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Friday, June 20, 2008

Letters of Credit … should state applicable law and jurisdiction

Letters of Credit (LCs) are still widely used in international trade, although they cover a diminishing proportion of that trade. Most sellers who receive and buyers who initiate LCs and their bankers know that their LCs must be opened subject to the Uniform Customs and Practices for Documentary Credits 2007 revision, as published by the International Chamber of Commerce, in publication number 600; generally called UCP 600.

However relatively few bankers and very few exporters and importers realise the importance of ensuring that the LCs they open, receive or initiate should stipulate the law and legal jurisdiction which applies in each case.

This becomes vitally important if a dispute arises regarding an LC. If applicable law and jurisdiction are not stated, the parties to the dispute may do some ‘jurisdiction shopping’ and/or place the matter in the hands of a court inexperienced in matters of international trade, which has to work with law that does not adequately support an equitable ruling.

UCP 600 is a body of rules incorporated into the LC contract. It is not law hence it does not have the force of law in any jurisdiction. It is a contract between the parties to the LC so the rules will be interpreted by a court simply as rules agreed by the parties, against the background of the applicable law.

I recommend the inclusion of a clause in all LCs stipulating either English law and English Courts, or Singapore law and Singapore Courts, or Hong Kong law and Hong Kong Courts, or New York law and New York Courts; simply because it is these courts that by virtue of the fact that they are based in trading hubs, have extensive experience and sound legislation and/or precedent decisions on which to base broad-minded judgements.

It may not always be possible to persuade an opening bank to include a law and jurisdiction clause but I have found through experience that most banks will agree. I have found that if you persist in requesting this clause it is possible to achieve a high percentage of success.

Feel free to take professional legal advice on this matter, but I recommend that if you do so you consult a lawyer with experience in international trade. I will be happy to recommend some appropriate legal firms if you are not familiar with the field.

Ron Wells