Applying UCP 600 to resolve disputes in international payments at some commercial banks

A documentary credit is an agreement in which a bank (the bank that opens the letter of credit) will, at the request of a customer (the person who requests the letter of credit), pay a certain amount of money to another person (the beneficiary of the letter of credit) or accept a bill of exchange drawn by this person within that amount when this person presents to the bank a set of payment documents in accordance with the provisions set out in the letter of credit (Nguyen Thi Thu Thao, 2012).

From the practical development of international trade today, there is a need for a new payment method that both ensures the rights of buyers and sellers and at the same time promotes the strengths of banks - a reputable financial intermediary with great economic potential? That method must ensure that the seller will definitely receive money when the goods are delivered according to the provisions of the contract, and must also ensure that when the buyer pays, the buyer will definitely receive the goods according to the requirements of the sales contract.

The most effective and safest payment method for both buyers and sellers, while at the same time being able to promote the strengths of the bank, has been born. That is the documentary credit payment method.

According to Article 2 of UCP600 (Uniform Customs and Practice for Documentary Credits), “A credit is any arrangement, however named or described, which is irrevocable and which constitutes a definite undertaking of the issuing bank to pay upon a complying presentation” (Nguyen Thi Thu Thao, 2012).

The above definition can be simply understood as follows: in essence, the documentary credit payment method is an agreement in which a bank (issuing bank) at the request of a customer (the person requesting the issuance of the letter of credit) will pay a certain amount of money to another person (the beneficiary of the letter of credit) or accept a bill of exchange drawn by this person within that amount when this person presents to the bank a set of documents in accordance with the provisions set out in the letter of credit. In order to make payment for imported and exported goods by documentary credit payment method, the importer (the payer) must first submit a request to the bank to issue the letter of credit.

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1.1.2. Letter of credit L/C

Letter of credit (L/C): is a commitment used in payment, in which a bank (the bank serving the importer) at the request of the importer opens and transfers to the branch or agent of this bank abroad (the bank serving the exporter) an L/C for the beneficiary (the exporter) to commit to pay a certain amount within the prescribed time limit, on the condition that the beneficiary must present all documents in accordance with the content and conditions specified in the letter of credit (Phan Thi Thu Ha, 2014).

- The person requesting the issuance of a letter of credit: That is the importer: the person importing the goods or the person importing on behalf of another person.

- Letter of credit issuing bank: Is the bank representing the importer, it grants credit to the importer.

- Beneficiary of the letter of credit: Is the exporter: The exporter or any person designated by the beneficiary.

- Advising bank: Is a bank in the beneficiary's country.

1.1.3. Payment procedure by letter of credit L/C

(Phan Thi Thu Ha, 2014)

Figure 1.1. Commercial Bank's letter of credit payment process

Specific steps include:

(1) Foreign trade contract signed between exporter and importer

(2) The importer submits an application for a letter of credit to the issuing bank requesting the opening of a letter of credit in favor of the exporter.

Normally, when applying for a letter of credit, the importer must provide the bank with the necessary documents according to the requirements of the issuing bank, usually including the following documents: foreign trade contract, business registration certificate, import-export license (if the goods are subject to import-export quotas).

1.1.4. Basic characteristics of documentary credit payment method

a. The documentary credit payment method is a method related to three contractual relationships.

Sales contract between exporter and importer:

A sales contract is an agreement between a buyer and a seller, in which the seller is responsible for delivering the correct and complete goods and the buyer is responsible for paying. In the sales contract, the parties agree on the method of payment for the goods: money transfer, collection, bookkeeping, documentary credit. When choosing a letter of credit as the method of payment for the goods, a letter of credit will be opened. It can be said that the sales contract is the basis for the documentary credit payment method.

Although the letter of credit is based on a sales contract between the exporter and the importer, it is completely independent of the sales contract. Any reference to the terms of the sales contract is not considered as an integral part of the letter of credit and is not considered by the bank.

