The Historical Perspective
There was life before the UCP regime.3 There is evidence to suggest that instruments 1.02 analogous to letters of credit were used in ancient Egypt and Babylon, as the University Museum of Philadelphia contains a clay promissory note dating from 3,000 BC providing for repayment with interest.4 A cuneiform tablet found in Egypt is the earliest extant example of a letter of credit.5 Other examples of promissory and negotiable instruments from that period also exist.[2] Furthermore, there is evidence to suggest that Phoenician merchants used letters of credit when trading with Mediterranean cities and that banks in Ancient Greece prepared ‘letters of credit on correspondents with a view to obviating the actual transport of specie in payment of accounts’.[3] Given the reception of many Ancient Greek concepts into Roman Law, it can be surmise[d] that Roman commerce required something in the nature of the letter of credit’.[4] Indeed, as Usher has stated, ‘[t]here was nothing in the formal rules of law to prevent a banker from recognizing a written order of payment as an appointment of the person named as agent of the principal for that specific act’.[5] Following the collapse of the Roman Empire and a period of degeneration in banking activity,[6] it was the rise of the Italian city-states, such as Genoa, Venice, and Florence in the twelfth and thirteenth centuries, together with the increasing levels of trade between European nations, that saw the genesis of modern instruments resembling the letter of credit.[7] Indeed, by the fourteenth century, letters of credit were used freely across continental Europe[8] and in England.[9] Whilst the legal concepts underlying letters of credit were received in a relatively straightforward manner in civil law jurisdictions,[10] the English common law had more difficulty reconciling the irrevocability and enforceability of letters of credit with traditional doctrines, such as consideration.[11] This issue was overcome in Pillans v Van Mierop,[12] in which Lord Mansfield pithily stated that ‘a nudum pactum does not exist in the usage and law of merchants’.
Whilst the English courts sought to row back from Lord Mansfield’s view in later years,[13] letters of credit continued to be used during the eighteenth and ninteenth centuries and their legal validity has never since been explicitly doubted. Indeed, as Goode has stated, ‘to this day there is no reported English case which directly holds that a letter of credit becomes binding on receipt despite the lack of consideration in the ordinary sense... But there are dicta in several cases in which the courts have taken it for granted that letters of credit are enforceable undertakings and any argument to the contrary would be likely to receive short shrift at the hands of the judiciary’.[14] Indeed, the legal validity of letters of credit has only belatedly been acknowledged judicially in England.[15]The legal force given to letters of credit in Pillans is, however, only part of the narrative; there can be little doubt that letters of credit would not have had quite the same success story had it not been for the impetus given by the International Chamber of Commerce (‘ICC’). The ICC was founded in the immediate aftermath of the First World War, when there was no global system of rules governing international trade or its financing. Given that many of the major state-based actors were focusing upon re-building their economies, it fell to a group of entrepreneurs, driven by the view that the private sector was best placed to establish universal business standards, to create an institution representing international trade and global business interests. Following its inception in 1919, the ICC quickly established its significance by inaugurating the International Court of Arbitration in Paris, which still functions as one of the pre-eminent centres for international commercial arbitration today.
From its earliest days, the ICC recognised that the facilitation of international trade depended upon the availability and security of finance and credit. During the 1920s, banks in a number of European countries had adopted embryonic versions of the UCP, and by 1927 a consensus had started building around a set of principles and guidelines followed by banks in New York.
It was this version that was subsequently adopted by the ICC in its Uniform Regulations for Commercial Documentary Credits in 1929, which sought to unify ‘the commercial documentary credit regulations previously adopted and published by banking associations in various countries’.[16] This initial instrument was, however, replaced only four years later with the Uniform Customs and Practice for Commercial Documentary Credits in 1933.[17] There have subsequently been six revisions to the UCP regime since its adoption,[18] with the coverage and detail progressively increasing with each revision.[19] Both the original version of the UCP and its subsequent revisions represent the product of a concerted and coordinated effort on the part of bankers, traders, and lawyers (increasingly mediated nowadays through the ICC’s various committees and sub-committees), albeit that the representation of bankers increasingly overshadows the other interested constituencies.In terms of its timeline, the UCP’s greatest popularity was arguably during the period between the 1970s and the 1990s when the UCP 400 and 500 were in effect. As a letter of credit is a proxy for counterparty trust, it is unsurprising that the UCP saw its greatest success during periods of global economic and political instability, with oil crises in the 1970s, the Cold War in the 1980s, and the collapse of the Soviet Bloc in the 1990s[20] (indeed, there was a marked uptick in letter of credit use between 2009 and 2013 following the Global Financial Crisis,[21] and a similar phenomenon is predicted in the wake of the coronavirus pandemic).[22] Over that time, the UCP regime's achievements have been significant. Principally, it has led to a harmonisation in the banking practices and customs applicable to letter of credit operations and, such has been its level of acceptance, that it is unusual to find a letter of credit that is not subject to the UCP, a bank that does not operate according to its guidance, or a jurisdiction that is not prepared to give effect to its tenets.
