Banks Deal with Documents and Not with Goods, Services or Performance Essay

Banks Deal with Documents and Not with Goods, Services or Performance to Which the Documents May Relate' (UCP 600, Article 5) - Essay Example Further risks are the economic climate in both the importing and exporting countries and the political stability of the countries, which affects the sale transaction and the degree of trust and confidence of each party in the other. As a result, banking regulations serve to lower or alleviate the risks that banks are exposed to and any disruptions and interruptions emanating from adverse economic and banking conditions. Additionally, banking regulations reduce the criminal risks to which banks are exposed, not to mention promoting and ensuring the confidentiality of banks.4 To reduce risks in international sales, in terms of the payment issue, the seller and buyer usually agree to settle through letters of credit. This essay seeks to explore Article 5 of the Uniform Customs and Practice for Documentary Credits (UCP 600) 2007, which reads as follows: â€Å"Banks deal with documents and not with goods, services or performance to which the documents may relate†. In fact, this Art icle is usually explored in regard to the letters of credit principles. Thereby, in the first part of this essay, the concept of letters of credit in the light of the UCP 600 will be revealed. Subsequently to that, the principles of letters of credit, which are autonomous and conform to strict compliance, will be discussed in the light of relevant cases. Finally, the way that fraud affects letters of credit will be examined in the light of relevant cases. 1. Letter of Credit and the UCP The importance of letters of credit to the current commercial society is evidenced by the many rules established to regulate and control its usage. These rules are called the Uniform Customs and Practice of Documentary Credits (UCP), which were created by the International Chamber of Commerce (ICC).5 Several commentators tend to accept this unification, such as Royston Goode, who describes it as â€Å"the most successful harmonizing measure in the history of international commerce†.6 In fact, the first version of these rules was drafted by the ICC in 1929. The rules were revised many times until the last version, UCP 600, was issued in 2007 and came into force on 1 July, 2007.7 Even though the UCP 600 regulates letters of credit, the legal status of these rules will not be considered binding until they are incorporated into the two parties’ contract, as it is mentioned in Article 1 of the UCP 600.8 Letters of credit, which are also known as documentary credit or banker’s commercial credit, is defined in Article 2 of the UCP 600 as â€Å"any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation†. According to this definition, a letter of credit has two characteristics. First, it is an irrevocable credit, which means that it cannot be amended or cancelled when it has already been communicated to the seller; under the previous UCP 500, credits co uld be