MEMORANDUM

 

 

TO:                             Chairman Ed Smith and members of the Drafting Committee for Implementation of the UN Convention on Independent Guarantees and Standby Letters of Credit

 

FROM:                       James J. White, Reporter

 

SUBJECT:                  Article 5 v. UN Convention[1]

 

DATE:                        October 26, 2007

 

 

            If the United States were to ratify the UN Convention on Independent Guarantees and Stand-by Letters of Credit, it would have limited impact on current American letter of credit law, Article 5 of the Uniform Commercial Code. For the most part, the provisions of the UN Convention are general and set up default rules that can be changed by agreement of the parties.  Conflicts may be soluble by the United States’ issuing understandings or declarations that interpret the provisions of the convention in accordance with U.S. law and practice.

            The virtue of the United States’ adoption of the Convention is that it will provide sound law for transactions with parties in countries where there is no well developed letter of credit law.  The vice of such an adoption is that it will give new incentive to issuers, beneficiaries or applicants to litigate over choice of law.  In most cases there is no viable alternative to UCC Article 5 in today’s American courts.  If the Convention is adopted, that will change, for there will be two viable competing bodies of law.  If the cost of choice of law litigation outweighs the value of having a fair and clear body of law for international transactions, the United States should not adopt the Convention.  If the opposite is true, it should.

 

CHAPTER I. SCOPE OF APPLICATION

 

Article 1. Scope of Application

            Under Article 1, parties to a standby letter can opt out of or into the Convention.  Were the Convention to be adopted, US banks that wanted UCC Article 5 to apply to an “international standby” would have to exclude the application of the Convention expressly.  So, for “international” standbys issued by US banks, the Convention will be the default law.

            If a standby does not, by its terms, adopt or reject the Convention, and the parties have not otherwise agreed to the law of a particular state, the Convention will apply if the bank that issues or confirms it is located in a country adopting the Convention.  In the absence of a formal choice, only international undertakings are covered by the Convention.  Article 4 tells what is “international.”

 

Article 2. Undertaking

            Article 2 defines the “undertaking” that the Convention governs as an “independent commitment” to pay on the presentation of required documents. The definition distinguishes the commitment to which it applies, independent guarantees and standby letters of credit, from other independent undertakings by referring to international practice.

            Article 2 also refers to the person making the commitment, the guarantor or issuer, its beneficiary, and the customer at whose request it is made, the principal or applicant. 

            Article 2(1) indicates that the Convention applies both to “clean” standbys (in which the only document to be presented is a demand for payment) and to standbys in which other documents are required, such as documents relating to default in performance or payment, or because of another contingency, or to repay a debt.

            By emphasizing the documentary character of the undertaking, the Convention recognizes the difference between an independent guarantee, and a dependent guarantee or suretyship undertaking that does not turn on presentation of a document. This distinction and emphasis on the documentary character of the former type of undertaking will assist courts that are unfamiliar with letters of credit and prevent their confusion with dependent guarantees.

 

Hypothetical Example

            Assume that Bank of New York issues a so-called “direct pay” standby under which it agrees to make payment to a beneficiary whose place of business is in a Middle Eastern country that has adopted the Convention.  Assume that the U.S. has also adopted the Convention.

            When litigation ensues over the document, Bank argues that Article 5 governs its liabilities.  It maintains that a “direct pay” standby is not within the list undertakings covered by Article 2 because payment does not result from “default in the performance of an obligation” nor from “money borrowed” nor from “another contingency.”  Beneficiary argues that the Convention does apply and the payment results from “another contingency.”  What result?

 

Hypothetical Example

            Assume that Bank of New York issues a conventional commercial letter of credit to a seller in the Middle East.  Assume that both countries have adopted the Convention. 

            Bank argues that the letter of credit is governed by Article 5 of the UCC since the letter is a commercial and not a standby letter.  Beneficiary, who for some reason wishes to be under the Convention, maintains even a commercial letter is covered under Article 2 of the Convention because it calls for payment “because of another contingency.”  He argues that if direct pay standbys are covered then necessarily commercial letters should be covered since the two perform substantially the same or similar functions.  Bank argues that the very need to make arguments under Article 2(1) to bring direct pay letters within the Convention shows that commercial credits are not covered.

