Application of US Uniform Commercial Code Article 5 in International Letter of Credit Transactions

Most every commercial letter of credit and a certain number of standbys are issued subject to the Uniform Customs and Practices for Documentary Credits (UCP) rules of practice published by the International Chamber of Commerce (ICC). As such, UCP is an invaluable source for judges adjudicating letter of credit cases and serves as a guidance standard for international banks in their letter of credit operations.

Despite its occasional misperception as international law which supersedes local law, UCP functions as a set of practice rules which apply to letters of credit based on the intention of the LC parties to abide by the rules.

When a negotiating bank is notified by the issuing bank that a local court has issued an injunction against the issuing bank from making payment, the negotiating bank regards the UCP as rules which should defeat the injunction which is local law. But UCP is not law and cannot override local law such as injunctions.

Most courts when adjudicating LC cases look to the UCP as the primary rule in letter of credit transactions. UCP does not and cannot deal with legal issues. Rather, it clarifies practice issues by revising its rules as necessary and the ICC Banking Commission writes opinions and releases guidance papers from time to time. For issues like fraud and forgery, the UCP simply does not deal with such matters and UCP defers to the treatment of such issues by local courts.

This is where the US Uniform Commercial Code (UCC) Article 5 (Letters of Credit)¹ comes into play. Many of the legal issues arising from letter of credit court cases are not covered by the UCP articles for the simple reason that UCP is not law. However, UCC Article 5 is United States law and is applied to letters of credit issued subject to US law. Thus, when an issuing bank and other parties to an LC subject to US law are faced with legal issues on an LC transaction, they look to UCC Article 5.²

While the UCP is applicable to credits issued subject to it, the International Standby Practices (ISP) applies to standby credits issued subject to it. UCC Article 5 applies to both documentary credits and standby credits. With the ISP for standbys, the UCC Article 5 is a good complement to the ISP.

For many situations not covered by the UCP, they are governed under UCC Article 5. While UCC Article 5 does not apply to countries other than the United States, parties may decide to have an LC issued that is governed by US law. As persuasive authority, UCC Article 5 can guide both non-US courts and international banks in dealing with legal issues before and after a case is brought to the local court.

Should issuing banks wish to subject their LC to UCC Article 5 to complement the UCP, they can issue their LC subject to UCP and for situations not covered by the UCP make it subject to UCC Article 5. UCP provides the basic transaction rules but for legal issues, the UCC Article 5 would be very useful for the parties. Disputes occur in LC transactions and international bankers and lawyers need a rule of law and practice to deal with such situations.