Received : September 16, 2007

Accepted : November 26, 2007

Governing Laws on Letters of Credit under

Uniform Commercial Code
Jaephil Hahn*

Abstract
Unlike most countries, the USA has express rules for letters of credit in its national
law, Uniform Commercial Code Article 5. Due to its unique nature, this article has
provided academic attractions to lawyers and practitioners alike, so that various issues
thereof have been thoroughly studied. However, its sub-article, 5-116, which
determines the choice of law matters thereof, has not been dealt with by scholars, albeit
its importance. Considering the fact that this specific issue is generally recognised as to
provide rather complicated legal and practical issues, such a curious dearth of
academic analysis, needs to be rectified. This article aims, therefore, to provide the indepth analysis with respect to how the choice of law matters for disputes arising out of
letters of credit would be determined under the UCC, for the purpose of providing a
solid foundation for a stable letter of credit transaction with the USA.
Key words: Letters of Credit, Article 5 of Uniform Commercial Code, Choice of Laws

Assistant Professor, College of Law, Donga University, email: jphahn@dau.ac.kr

I. Introduction
A letter of credit, also called a documentary credit, is a means of providing the seller
of goods or supplier of services with guaranteed payment by a bank if he presents the
stipulated documents which, on their face, are in conformity with the terms and
conditions of the credit.1 The origin of the instrument is obscure ,2 but it has been used in
its present form since the first half of the 19th century.3 It has become more common and
convenient among businessmen since the Second World War.
In order to utilise a letter of credit as a commercial transaction, at least four parties, in
general, are required: the applicant (who is normally an importer), the issuing bank, the
correspondent bank and the beneficiary (who is usually an exporter). Due to its
fundamental principle, autonomy or independence principle, 4 a rather complex
contractual web is created in a single transaction as a whole. They are usually first, the
contract between the issuing bank and the correspondent bank; and second, the
correspondent bank, where it is a confirming bank or a negotiation bank, and the
beneficiary, and the contract between the issuing bank and the beneficiary.
Since these parties usually reside in different countries with different legal systems
due to its international characters, a potential problem of the governing law may arise in
the case of disputes between the parties to credit. It may be argued that, since the
Uniform Customs and Practices for Documentary Credit (hereinafter referred to as
UCP)5 regulate most of a letter of credit, the governing law problem in relation to a
letter of credit may not offer significant importance. However, considering the fact that

UCP 600 Article 2 states the meaning of credit: King, Gutteridge & Megrahs Law of Bankers
Commercial Credits, 8th ed., 2001, p.1; Ventris, Bankers Documentary Credit, 3rd ed., 1990, p.1. In
addition, Uniform Commercial Code (hereinafter referred to as UCC) 5-102 (a)(10) states that a letter
of credit means a definite undertaking... by an issuer to a beneficiary at the request or for the account
of an applicant... to honor a documentary presentation by payment or delivery of an item of value.
2
The precursor of the credit, which is most frequently mentioned, is an early Mediterranean form of a
bill of exchange used in the 12th and 13th centuries, referred to as the letter of payment: Kozolchyk,
Commercial Letters of Credit in the Americas, 1976, pp.3-4. However, another theory argues that a
form of credit was used in the ancient Greek era: Ward & Harfield, Bank Credits and Acceptance, 4th
ed., 1958, p.145. Nevertheless, no connection with modern letters of credits has been proved.
3
Dolan, The Law of Letter of Credit, 2nd ed., 1991, 3-19; Kozolchyk, ibid, p.7.
4
For this principle, see UCP 600 Article 4; Goode, Commercial Law, 3rd ed, 2004, pp.971-973; Jack,
Documentary Credits : the Law and Practice of Documentary Credits including Standby Credits and
Demand Guarantees, 3rd ed., 2001., 1.40-1.42, 8.11-8.14.
5
UCP is the most successful codification of banking practice in relation to documentary credits. It was
first published in 1933, and revised in 1951, 1962, 1974, 1983, 1993 and 2006. The last Revision
became operative on 1 July 2007.

