The main attraction of documentary credits is a harmonisation of the contracting parties’ discordant demands in relation to the time of the payment, i.e., the seller wants to be paid before the contract goods are handed over to the buyer, and the buye ...
The main attraction of documentary credits is a harmonisation of the contracting parties’ discordant demands in relation to the time of the payment, i.e., the seller wants to be paid before the contract goods are handed over to the buyer, and the buyer, on the other hand, prefers making payment after examination of the goods. Payment under a documentary credit is made not against the goods but against the stipulated documents, which can be obtained after due performance of the contract. This reconciles the different needs of both parties. Thus, the seller’s payment is guaranteed where he assembles the documents as stipulated in the credit after the performance of the contract even if the buyer is in default or in danger of insolvency. In addition, the fact that payment against the documents is made only after the bank has examined them to ascertain their facial conformity affords the buyer a certain level of protection in that the documents provide evidence of performance of the seller’s obligations under the contract. As a documentary credit is used to finance international transactions, the issuing bank and the beneficiary normally reside in different jurisdictions. The issuing bank may deal with the beneficiary directly. However, the services of the intermediary correspondent bank, which is normally situated in the beneficiary’s domicile, are usually utilised to avoid the inconvenience arising out of dealing with a foreign party. The contractual relationship, which emerges between the issuing bank and the correspondent bank is regarded as formed when the correspondent bank accepts the issuing bank’s instruction by communicating its acceptance to the issuing bank. This contract is generally characterised as one of principal and agent relationship irrespective of the specific role of the correspondent bank, as a correspondent bank is employed to perform the contract as instructed, normally on the issuing bank’s behalf. It has been accepted that the same characterisation applies where the correspondent bank is a confirming bank. Such a classification, however, has recently been challenged in the contract of a confirming bank. In Credit Agricole Indosuez v. Muslim Commercial Bank Ltd, Sir Christopher Staughton pointed out that ‘[i]t is of course right that there is not in law an agency relationship between an issuing bank and a confirming bank.’ However, he further noted that, from a commercial viewpoint, the confirming bank might be seen as an agent in the sense that ‘the confirming bank is the correspondent of the issuing bank, and acts for the issuing bank in order to do what the issuing bank is not present to do for itself.’ Considering these conflicting viewpoints, Jack’s explanation is rather persuasive. He points out the dual capacity of the confirming bank. Namely, as between the issuing bank and the confirming bank, a confirming bank acts as an agent in carrying out the issuing bank’s instruction. As between the confirming bank and the beneficiary, the confirming bank acts as a principal. It must be noted that the issuing bank’s relationship with the intermediary correspondent bank, referred to as a ‘negotiation bank’, is not established on the above analysis. A negotiation bank is not an agent of the issuing bank, but, as a purchaser of the documents of the draft, claims payment from the issuing bank in its own right, having rights almost identical to those of the beneficiary as against the issuing bank. The contract between the issuing bank and the negotiation bank falls therefore into the same category as that between the issuing bank and the beneficiary.