 

Article 3. Independence of undertaking

            Article 3(a) focuses on the independence of the standby from the validity or existence of any related undertaking. Article 3(b) explains that the conditional character of the standby is solely documentary and does not depend on the determination of an event except those conditions within the control of the issuer which would enable it to ascertain its occurrence.

            Since its independence from the underlying transaction is the principal advantage of the standby letter of credit, a provision explaining the consequences of independence is particularly useful for courts in systems not accustomed to dealing with such concepts.

            The clarification in Article 3(a) that a standby is independent from any underlying independent undertaking is most important for “counter-standbys” that are used widely in the Mid-East.  U.S. banks sometimes issue standbys to local banks in the Middle East who, in turn, issue their local guarantees, typically to Middle Eastern governments in connection with contractual obligations.

            The provisions on non-documentary conditions are aligned with international practice and UCC.  UCP 14 h and UCC 5-108(g) state that banks should disregard non-documentary conditions when examining the required documents. Similarly, US courts interpreting the UCC have correctly characterized arrangements that provide for more than the examination of documents as transactions other than letters of credits. Comment 6 to UCC § 5-102 makes this point clear by stating that a document requiring more than the presentation of documents before payment is made, is not a letter of credit. By linking the independence of the standby with its documentary character, the Convention emphasizes this central characteristic of the letter of credit.

 

Article 4. Internationality of undertaking

            Under the terms of Article 4(1) “[a]n undertaking is international [and thus covered by the Convention] if the places of business, as specified in the undertaking, of any two of the following persons are in different states: guarantor/issuer, beneficiary, principal/applicant, instructing party, confirmer.” 

            If therefore Citicorp is the issuer and the address listed for Citicorp is in New York and the beneficiary shows an address in a country in the Middle East, the places of business of the two as “specified” in the letter would be in different states and the letter would be considered “international” and thus covered by the Convention (if both states had adopted it).

 

Hypothetical Example

            Assume the Issuer of a letter actually “issues” (i.e., makes the decision to issue the letter and sends the hard copy or the telex) from its New York office, but that it lists its Saudi Arabia office as the address on the letter.  Assume that the beneficiary is an American company listing an American address and that the applicant is a company whose address is listed as a place in Saudi Arabia.  Presumably this is an international letter because there are multiple states “specified.”  And we would not listen to evidence otherwise.

            What if the same letter were issued by the same parties but all of the addresses on the letter were in Saudi Arabia?  Could the issuer, wishing to be controlled by the Convention, show by external evidence that in fact the letter was issued from its New York branch and thus the Convention should control?  Probably not.

            Or what of the case in which there is no address attached to one of the parties, but the party wishes to show by extrinsic evidence that its “location” under Article 5 or its “habitual residence” under Article 4(2)(b) is in a particular place and so seeks to enjoy either the local law of that place or to be included within the Convention?

 

CHAPTER II. INTERPRETATION

 

Article 5. Principles of interpretation

            Article 5 states that the interpretation of the Convention should promote uniform international banking practices and avoid purely local approaches.

            Only the Lord knows what the exhortations contained in Article 5 mean.  How does a court give appropriate regard to a letter’s “international character” and to the “need for more uniformity” and the observance “of good faith in international practice”?

            Presumably American commentary could suggest, at a minimum, that a court applying the Convention in circumstances where the Convention was incomplete, should look to interpretations of the Convention by other courts, should refer to international practice such as the Uniform Customs and Practices (see e.g., Article 3 UCP 600), and should resort to local law only in circumstances where the appropriate local jurisdiction has local statutory or common law (such as UCC Article 5 or the English common law) that takes account of and conforms to modern letter of credit practice. 

 

Article 6. Definitions

            Article 6 defines Undertaking, Guarantor/issuer, Counter-guarantee, Counter-guarantor, Confirmation, Confirmer, and Document.

            Typically, a counter-guarantee is issued by a European bank on behalf of its corporate customer to induce a Middle Eastern bank to issue its guarantee in favor of the corporate customer’s counter-party. Article 3(a) specifies that the counter-guarantee is independent from the guarantee. As explained, this undertaking is similar to the counter-standby used in US practice.

