Effect of a Draft Drawn on the Credit Applicant
5.42
Under article 6(c) of the UCP 600, a ‘credit must not be issued available by a draft drawn on the applicant’.[521] This provision reaffirms the spirit of the second sentence of article 9(a)(iv) of the UCP 500; but, presumably in an attempt to emphasise the prohibition, the UCP 600 has dropped the further provision found in the UCP 500 to the effect that, when a credit expressly requires a draft to be drawn on the applicant, the draft would be treated as an additional document.[522] The reason underlying the UCP's proscription is to remind the parties to a letter of credit calling for a draft drawn on the applicant that a credit involves only the bank's irrevocable undertaking to honour drafts against complying presentation.
Yet, in practice, it is common to see credits stating in relevant part, ‘[w]e hereby issue in your favour this irrevocable documentary credit which is available by your drafts at sight drawn on XYZ Pte Ltd (the applicant) for full invoice value accompanied by the following documents’New Roman",serif;color:black'>[523] A typical variant on this wording is that ‘[t]his irrevocable letter of credit isavailable by acceptance of your drafts on (openers) XYZ Pte Ltd... at 90 days sight for 100% invoice value’.[524]
5.43 In a credit of the first type, which is essentially a credit available by sight payment, the requirement that the draft be drawn on the applicant does not usually present any practical problems or conceptual difficulties. Under such a credit, the issuing bank undertakes to make payment immediately, provided that a draft drawn in the required form is presented along with the other stipulated documents.
Thus, as long as the draft is tendered in precisely the specified form, it is conforming and has to be paid forthwith. At one time, however, it was believed that, where a credit required sight drafts to be drawn on the applicant, an issuing bank's omission to include those drafts in its presentation to the credit applicant would not render the documents non-conforming, so that the applicant would still have to reimburse the bank.[525] The justification for this position was that the drafts served no real commercial purpose for the applicant. Unsurprisingly, this proposition has never been accepted judicially,[526] as the commercial utility of a stipulated document is not an acceptable basis for determining the conformity or otherwise of a documentary presentation. Credits calling for sight drafts are fairly straightforward and give rise to little controversy about the apparent irregularity in a presentation which does not include the required drafts.5.44 In contrast, the second type of credit, which expresses itself available by the acceptance of time drafts drawn on the applicant, presents considerable problems. Particularly unappealing is the fact that a time draft accepted by the applicant, unlike a draft drawn on a bank for acceptance, is not readily discountable in the financial market.[527] Furthermore, in practical terms, such a documentary requirement brings the applicant into the credit settlement process and puts him in a position to manipulate the performance of the issuing bank’s undertaking under the credit, notwithstanding that the issuing bank has received an otherwise complying presentation. According to such a credit’s terms, the bank’s undertaking is simply to obtain acceptance of the beneficiary’s draft by the applicant and then to ensure its payment at maturity.[528] In contradistinction to its traditional undertaking in a credit, the issuing bank’s primary liability is thus not immediately engaged.
Indeed, where the applicant, for reasons best known to himself, declines to accept the draft, the issuing bank may thenbe tempted to sit on its hands and justify its refusal to honour the presentation by asserting the non-acceptance of the draft.[529] In that event, what options are open to the beneficiary? Article 6(c) of the UCP 600, which states that a credit ‘must not be issued available by a draft drawn on the applicant', offer no further answers and provides no clue as to what should happen in the event of a failure to observe its directive in a credit. Nevertheless, two possibilities suggest themselves.
5.45
Under the first possibility, provided the credit has not expired, the beneficiary may apply to a court in his own jurisdiction for a mandatory order requiring the applicant to accept the draft tendered.[530] Notably, a successful application may be of little value: the stated route entails the beneficiary prosecuting a potentially expensive action to obtain the relief; the accepted bill of exchange does not translate into actual cash unless and until discounted by a willing forfeiter; and the applicant's acceptance of the draft exposes the beneficiary to the applicant's shenanigans or insolvency at the draft's maturity date, which is the very evil from which the letter of credit device is supposed to protect the beneficiary. The second possibility would be to require the issuing bank to honour the credit by its permitting the beneficiary to draw his bill of exchange directly on that bank for the same amount and tenor as the draft that the credit requires to be drawn on the applicant.[531] This seems a preferable solution, as it conforms with the fundamental premise that modern letters of credit, as understood by the global banking community, represents the bank's (rather than the applicant's) undertaking to provide payment against conforming documents.
According to this approach, even when the bank's undertaking appears to be conditioned by the acceptance of a draft by the very party on whose behalf the credit is issued (rather than simply the bank's receipt of apparently regular documents), the bank's obligation should nevertheless still be viewed as one to pay against conforming documents, irrespective of whether the applicant accepts the draft or not. In that sense, it is to be hoped that judges will be willing to uphold the validity of letter credits requiring an applicant to accept a draft, rather than re-classifying the credit as some other form of non-autonomous payment undertaking.[532]IV.