Trade Finance: Technology, Innovation and Documentary Credits

Description

Trade Finance provides a much-needed re-examination of the relevant legal principles and a study of the challenges posed to current legal structures by technological changes, financial innovation, and international regulation. Arising out of the papers presented at the symposium, Trade Finance for the 21st Century, this collection brings together the perspectives of scholars and practitioners from around the globe focusing on core themes, such as reform and the future role of the UCP, the impact of technology on letters of credit and other forms of trade finance, and the rise of alternative forms of financing. The book covers three key fields of trade finance, starting with the challenges to traditional trade financing by means of documentary credit. These include issues related to contractual enforceability, the use of "soft clauses", the doctrine of strict compliance, the fraud exception, the role of the correspondent bank, performance bonds, and conflict of laws problems. The second main area covered by the work is the technological issues and opportunities in trade finance, including electronic bills of exchange, blockchain, and electronically transferable records. The final part of the work considers alternative and complementary trade finance mechanisms such as open account trading, supply-chain financing, the bank payment obligation, and countertrade. cover Trade Finance Copyright Preface Table of Contents List of Contributors List of Abbreviations Table of Cases Table of Legislation PART I: LEGAL AND PRACTICAL CHALLENGES TO TRADITIONAL TRADE FINANCE 1. The UCP Regime: Past, Present, and Future I. Introduction II. The Historical Perspective III. The Present Context A. Reliability B. Competition C. Technology D. Language, Development, and Regulation IV. Towards UCP 900? A. The Procedural Question B. The Substantive Question V. Conclusion 2. The Letter of Credit as a Contract I. Introduction II. Overview of the Letter of Credit Contractual Relationships A. Buyer and Issuing Bank B. Issuing Bank and Correspondent C. Buyer and Correspondent D. Collecting Bank and Seller III. Issuing/ Confirming Bank and Seller A. The Letter of Credit and the Requirements for Contract Formation B. Fitting the Letter of Credit into an Existing Legal Category C. Contract Alternatives D. Legal Fiction E. Custom and Usage IV. Conclusion 3. Soft Clauses in Letters of Credit I. Introduction: A Rod for the Beneficiary’s Own Back II. Little Sympathy for Beneficiaries III. Fraud in the Underlying Transaction, Unconscionability, Good Faith: A Sword Instead of a Shield? IV. What Are the Beneficiary’s Alternatives? A. Documentary Collections and Bills of Exchange/ Time Drafts: Back to the Future? B. Open Account/ Standby Letter of Credit: Not Really the Future at All? C. Blockchain: The Real Future? V. Conclusion 4. Perspectives on the Role of the Nominated Bank in a Letter of Credit I. Introduction II. Decision in Grains III. Practical Implications of the Decision in Grains A. Practical Implications from Issuing Bank’s Perspective B. Practical Implications from Nominated Bank’s Perspective IV. Conceptual Implications of Treating Nominated Bank as Issuing Bank’s Agent A. The Nominated Bank as Defined in UCP 600 B. A Narrow Reading of Grains V. Conclusion 5. Determining a Complying Presentation in Letter of Credit Transactions: A Principled Appraisal of Current Requirements and Challenges I. Introduction II. Proper Approach to Interpretation of the UCP 600 as to Documentary Compliance A. Background to the UCP Regime B. Contractual Interpretation of Letters of Credit and the