PIII.01  In the preceding parts, we explored the measurement of compliance with obligations arising out of a letter of credit and the underlying credit-opening agreement, and the ways in which recovery may be sought by a party who has suffered a financial loss on account of its failure to realize the credit by reason of making a non-conforming tender of documents. The focus of this final part of the study is the means of ascertaining the legal system by which conformity with the obligations and the right to recover damages are determined.

PIII.02  As noted in the previous situations, issuing banks normally honour their payment and reimbursement undertakings to beneficiaries and nominated banks upon receipt of conforming documents; in due course they will be reimbursed by the applicant in accordance with the manner set forth in the credit-opening contract. But in circumstances where an issuing bank refuses to perform its obligation, the aggrieved promisee beneficiary or nominated bank may find itself obliged to launch litigation, of course in the courts of its country (since it is familiar with their workings, albeit it may well be costlier to prosecute a law suit there), against the foreign issuing bank to contest the failure to honour its promise spelt out in the credit, in particular the propriety of the denial of payment or reimbursement.

PIII.03  It sometimes happens that the claimant beneficiary or nominated bank seeking to enforce the engagement embodied in the credit is located in London and the issuing bank is resident abroad with no presence whatsoever in the jurisdiction of the English courts. In that event, it will be necessary for the claimant beneficiary or nominated bank to apply to an English judge for permission to serve the claim form on the issuing bank out of the jurisdiction.¹ Showing² that the claim brought for enforcement is governed by English law may constitute a sufficient reason for the court to grant the application.³(p. 270)

PIII.04  However, the court may well hear the case because the defendant issuing bank is amenable to its jurisdiction in that it is resident there and, compared with some other country, it is clearly the more appropriate forum for the trial of the action;⁴ or, if the defendant is domiciled in a Member State of the European Union, because it is entitled to do so by virtue of Article 5 (1) (a) of the Brussels I Regulation.⁵

PIII.05  To resist the proceedings, a potential defence is that its liability for non-performance of its obligation to accept the documents presented to it is excused by reason of a subsisting local injunction;⁶ or that the claim is statute-barred;⁷ or that the documents are forgeries and a nullity on the grounds that it has irrefutable evidence that the goods they represented do not exist, and shipment was neither made nor attempted;⁸ or that the party claiming payment is merely an assignee of the sum named in the credit and affected by the fraud discovered on the part of the beneficiary;⁹ or that its liability created by the credit has been discharged or extinguished by a municipal legislation or statutory scheme; or, finally, that performance of its undertaking has been rendered impossible by the exchange control regulations of the country where remittance of the funds stated in the credit is to be effected.

PIII.06  Whether or not any such defences afford a good answer to the action so as to entitle it to say, for example, ‘My obligation to honour your tendered documents has been discharged, suspended or modified by the law of my country’, usually turn on the answer to one question: What legal system governs the undertaking sought to be enforced under the credit? This question is particularly important because the substantive provisions (p. 271) of various legal systems tend to hold different views on the potential defences already mentioned.¹⁰

PIII.07  Now, there seems little doubt that if the law found to be governing the obligation is that of a country foreign to the issuing bank, the law of the issuing bank’s country will generally regulate the manner or mode of performance of the obligation, but the effect and validity of the undertaking is under the control of the governing law. So, a foreign governing law does not usually control the entire field of implementation of the obligation. In deciding if the rejection of a tender of documents is justified in an action seeking the enforcement of a credit, the judge may thus be obliged to consider what acts of performance fall within the purview of the expression ‘manner or mode of performance’.

PIII.08  In ascertaining the law governing the obligation to honour a tender of documents and the lex situs of the debt due under the credit, the court hearing the case has to employ the forum’s choice of law rules for contracts.¹¹ If the applicable law is thereby found to be the law of the country in which the issuing bank is located, the judge will normally accord recognition to it together with the court order freezing the credit. But if the finding is otherwise, the defence would fail, and the issuing bank would, in the absence of any contrary justification given it by the applicable law, be required to fulfil its promise to the claimant beneficiary or nominated bank.

PIII.09  Either way, an erroneous ruling can have profound implications for the parties. If the judge wrongly concludes that the governing law of the claim is other than that of the issuing bank and thus orders it to honour the credit, the issuing bank will be caught in a cleft stick. If it makes payment and looks to the applicant in its country for reimbursement, the subsisting injunctive order will stand in its way; conversely, if it does not pay, its assets within the jurisdiction of the English courts will be liable to attachment to satisfy the judge’s ruling. With regard to the claimant nominated bank or beneficiary, if the judge is mistaken in holding that the applicable law is that of the issuing bank and, accordingly, sets aside the proceedings initiated against the issuing bank, the claimant in question (if it is determined to realize the fruit of the credit) may have no option but to expend a great deal of time and money to initiate fresh proceedings in China to fight the stop payment order and prove its entitlement to the payment or reimbursement promised by the issuing bank under the credit.

