Under the second sentence of Section 5-114(1) of the UCC an issuer of a letter of credit may add some conditions to the credit, for his own protection against
See appendix 1; as to the necessity o f the indemnities the official comment to the Section 5-113 said: "A draft and accompanying documents may almost comply with the terms o f the credit, but fail in some particular. The issuer is then not obligated to honour the draft, but it may be w illing to do so i f properly indemnified against the particular defect. Subsection (1) makes clear that it is proper for a bank seeking payment, acceptance, negotiation or reinibursemnet under the credit to give such indemnities, and that doing so is a proper part o f the business o f banking and therefore not ultra vires." [See UCC, supra (f.n. 2), at p. 434]
Documents presented by the beneficiary/seller are not always in accordance with the credit's conditions; but such distinctions may not important from the bank's point o f view. On the other hand, the bank is not interested to lose its customer. Therefore, a practical solution for that situation is that the bank arrange the payment in a way called under reserve namely if the applicant for the credit or the issuing bank as the case may be rejecting tendered documents the beneficiary must give back the amount o f money he received from the bank. In other words, the bank has a right o f recourse against the beneficiary for the amount o f the credit paid 'under reserve'. The leading authority in English law is Banque de ITndochine Et. Sues v. J.H. Rayner (M incing Lane) Ltd.. [1983] 1 A ll E.R. 1137, at p. 1144 (the relevant part o f judgment by Kerr, L.J. in the Court o f Appeal).
Unfortunately Section 5-113 o f the UCC was suggested to be omitted under PFD, supra (f.n. 1). This position would cause confusion and more distinction between UCC and UCP 500.
the beneficiary, as a privilege for issuing the credit. It says: 'The issuer is not excused from honour of such a draft or demand by reason of additional general term that all documents must be satisfactory to the issuer, but an issuer may require that specified documents must be satisfactory to it."®® There is nothing under the UCP 500 precisely referring to the same matter.
Here several questions may arise: (1) Is such a provision necessary at all?; (2) If so, then what is the solution where a conflict of interests arises between the issuers of LCs (mostly banks) and their customers? In other words, should the bank's satisfaction overrule the applicant's requirements under the credit? (3) If there is a justification for having such a rule, why is it accepted in a limited form, namely, that banks' requirement must be connected only to specified rather than all documents? As to the first query, generally speaking, both banks and their customers look at documents as security instruments, namely, as valuable papers which replace the amount of money paid under the credit. However, there may be differences between the bank's point of view regarding the meaning of a security measure and the views of an applicant for a credit; for instance, a bill of lading, an insurance policy, an invoice, or any other document required in a particular form by the applicant under the credit may be accepted as a good document from the applicant's point of view but such a document may not meet the bank's conditions. Therefore, it is accepted as a non-satisfactory document by the bank. So, in general, it is possible to have a situation where a distinction may arise between the bank and its customer relating to the importance of a document.
One additional point should be addressed here before considering other questions, namely, whether banks are entitled to ask for document(s) other than those required by the applicant in order to match their satisfaction. If the answer Is positive then it may be further asked whether banks are able to process such a requirement on their own behalf or whether they should bring their request under the name of their customers (the applicant for a credit). It is noticeable that in the
Emphasis added; for the text o f the Section 5-114(1) see appendix 1 (below).
relevant part of Section 5-114(1) of the UCC, quoted above, it is only stated that "specified documents must be satisfactory", and there is nothing about the point raised above. Does that phrase refer only to documents mentioned by the applicant for the credit? Or can the meaning of above phrase also be extended to documents asked for directly by banks? The first impression by reading the above phrase is that it covers only those documents which are required by the bank's customer (applicant for a credit); so, the bank's satisfaction is limited to those documents and nothing else. Therefore, there is no chance for banks to require new document(s) in their own name. However, it is possible to imply from'the above phrase that if banks have any request for new documents, other than asked for by the applicant, such a request should accompany the applicant's request. Although such a procedure may fit the procedure accepted under Section 5-114(1) of the UCC, namely, documents must be specified, it is more appropriate to suggest that banks should also be allowed to benefit from a direct requirement, namely, asking for documents similar to or separate from those documents required by the applicant for a credit and bring their request in their own name.
Regarding the second above question, namely, concerning a conflict of interest between the bank and its customer, which one of them should be preferred? Nothing is mentioned under the UCC. It seems that in such a dispute the bank's satisfaction should be put first since it is the bank that accepts more risks at the beginning by paying for documents which may, in a later stage, turn into waste paper. Also, the bargaining power of banks should not be forgotten, since in practice it is the banker who dictates his points of view to the applicant and if the latter would like to enjoy the full benefit of the documentary credit system, it is necessary for him to direct his action in a direction that meets also the bank's conditions for issuing the credit.
