Issues concerning bank-customer relationship

1.3.1. Risks of transmission, translation, and interpretation of any mess­

ages related to a credit

Section 5-107(4) of the UCC provides: "Unless otherwise specified the customer bears as against the issuer all risks of transmission and reasonable

ICC Publication No. 400 (UCP 1983).

Internatinal Banking Law, supra (f.n. 17), p. 294; Davis, A.G., "The law relating to commercial letters o f credit". 3rd ed., 1963, p. 35 & f.n. 2 [hereinafter referred to as Davis]; in International Banking C orp.

V. Barclavs Bank, it was held: "On the evidence, a cable credit used in the Far Eastern trade and hence, of

necessity, advised by a correspondent bank, was irrevocable unless it appeared on the face o f it that it was revocable." [quoted from (1925) Legal decisions affecting bankers, Vol. 5, p. 1]; Gidden_y. Anglo African Produce Co.. (1923) 14 Ll.L.R. 230; for American authority see Foglino & Co. v. W ebster. 216 N.Y.S. 225 (1926).

It was officially said that the Code itself settles this issue with respect to the sales contract (Section 2-325), and also provided that this issue intentionally was left for the court’s decision under Section 1-103, and general Provisions o f Code in Article 1 particularly Section 1-205 [look at O fficial Comment (number 1) to Sec. 5-103, UCC, supra (f.n. 2), at p. 421, col. 1]; fortunately, the point under consideration was clarified under Section 5-106(a) o f PFD, supra (f.n. I), suggested, "[...] A letter o f credit is revocable only i f it is so provided."

translation or interpretation of any message relating to a credit." A similar policy is accepted under Article 16 of UCP 500. However, there are differences between them, as follows.

1. Under Article 16 of UCP 500 all risks relevant to transmission and interpretation of a message relating to a credit are put on the shoulder of the applicant for a credit and there is no possibility to transfer such risks to the bank. A different approach is accepted under the UCC, since by providing the term "unless otherwise specified" there is a possibility for an alternative solution agreed by contracting parties, namely, the bank becomes responsible for its failure.

2. Under sub-section 4 of Section 5-107 an applicant becomes responsible if the banker proves that he adopted a reasonable procedure for the translation or interpretation of a message relating to a credit transaction. This is not the case under Article 16 of UCP 500; even more strangely, under the same article banks reserve a right to transmit credit terms without translating them. How is it possible to support such a view where translation of a message is the only way for communication between the bank and the beneficiary of a credit? Why on earth banks, instead of accepting some sort of responsibility trying to transfer risks caused by their failure to the applicant or by sending an untranslated message, cause confusion for the beneficiary of the credit? The point under consideration has been discussed elsew here,but in short, it is accepted in the present study that if banks choose to translate or interpret a message relating to a credit, then they should also accept any unsatisfactory result caused by their action. If, on the other hand, banks are not able or are not interested to translate or interpret a message, then they should inform their customers from their decisions in due time, rather than sending an untranslated message to the beneficiary.

One may argue that the second sentence of Article 16, firstly, related to errors in translation and/or interpretation of "technical terms"; secondly, banks' reservation is about translation of terms of credit and not terms of any message

See discussion related to Article 16 o f UCP 500 in Section B.1.1 o f Chapter IV (above).

related to the credit. In other words, banks are responsible for their errors in translating and/or interpreting terms other than "technical terms" as well as they

have no right to transmit any message without translating it first. If this argument is

right, several questions should be considered first in order to give support to such an approach. As to the first argument, what is the meaning of "technical terms" under Article 16 of UCP 500? And, how can these terms be distinguished from other terms used in a credit transaction? Moreover, who is in charge of making the decision that a terrn is technical or non-technical? As to the second argument (above), is it really possible to make any distinction between terms and conditions of a credit transaction and those messages which are related to such a transaction? in other words, on what grounds can one justify that terms and conditions which are expressed within letters and correspondence messages between contracting parties to a letter of credit are less important than those terms and conditions stipulated in the letter of credit contract? If it is so, then any messages relating to an amendment or cancellation of a credit should not be treated in the same way as the first message or letter about the issuance of credit. Certainly, it is not true that in real business activities banks as well as other interested parties do invest sufficient care in order to prevent any mistakes occurring in that aspect. Consequently, and generally speaking, there is no justification to follow the above cited arguments. Therefore, it is suggested that the second sentence of Article 16 of UCP 500, for reasons considered above, should be revised in a way that banks assume liability or responsibility for their errors in translation and/or interpretation of terms of credit and any messages relating to it if they choose to carry such a duty. If banks decide otherwise, then they should promptly inform their customers about such a decision.

As far as Section 5-107(4) of the UCC is concerned, as discussed previously, it provides a more reasonable approach relating to the issue of concern, namely, risks of transmission and translation/or interpretation of any message relating to a

credit. Similar terms could be applied for an international set of standards about LCs.“

1.3.2. The issuer's obligation to its customer

Section 5-109(1 )(b) of the UCC provides; "(1) An issuer's obligation to its customer [...] unless otherwise agreed does not include liability or responsibility [...] (b) for any act of omission of any person other than itself or its own branch or for loss or destruction of a draft, demand or document in transit or in the possession of o t h e r s . T h e relevant provisions under UCP 500 are found in paragraph (b) of Article 18: "Banks assume no liability or responsibility should the instructions they transmit not to be carried out, even if they have themselves taken the initiative in the choice of such other bank(s)." Comparing these provisions, it becomes obvious that the position of the applicant for a credit is more vulnerable under the UCP than under the UCC, since under the latter a bank is responsible for any act or omission committed either by itself or by its own branch, whereas In a similar situation under the UCP such a bank has no liability or responsibility towards its customer for any act or omission of itself as well as for its own branch's failure.

As to the meaning of "its own branch", no distinction is made under Section 5-109(1 )(b) of the UCC between the branch(es) of the bank located in the same country as the principal bank doing its business, and those which are located in other country(ies). Therefore, it seems that the principal bank is liable or responsible for any act or omission of its own branch(es) without considering the location of those branches; but under UCP 500 it seems there is a different accepted view regarding the point under consideration, namely, banks are not responsible for the

failure of their branch(es) located in another country, since the last sentence of

Article 2 states; "For the purpose of these Articles, branches of a bank in different The issue under consideration was omitted as inadvisable default rule under PFD; see table 2,1 (below). Emphasis added; see also appendix 1 for the complete text o f Section 5-109; for a similar issue under PFD see Section 5-108(f)(2) where, as a new provision, it was suggested; "(f) An issuer is not responsible for [...] (2) an act or omission o f others."; it is, however, not clear whether term "others" includes the bank's branch, or not.

countries are considered another bank."^^ Then, by implication, it is possible to argue that the scope of paragraph (b) of Article 18 of the UCP is not so wide and banks assume liability or responsibility for an act or omission of their branches located in the same country as the principal bank carrying out its banking activities. However, such an argument may be challenged on the ground that the language used in Article 18(b) is so general that it can also cover branches not located in different countries.

To end such arguments it is of great necessity that rules and provisions related to LCs should be as much as possible clear and precise in order to prevent confusion and prevent any dispute between parties interested in the credit transactions. In addition, the present discussion points out that UCP 500 is not far from confusion regarding the banks' obligations to their customers. Therefore, for reasons considered above, there is no harmony between UCP 500 and UCC as far as the issue is related to banks' liability or responsibility for any act or omission of themselves or their own branches located in other country(ies). This is another example which points to a need for more harmonization and/or unification of standards about LCs in international trade.

1.4. Issues concerning bank-beneficiary relationship