PIII.010  Considering the possible effects a decision as to the applicable law of a payment or reimbursement obligation could have on the rights of the parties to a credit, it is proposed to examine whether, and if so, the extent to which, the courts’ manner of making their evaluation can be justified. However, it is worth noting that each time the problem of identifying the applicable law of a payment or reimbursement obligation in a credit is presented in litigation, the judge’s task is not easy: Letters of credit almost invariably contain no provision (p. 272) as to their governing law; the Uniform Customs and Practice for Documents (the UCP), explained earlier as¹² a set of standard terms and rules routinely incorporated into credits all over the world, is similarly mute on the matter, despite spirited pleas by leading commentators that the rules should have such a clause.¹³

PIII.011  Perhaps the reason lies in the inherent nature of the transaction itself; the potential number of parties involved in a particular credit is often such that if they had to decide on the applicable legal system it is most likely there will be a deadlock and, consequently, no credit because each party will insist that the law it has selected rather than that of the others should regulate the credit. Effectively therefore, the typical silence of a credit (and indeed the UCP) on the law governing the obligations arising under it is not entirely fortuitous; it is doubtless the parties’ preferred option. Coupled with this preference is the implicit expectation that the court itself will determine the applicable law should a claim arising in the particular case so require.

PIII.012  There are two types of such claims the governing law of which the courts often encounter serious difficulty locating with reasonable precision. One is the beneficiary’s claim for wrongful denial of payment under the credit (Chapter 10). The other relates to the nominated bank’s right to be reimbursed by the issuing bank for the sum the nominated bank has paid to the beneficiary or another nominated bank against allegedly complying documents pursuant to its nomination under the credit (Chapter 11).

PIII.013  There are two further classes of claims, but these hardly ever arise in litigation to attract substantial attention in this work. The first concerns the correlative contractual claims arising between the issuing bank and the applicant from the credit-opening agreement. The law controlling them is almost always not in dispute, primarily because any such agreement intended to set up a letter of credit, in marked contrast to the ultimate credit, usually carries a clause stating that it is governed by the local law. But, on the grounds of special considerations discussed subsequently, opting for the law of the country in which the issuing bank is to effect payment or arrange for payment to the beneficiary should be the sensible thing to do. Nevertheless, in the few cases where a clause of that sort is not included, the current stand of the authorities generally presumes that they intend to submit themselves to that law for two reasons. First, they are both under the protection of the same legal system, subject to the same sovereign. The second derives from the nature of their relationship, which is basically that of banker and customer, the opening of the credit being a slice of the services a bank habitually renders to its customer for a small fee—in principle, the municipal law of the place at which the customer maintains an account with his banker governs their mutual rights and obligations.¹⁴

PIII.014  The other class of claim comprises allegations of breaches of non-contractual obligations, for example, a claim in tort¹⁵ for deceit occasionally pursued by the issuing bank (or the (p. 273) applicant claiming as subrogee of the issuer) against the beneficiary or a nominated bank, or a claim for negligence against the advising bank, or a claim by the beneficiary or a nominated bank against a third party such as shipping agents for conversion of the goods financed by the credit. These claims are more closely connected with the ascertainment of the law applicable to claims in tort and fall outside this work, as is an examination of the question of the limits of applicability of the law potentially applicable to contractual claims.

PIII.015  The ensuing analysis in the related chapters is primarily an exploration of the manner in which Anglo-American courts utilize the precepts established by their respective choice of law rules to ascertain the applicable law in the various classes of situations just enumerated. At present, those of Singapore are fashioned by case law without the helping (or paralyzing?) hand of the Parliament. In England the rules established for designated contracts (those for non-contractual claims are provided later in their appropriate context) are contained in Articles 3 and 4 of the Rome I Regulation. The Regulation replaces the Rome Convention on the Law Applicable to Contractual Obligations 1980 with effect from 17 December 2009 in all Member States of the EU except Denmark.¹⁶ In the United States, the controlling provisions are common law choice of law rules as supplemented by the Restatement (Second) of Conflict of Laws¹⁷ and section 5-116 (a) and (b) of the Uniform Commercial Code Revised Article 5–Letters of Credit. As mentioned earlier,¹⁸ Revised Article 5 governs letters of credit issued or confirmed in the United States or issued abroad but determined to be so governed by the application of the conflict of law rules of any jurisdiction. The provisions of the Article have been enacted with a few minor exceptions throughout the various jurisdictions in the United States, and in the Commonwealth of Puerto Rico, the Territories of Guam, and the Virgin Islands.