the UCP itself is not a comprehensive source of a letter of credit, but keeps silent on
various issues,6 the academic importance of the determination of the governing law for a
letter of credit cannot be denied. Nevertheless, there seems to be a dearth of in-depth
analysis in relation to this matter apart from three articles. 7 Since the governing law is
determined under the law of the court where the trial is brought so that a divergent
governing law may be determined under different jurisdictions, these articles are
insufficient to provide a comprehensive understanding of this specific issue.
Such a lack of academic treatment has been found in relation to the USA, although
the USA has express rules for choice of laws on letters of credit at UCC 5-116.
Considering the strategic importance of the USA market, this issue may call for in-depth
analysis. This article, therefore, aims to analyse how the governing law for disputes
arising out of letter of credit transactions would be determined under UCC 5-116, and
whether it may provide problems for the purpose of providing a solid foundation to
establish a stable letter of credit transaction with the USA.

II. Connecting Factors Relevant to Letters of Credit

In general, since governing laws for various contracts in letters of credit are
determined in consideration of relevant connecting factors thereto, an analysis of
relevant connecting factors must be performed. Depending upon the choice of law rule
in question, one, some, or all of the connecting factors discussed are considered for the
purpose of ascertaining the governing law. Relevant connecting factors are as follows.

1. Place of Formation of the Contract

In general, more than two independent contracts are involved in a single letter of credit
transaction, and each contract is concluded separately. The national law applicable to
the formation of a contract is indicated by the choice of law rules of the jurisdiction in
6

For this matter, see Jaephil Hahn, The Significance of Private International Law on UCP
Application, International Commerce Review, Vol.14, No1, 147.
They are Jong-Chil Kim, A Comparative Study on the Applicability of Governing Law under
Documentary Credits, The International Commerce & Law Review, 1999, 461; Chun-Soo Lee,
Choice of Applicable Governing Law between Concerned Parties in the Letter of Credit and a Case
Study, International Commerce Review Vol.16, No.1, 2001, 197; Jaephil Hahn, The Law Applicable
to the Contracts in the Confirmed Documentary Credit under Article 4 of the Rome Convention,
Journal of Korea Trade Vol,.8 No.1, 2004, 75.

which the suit is brought (lex fori). Generally, a contract is regarded as concluded where
acceptance of an offer becomes effective.8 However, since national laws adopt
different approaches to ascertaining such a place, different places can be nominated as
the place of formation of the contract depending on the rules of the applicable national
law. For example, some jurisdictions consider that an offer becomes effective at the
place where an acceptance is communicated to the offeror,9 regarding the domicile of
the offeror as the place of the formation of the contract. In contrast, some consider that
an acceptance is effective at the place of its dispatch, so that the contract is regarded as
concluded where the offeree resides.
An offer in letters of credit, in general, takes the form of an instruction. With respect to
an acceptance, in practice, the offeree often communicates to the offeror by telex,
facsimile or other expedient means to give notice of acceptance. 10 However, as the
UCP does not require the offeree to contact the offeror in accepting an offer,11
acceptance may consist of conduct which prima facie shows the partys intention
to accept the instruction. For example, in the case of the contract between the
issuing bank and the beneficiary, due to its unilateral characteristics of the
contract and the fact that the beneficiary is not obliged to contact the issuing bank
in accepting the credit, it is reasonably assumed that this contract is formed when
the issuing bank recognises the acceptance of the beneficiary. The bank may
recognise the acceptance of an offer by the beneficiary either when the bank is
informed or able to recognise by other means that the beneficiary performs the
contract or when the documents are presented by the beneficiary either to the
correspondent bank or the issuing bank dependent upon the terms and conditions
of the credit for payment.12