UCP 600 C. Treatment of Expert Testimony D. Credit Stipulations Tying Payment to Performance of the Underlying Contract III. Effect of a Draft Drawn on the Credit Applicant IV. Implications of the Place for Documentary Presentation V. Conclusion 6. The Fraud Rule in the Law of Letters of Credit Revisited I. Introduction II. The Current Status of the Fraud Rule A. International Rules and Conventions B. National Laws III. Refining the Current Fraud Rule A. The Rationale B. The Way Out IV. Conclusion 7. Letters of Credit and Stop Payment Orders Made in the Issuer’s Country I. Introduction II. The Role of Choice of Law Rules III. Stop Payment Orders at Common Law A. Where Documents Are to Be Presented Directly to the Issuer 7.13 B. Where Documents Are to Be Presented to Another Bank 7.14 IV. Stop Payment Orders under the Rome Convention 7.19 A. Article 4(2) Points to the Law of the Issuer’s Country 7.20 B. Displacing the Law of the Issuer’s Country under Article 4(5) 7.23 V. The Rome I Regulation: Has it Opened a Door to Stop Payment Orders? 7.29 A. Does the Law of the Issuer’s Country Apply under Article 4(1) or (2)? 7.30 B. Can Article 4(3) Be Invoked to Displace the Law of the Issuer’s Country? 7.35 VI. Any Role for the Public Policy Exception? 7.46 VII. Claims by Correspondent Banks 7.49 A. Confirming Bank 7.50 B. Nominated Bank that Has Not Confirmed the Credit, but Has Honoured or Negotiated a Complying Presentation 7.57 VIII. Conclusion 7.60 8. Injunctions to Restrain Payment on Independent Guarantees: ‘Unconscionability’ to Bolster the Fraud Exception 142 I. Introduction 8.01 II. General Features of Independent Guarantees 8.05 III. The Fraud Exception 8.09 IV. The Unconscionability Exception 8.17 A. The Unconscionability Exception in Singapore 8.17 B. The Unconscionability Exception in the UK and Other Jurisdictions 8.20 C. Policy Reasons for an Unconscionability Exception in Performance Bonds Cases 8.23 D. Assessing the Unconscionability Exception 8.27 V. The Underlying Contract 8.35 A. Demand in Breach of the Underlying Contract 8.36 B. Contractual Clauses Excluding Unconscionability 8.39 VI. Change of Circumstances: Frustration and Force Majeure 8.46 A. General Principles 8.47 B. Frustration 8.49 C. Force Majeure 8.50 D. Government Action 8.56 VII. Limits of Unconscionability and No- Injunction Clauses 8.60 A. Unconscionability Not Applicable to Commercial LCs 8.60 B. Unconscionability only Applicable to Injunctions 8.61 C. Excluding the Fraud Exception? 8.62 VIII. Conclusion 8.63 PART II: TRADE FINANCE TECHNOLOGY 9. The Electronic Bill of Exchange and Its Use in International Trade 175 I. Introduction 9.01 II. Physical and Electronic Formats for Bills: Legal Requirements 9.05 III. Electronic Presentment of a Bill 9.28 IV. The Substitute Paper Bill 9.34 V. Interbank Negotiation and Exchange of Bill Images 9.46 VI. Electronic Bill (EB) as ‘Paperless Bill’ 9.54 VII. Depository Bills 9.62 VIII. Concluding Observations 9.64 10. Digitalisation of Shipping and Insurance Documents: Implications for Trade Finance 197 I. Introduction 10.01 II. Background: The Presentation of Paper Documents under Documentary Letters of Credit with Special Focus on Bills of Lading and Insurance Certificates 10.02 III. The Digital Alternatives Landscape: State of Play and Perceived Benefits 10.07 A. Digital Alternatives to Bills of Lading 10.11 B. Digital Cargo Insurance Certificates 10.15 C. Trade Finance Communication Networks and Platforms 10.17 IV. Legal Framework Supporting the Use of Digital Alternatives to Paper Documents in Documentary Credit Arrangements: Gaps and A. Content Compliance 10.20 B. Legal Effects 10.24 V. Filling in the