Service contract between the applicant for the letter of credit (importer) and the issuing bank:

To pay by letter of credit, the letter of credit must first be opened. For the letter of credit to be opened, the importer of goods (the payer) must submit an application (Application for issuance of letter of credit) to the issuing bank to open an L/C. Based on that, the issuing bank will issue a letter of credit to the beneficiary, and the importer will have to pay a fee to open the L/C.

In essence, this is a service contract between the bank and the L/C issuer. Accordingly, the bank uses its reputation and financial capacity to guarantee payment to the exporter when they present the correct documents and collect fees from the importer. And then, the bank will be responsible for checking the set of documents presented by the exporter before deciding to pay or refuse to pay.

Letter of credit:

Letters of credit are created on the basis of a service contract signed between the issuing bank and the importer. Letters of credit are formed on the basis of a sales contract, but after being created, they are completely independent of the sales contract. Even in cases where the letter of credit refers to the sales contract, banks do not consider the sales contract as a component of the letter of credit. Therefore, banks often advise their customers not to refer to the sales contract in the letter of credit. The importer applies for a letter of credit based on the contract. The exporter uses the terms of the letter of credit to deliver the goods and prepare documents based on the requirements of the letter of credit. Therefore, when receiving a letter of credit, the exporter must carefully check the terms of the letter of credit. If there are any inappropriate terms, the importer must request the importer to amend the letter of credit accordingly before making the delivery. The exporter must prepare all documents in accordance with the requirements of the letter of credit and present them to the bank within the prescribed time limit. After checking the documents, if they are found to be in full compliance with the provisions of the letter of credit, the issuing bank will pay the exporter for the goods.

Thus, a letter of credit is an undertaking by the issuing bank to pay the exporter. It is completely independent of the underlying contract. Article 4a UCP600 states: “By its nature, a credit is a separate transaction from the sales or other contracts on which it may be based. Banks are not concerned with or bound by such contracts, even if any reference to such contracts is made in the credit. Consequently, the undertaking of a bank to honour, negotiate or perform any other obligation under the credit is not subject to claims or defences of the applicant arising out of its relationship with the issuing bank or the beneficiary.”

b. In the documentary credit payment method, the transacting parties only rely on documents and not on goods:

It can be said that in the documentary credit payment method, whoever holds the documents of ownership of the goods is the one who has the ownership of the goods. Because just holding the documents is enough to receive the goods. In the documentary credit payment method, the parties to the transaction also only rely on the documents to see if the presentation is appropriate or not? to decide whether to pay or accept the payment or not? The presented documents are the sole basis for banks to decide to pay or refuse to pay the beneficiary, and at the same time are the sole basis for the importer to refund or refuse to pay the bank. If the exporter presents documents that appear on their surface to be in accordance with the provisions of the letter of credit, the bank will pay.

The bank has no reason to refuse to pay for the goods when the exporter presents a valid set of documents. Because as mentioned above, the method of payment under a documentary credit is the bank issuing the letter of credit's commitment to pay the exporter when they present a set of documents in accordance with the provisions of the letter of credit. The bank is not responsible for the name, quantity, weight, quality, condition, packaging, delivery, value or existence of the goods represented by any document. Similarly, if the set of documents presented by the bank to claim payment from the importer is valid, the importer will pay the bank, otherwise the importer has the right to refuse payment. In that case, the risk will be entirely on the bank. Therefore, the bank needs to carefully check the set of documents presented before accepting payment to the exporter.

Thus, in the documentary credit payment method, documents are of great importance. They represent the value of the goods that the exporter has delivered and are the basis for the exporter to demand payment from the bank. At the same time, they are also the sole basis for the importer to decide to pay or refuse to pay the issuing bank.

II. UCP 600 and ISBP 681

1. The need for UCP 600 and ISBP 681

The birth of UCP 600 is the inevitable result of theoretical and practical issues.

a. In theory: