In a commercial letter of credit transaction banks are not liable for acts of an Instructed Party. This is currently stipulated in Article 37 UCP 600 and previously was provided for in
Article 18 UCP 500. A simple concept, easily understood, clearly drafted, however, it is partially invalid.
The drafters of the Uniform Customs and Practices, abbreviated UCP, are members of the International Chamber of Commerce, a private organization without any power to enact laws. The UCP 600 hence are considered to be contractual provisions
that need to be incorporated into each letter of credit transaction.
As a contractual provision the UCP have to comply with national law and German law, even though a decision of
a higher court has not yet been issued, will consider this provision partially invalid.
Article 37 b UCP 600 specifies that the Issuing Bank is not liable even “if it has taken the initiative in the choice of that other bank.” This can only be true if the Applicant has chosen the secondary bank and issued conforming instructions to the Issuing Bank. In this case the Issuing Bank, following the instructions of its customer, will not be liable for mistakes made by the secondary bank. However, more typical is that the Issuing Bank may choose freely which secondary bank to use. The disclaimer for choosing the right secondary bank is considered invalid,
since a bank cannot limit its liability for gross negligence.
Furthermore, depending on the function of the secondary bank, German law distinguishes as follows in regards to the validity of disclaimers of liability: Advising Bank: For the advising bank the maxim applies: “respondeat superior”, which means that the Advising Bank acts like an organ of the Issuing Bank, hence, the Issuing Bank cannot disclaim liability for acts of the
Nominated bank: Decisions of higher courts have not yet issued, however, the author is of the opinion that the Nominated Bank should be deemed a sub-contractor, since it will satisfy obligations independently of the Issuing Bank, as eg examination of the documents. Here it seems appropriate to assume, that the Issuing Bank is not liable for the acts of the Nominated Bank. In particular, if the Nominated Bank erroneously pays out the letter
of credit, the Applicant only can reclaim the funds from the Nominated Bank, not the Issuing Bank.
Confirming Bank: The confirmation is a substitution of obligations, that is, the Issuing Bank itself cannot provide the confirmation (which is a promise to pay independent of the obligation of the Issuing Bank). In this situation, the disclaimer of liability of the Issuing Bank for acts of the
confirming bank Confirming Bank is valid.
Conclusion: The UCP are drafted by committees heavily influenced by anglo-american views on law. These generally allow limitations of liability. Other jurisdictions however differentiate the validity of limitations and disclaimers of liability based on type of obligation and type of act committed. German law is of particular interest in this context, since Germany is one of the biggest exporters in the world and hence very interested in an equitable application of the rules governing letter of credit transacionts.
Also, her judges cannot decide in splendid isolation as US judges are prone to doing when considering the protection of their citizenry’s interests.
If international trade and finance interests you, you will find more information at the letter of creditforum.
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