Gaps: Contractual Frameworks and their Limitations 10.26 A. Contractual Rights Against the Carrier and Rights Over the Goods Themselves 10.27 B. Direct Claim Against the Insurer 10.32 C. Trade Finance Platforms: The Bank’s Legal Position 10.37 VI. Filling in the Gaps: Legislation 10.38 VII. Conclusion 10.41 11. Implementation and Implications of the UNCITRAL Model Law on Electronic Transferable Records in Trade Finance 217 I. Introduction 11.01 II. Model Law on Electronic Transferable Records 2017 11.14 A. Purpose 11.14 B. Operation 11.17 C. Implementation 11.32 III. Conclusion 11.34 12. Will Blockchain Transform Trade Finance? 230 I. Introduction: Why Transforming Trade Finance is Hard 12.01 II. Believing in Blockchain 12.12 III. Some Realism about Blockchain 12.22 IV. Transforming the Architecture of Global Trade Systems 12.40 V. Transforming the Workflow of Global Trade Transactions 12.57 VI. Transforming Trade Finance Incrementally 12.68 VII. Conclusion 12.73 PART III: INNOVATION AND TRADE- FINANCE CHALLENGERS 13. The Bank Payment Obligation as a Signal Step in the Evolution of Digital Trade Finance 255 I. Introduction 13.01 II. The Business Case and Contractual Setting for the Bank Payment Obligation 13.05 A. Transaction and Contractual Setting 13.10 III. Salient Features of the Legal Framework for the BPO 13.11 A. Applicable Rules and Notable Exclusions 13.12 B. Establishment of the BPO and Amendment of an Established Baseline to Add a BPO 13.14 D. Honour of the Undertaking 13.17 C. Expiry Date 13.16 E. Duties of the Bank 13.18 F. The Independence Principle: Separate and Independent Contracts 13.19 G. Data Supremacy in a Digital Bank- to- Bank Instrument 13.23 H. The Boilerplate Provisions 13.25 I. Assignment of Proceeds (Article 16) 13.26 J. Applicable Law 13.27 IV. Evaluation 13.28 V. Conclusion 13.33 14. Something Old, Something New: Open Account, Prepayment, and Supply Chain Finance 273 I. Introduction 14.01 II. The Letter of Credit’s Demise 14.02 A. Technology 14.04 B. Regulation 14.05 C. Competition 14.10 D. Efficiency 14.12 III. The Rise of Open Account, Prepayment, and Supply Chain Finance 14.13 A. Open Account and Prepayment Terms 14.13 B. Supply Chain Finance 14.17 C. Traditional Liquidity- Enhancing Techniques 14.22 D. Modern SCF Techniques 14.36 E. Problems 14.51 IV. Conclusion 14.60 15. Islamic Trade Law and the Smart Contract Revolution 308 Jonathan Ercanbrack I. Introduction 15.01 II. Trade in the Muslim World— Then and Now 15.07 III. The Development of the Modern Islamic Finance Industry 15.11 IV. Principles of Islamic Commercial Law 15.15 A. Ownership and its Limits 15.15 B. The Nature of Property 15.16 C. Riba 15.19 D. Gharar 15.22 E. Freedom of Contract and the System of Islamic Nominate Contracts 15.25 V. Islamic Trade Finance in Practice: The Murabaha Contract 15.29 A. Structure, Profit, and Fees 15.31 B. Payment Schedule 15.35 C. Title to the Asset 15.36 D. Agency 15.37 F. Actual Sale 15.39 E. Possible Syndication 15.38 G. Subject Matter and Liability for Defects 15.40 H. Phases of the Murabaha Agreement 15.41 I. Ensuring Performance 15.46 J. Default and Restructuring 15.47 VI. Islamic Trade Finance in English Courts 15.50 A. The Symphony Gems Case 15.51 B. Shamil Bank v Beximco 15.57 VII. The Future: Blockchain for Islamic Trade Finance 15.59 VIII. Conclusion 15.67 16. Countertrade as Finance 335 I. Introduction 16.01 II. Forms of Countertrade 16.06 III. Legal Problems of Countertrade 16.15 A. The Nature and Effectiveness of the Transactional ‘Link’ 16.16 B. Certainty and Completeness 16.23 C. Nature and Effect of ‘Blocked Accounts’ 16.29 D. Choice of Law Issues 16.32 IV. Conclusion 16.37 Index