            As clarified in Article 6(e), a confirmation is an undertaking in addition to that of the issuer so that the beneficiary may look to either the confirmer or the issuer for payment.

            The definition of “document” in Article 6 is not the same as the definition of “document” in UCC 5-102(a)(6): 

 

Hypothetical Example

            Assume that a letter of credit is issued by an American bank and that the beneficiary submits its draft and any other necessary documents electronically.  The issuer dishonors.  These documents will not satisfy the presentation rules under UCC Article 5 because UCC Article 5 recognizes documents in media other than writing only in circumstances in which the “letter of credit or … the standard practice referred to in Section 5-108(e)” permits those media.  Nothing in UCP 600 or elsewhere in UCC Article 5 explicitly authorizes electronic documents.  But Article 6 of the Convention appears to permit electronic documents (i.e., “a communication made in a form that provides a complete record thereof.”)

            Thus such a presentation would be non-complying under American domestic law, but would be acceptable under Article 6 of the Convention.  So if UCC Article 5 applies there has been no presentation and, so, no duty to pay.  The issuer escapes liability. 

 

CHAPTER III. FORM AND CONTENT OF UNDERTAKING

 

Article 7. Issuance, form and irrevocability of undertaking[2]

            The provisions regarding the form of a standby in Article 7(2) correspond to practice under which it has been common to use electronic means of issuance since the days of telegraph. “Record” corresponds with other UN texts and the provision is sufficiently flexible to accommodate advances in technology. This provision is comparable with US law as UCC § 5-104 which states that it can be issued in any form “that is a record and is authenticated.” The authentication contemplated by the UCC is a signature or a procedure agreed upon by the parties. Article 7(2) states that any generally accepted means of authentication will suffice.

            The default provisions in Article 7(3) and (4) regarding availability for drawing and irrevocability correspond to UCP 600 and UCC Article 5. UCC § 5-106(a) states that an undertaking is irrevocable unless the credit stipulates otherwise.  On the other hand, UCP Article 2 defines “credit” to cover only irrevocable letters of credit.

 

Article 8. Amendment

            Article 8 authorizes amendments but it does not make clear that a draw after an amendment is, ipso facto, an agreement to the amendment.  Comment 2 to section 5-106 and UCP 600 Article 10 c specifically state that a person can consent to an amendment by implication.  Difficulty might arise in the following circumstance:

 

Hypothetical Example

            Assume that issuer agrees to amend a letter of credit at the request of applicant.  Beneficiary draws on the letter of credit, but later wishes to argue that its draw on the letter did not constitute an agreement to the amendment that, for example, reduce the amount available under the letter.  In this case, the parties could argue that the beneficiary’s draw on the letter is an agreement to the amendment under the terms of Comment 2 to 5-106. 

            Under the Convention beneficiary would have a stronger argument against the effectiveness of the amendment, for Article 8(4) states that an amendment has no effect on the rights and obligations of the other party unless “such person consents to the amendment.”  That explicit and limited statement diminishes the probability that a beneficiary would be treated as though he had agreed to the amendment by the act of drawing.

 

Article 9. Transfer of beneficiary’s right to demand payment

            Article 9 clarifies the meaning of “transfer” in letter of credit practice, restricting it in accordance with international practice to situations where the standby so provides. This provision is particularly useful because general contract law tends to equate transfer with assignment and to provide that most obligations to pay money can be transferred or assigned without the consent of the obligor. For that reason, standard practice and UCC Article 5 are specific about the meaning and consequences of a transferable letter of credit in a manner similar to that of Article 9. Article 9(1) is in accord with UCC § 5-112(a) which states that a letter of credit is not transferable unless transfer is authorized in the undertaking. UCC § 5-113 also provides for transfer of rights by operation of law and it allows the successor of a beneficiary to take on the rights and obligations of the original beneficiary. There is no comparable provision in the Convention, but there is nothing that conflicts with this provision of the UCC.

            Article 9(2) is somewhat broader than UCC § 5-112(b) in expressly requiring the consent of the issuer where the standby does not provide for automatic transfer. In this respect, Article 9 is more closely aligned with international practice, but the difference is slight since the limitation in UCC Article 5 defers to standard practice.

