With The Documentary Credit Under The Bill Of Exchange Law

Documentary credit and bill of exchange are both commonly used means of payment in domestic and international trade. Generally speaking, there is systematic domestic law on Bill of Exchange in each country. The use of documentary credit is customarily "regulated" or governed by the ICC Uniform Customs and Practice for Documentary Credits. The legal issues concerning fraud and documentary bill of exchange are left to domestic law. Only few countries e.g. the U.S has a statute law governing documentary credit, i.e UCC article 5. The legal practices of documentary credit in many countries are case law. Many documentary credit disputes are settled within the framework of domestic bill of exchange law without observing international customs and practices. In China, there is still no statute law governing the usage of documentary credit.The origin of documentary credit is closely connected with bill of exchange. Beneficiaries under the credit can be easily financed under documentary credit with a draft, and financing banks are better protected as bone fide holders by the bill of exchange law. Hence, many judges, lawyers and bankers tend to equal draft under documentary credit with bill of exchange. Legal disputes concerning drafts under the credit are settled within the framework of domestic bill of exchange law. This leads to many contradictory decisions, and bankers and traders are faced with uncertainty and potential risks.Is draft under documentary credit a document or a demand for payment? Is it the same with the bill of exchange? Are there any differences among the legal status of financing banks under different types of credits? Many papers and articles have discussed the legal nature of documentary credit, but only a few have studied the differences. Almost all the research has focused on the remedies in case of fraud. Therefore, understanding of the unique characteristics of documentary credit and international customs has special meaning to the establishment of documentary credit law in China.This paper studies the legal nature of bill of exchange under documentary credit, analyze the legal arguments existing in this sphere and point out the differences between draft under documentary credit and the common bill of exchange. It also offers suggestions for operations and legal practices. The paper consists of 5 chapters:Chapter 1: Introduction to documentary credit and bill of exchange. From the analysisof the their concepts and basic principles, it can be concluded that the legal framework of the above two are different. Not all types of credit require presentation of drafts. The issuing bank must undertake its liability of payment provided stipulated documents are presented and complied with the terms and conditions of the credit.Chapter 2: Legal Characteristics of drafts under documentary credit. There are arguments about whether bill of exchange is a document under documentary credit. Different answers to this question will cause uncertainty to the issuing bank's undertaking. The reason of arguments is the existence of conflicts among bill of exchange law and documentary credit international customs and practices.Chapter 3: Legal issues in banking and legal practices concerning drafts under documentary credit. There are conflicting court decisions concerning bill of exchange acceptance under documentary credit. It is difficult for the original payee of the bill of exchange to be bone fide holder in English law system. Financing banks under documentary credit with drafts are better protected than those without bill of exchange.Chapter 4: Difficulties in solving the legal issues concerning bill of exchange under documentary credit within the framework of bill of exchange law. According to traditional bill of exchange law theories, there are serious conflicts between bill of exchange and drafts under documentary credit. International customs and practice has different explanations in this topic.Chapter 5: Conclusions and Suggestions. It can be seen from various ICC opinions and practices of documentary credit, the role of bill of exchange as a financial document under the credit has a tendency of weakening. Whether bill of exchange is required or not has no affection to the undertaking of the issuing bank. However, the presentation of drafts causes misunderstandings of documentary credit It is necessary for China to establish statute law of documentary credit that is different from bill of exchange law.It is really a hard work to have a systemic and through study on this topic as it covers case law, statute law, international customs and practices etc. In order to have a better understanding of the references to English materials, the paper gives the original English version where it is possible. Lack of Japanese and German materials and cases is the shortcomings of this paper.