Study On The Standard For Document Examination Under Documentary Credit And Its Choice Of Strategy

Over a long period of time,the standard for document examination has been a major factor contributing to the refusal of the issuing bank to honor the letter of credit(L/C)upon the receipt of documents in appeal cases.Formulating and adhering to a reasonable standard for examination of documents will be a key to reducing the conflicts between the seller,buyer and issuing bank,as well as to the sustainability and stable operation of L/C businesses.However,a unified standard for examination of L/C documents is still non-existent at present,and courts and arbitral bodies from different countries also rule differently when dealing with cases regarding dishonor upon the receipt of L/C documents.How to establish a unified and explicit standard for examination of L/C documents remains an important subject for the banking and even legal systems of different nations.Using methods like game analysis and case studies,this paper attempts to identify the optimal decision-making for the buyer,seller and issuing bank,thereby providing certain references for the issuing bank to establish document examination standard,as well as recommendations for the buyer and seller with respect to how to maximize benefits by leveraging their own decision-making and indirectly exert influences on the formulation of examination standard by the issuing bank.Despite a large number of existing studies on the standard for examination of L/C documents,most of these studies have been conducted merely from the legal or practical operation perspectives,and few have adopted the perspective of economics to study the examination standard of L/C documents.Papers using game theory models for L/C analysis are even more scarce.Although the game analysis method has been employed by a limited number of papers to explore the risk control in L/C transactions,using such a method to study the examination standard of L/C documents has been unprecedented.Thus,exploring the examination standard of L/C documents from the perspective of the game analysis constitutes an innovation of this paper.The L/C business involves three actors: the seller,the buyer and the issuing bank.In essence,the business constitutes a game process between three parties based on the credibility of the bank.In this process,different strategies will be adopted by the three parties in order to maximize their own interests.The degree to which the issuing bank strictly examines the documents will directly affect the decision-making of any one of the three parties.Thus,the respective optimal strategies for the three parties can be analyzed by using the game analysis method,thereby deriving constructive recommendations for the degree of strictness for the examination standard of L/C documents.The profitability of the seller is directly determined by the degree to which the issuing bank strictly examines the documents.Based on his/her prior expectation for the degree to which the document examinations are strictly examined by the bank,the seller would choose to or not to file a lawsuit once dishonor occurs.Thus,to ensure both parties reach an agreement in the transaction and improve the credibility and efficiency of L/Cs as an instrument of settlement,a way needs to be found to lower the seller's expectation for the degree to which the issuing bank strictly examines the documents prior to the transaction.The buyer,however,expects to raise the degree of strictness to ensure the quality of the received goods.If the issuing bank's standard for document examination is perceived to be too lenient,the buyer will also dishonor the documents to the issuing bank.Thus,the higher expectation that the buyer holds towards the issuing bank's standard for document examination,the higher his/her preference for using L/C in the transaction.Therefore,the bank needs to find ways to balance different expectations between the buyer and the seller for the standard of document examination,so as to strike an equilibrium in the process of the game.