took the view that the bank is under duty to pay upon the actual existence of facts regarding the performance of the underlying agreement, and such requirement is said to be not "too far from the basic purpose of letter of credit, namely, providing a means of assuring payment cheaply by eliminating the need for the issuer to police the underlying contract."'^^ In the second authority it is stated that if the issuer fails to require any document for a particular fact, then there is a presumption that there is no need for the beneficiary of the credit to present a document to that effect.'^®
Banks, supra (f.n. 3), pp. 75-6 described this point clearly as following: "It is well established today that the standby letter o f credit is not guaranty. [...] An insti ument is a standby letter o f credit i f "the issuer has a primary obligation that is dependent solely upon presentation o f conforming documents [or demands for payment] and upon the factual performance or non-performance by the parties to the underlying transaction, [...] By contrast, i f the condition o f compliance are phrased in factual rather than in documentary terms, the honouring o f the instrument becomes contingent upon the actual occuiTence or non-occurance o f a factual event. Under such conditions, the issuer, rather than examining documents which state that an event has or has not occurred, would be required to examine questions o f fact relating to the perfonnance o f the underlying contract. These are the charectristics o f a guaranty, not o f a standby letter o f credit."; Vaart, supra, p. 41; "As regards guarantees, uncertainty arises from the fact that the autonomy or independent nature o f the undertaking is not yet recognised in fu ll and firm ly established in all jurisdictions." [U N C ITRAL Y.B., 1988, supra (f.n. 1), p. 57, para. 92]
W ichita Eagle & Beacon Publishing Co. v. Pacific National Bank. 343 F. Supp. 332 (N.D. Cal. 1971), rev.d. 493 F.2d 1285 9th Cir. 1974), p. 1286; Banks, supra (fn . 3), p. 77; John F. Battaile III, "G uaranty letters o f credit: Problems and posibilities". Arizona Law Review, 1974, Vol. 16, pp. 822-38, p. 842 [hereinafter referred to as Battaile]; Henry Harfield, "E njoining letter o f credit transactions". Banking Law Journal, 1978, 95, pp. 596-605 [hereinafter referred to as Harfield's article]; Becker, supra (f.n. 33), p. 341 (about the problem o f ultra vires); Banks, supra (f.n. 3), p. 77, f.n. 39 it is said that: "Note that requiring the conditions to exist is different from requiring a document (such as an affidavit) from the beneficiaiy stating that the conditions exist. In the first instance, the burden o f determining facts relating to the underlying contract is place upon the bank. In the second instance, the bank's only burden is to examine the document to see if, on its face, the document appears to comply with the terms o f the letter o f credit."; Banks, supra (fn . 3), at pp. 77-8 suggested that the above decision was not made under the UCC since at that time the state o f California had not adopted such provision. So, under the literal interpretation o f section 5-112(l)(c) o f the UCC the above court may took opposite view since under the mentioned section "a letter o f credit need not required presentation o f a document provided that the letter o f credit conspecuously states that it is a letter o f credit or is conspecuously so entitled.
In Bank o f America v. W hitnev-Centrai National Bank 291 F. 929 (5th Circ. 1923), at p. 935 the court stated: "A bank may issue its letter o f credit unconditioinally, and without requiring documents, or it may prescribe such conditions and require such documents as it sees fit. [...] It follows that when any particular fact is not required to be presented by documents the letter o f credit is unconditional as to such fact, and in that event the issuing bank is presumed to rely upon the presentation o f the person in whose favour the credit is issued."; Banks, supra (f.n. 3), p. 78.
2.2.3. Guarantees in the USA
In the USA banks may not legally guarantee third parties' debts since this is ultra vires; but there Is no legal prohibition against issue of a standby letter of credit/"^
CONCLUSIONS
The importance of the documentary letters of credit system in international trade makes clear how significant the recent activities by the UNCITRAL concerning SLCs and BGs are and how they are opening up a new dimension with respect to the issue under consideration here, namely, the necessity of having a uniform law relating to LCs. Although points raised above, confirm that SLCs have more similarities with LCs than BGs (similarity in principles, operations, and relevant rules and provisions accepted by courts as well as by international business bodies like the ICC) UNCITRAL has preferred to study SLCs beside BGs for their common operational legal character and functional equivalence"^® and has taken the view that SLCs have more differences with LCs than with BGs/® This
Vaart, supra (f.n. 38), p. 42, at f.n. 28 said: Jai-vis suggests that "the main reason why banks issue standby latters o f credit is to get around ultra viers problems." Jarvis, "Standby letters o f c re d it". 10 U.C.C. L.J. 38, 45 n. 21 (1977); Driscoll, supra (f.n, 40), p. 470; see alse Becker, supra (f.n. 33).
