The legal aspects of documentary credits in international trade: the case for Botswana

Author(s): B Maripe
Source: The Comparative and International Law Journal of Southern Africa , JULY 1997
, Vol. 30, No. 2 (JULY 1997), pp. 199-207
Published by: Institute of Foreign and Comparative Law

Stable URL: https://www.jstor.org/stable/23250181

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 The legal aspects of documentary
credits in international trade: the case
for Botswana

B Mari pe*
Department of Law, University of Botswana

There has been little litigation on matters of international finance, and in

particular the use of documentary credits as a means of financing international
trade, in Roman-Dutch law. This is evidenced by the paucity of judicial
pronouncements both in South Africa and Botswana,1 countries which apply
the Roman-Dutch common law.2 While documentary credits have assumed a
central role in international trade worldwide, their legal import has not been
without controversy and this has led to considerable litigation more especially
in developed countries. This has not been the case with the less developed
countries where the scale of international trade is very low, resulting in little
litigation.

Judge Gaefele's decision in African Handling Equipment Company v Monitor

Kamaz Trucks (Pty) Ltd3 is of more than passing interest not only because it
is the first decided case in Botswana in which the legal effect and conse
quences of documentary credits have been considered, a position recognised
by Gaefele AJ,4 but also because of the issues raised and conclusions reached.

The facts

Briefly stated the case concerned a contract of agency between th

('the underlying agreement') on which the applicant agreed to be the
respondent's agent for the sale of Kamaz trucks and the supply of spare parts
for the trucks in South Africa. The applicant was a South African Company and
Respondent a company registered in Botswana. An irrevocable letter of credit
was issued in favour of the respondent by Standard Bank of South Africa
Limited and confirmed by First National Bank of Botswana. In essence,

*I thank Dr C Ng'ong'ola for his helpful comments. I remain individually responsible

for all errors.

'There are as of now three decisions in South Africa; Phillips and Another v
Standard Bank of South Africa Ltd and Others 1955 3 SA 286 and Ex parte Sapan
Trading (Pty Ltd) 1995 1 SA 218, Loomcraft Fabrics CC v Nedbank Ltd and Another
1996 1 SA 812 (AD) and one in Botswana.
2Other countries include Lesotho, Swaziland, Zimbabwe, Namibia and Sri Lanka (the
only country outside of Africa applying Roman-Dutch law).
3Misca 308/95 (unreported).
4Id at 2.

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 200 XXX CILSA 1997

Standard Bank of South Africa Limited was the issuing bank, First Nationa
Bank of Botswana the confirming bank and the respondent the beneficiary. A
dispute later arose over the underlying agreement, with the applicant alleging
certain breaches by the respondent in that the trucks were latently defective,
that they did not comply with the necessary standards, and delays in delivery.
On the other hand, the respondent accused the applicant of certain breaches
relating to the underlying agreement. The applicant sought to cancel the letter
of credit on the basis of the alleged breaches in the underlying contract and
also sought an order restraining the respondent from drawing on the credit

Preliminary observation
The dispute between the parties did not relate to any irregularities in the letter
of credit. It related to the contract in terms of which the letter of credit had
been issued. The issue the court had to decide was the extent to which
disputes in the underlying contract could affect the execution of the
documentary credit. Though there was also a dispute as to the correct letter
of credit,5 it is submitted not much turns on that and the judge was of the
view that, notwithstanding this dispute, a letter of credit was in fact issued, it
having been submitted for the respondent that the application could be
dismissed on that ground alone, a submission implicitly accepted by Gaefele
AJ. However, the judge was 'generous' and proceeded to deal with the issues
raised in relation to documentary credits.

Legal status and application or the UCP

The Uniform Customs and Practice for Documentary credits (UCP) are a set of
rules governing documentary credits which have gained wide recognition over
the years. They are issued by the International Chamber of Commerce (ICC)
which is in the main an association of bankers. However, the rules are made
in consultation with other interested parties. They are therefore
... the result of collaboration between the International Chamber, the United
Nations and the Foreign Trade Banks of Socialist Countries.6

and as such could be said to enjoy worldwide acceptance. However, their

legal effect is not without controversy,7 not least of all as to whether or not
they have legal force. Judge Gaefele took an almost conclusive view on this
matter. He observed:

The practice which is subject to a body of rules formulated by the International

Chamber of Commerce is an old one and has been applied by the Courts to tbe
extent that it can be said to be a legal rule8 (emphasis added).

5It seemed there were two letters of credit before the court and the dispute related
to which of the two was in issue.