 

Article 10. Assignment of proceeds

            Article 10 gives a more generous right to assign proceeds to the beneficiary of a credit than exists under the UCP or under Article 5 of the UCC.  It states that unless otherwise specified in the letter, the “beneficiary may assign to another person any proceeds.”  Article 10(2) specifies that the issuer’s payment to the assignee discharges the issuer and, by implication, that payment to the assignor would not do so.  By contrast, UCC 5-114(c) states that an issuer “need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.”

 

Hypothetical Example

            Assume a letter of credit is silent concerning the assignment of proceeds.  Assume that the beneficiary assigns proceeds under the letter of credit to a third party and that the issuer later pays to the beneficiary despite its knowledge of the assignment to the third party.

            Under the UCC the issuer could defend its behavior by noting that it never agreed to the assignment and thus was free to disregard it.  There is no provision under Article 10 that would give similar strength to such a claim, and it is certainly possible that a court would say that the issuer had not discharged its liability to the assignee by payment to the original beneficiary (who, of course, is committing fraud).

 

Article 11. Cessation of right to demand payment

            Article 11(1) catalogues the ways in which the irrevocable undertaking of the issuer is terminated. They include a written release from the beneficiary, an agreement between the issuer and the beneficiary as provided in the credit or in a record, payment of the amount available under the standby, or expiration of the standby. This provision is aligned with international practice and UCC Article 5. A termination agreement is contemplated by the UCC in its amendment provisions that state the terms of a credit can be altered by an authenticated record of an agreement between the beneficiary and issuer in UCC § 5-106(b).

            Article 11(2) recognizes the practice, apparently common, to cancel a letter of credit by the beneficiary’s return of the letter to the issuer.  Article 5 does not contemplate or address any such behavior and particularly in a day when letters will be digital, issues and differences might arise surrounding this practice:

 

Hypothetical Example

            Assume that a letter of credit is issued in a digital format.  Assume that a printout of the digital letter is returned to the issuer with the understanding by the applicant that the letter has been cancelled.  Several months later the beneficiary, who denies any such intention, draws on the letter of credit and the issuer pays.  The applicant now sues the issuer for wrongful honor on the ground that the letter had been cancelled.  Applicant has a good argument under 11(2) that the return of the hard copy was a “procedure functionally equivalent to the return of the document….”  There is nothing in Article 5 that supports the applicant’s argument.  It will have to rely on case law and practice. 

            Article 11(2) also rejects the notion that is held in some parts of the world that physical retention of the original operative instrument defeats any termination through expiration. In this respect, it is aligned with international practice and UCC Article 5.

 

Article 12. Expiry

            An overwhelming percentage of all letters of credit have expiration dates.  If there is an expiration date, the letter expires on that date and that is so whether Article 5 the Convention or some other law applies.  For that reason deviations in law having to do with expiration in the absence of such a date are probably minimally important. 

            Nevertheless, there is a significant difference between the Convention and the UCC:

 

Hypothetical Example

            Assume a letter of credit has a date of issue but it has no date of expiration.  Under 5-106(c) the letter of credit will expire one year after the date of issuance.  Under Article 12(c), the letter will expire six years after its issuance.

            Of course this means that in the small number of cases where there is no expiration date, when the party makes presentation more than the year after issuance, but less than 6 years, it will be in the interest of the parties to fight bitterly on whether the letter is covered by UCC Article 5 or by the Convention.  Quaere whether the U.S. can adopt a comment or understanding that would so directly conflict with the rules in Article 12 (one year instead of six)?

            Note too that letters of credit stating that they are “perpetual” expire after five years under the UCC; there is no rule for such letters under the Convention.

 

CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENSES

 

Article 13. Determination of rights and obligations

            Article 13(1) specifically recognizes the relevance of any rules of practice to which the standby is subject.

            Article 13(2) provides that in situations where neither the terms of the credit, any applicable rules, the Convention, nor positive law provides an answer, regard shall be had to generally accepted usages of standby practice. This approach parallels that of UCC Article 5.

