Letters of credit and stop payment orders made in the issuer's country

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Colleges, School and Institutes

Abstract

Letters of credit play a valuable role in facilitating international trade. They provide the exporter with an assurance that he/she will be paid by a bank, if they ship the goods to the importer and present the required documents to the bank, even if the importer requests the bank not to make payment. The functioning of this trade finance instrument can be seriously undermined if the importer, who instructed the bank to issue the credit, can obtain an order from a court or other public authority in the country of the issuing bank prohibiting the bank from making payment to the exporter or to a bank that has paid the exporter and is claiming reimbursement. The extent to which such orders can be effective in outside of the issuer's home country has remained largely under-explored. This paper examines this important issue.

It finds that at common law and under the Rome Convention foreign stop payment orders made in the issuing bank's country had limited effect on claims against the issuing bank in England and other common law jurisdictions. However, under the current Rome I Regulation, amendments to certain provisions have opened the possibility that such orders may now have a wider reach, which would be disruptive to the system of trade finance based on letters of credit. This work argues that, contrary to the suggestion in some quarters, the changes introduced by the Regulation should not be interpreted as requiring such as outcome. It suggests that the courts can and should continue to apply Article 4 of the Regulation in a way that confines the effect of such stop payment orders on claims against the issuer in England.

Details

Original languageEnglish
Title of host publicationTrade finance
Subtitle of host publicationtechnology, innovation and documentary credits
EditorsChristopher Hare, Dora Neo
Publication statusPublished - 7 Jul 2021

Keywords

  • Letters of credit, stop payment orders, issuing bank, Rome Convention, Rome I Regulation, Nominated bank, confirming bank, place of performance, Public policy, Choice of law rules, applicable law, recognition and enforcement of judgments, foreign court order, foreign judgments, trade finance