6HC Gutteridge & M Megrah Tbe law of banker's commercial credits (1984) 6.
7RM Goode Commercial law (1982) 657; Rolf Eberth 'The Uniform Customs a
Practice for Documentary Credits' 28-33 and PJ Davidson 'The UCP, the need fo
amendment in the light of technological advances' 39-44 both in 1983 Current
Problems of International Trade Financing.
«At 13

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 Legal aspects of documentary credits in international trade 201

This statement seems to suggest that the UCP are legal rules to the extent that
they have habitually or from time to time been applied by the courts. It is
doubtful if this is the correct approach in determining either the legal status
or the applicability of a body of rules. This would beg several questions:
whether they have been applied by the courts generally or in limited circum
stances, and whether the courts were bound, as a matter of law, to apply
them. Courts may apply a set of rules such as the UCP for a variety of reasons,
as for example where they are required to do so by statute, or the rules are
regarded as forming part of a custom or usage by which they are bound.
Regrettably, the basis of the judge's opinion does not come out clearly from
the judgment. It has been held that the UCP do not have the force of law.9
The UCP are revised from time to time to suit changing circumstances and the
1993, and latest, revision begins with a general statement on the application
of the UCP:

The Uniform customs and Practice for Documentary credits, 1993 Revision,
ICC Publication No. 500, shall apply to all documentary credits (including to
the extent to which they may be applicable, standby letter(s) of credit) where
they are incorporated into the text of the credit. They are binding on all
parties thereto, unless otherwise expressly stipulated in the credit.10

Thus they have legal force only to the extent that they have been incorporated
into the text of the credit and are thus a term thereof, and they have not been
expressly excluded from application by one or other of the parties to the letter
of credit. This accords with the common law position which is that the UCP

are applicable only if the parties have embodied them in their contract.
Another view obtaining in some legal systems, notably Germany, is to regard
the UCP as binding because of uniform usage over a period of time coupled
with the belief that they have legal effect.12 In other words, they are accorded
the status of customary law. It would seem their status will be determined by
reference to the views adopted in individual national systems. Whatever
position one adopts, should indicate the basis underpinning the status one
accords the UCP. Despite the heavy reliance on English authorities, which
Gaeiele AJ accepted as reflecting the law in Botswana,*3 the basis on which
he applied the UCP is different and may well be wrong. Be that as it may, on
the practical side, the UCP will almost always be incorporated into the text of
the letter of credit, as they have been formulated by banks largely for their
own protection.14 This should not however be taken to create some custom
which may have binding legal force, it is only proper at this stage to say the
UCP apply if the documentary credit is issued subject to the UCP.

9J Donaldson in M Golodetz and Co v Czarmkov — Riondo Co 1980 1 WLR 495 at

509. See also CM Schmitthoff Export trade: tbe law and practice on international
trade (9ed 1990) 402.
10UCP 500 article 1; and Forestall Mimosa v Oriental Credit Ltd 1986 1 WLR 631
"SchmitthofF n 9 above.
12Rolf Eberth n 7 above at 28.
13At 17.
I4See articles 15-18. See also Gian Singb and Co v Banque de L'lndocbine 1974 1
WLR 1234.

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 202 XXX CILSA 1997

The law

Gaefele AJ defined a letter of credit in the following terms:

A letter of credit is in principle an undertaking by the banker to meet
drawn under the credit by the beneficiary of the credit in accordance wit
conditions laid therein."

This definition would appear to be correct, at least in the sense t

describes the situation before the court, ie an irrevocable letter of
However, it is too general and ignores the various legal conse
attaching to different letters of credit depending on whether th
revocable or irrevocable, or the existence or otherwise of a confirming
etcetera. A leading scholar puts the matter thus:
Credits may be classified in various ways, in particular by reference
revocability or otherwise of the bank's undertaking, the presence or
of a separate undertaking from a second bank, the time and mode of
settlement, the range of parties entitled to enforce the undertaking, the
transferability of the benefit of the undertaking given to S by the bank, and so
on.17

The judge's definition was therefore only apt to describe the particular
situation, and in this regard only article 2(ii) of the UCP 500 would be
applicable.18 Otherwise the definition would be too wide.
Proceeding with the judgment, the judge observed;
It is now generally accepted as trite law that confirmed irrevocable documen
tary credits in international sale of goods involve four autonomous though
interconnected contractual relationships.19