 

Article 14. Standard of conduct and liability of guarantor/issuer

            Although Article 14(1) refers to good faith and reasonable care, they are to be determined in light of the standards that prevail under international practice. These standards are articulated in internationally accepted rules of practice rather than general standards of negligence or ordinary care or even general principles of honesty in fact and the observance of reasonable commercial standards or fair dealing in a broader commercial context.[3]

            Section 5-102(a)(7) defines good faith as honesty in fact with no mention of the exercise of reasonable care. Moreover, UCC § 1-302 states that the obligations of good faith, diligence, reasonableness and care may not be disclaimed. However, UCC § 5-108 makes no mention of good faith or reasonable care, it simply says that an issuer “shall honor a presentation” and “shall observe standard practice of financial institutions that regularly issue letters of credit.”

            To see the problem, consider the following case:

 

Hypothetical Example

            Assume Issuer is presented with documents and, observing the UCP and other relevant practice, decides that the documents do not conform to the letter of credit.  Issuer made that decision because the document examiner was an inexperienced person and because the examiner failed to go to her superior, a more experienced person for advice.  Assume, arguendo, that had the examiner gone to such person, she would have found that there was no basis to dishonor payment and that Issuer would be obliged to honor the presentation.

Under Article 14 Issuer could defend its behavior by noting that its duty is merely to exercise “reasonable care.”  If it did so, it would be free of liability for its failure to pay.  Under UCC Article 5, Issuer would be obliged to pay if, under standard practice, the presentation “appear[ed] on its face strictly to comply with the terms and conditions of the letter of credit.”  This is strict liability and it is no defense that Issuer was free of negligence or that it used “reasonable care.”  So the same action would be a violation of 5-108 (for failure to pay against strictly complying documents), but not be a violation of Article 14 because Issuer exercised reasonable care and was not negligent in declining to pay.

 

Article 15. Demand[4]

            Article 15(3) is a warranty by the beneficiary that it is not making the demand “in bad faith and that none of the elements referred to in subparagraph of Article 19 are present.”  In several ways, this warranty is more broad than the warranty given in section 5-110 by the beneficiary.  Consider the following hypothetical:

 

Hypothetical Example

            Assume Contractor presents drafts and documents certifying that Subcontractor is in default under the letter of credit and asks for payment.  In making such a demand, under Article 15(3), Contractor-beneficiary is “deemed to certify that the demand is not in bad faith.…”  (Bad faith is not defined in the Convention.)  Issuer declines to pay and when sued for wrongful dishonor, responds with a defense that Contractor-beneficiary’s demand was given in circumstances that it knew were either “not honest” or in violation of “reasonable commercial standards” and therefore not in good faith.  If Issuer is successful in so asserting a defense to its dishonor, it has a warranty that is a defense to its refusal to pay.

            Under UCC § 5-110, the issuer would have no such warranty claims because under that section the warranties do not arise until the issuer has made payment and, even then, the beneficiary warrants only the absence of fraud and forgery.

 

Article 16. Examination of demand and accompanying documents

            Article 16(1) links the examination of documents presented under a standby to generally accepted standards of practice and to applicable rules of practice. However, it expressly imports the duties to act in good faith and exercise reasonable care stated in Article 14 whereas UCC § 5-108 states the issuer’s obligation is to honor a presentation that appears on its face strictly to comply, in accordance with standard practice.

            The time for examination is different in the UCC and Convention (7 business days) from the UCP (5 banking days).

            Article 16 of the Convention requires the bank to give notice if it dishonors a presentation.  The Article does not state the consequences to the Issuer for failure to give notice.  Nowhere does Article 16 specify that failure to give notice means that Issuer later has liability for the full amount of the letter. 

            In contrast, UCC § 5-108 requires the bank to give “notice to the presenter of discrepancies in the presentation” and precludes it “from asserting as a basis for dishonor any discrepancy anytime a notice is not given or any discrepancy not stated in the notice if timely notice is given.”  Unless Article 16 is interpreted to deprive Issuer of using any discrepancies not stated as a basis for dishonor in a subsequent lawsuit, the practical substantive outcome will be quite different under Article 5 than under the Convention.

