rules, adopting new, more comprehensive definitions and interpretations andchanging the rules for examination of documents presented. Although UCP600, like UCP 500, states that it is applicable to all forms of letter of credit,its focus is commercial credits, where payment is typically made against thepresentation of documents that may include complex bills of lading, productinspection reports, insurance documents and other documents common ininternational trade.
ISP98 is a product of the Institute of International Banking Law andPractice and became effective on January 1, 1999. As its full name indicates,ISP98 deals exclusively with standby credits. ISP98 is primarily the productof American bankers and lawyers operating through the U.S. Council onInternational Banking (the predecessor of the International FinancialServices Association), and its style does seem to reflect the fact that morelawyers were involved in its drafting than in the drafting of UCP 600.
However, because it is generally issuer-favorable, many non-US banks today prefer to issue standby credits pursuant to Article 5 (or another defined locallaw) and ISP98.
THE “INDEPENDENCE PRINCIPLE”
The most important component of modern letter of credit practice is the“independence principle” — the principle that payment under a credit willbe made solely against receipt by the issuer
of the documents called for inthe credit, without regard to the relationships between and the relative rightsand obligations to each other of (i) the beneficiary and the party who pro-cured the issuance of the credit (normally known as the “applicant”), or (ii)the issuer and the applicant. The independence principle is embedded in allthree sets of rules: UCC 5-103(d),
UCP 600 Arts 4(a) and 5,
and ISP98Rule 1.06(c) and 1.07.
In essence, the letter of credit issuer is saying “if yougive me the following pieces of paper
that say the following things then I will pay you the stated amount without regard to the terms of my agreements with the applicant or your agreements with the applicant.” The issuer is nei-ther expected nor entitled to look behind the pieces of paper to determine whether the statements they contain are true, or to determine whether underits agreements with the applicant, the beneficiary has the right to make
DRAFTING LETTERS OF CREDIT
Published in the February 2008 issue of The Banking Law Journal. Copyright ALEXeSOLUTIONS, INC.