He went on to identify the four contracts. The correctness of this cannot be

overemphasised in view of existing authority, both academic20 and judi
cial.21 It is apparent in the light of the facts that the proceedings concerned
in the main the relationship between the confirming bank and the beneficiary,
though the former was not joined as a party, a position decried by the
judge.22 Documentary credits are a means of effecting payment in interna
tional trade, and constitute in essence a banker's assurance of payment against
presentation of documents specified in the credit facility arranged. The UCP
500 define a documentary credit as:
any arrangement, however named or described, whereby a bank (the "Issuing

ISNote 3 above at 7.
16See UCP 500 article 9(a), relied upon by the judge.
"Goode n 7 above at 648. See also Gutteridge & Megrah n 6 above at 17-18. The
authors outlined the legal import of each. "Hie distinction between revocable and
irrevocable credits is also recognised by the UCP 500 article 6. See Schmitthoff n
9 above at 423.
18This was cited with approval by the judge, see page 9 of the judgment.
"At 15.
^CGP Morse 'Letters of credit and the Rome Convention' 1994 LMCLQ 560,
Gutteridge & Megrah n 6 above.
21United City Merchants (Investments) and Another v Royal Bank of Canada and
Others £4 1983 AC 168 (HL); Bank of Baroda v Vysya Bank Ltd 1994 2 Lloyds Rep
87; Offshore International ¿4 v Banco Central SA 1977 WLR 399 among others.
^At 20.

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 Legal aspects of documentary credits in international trade 203

Bank") acting at the request and on the instructions of a customer ("the

applicant") or on its own behalf
(i) is to make a payment to or to the order of a third party (the "Bene
ficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the
Beneficiary, or
authorises another bank to effect such payment, or to accept and pay
such bills of exchange (Draft(s)) or
authorises another bank to negotiate, against stipulated documents),
provided that the terms and conditions of the credit are complied
with.23

Once an irrevocable letter of credit2 has been issued, an obligation arises

under which the bank is to pay on presentation of documents stipulated in the
credit. This obligation is independent of and detached from the underlying
contract in terms of which the letter of credit has been issued. Therefore, if it
is a contract of sale that calls for payment by credit, the bank's obligation to
pay is independent of the contract of sale between the buyer and the seller.
Professor Goode calls it

a cardinal rule of documentary credits that conditions of the bank's duty to pay
are to be found exclusively in the terms of the letter of credit and that the right
and duty to make payment do not in anyway depend on performance by S of
his obligations under the contract of sale.25

Although the underlying contract will generally be a contract of sale, it is not

invariably so. It may also be a construction contract, or indeed a contract of
agency as in African Handling Equipment Company v Monitor Kamaz
Trucks, or some other form of contract. This autonomy is recognised by the
UCP 500 in that,

credits by their very nature are separate transactions from the sale or other
contractus) on which they may be based and banks are in no way concerned
with or bound by such contract(s), even if any reference whatsoever to such
contracts) is included in such credit ...26

This autonomy was rightly recognised by Judge Gaefele. Depending on the

type of credit, both the issuing and the confirming bank are under an
obligation to pay in terms of the letter of credit subject to limited exceptions
under which they can withhold payment.

The exceptions
Judge Gaefele regarded it an absolute obligation on the part of the bank to
honour the credit subject only to the fraud exception.28 While the position
in relation to fraud is accepted, it must be pointed out that this is not the only
exception. The bank may not pay if to do so would be illegal 'according to the

^Article 2.
24A revocable credit may be amended or cancelled at any time without notice, article
8.
25Goode n 7 above at 659.
MUCP 500 article 3
"At 12-13.
MNote 3 above at 11.

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 204 XXX CILSA 1997

law of the place where the bank's performance is due'.29 This would occ
for instance, where the letter of credit is a nullity either on account of infrin
ment of some statutory provision, or on some general ground like mista
Though no reported decision may be cited off-hand in support of this
proposition, it would seem that like any other contract it would be subject to
other possible defence open to contracts generally. Professor Goode goes
further in this regard to propose that the bank may set-off any claim due to it
by the beneficiary.30 He was to be vindicated six years later in Hong Kong
and Shanghai Banking Corporation v Kloeckner and Co AG. The plaintiff
bank had provided credit facilities to a group of companies in connection with
crude oil trading dealings, between the group and defendants. The bank paid
the group's suppliers and received a pledge on a bill of lading. Defendants in
turn gave an undertaking to pay the bank in full. Following heavy losses
defendants failed to pay and the bank instituted proceedings. The defendants
then brought summary judgment proceedings against the bank for failure to
pay under a letter of credit, and the bank pleaded set off. It was argued for the
defendants that as a matter of first principle the court cannot as a matter of
law entertain a set-off against a claim under a letter of credit, and that such set
off was incompatible with the doctrine of the autonomy of the letter of
credit.32 Hirst J rejected this argument on the basis that the subject of the set
off was closely linked to the demand made under the letter of credit and that
it was a liquidated demand. It seemed to the judge to be
anomalous that such a setoff should be unavailable in letter of credit cases, but
available against bills of exchange which ... are closely analogous in that a bill
of exchange is also virtually equivalent to cash.33