10

11

12

For example, see U.N. Convention on Contracts for the International Sale of Goods (Vienna, 1980),
Article 23. A contract is concluded the moment when an acceptance of an offer becomes effective when
it reaches the offeror.
See, U.N. Convention on Contracts for the International Sale of Goods (Vienna, 1980), Article 18 (2) An
acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror...
Ventris, Bankers Documentary Credit, 3rd ed., 1990, p.77. For English case laws about the place of the
formation of the contract where the parties have communicated by telex, see Brinkibon Ltd. v. Stahag
Stahl G.m.b.H. [1982] 2 W.L.R. 264 ; Entores Ltd. v. Miles Far East Corporation [1955] 2 Q.B. 327.
According to UCP, the party is obliged to inform an offeror without delay only where it rejects the
instruction. See, UCP Article 9 (e).
In the case of the contract between the issuing bank and the correspondent bank, the contract is
regarded as formed when the correspondent bank accepts the issuing banks instruction by
communicating its acceptance to the issuing bank by telex, facsimile or other expedient means, or by
commencing to perform a contract as stated on the instruction.

It is worthwhile noting that acceptance by conduct does not cause any legal complexity
in this context even under the rule which views a contract as concluded at the
place where an acceptance is dispatched. This is because the place of performance
of the offerees conduct which constitutes acceptance normally coincides with the
domicile of the offeree. For example, in the case of a contract between the issuing
bank and the correspondent bank, acceptance of the issuing banks offer,
depending upon the instruction, will consist of advising of the credit and/or
adding confirmation, and they are deemed to be done at the place of location of
the correspondent bank.

2. Place of Payment
As the main purpose of letters of credit is to provide a secure payment method to the
beneficiary, the performance of the payment obligation can be regarded as the essence
of these instruments. Therefore, the place of the payment is deemed to have a strong
connection in determining the governing law of the contract.
In a letter of credit, payments are made in the course of the transaction as follows:
payment by the correspondent bank to the beneficiary;
reimbursement of the correspondent bank by the issuing bank;
reimbursement of the issuing bank by the applicant;
rarely, payment by the issuing bank to the beneficiary.
In and contracts, finding an indication of the place of the payment may be simple
because the parties are normally domiciled in the same jurisdiction. However, with
respect to the other payment transactions, divergent approaches of national courts
towards the place of payment 13 may lead to the nomination of different places, if the
contract fails to provide a specific place of payment.14

3. Place of Tender and Examination of Documents

13

14

For example, English law indicates the creditors place of business or residence as the place of
payment whereas German law indicates the domicile of the debtor. For more discussion about this
matter, see Kennett, Place of Performance and Predictability (1995) 15 Y.B.E.L. 193.
Where the contract specifically nominates the place of payment, the payment is deemed to be made in
that place. For European authority to this effect, see Case 56/79 Zelger v. Salinitri (No. 1) [1980]
E.C.R. 89.

Because the payment obligations between the parties to letters of credit are decided by
the tender and the examination of the stipulated documents, the place where the
documents are tendered and examined may have significance in determining the
governing law.
In letters of credit, tender and examination of the documents normally occurs three
times. The first tender is made by the beneficiary to the correspondent bank nominated
by the issuing bank and the first examination is made by the bank. After that, the
correspondent bank makes the second tender to the issuing bank which will examine the
documents, and then the third tender will be made by the issuing bank to the applicant.
In general, the tender and the examination of the documents are made in the same place
in which the party receiving the documents is domiciled.
It has been argued that the site of the tender and examination of documents should not
be accorded too much weight since the place of tender and examination can be different
from the place of payment. 15 However, the importance of these matters should not be
overlooked. For instance, consider the case where the correspondent bank is merely
employed to pay the beneficiary subject to the issuing banks approval and without
dealing with the documents, which are sent directly to the issuing bank and not through
the correspondent bank. In that case, the role of the correspondent bank may not be
regarded as a significant factor in determining the governing law for the contract. In this
situation, reasonable weight should arguably be given to the place of the tender and the
examination of the documents.
Moreover, it is possible that the place of tender of the documents and the place of
examination of the documents may differ, if the correspondent bank is employed to
merely forward the documents to the issuing bank for their examination. Under these
circumstances, the place of tender of the documents should not be regarded as a
significant factor in determining the applicable law. Instead, some weight should be
given to the place of examination of the documents.