 

Hypothetical Example

            Assume that beneficiary presents documents that are arguably discrepant in several ways.  Assume that it must present an inspection certificate stating that a particular person has inspected the job and that the job was not properly performed.  The inspection certificate does not describe the job quite the same way as the job is described in the certificate of default.  Issuer examines the documents and two days after they had been presented sends notice to the beneficiary that it is dishonoring the presentation.  Beneficiary sues issuer for dishonor.  If the transaction is covered by Article 5, beneficiary clearly recovers under section 5-108. 

            But issuer claims that the Convention controls and that:

            1.  The presentation was defective not only because it did not conform to the letter, but also because the documents presented did not meet Article 16(1)’s requirement that the documents be “consistent” with one another.  (The inspection certificate and the certificate of default describe the project differently.)

            2.  Even if issuer has violated its obligation under Article 16, that does not mean that the beneficiary gets recovery of the full amount under the letter because there is no “preclusion” under the Convention.  At most the beneficiary can collect whatever damages it suffered and in this case there are none. 

 

Article 17. Payment

            Article 17(1) states the general rule that an issuer must honor promptly on determining that a presentation complies with the terms and conditions of the standby.

            Article 17(2) indicates that payment itself does not obligate the person who has applied for issuance of a standby to reimburse the issuer where the presentation is not in compliance with the terms and conditions of the standby. This provision implies that such an obligation exists where the presentation is in compliance. Where it is not, Article 17(2) merely states that payment itself does not give rise to any rights. The UCC has nothing similar to this. These rights, however, are typically addressed by separate agreements between issuers and nominated persons and between issuers and applicants.[5]

 

Article 18. Set-off

            Article 18 allows an issuer to set off against the beneficiary the amount that beneficiary owes to the issuer.  This right conflicts with the independence principle.  There is no such authority to set-off under UCC Article 5, and statements about the independence principle in the UCC might be construed to bar set-off.  Note that section 5-110 on warranties and 5-117 on subrogation give rights only to issuers who have “honored” and may not be used as defenses to dishonor by an issuer.

            This provision seems inconsistent with the policy that underlies letter of credit law and with the rules set out in Article 5 of the UCC.  It should be the subject of United States commentary.

 

Article 19. Exception to payment obligation

            The categories for relief in Article 19(1) arguably correspond to forged or fraudulent documents or material fraud in the transaction recognized by UCC Article 5 as a basis for excusing the obligation.  In fact, Article 19 gives an issuer more bases for excusable non-payment.[6]

            UCC § 5-109 permits an issuer to dishonor a presentation that appears on its face to strictly comply with the terms of the credit, only if a required document is forged, materially fraudulent, or would facilitate a material fraud. Article 19(1) grants additional reasons for an issuer to dishonor a presentation that appears on its face to strictly comply. Article 19(1)(c), in particular, creates an apparently subjective excuse for dishonor that is not well illustrated by Article 19(2).  UCC Article 5 is a statute of hard rules, and, the standard under UCC § 5-109 is straightforward in that forgery or material fraud are the only reasons to dishonor a compliant presentation. This may create conflict between the Convention and UCC Article 5:

 

Hypothetical Example

            Assume Contractor, the beneficiary on a stand-by letter of credit, submits documents to Issuer certifying: 1) that Subcontractor, the applicant, has defaulted in his performance on the contract; and 2) that Subcontractor will not complete performance.  Assume that that certification entitles the Contractor to a payment of $1 million.  Subcontractor comes to Issuer and says that Contractor is wrong, that Subcontractor had a right to cease or at least postpone performance because of an earlier breach by Contractor that is known to Issuer.  Subcontractor accordingly asks that Issuer not honor the letter of credit.

            Under Article 19(1)(b) Subcontractor argues it is “manifest and clear” that “no payment is due on the basis asserted in the demand and the supporting documents.”  According to the final clause in Article 19(1), Issuer would have a right, but not a duty, to refuse payment. 

            Similar circumstances under the UCC would be governed by § 5-109(a).  Under that section, the Subcontractor-applicant would have to show or convince Issuer that a document was forged or “materially fraudulent” or that payment would “facilitate a material fraud by the beneficiary on the issuer or applicant.” 