In view of the fact that the bank's claim was liquidated, and related to banking
instructions which gave rise to the letter of credit itself, the judge found the
case in favour of a right of set-off 'overwhelming'.34

The fraud exception

This is the most common ground upon which the bank may be entitled to
refuse or withhold payment under a letter of credit, and it has been relied
upon in a host of cases.35 Fraud in relation to documentary credits can exist
at two levels. It may be fraud in relation to the autonomous letter of credit
itself, for instance, forgery in the documents in which the parties deal36 or it
may relate to the underlying contract in terms of which the letter of credit was

29Goode n 7 above at 660.

30Ibid.
311990 2 QB 514.
32See Benjamini's Sale of goods (4ed 1990) 1523
"1990 2 QB at 526.
MIbid.
''Including Sztejn v Henry Schroder Banking Corporation 31 AW 2D 631 (1941),
Gian Singb v Banque de Indochine n 14 above, Deutsche Riickversicberungs AG v
Walbrook Insurance Co 1995 1 WLR 1017.
^UCP 500 article 4, United City Merchants v Royal Bank of Canada 1983 1 AC 1

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 Legal aspects of documentary credits in international trade 205

issued.37 The bulk of decided cases concern the former, and the impression
may have been created that only fraud in relation to the credit may entitle the
bank to withhold payment or restrain the beneficiary from accessing the credit
where the bank may have paid.

Judge Gaefele takes a general view in this regard, without specifying the kind
of fraud, as between the two referred to above, that would legally create a
restraint on the beneficiary in operating the credit. This is discernible from his
statement that:

The question is how does the controversy regarding the agreement affect the
letter of credit in the absence of any allegation of fraud on the part of the
respondent.38

This inquiry is proper to the extent that banks are not to be concerned with
disputes between the parties which relate to the underlying contract,39 they
being parties only to the documentary credit. In the absence of any allegation
of fraud whatsoever, perhaps the question as to the kind necessary to allow
the confirming bank to withhold payment is academic in the light of the facts.
Nevertheless, it would have been helpful had the judge made a pronounce
ment on the issue. It would appear that fraud in both situations described
above, will entitle the bank to refuse payment or restrain the beneficiary from
operating the credit. In Tbemehelp Ltd v West and Others*0 it was argued
that to allow the buyers to restrain the sellers from drawing on the credit
would be an attack on the integrity of the performance guarantee.41 The
court of appeal disagreed (with one dissentient, Evans LJ) and held that
although a performance guarantee was an autonomous contract not to be
interfered with on grounds extraneous to the guarantee itself, where fraud was
raised between the parties to the main transaction before any question of
enforcement of the guarantee arose as between the beneficiary and the
guarantor, to grant an injunction restraining a beneficiary's rights of enforce
ment did not amount to a threat of the integrity of the performance guarantee.
The other question relates to proof of fraud. What is the required standard?
Broadly speaking, three cases may be distinguished.

First, where there is a suspicion, which may be serious or grave, that a forgery
has been committed. In this case it has been held the bank must pay Megarry
J's statement in Discount Records Ltd v Barclays Bank Ltd is most instructive.
The judge said:
I would be slow to interfere with Banker's irrevocable credits, and not least in

"See n 35 and Tbemebelp Ltd v West and Others 1995 1 WLR 751; Discount Records
Ltd v Barclays Bank Ltd 1975 WLR 315; Establissement Esefka v Central Bank of
Nigeria 1979 1 Lloyds Rep 445, United Trading Corpu v Allied Arab Bank Ltd 1985
2 Lloyds Rep 554, Schmitthoff n 9 above at 441-2.
MAt 11.
39UCP 500 art 3(a).
401995 1 WLR 751.
"Which has been held to stand on a similar footing to a letter of credit: see Edward
Owen Engineering Ltd v Barclays Bank International Ltd 1978 QB 159 at 171 per
Lord Denning MR.

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 206 XXX CILSA 1997

the sphere of international banking, unless a sufficiently grave cause is

shown.42

Secondly, where it is proved to the satisfaction of the bank that a fraud has
occurred but it cannot be attributed to the beneficiary or shown that he knew
of it. It has been held that in this case the bank must pay.43

Thirdly, where it is proved that a fraud has occurred and the beneficiary was
either a party thereto or knew of it, the bank may refuse to honour the
credit.44 Thus the fraud exception will only be operative if fraud is clearly
established and this has been brought to the attention of the bank, and the
beneficiary was either a party thereto or had knowledge of it. Judge Gaefele's
broad statement would not be very helpful to the extent that it does not
mention the circumstances, as spelt out above, the existence of which may
forestall the effective operation of the credit facility.

The relief(s) sought

The main thrust of the proceedings in African Handling Equipment Co v
Monitor Kamaz Trucks was an application for an order restraining the
beneficiary from drawing on the credit. Proceedings of this kind would
normally not affect the paying bank's discharge of its obligations, as it would
already have honoured the credit anyway, though it would normally be joined
as a party. In such an application no relief is sought from the confirming bank,
where in the absence of any allegation of fraud whatsoever, as in the case
before Judge Gaefele, the bank is entitled to and in fact does pay under a letter
of credit. What is sought is an order in terms that notwithstanding that the
letter of credit has been honoured by the bank, the credit should be
'immobilized' or 'frozen' as it were. The court should have dealt with the
propriety or otherwise of such an application.
The main dispute between the parties related to the underlying contract. Th
application to 'freeze' the credit facility should therefore be seen as anci
to the main dispute relating to the agency agreement. The common remedy
such circumstances is the 'Mareva Injunction'45 by which the courts a
asked to restrain a foreign defendant from removing assets from the jurisd
tion pending substantive litigation. Given that the respondent was an ín
and domiciled within the jurisdiction, and that the agreement was expre
made subject to the laws of Botswana, such an order would not have b
proper. Due to the limited circumstances under which a letter of credit will
interfered with by the courts, it seems the only way open to the applicant
to institute proceedings for breach of contract, and if successful, to rec
damages. If these could not be made good, it would be open for them to
an order attaching the defendant's property, if any, in satisfaction of

421975 WLR 315 at 320.

43See United City Merchants (Investments) Ltd v Royal Bank of Canada 1983 1
168 (HL).
MIbid. For an interesting and further account see Schmitthoff n 9 above at 442-
Schmitthoff & P Dobson Charlesworth Business law (15ed 1991) 424.
45After the case Mareva Compañía Naviera SA v International Bulk Carriers SA
2 Lloyds Rep 509.

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 Legal aspects of documentary credits in international trade 207

judgment. The position would appear to be as follows:

So far as concerns defendants who are within the jurisdiction of the court and
have assets here, it is well established that the court should not, in advance of
any order or judgment, allow the creditor to seize any of the money or goods
of the debtor or to use any legal process to do so. His proper remedy is to get
judgment — under Order 14 if he can — and issue bankruptcy proceedings
against the debtor. In those proceedings any fraudulent conveyance or
preference — done to defeat creditors — can be set aside.46

The application in African Equipment Co was, it is submitted, misconceived,

and could and should have been dismissed on this ground.

Conclusion

Judge Gaefele dismissed the application. It is submitted this was the

to do, either on the ground he chose to rely upon,47 or because
tion was misconceived, or indeed on the ground that there exi
dispute of fact.48 It would have been more helpful, although it
constituted obiter, for the judge to have explored the other area
in this article in view of the paucity of judicial authority in Ro
law.49 Without necessarily advocating a proliferation of litigation, o
hope for such issues to be illuminated when the opportunity of
International trade is gaining momentum and documentary credits a
currency as the most convenient mode of payment. They have been
as 'the lifeblood of international Commerce'.50 It is therefore inevitable that
disputes will arise in the use of documentary credits; their use could be
facilitated by legal principles laid down in print. This could avoid uncertainties
surrounding their legal effect. However, the judge is commended for not
having adopted a 'technical' approach where he would have stopped at the
procedural stage and dismissed the application on technical grounds.

46Rasu Maritima SA v Perusabeatt Pertambangan 1978 QB 644, 659 per Lord

Denning MR.
47The absence of any allegation of fraud.
^Order 6 rule 10 of the Botswana High Court Rules Cap 04:02 and Room Hire Co
(Pty) Ltd v Jeppe Street Mansions (Pty) Ltd 1949 3 SA 1155.
49There is evidence of increasing litigation in this field though; see Loomcraft Fabrics
CC v Nedbank Ltd and Another 1996 1 SA 812 (A).
xHarbottle (Mercantile) Ltd and Another v National Westminster Bank Ltd and
Others 1977 ALL ER 862 at 870 per Kerr J.

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