Can Soft Clauses in Letter of Credit Transactions Be Considered Letter of Credit Fraud in China?

Abstract

Documentary credit (also letter of credit, or more formally documentary letter of credit), which was created in trade and business several hundred years ago, is a well known financial method for international trade parties nowadays. Letter of credit has a long history and has been stated as “the life blood of international commerce” by English judges1. It is considered as an instrument that reconciles the interests of the seller and the buyer, thus providing security both to the buyer and seller.2 The terms and conditions governing letter of credit transactions are almost always to be found in Uniform Customs and practice for Documentary Credits (UCP) issued by the International Chamber of Commerce (ICC)3. In commercial practice, letter of credit4 is a letter issued from a bank promising payment where the recipient of the letter (known as the beneficiary of letter of credit) presents to the bank the stipulated documents during a specific time period.5 The buyer (known as the applicant) is the person who applies for a letter of credit for the beneficiary from a bank. These documents presented by the beneficiary of the letter of credit (also the seller of the sales contract) will then be passed on by the bank to the buyer. Thus, a letter of credit also signifies an agreement in which a bank acts for its customer and assures payment against presentation of the specified documents by the beneficiary. In the letter of credit system, two fundamental principles are the autonomy of the credit (also the independence principle) and the doctrine of strict compliance.6 The independence principle of the letter of credit is clear and is accepted worldwide.7 According to the autonomy principle, a letter of credit is separate from and independent of the underlying contract of sale or other transactions involved.8 The strict compliance doctrine, which accords with the first autonomy principle of the letter of credit, means that the beneficiary must strictly comply with the documentary requirements laid down in the letter of credit. In brief, the letter of credit has its documentation character, and the two fundamental principles of it allow letter of credit payment in international trade to operate in an efficient manner. In an international letter of credit transaction, a letter of credit usually involves four different and independent contracts between different parties. Some scholars9 have accepted the idea of the letter of credit as a contract between the bank and the beneficiary, although several theories have been advanced to explain the judicial basis of the letter of credit itself10. In this paper, contract theory is employed to explain different legal relationships in letter of credit transactions.