In respect of the above third question, namely, for what reason(s) Is it under Section 5-114(1) provided that only "specified" and not "all" documents must be satisfactory to the issuer of a letter of credit, one may argue differently. In an official comment it has been pointed out that accepting a different view would destroy the
whole purpose of issuing an irrevocable credit; however, the procedure can be different in case of a revocable credit. Because of the importance of the matter, the relevant part of the official comment says: "Attempts by the issuer to reserve a right to dishonour by including a clause that all documents must be satisfactory to itself are declared invalid as essentially repugnant to an irrevocable letter of credit. Such a reservation can be made by issuing a revocable credit. See Section 5-106. Particular documents, such as bills of lading or inspection or weight certificate can, of course, be required to be satisfactory to the issuer."®®
As considered previously, distinctions exist between a revocable and irrevocable credit;®^ but a connection between the point accepted under Section 5- 114(1) and differences between them are not clear. Why should the same policy accepted under that section (as mentioned above) not be accepted in case of a revocable credit? In other words, whether any difference between revocable and irrevocable credits is really a matter for distinction as far as the bank's right under sub-section 1 of Section 5-114 is concerned.
The main distinction between a revocable and an irrevocable credit is related to the bank's undertaking against its customer and the beneficiary. In the case of a revocable credit the bank is entitled to modify or cancel the credit without giving any notice to its customer or the beneficiary of the credit or asking for their consent (Section 5-106(3) of the UCC), whereas under an irrevocable letter of credit the procedure is different, namely, after the credit is established it can be modified or revoked only by consent of the applicant and the beneficiary of the credit (Section 5- 106(2) of the UCC). The procedure is similar under the UCP 500, although there are distinctions between UCC and UCP as considered earlier (Chapter IV, Section B.2.1 above). If this is the case, what is then the nature of the bank's right under Section 5-114(1) of the UCC? Is it a type of modification of the credit, which in the case of an irrevocable credit requires the consent of other parties; or is it not a modification
See UCC, supra (f.n. 2), p. 436.
See relevant discussions in Secetions B. 1.2.2 (present chapter) and B.2.1 (Chapter IV) above.
of the credit, as a part of credit's conditions agreed upon by contracting parties when establishing the credit? Even if it is accepted as a modification of the credit, then by consent of all the parties to a credit contract such a modification may or may not be enforceable. If the answer is positive, which seems to be so, as pointed out above, then there is no justification for the policy accepted under sub-section 1 of the Section 5-114, namely, that an issuer may require that "specified", not "all", documents must be satisfactory to his conditions under the credit.
Another matter which may arise is about the meaning of terms "specified" and "all"; one may argue that the former refers to documents stipulated under the credit but the latter is more genera! and covers both stipulated as well as non stipulated documents, namely, because of trade usage or conditions stated under the credit contract the beneficiary should also tender them.®® Therefore, it is not a complex issue and the real meaning of term "specified" under Section 5-114(1) concerns all documents stipulated in the credit contract; so those documents must also be satisfactory from the bank's point of view.
If the above argument is accepted, then the above quoted official comment becomes meaningless because the last part of the comment put forward several examples of what is a particular document, e.g. bills of lading or inspection or weight certificate. Moreover, in most of credit transactions, documents are numbered and specified by contracting parties, and situations where the beneficiary is obliged to provide further document(s) because of trade usage or other conditions stated in the credit imposing further duties upon the beneficiary, are accepted as exceptions to the general rule. Therefore, the interpretation of terms specified and aif as suggested above would lead to a meaning totally in contradiction with the intention of parties to the credit transaction. It is hence appropriate to suggest that the term "all documents" refers only to all those documents which are precisely stipulated in
For more details see the relevant discusion about stipulated and non-stipulated documents in Section A o f Chapter V I (below).
the credit and the term "specified documents" means document(s) which is/are selected by banks from those documents stipulated in the credit.
To sum up the present discussion, it seems the last sentence of Section 5- 114(1) of the UCC needs to be clarified for reasons considered above.®® Concerning the UCC and the UCP 500, regarding the point under consideration, it seems the policy adopted by the UCC, namely, providing some provisions relating to the rights of the bank over documents, is preferable and it is necessary for any future attempt for providing an international set of standards about LCs to deal with the given issue properly.