A Study On Several Legal Issues Of The United Nations Convention On Independent Guarantees And Stand-by Letters Of Credit

There are various risks including credit risk ininternational trade, and security is a legal mechanism by whichthe creditor can control the credit risk and the debtor canenhance his credit. Security is normally classified as securityinterest and surety, and surety is of an accessory nature intraditional civil and commercial law. With the rapiddevelopment of international trade, the surety can not meet theneeds of the creditor who longs for an efficient reimbursemechanism. Therefore, merchants drew references from the legalstructure of the commercial documentary letter of credit andcreated the independent commitment whose key feature is thatthe guarantor abandons various rights of defense However,independent undertakings once functioned differently invarious legal regimes, which caused numerous disputes thathindered further use of independent undertakings ininternational trade. Therefore, the ICC drafted several rulesand the UNCITRAL drafted the United Nations Convention onIndependent Guarantees and Stand-by Letters of Credit(hereinafter as "the UN Convention") for independentundertakings to operate on a smoother legal platform. The UNConvention was approved by the UN General Assembly on December11th, 1995; and it came into effect on January 1st, 2000 whichinfluences deeply the unification of internationalundertakings law. Consequently, a further study of the UN Convention will stir up the development of bank guarantees andstand-by letters of credit in China and the legislator will drawa reference from the study.The thesis is divided into eight parts. And in part one,the author analyzes the legal imperatives for drafting the UN.Convention; namely, the drafters of ICC Uniform Rules forContract Guarantees ignored the legal effects of independentundertakings and drafting process of the ICC Uniform Rules forDemand Guarantees was unbearably slow. And some problemsarising from the operation of independent undertakings couldnot be solved by the ICC rules and practices. All these factorscontributed to UNCITRAL's determination to draft a conventionon international undertakings.In part two to part seven, the author makes a detailed studyof the key articles in the UN Convention by a comparison withthe corresponding ICC rules and in a legal theoreticalapproach.In part two, the author analyzes articles on scope ofapplication of the UN Convention. The drafters of the UNConvention adopted a dualistic approach to limit itsapplication on international undertaking for fear that thosestates with mature laws will oppose the UN Convention. Also,the autonomy of the parties is embodied in these articles.In part three, the author analyzes articles on the form andcontents of undertaking. The author draws a conclusion that bycombining various academic points of view, rules on issuanceand irrevocability of undertaking and rules on transfer of beneficiary's rights to demand payment and assignments ofproceeds are for the good of the beneficiary. Also, rules oncessation of right to demand payment in the UN Convention aremore comprehensive than the corresponding ICC rules.In part four, the author analyzes the articles on rights,obligations and defenses of the UN Convention. The authorconcludes that that the rules on standard of conduct andliability of guarantor/issuer favor the interests of theguarantor/issuer; also, the rules on set-off favor theguarantor/issuer greatly.In part five, the author analyzes the rules of fraudexception of the UN Convention by studying legal practices inthe United States of America, Great Britain, Germany and France.The author thinks the drafters adopted a descriptive approachto list theexceptions to paymentobligation, which is rathercreative, and the drafters drew reference from the criteria of "material fraud" in the US legislations. Also, the criteriaof material fraud is not strict;for fear of the fraud exceptionbeing abused, the drafters render heavy burden of proof on theapplicant.In part six, the author analyzes the rules of interim reliefand the final clauses of the UN Convention and the author thinksthe former is of a framework nature. Also, the author analysesfinalclauses of the UN Convention, the author concludes thatthe content of no reservation shows that the UNCITRAL wants tounify the international independent commitment legislations.In part seven, the author sums up some features of the UN Convention as follows: first, the drafters adopt the form ofconvention with an aim to unify the international undertakinglaw, and the drafting technique is characterized by the CommonLaw drafting skills. The drafters also adopt the DualisticApproach to apply the rules to international undertaking onlyfor fear of strong opposition from the states with matureletter-of-credit law. Furthermore, the contents of the UNConvention keep in terms with the corresponding practices. Also,the drafters moderately balance the interests of theguarantor/issuer and the beneficiary. Most important of all,the drafters make mandatory rules against fraud in independentcommitment and provide corresponding provisional courtmeasures. In the latter section of the part, the author analyzesthe prospects of the UN Convention. The author draws aconclusion that the carrying out of the ISP98 is acountermeasure against the UN Convention by the US bankers. Andthe ISP98 is detailed but faulty. And by combining the UNConvention with the ISP98, all parties will get better results.Also, the author points out that the prospects of the UNConvention are largely determined by whether the US Congresswill ratify it or not.In part eight, the author analyzes the status quo ofindependent commitment in China. The author draws a conclusionthat the China's legislators recognize the legal effect ofindependent undertaking but the corresponding rules arescattered in legislations and rules. Based on the study above,the author advocates such a country as China who lacks of mature laws in independent commitment should accede the UN Conventionwith the aim to systematize the laws and rules concerningindependent commitment. Also, the accession of the UNConvention also provides a safeguard switch for the judges inChina when they apply the corresponding internationalpractices.