Volume 42 | Number 3 Summer 2007
V. Conclusion
This paper lists and identifies detailed technical differences between negotiation with respect to negotiable instruments and negotiation with respect to letters of credit. These differences are substantial and themselves warrant the conclusion that the law of negotiable instruments is inadequate as a basis for governing issues with respect to negotiable instruments presented under letters of credit.
This paper follows the evolution of the letter of credit from an appendage of negotiable instrument law to a separate system in its own right with some remaining vestiges of negotiable instrument law, albeit in new guise. In one sense, the various matters discussed are elementary. In another sense, comparison between them and analysis of their differences and their significance is challenging. This paper does not claim to be a definitive or systematic study of this area, but is intended to provoke further efforts that will hopefully lead to such a study.
One of its themes is that letter of credit practice and law have evolved as a separate legal discipline. As a result, letter of credit law has become decoupled from the law of negotiable instruments. Where a negotiable instrument is involved, there may be another cause of action or theory of liability or available recovery—in addition to that under letter of credit law—but the two are separate and distinct areas of law.
The failure to recognize the existence in letters of credit of a system that is parallel, different, and separate from that of negotiable instruments will lead to confusion and defeat the reasonable expectations of the commercial community. This result has been apparent in cases regarding acceptances arising under letters of credit where a rigid interpretation of the abstract character of an acceptance led the court to the conclusion that payment must be made to a fraudster simply because of the existence of the acceptance.103 This approach results in bad policy, not only with respect to letters of credit, but also with respect to negotiable instruments.
The attraction of negotiable instruments law as a means of resolving letter of credit issues is, in part, that it represents a codified body of law and, also in part, that lawyers and judges are familiar with it—whereas in many countries, letter of credit law is not codified, and most lawyers and judges are not familiar with it. As a result, it becomes easy to apply the highly technical rules of negotiable instruments as a means of reaching a decision in cases involving letters of credit without delving into the policies which underlie these rules and the appropriateness of their application to a problem involving letters of credit. Without a clear understanding of the policy behind rules, however, it is no longer possible to apply rules in an intelligent manner because it becomes impossible to determine when the rule ceases to achieve the end for which it is designed.
Under letters of credit, the undertaking embodied in the letter of credit extends beyond bringing into existence a draft to be presented. While there may be a separate set of obligations which arise with respect to the draft, even where it has been accepted, there remain in place obligations concerning the letter of credit undertaking that are not subsumed by the acceptance. Indeed, where there is a conflict, it is the letter of credit obligation that subsumes that which arises with respect to the draft.104
There is, however, a further point to which attention should be drawn. The letter of credit takes the concept of negotiability beyond that which is achieved under the regime of negotiable instruments. Negotiable instruments shackle the concept of negotiability to the paper with which it is merged, and for historical reasons, immerse it in formal and technical rules. While it may be necessary that a general instrument of debt and credit be surrounded by such technicalities, it is not inevitable. Indeed, an equivalent level of abstractness has been achieved at least in U.S. commercial law with respect to leases of personal property and their hell-or-high-water clauses105 and security interests in personal property, whereby an assignment can be given the effect otherwise achieved by a negotiable instrument.106
With letters of credit, however, a higher degree of negotiability has been achieved. In this sense, negotiability consists of a free transfer of obligations without or with limited encumbrances. Letters of credit have thus achieved a relatively high form of liquidity. In particular, in the form of standby letters of credit, they have achieved an incomparable level of liquidity—coupled with flexibility in an instrument whose integrity has, on the whole, not been diminished. This remarkable achievement, having arisen historically and conceptually from the doctrine of negotiability, has become a central feature of letter of credit practice and law.
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Footnotes
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