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MEMORANDUM

 

 

 

TO:                  Mr. Edwin Smith, Chair Drafting Committee for Implementation of the U.N. Convention on Independent Guarantees and Standby Letters of Credit

 

cc                     Professor Boris Kozolchyk and Mr. James G. Barnes

 

FROM:            Professor James E. Byrne, Director, Institute of International Banking Law & Practice

 

DATE:             22 October 2007

 

RE:                   Agenda and Work of the Drafting Committee

 

 

As head of the US Delegation to the United Nations Commission on International Trade Law (UNCITRAL) Working Group on International Contract Practices which drafted the UN Convention on Independent Guarantees and Standby Letters of Credit, I welcome and encourage the National Conference of Commissioners on Uniform State Laws (NCCUSL) to assist with implementation of the Convention.  Having promoted use of the Convention in the US and other countries during the years since its promulgation by the U.N. General, I offer to the members of the Drafting Committee my opinions regarding the contributions that would best promote its implementation. 

 

1. Implementation of the UN Convention on Independent Guarantees and Standby

    Letters of Credit

 

First and foremost, the Drafting Committee could help expedite ratification of the UN Convention on Independent Guarantees and Standby Letters of Credit by the United States including its prompt endorsement of the US adoption of the Convention.  Much has already been done in this regard.  The Convention was drafted chiefly during the early 1990s and the US delegation members (Boris Kozolchyk, Jim Barnes, and me) were also active participants in and advisors to the NCCUSL Drafting Committee then revising UCC Article 5 (Letters of Credit).  A serious and concerted effort was made throughout this process, almost unique in the drafting of modern commercial laws, to assure the relative alignment and coordination of the two efforts.  In addition, shortly after the completion of the Convention, a study of the correlation between the Convention and Revised UCC Article 5 was undertaken by the Letter of Credit Subcommittee of the American Bar Association Business Law Section’s Uniform Commercial Code Committee, many of whose members had been active participants in both processes.  Among those who participated in the formulation of this Study were Janis Penton, Gerald McLughlin, and Paul Turner, as well as the US delegation members Boris Kozolchyk, Jim Barnes, and me.  On the basis of this Study, both the Business Law Section and the International Law Section of the American Bar Association endorsed adoption of the Convention by the United States.  In addition, the major trade association of banks in the US that are active in the field, the International Financial Services Association (then named the U. S. Council on International Banking) also endorsed adoption of the Convention, a project in which they had taken considerable interest.  Moreover, the IFSA lent its support to the endorsement by the International Chamber of Commerce of the Convention, adding the international voice of letter of credit bankers in support of this treaty. 

 

At the request of the US State Department, the members of the US Delegation have prepared a draft transmittal intended to accompany the submission of the Convention to the Senate.

 

At this stage, it is my opinion that there has been adequate study of the relationship between the Convention and Revised UCC Article 5.  Such studies were undertaken during and immediately after the drafting of these two pieces of legislation and nothing in the intervening decade warrants any change to the conclusions reached therein. The two differ but are not incompatible.  The US should adopt the Convention, not because it is better than Revised UCC Article 5, but because the Convention would be better than the largely uncodified and unknowable law of independent undertakings in countries outside the US.  Other countries are likely to postpone adoption of the Convention until the US adopts it, and their banks and businesses are likely to continue resisting revised Article 5 because it is “foreign” law. 

 

The Drafting Committee could usefully focus on the proposed transmittal document with a view towards additional comments or revisions to that document and with a view towards policy questions regarding the adoption of the UN Convention on Independent Guarantees and Standby Letters of Credit.  In particular, the Drafting Committee and NCCUSL might wish to consider what law should be applicable to issues not expressly addressed by the Convention where it is applicable.  While there is both scholarly and judicial opinion to the effect that the UN Sales Convention ought to be interpreted with respect to issues not expressly addressed with respect to international harmonization as opposed to applying domestic law, we are less sure whether such an approach should obtain as to those aspects of Revised UCC Article 5 that reflect international letter of credit law but which are not taken up by the Convention. This topic raises a number of discrete policy questions on which the views of the Drafting Committee and NCCUSL would be important and could be included in the understanding to be expressed or suggested in the ratification of the Convention by the Senate.

 

2. Formulation of Model Domestic Legislation Provisions.

 

As to additional work which might be addressed by the Drafting Committee, it is my opinion that there is outstanding an area which could be usefully addressed by NCCUSL and other similar international organizations.  In my opinion, the UN Convention on Independent Guarantees and Standby Letters of Credit, while valuable, only addresses one part of what is necessary for an integrated and balanced system of letter of credit regulation.  The other components of such a system are:

 

1.         A balanced scheme of bank regulation addressed to the safety and soundness of banking practice,

 

2.         A domestic statutory system, and

 

3.         Sound rules of practice.

 

It is in particular with regard to the second of these matters that work by the Drafting Committee could be particularly useful.  The NCCUSL has drafted a successful and effective model law for the 50 states of the United States in this area.  It, therefore, uniquely possesses insights and expertise relevant to the questions which must be addressed in the formulation of a model law for this field.  It may be recalled that it was at a relatively late stage in the process that the determination was made to opt for an international convention rather than model law.  This decision, however, in no wise reflected the opinion that domestic legislation was not important but rather that the work of the Working Group could best be expressed in a convention.  In my opinion, there remains an important role for domestic legislation as is evident in the existence of Revised UCC Article 5 and my conclusion that even where the Convention was applicable Revised UCC Article 5 would not be entirely displaced by the Convention but rather would serve to supplement it. In other words, those countries that have or will adopt the Convention would also benefit from a domestic statute which probably should be broader than the Convention.

 

Therefore, I encourage the Drafting Committee, after it takes up the primary task of helping to expedite Convention adoption in the US (and in Canada, Mexico, and elsewhere), to turn its attention to the formulation of a model law or legislative guide with respect to the creation of a domestic legal regime for independent undertakings including commercial letters of credit, confirmations, pre-advices, and reimbursement authorizations, as well as standby letters of credit and independent guarantees, and seek to articulate those policies which are most appropriate as well as the issues which need to be considered and addressed in light of national law.

 

If the Drafting Committee were to undertake such a process, however, I believe that an important point must be recognized. While I strongly support Revised UCC Article 5 and am proud to have been associated with its drafting, it is my opinion that it is in many respects uniquely American in its draftsmanship and structure and would require a more general style of drafting in order to be widely acceptable outside the United States.  I am confident that the Drafting Committee possesses sufficient detachment from a specific style and approach to be able to identify issues and suggest language.

 

I also encourage the Drafting Committee to enlist the active cooperation and support of the Secretariat of the UNCITRAL in this project with a potential view towards combined efforts which might result in UNCITRAL’s adoption or endorsement of the Drafting Committee’s work and its translation and publication in the official languages of the United Nations.

 

While Revised UCC Article 5 does not address regulatory issues, the current regulation by the Office of the Comptroller of the Currency, 12 C.F.R. 7.1016, comes from the same matrix that produced the statute and, with the assistance of the OCC, could prove a useful supplement to any guide or model legislative provisions.

 

The Institute is prepared to assist in these projects to the extent permitted by our limited resources and wishes the Drafting Committee well in its endeavors.

 

I have attached a copy of all relevant documents for your information.