"The view was expressed that the stand-by letter o f credit should be dealt with clearly separately from the independent guarantee because o f its different functional origin. The prevailing view, however, was in favour o f a join t treatment in view o f their common operational legal character and functional equivalence." [UNCITRAL, "IV . GUARANTEES AND STAND-BY LETTERS O F C R E D IT. A. Report o f die W orking G roup on International C ontract Practices on the w ork o f Its thirteenth session (New York, 8-18 January 1990J fA/CN.9/330J fO rigitial: E ngfishl". Yearbook o f the United Nations Commission on International Trade Law, Vol. X X I, 1990, pp. 227-238 [hereinafter refeiTed to as UNCITR AL Y.B., 1990], p. 229, para. 14]; see also previous notes and UNCITRAL, " II. G UARANTEES AN D STAND-BY LETTERS O F C R ED IT. A. Report o f the W orking G roup on International C on tract practic£S_iHi_i.h£ w ork o f its eighteenth session (Vienna. 30 November- 11 December 1992) (A/CN.9/372) {O riginal: English)". Yearbook o f the United Nations Commission on International Trade Law, Vol. X X IV , 1993, pp.
139-154 [hereinafter referred to as UNCITRAL Y.B. 1993, part a], p. 140, para 13.
"By its function and purpose, the stand-by letter o f credit différés considerably from the traditional commercial letter o f credit or documentary credit and is equivalent to independent bank guarantees and similar indemnities. [...] As regards stand-by letters o f credit, it is often doubtful whether a given provision o f the law on letters o f credit is applicable, i.e. appropriate in view o f the special nature and purpose o f the stand-by letter o f credit, As regards guarantees, uncertainty arises from the fact that the autonomy or
view is in contradiction to the facts, as admitted even by the ICC Commission, namely, that national laws treat SLCs and LCs similarly/^ Therefore, for reasons pointed out previously, it is more preferable that rules and provisions related to SLCs and LCs should be studied together and one international set of standards govern both of them; because, by adopting a different approach (as it is accepted by UNCITRAL) a new occasion for conflict of laws would arise between UCP 500 and a future set of standards provided by UNCITRAL. In other words, the international business communities would face two sets of standards for SLCs, namely, the first one (UCP published by the ICC) treating them like LCs while under the second type (the future UNCITRAL's set of standards) they would be treated as being similar to BGs. Although there may be similar provisions about SLCs in both sets of the above mentioned standards, there would be also distinctions between them in contradiction with the task of UNCITRAL, namely, to provide a more unified front regarding an international payments system."*®
In conclusion, for reasons pointed out above, there is a marked need and practical interest for having an international unified and codified set of standards concerning LCs. However, before considering different aspects of unification/ codification of the law of LCs it is necessary to know more about the current system; therefore, questions related to UCP 500 and legal issues related to LCs (common law perspective) are to be discussed below.
independent nature o f the undertaking is not yet recognised in full and firm ly established in all jurisdictions." [UNCITRAL Y.B., 1988, supra (f.n. I), p. 57, paras. 91 and 92]
"Stand-by letters o f credit and guarantees (or bonds), while functionally equivalent or at least similar, differ as to their legal treatment for the formal reason that the stand-by letter o f credit is a letter o f credit. Thus, the laws and rules governing documentary letters o f credit would generally be applicable to stand-by letters o f credit. [...] For guarantees and bonds, the legal framework is different. As discussed below (Part II, B), it is characterized by a varied development o f national laws, in particular case law, towards recognizing the independent (non-accessory) legal nature o f the guarantee and by attempts to prepare uniform rules." [UNCITRAL Y.B., 1988, supra (f.n. 1), p. 47, para. 5]
As to the question: "W liat would be the final decision by the Commission in order to prevent the emerge o f such a problem?, and other points concerning UNCITAL's activities see Chapter X (below).