            It may be “manifest and clear that there is no duty to pay,” but that is not necessarily fraud.  Therefore, under the articulation in § 5-109, presumably the Issuer would pay, but under the articulation in Article 19, it might not and it could defend its refusal to pay even though there was no fraud, much less material fraud. 

 

CHAPTER V. PROVISIONAL COURT MEASURES

 

Article 20. Provisional court measures

            Article 20 allows a court to grant provisional measures if the undertaking is being used for a criminal purpose. There is no similar provision in UCC Article 5 but this does not create a conflict if US courts would be willing to grant injunctions to prevent criminal behavior. UCC § 5-109(b) allows an applicant to seek an injunction from court only if: 1) there is forgery or fraud, 2) relief is not prohibited by law, 3) other parties are protected from loss, and 4) the applicant is more likely than not to succeed. However, Article 20 allows an applicant to seek an injunction based on the broader excuses in Article 19(1)(a), (b), and (c). There is a potential conflict:

 

Hypothetical Example

            Contractor-applicant seeks an injunction against Issuer to forestall Issuer’s paying against a draft drawn by the beneficiary on the ground that “no payment is due on the basis asserted in the demand and the supporting documents” under Article 19(1)(b).  Presumably the court will look at the documents presented by the beneficiaries and possibly hear testimony from the applicant about why no payment is due.  It may then enjoin payment under Article 20. 

            Under the UCC similar relief would have to be sought under § 5-109 and the applicant would have to claim that there is a forged document or materially fraudulent one or that the beneficiary is facilitating “material fraud.”  Under the UCC no injunction could be granted merely because it is clear that no payment is due.

 

CHAPTER VI. CONFLICT OF LAWS

            Even if the Convention does not apply because the place of business of the issuer is not in a contracting state or the applicable choice of law rules of the forum do not lead to its application, Article 1(c) would make the choice of law rules of Article 21 and Article 22 applicable to an international undertaking where a contracting state is the forum.

 

Article 21. Choice of applicable law

            Article 21 gives effect to a provision in the standby which provides for the applicable law either expressly or where it is demonstrated by its terms and conditions or to an agreement between the issuer and beneficiary. This rule is aligned with international practice and the provisions of UCC § 5-116. UCC § 5-116 allows the parties to choose their own law even if the jurisdiction bears no relation to the underlying transaction.

 

Article 22. Determination of applicable law

            In the event that the standby does not have a choice of law term and the parties have not otherwise agreed to one, Article 22 provides that the law of the place of issuance will govern.  This rule may conform to international practice, but it is at variance with the rules stated in 5-116.  Under subsection 5-116(b) the liability of parties other than the issuer is governed by the law of the jurisdiction where that person “is located.”  For example where a beneficiary is located in a jurisdiction other than the jurisdiction of the issuer, the law of the beneficiary’s location would apply to any suit where it was named by a defendant by the issuer.  The same would be true where the issuer was suing for recovery on its reimbursement agreement from an applicant whose location was in a jurisdiction other than the issuer’s.

 

CHAPTER VII. FINAL CLAUSES

            Chapter VII deals with technical matters relating to the adoption or denunciation of the Convention including deposit of an instrument of accession, its application to territorial units, reservations, its entry into force and denunciation.

 

Article 27. Reservations

            No reservations are permitted under the Convention. A Contracting State will be subject to the entire Convention, except where declaration is made under Article 25 with respect to application or non-application to a territorial unit of a federal state. Were it to adopt the Convention, the United States would not make any reservations.

 

Article 28. Entry into force

            Article 28 provides that the Convention will enter into force on the first day of the month following the expiration of one year from the date of the deposit of the fifth instrument of ratification, acceptance, approval or accession. Having been adopted by Ecuador, El Salvador, Kuwait, Panama, and Tunisia, the Convention came into force on 1 January 2000.  Belarus adopted the Convention after 1 January 2000.

 

Article 29. Denunciation

            Article 29 permits a Contracting State to withdraw from the Convention for itself or any of its territorial units by notification in writing to the UN Secretary-General, which denunciation takes effect on the first day of the month following the expiration of one year after the notification is received by the depositary, or such longer period is specified in the notification.