Part I considers the modern challenges presented to traditional trade finance instruments, namely documentary letters of credit and performance bonds.
The first challenge involves identifying the relevant legal framework for such instruments: on one level, it has become increasingly difficult to accommodate documentary trade finance within domestic contract law; whereas, on another level, the international framework provided by the ‘UCP’ and analogous default rules has become increasingly out of date and difficult to update.
Without either framework, it is unclear how documentary trade finance can continue to develop and serve the trading community effectively. Even within the principles governing such traditional documentary instruments a number of uncertainties and challenges have arisen, including the use of soft clauses in letters of credit; the role of nominated banks; the determination of compliant presentations; and the impact of fraud, unconscionability and foreign stop orders. Given that documentary trade has always pursued the twin aims of providing certainty of payment to the beneficiaries of such instruments and reducing the administrative burden on issuing and confirming banks, uncertainty regarding the applicable legal framework and its operation can only undermine the utility of documentary trade finance. This is not just a challenge; it is a matter of survival.
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