A Critical Analysis of Article 5 of UCP 600 Essay

A Critical Analysis of Article 5 of UCP 600 - Essay Example More especially the fact that banks are not concerned with the terms of the contract to which it is attached, means that regardless of whether or not the goods are delivered or not or conform to the terms of the contract or not, the letter of credit must be honoured by the bank. This paper will analyse the consequences of Article 5 of UCP 600 and the potential for fraud and other forms of injustice to the parties impacted by a letter of credit. Letters of Credit In its simplest form, a letter of credit is a device by which a bank or other similar party agrees to provide credit to a specific party on behalf of another party upon receipt of the relevant supporting documents.4 A standard letter of credit is comprised of at least four parties: the vendor (exporter); the purchaser (importer) and each of their banks.5 The importer/purchaser’s bank typically issues the letter of credit which imposes a duty on the importer/purchaser’s bank to pay the specified sum to the vendor /exporter once the particularized documents are received.6 A key feature of the letter of credit is the fact that it is independent of the underlying contract to which it applies. In other words, the bank’s responsibilities under the letter of credit are segregated from any other contractual duties existing between the parties to the letter of credit. This would include contractual duties between the vendor and the purchaser or any duties on the part of â€Å"reimburse the bank for payments made† by virtue of the letter of credit.7 The banks involved in the letters of credit are typically referred to as the â€Å"issuing bank† and the â€Å"conforming bank†.8 The issuing bank is asked by the purchaser who is commonly referred to as the applicant to assume responsibility for paying the vendor who is commonly known as the beneficiary, a specified sum upon the presentation of specific documents. The conforming bank is the bank selected by the beneficiary tha t acts as a â€Å"correspondent of the issuing bank to advise the beneficiary on the terms of the credit† and usually assumes the â€Å"same liability towards the beneficiary as the issuing bank†.9 The autonomy of the letter of credit was fortified in the case of Gian Singh & Co. Ltd. v Banque de L’Indochine in which the court ruled that the autonomy doctrine obliges an insuring bank to make payment to the beneficiary even if the specified documents submitted by the beneficiary pursuant to the letter of credit were forged.10 It was also held in IE Contractors Limited v Lloyds Bank Plc that the duty of issue payment under a letter of credit is not conditional upon ascertaining whether or not the supporting documents presented by the beneficiary are correct.11 The autonomy of the letter of credit is justified in the grounds that contractual disputes occur quire frequently. It would therefore be obstructive to international trade to permit one party to use a contra ctual dispute to delay payment and thus the â€Å"assurance given to the beneficiary would be severely undermined† and thus â€Å"documentary guarantees would become unacceptable†.12 The autonomy principle of the letters of credit therefore illustrate that indeed, banks are only concerned with documents and not the underlying transaction to which it is attached. Although the rationale for the autonomy principle rests on limiting the risks of delaying or stopping payments in international trad