Indeed, as an exercise in international harmonisation, the UCP regime's reach and impact are largely unparalleled. That said, the UCP regime is not law and its drafting indicates that the UCP was never intended to have mandatory application or to have the force of law;[23] instead, the various UCP revisions have generally only applied to particular letters of credit to the extent that the relevant version of the UCP had been incorporated into the text of the instrument itself.[24] Whilst civilian jurisdictions have been more willing to treat the UCP (or at least its more fundamental principles) as having achieved a more normative status,[25] or as having developed into a set of ‘rules'New Roman",serif; color:black'>[26] taking effect as a ‘universally accepted mercantile usage',[27] the notion that the UCP remains nothing more than an optional regime has certainly persisted in England[28] (despite the English courts occasionally applying the UCP to letters of credit without their incorporation).[29] Accordingly, the UCP regime establishes little more than a default set of contractual terms that can be incorporated by reference into the letter of credit, although those default provisions differ from ordinary contractual terms by virtue of the judicial approach to their interpretation,[30] implication,[31] and vitiation.[32]The UCP's modest legal status, however, belies its success; it is an exemplar of the superiority of private ordering over mandatory regulation. That said, the ICC has provided more than just the framework of principles in the UCP, but has been instrumental in developing the accompanying apparatus to support the UCP's operation. There are four key elements.
First, following the formation of the Society for Worldwide Interbank FinancialTelecommunication (SWIFT) in 1973, and the subsequent development of the SWIFT inter-bank messaging network from 1977, letters of credit could be inter alia issued, advised, amended, confirmed, and transferred on templates that sought to standardise the format, data, and layout of credits. Secondly, in the absence of any supra-national judicial authority over the UCP, the ICC's Banking Commission developed a mechanism for responding to individual queries from its banking members about the application of the UCP to letter of credit disputes facing them.[33] Whilst this jurisdiction was designed to provide guidance on the resolution of particular disputes, the ICC Commission on Banking Technique and Practice (‘ICC Banking Commission') on several occasions chose to intervene in a more general way by drafting position papers when a perceived error in the UCP's interpretation had developed at national level,[34] or when it became apparent that divergent domestic banking practices had developed. Indeed, the ICC's dispute-resolution function has been cemented with the development of the ‘Documentary Instruments Dispute Resolution Expertise' (‘DOCDEX'), which is a non-binding system whereby appointed experts issue opinions on letter of credit disputes that are published by the ICC to produce a body of persuasive determinations on the proper application of the UCP.[35] By these various adjudicatory mechanisms, the ICC has been able to maintain and strengthen the consolidating effect of the UCP on international payments in the long period between the various revisions. Thirdly, in an effort to reduce discrepancies between banking centres in terms of the applicable standards for documentary compliance,[36] the ICC developed the ‘International Standard Banking Practices' as a supplement to the UCP regime, thereby providing international banks with a common frame of reference for their document-checking role.[37] The latest version was published in 2013 as ‘ISBP 745'.
Fourthly, in anticipation of there being a mass migration towards the digitisation and electronic presentation of documents under letters of credit, the ICC introduced an electronic supplement to the UCP regime in the form of the ‘e-UCP'.[38] Despite this failing to have the intended impact, as considered further below, the ICC has attempted to keep the UCP relevant by updating the electronic supplements regularly.[39] The institutional framework developed around the UCP regime has been as much a reason for its success, as the rules themselves.Accordingly, it is clear that the twentieth century represented the letter of credit's heyday and it was this success that drove the drafting and adoption of the UCP's current version, the UCP 600. The issue is whether the twenty-first century will treat the letter of credit as kindly.
III.