5. Place where the Parties have their Primary Business

The parties domicile and nationality may constitute an important factor for

15

Kurkela, Letters of Credit under International Trade Law : UCC, UCP and Law Merchant, 1985, p.
219.

ascertaining the law governing matters relating to internal company affairs or a private
persons personal affairs.16 However, in the case of documentary credits, their
significance is comparatively weak. Instead, the place at which the parties have their
primary business may have more significance.
So far as a bank is concerned, it is worthwhile noting that a branch is regarded as a
separate entity in documentary credits irrespective of the fact that the head office of the
branch may be held responsible for the debts of the branch dependent upon the
applicable national law.17 Therefore, the place of the relevant bank branch which issues,
advises, confirms the credit, and pays against the documents in compliance with the
terms and conditions of the credit has importance in this context.

6. Language and Currency Used

Normally, the language and currency used in the contract are significant factors which
provide an indication of the choice of law in certain situations. For example, assume
that a letter of credit is issued by a Japanese bank in favour of an English beneficiary
payable by an English bank. In such a case, if the language used in the credit is English,
and sterling is used for currency, they can be regarded as strong factors which may lead
a court to apply English law rather than Japanese law.
However, it is quite normal for the terms and conditions of credits and guarantees to be
drafted in English and for them to be normally payable in U.S. dollars as English is an
internationally accepted language and U.S. dollars are commonly used in international
trade. Therefore, even though the credit is issued in English while stipulating a payment
in American dollars, these should not be regarded as significant facts which indicate an
application of US law.

III. Determination of Governing Law under UCC 5-116

1. Determination of Governing Laws : Prior to UCC 5-116

16
17

Kurkela, op.cit. pp. 227-228.

See, UCP 600 Article 3: Branches of a bank in different countries are considered to be separate banks.

The Uniform Commercial Code (hereinafter referred to as U.C.C) contains a set of

rules dedicated to letters of credit in Article 5, but it did not contain a choice of law rule
until 1995. Therefore, private international law matters thereof were determined under
the general rule of the U.C.C. and the Restatement (Second). 18 According to these rules,
party autonomy is limited to choosing a governing law which has a reasonable
connection to the contract. The limitation is clearly stated in both of them as follows:
U.C.C. Article 1 1- 105
(1) Except as provided hereafter in this section, when a transaction bears a
reasonable relation to this state and also to another state or nation, the parties
may agree that the law either of this state or of such other state or nation shall
govern their rights and duties. Failing such agreement, this Act applies to
transactions bearing an appropriate relation to this state.
The Restatement (Second) Article 187: Law of the State Chosen by the Parties
(2) The law of the state chosen by the parties to govern their contractual rights and
duties will be applied even if the particular issue is one which the parties could
not have resolved by an explicit mention in their agreement directed to that issue,
unless either
(a) the chosen state has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for the parties choice, or (b) application of
the law of the chosen state would be contrary to a fundamental policy of a state
which has a greater material interest than the chosen state in the determination of
the particular issue at which, under the rule in 188, would be the state of the
applicable law in the absence of an effective choice of law by the parties.

In the absence of the parties express choice of law on the contract, the applicable law
is ascertained by finding the law of the state which has a most significant relationship
to the transaction. According to the Restatement (Second) Article 188 (1), the contracts
to be taken into account by applying the principles of 6 to determine the law
applicable to an issue include: the place of contracting; the place of negotiation of the
contract; the place of performance; the location of the subject matter of the contract;
and, the domicile, residence, nationality and place of incorporation and place of the
business of the parties. Article 6 also identifies several principles relevant to the choice
of law procedure as follows.
Article 6: Choice-of-Law Principles
(1) A court, subject to constitutional restrictions, will follow the statutory directive of
its own state on choice of law.
18

Although the Restatement (Second) is not a legislative codification, it is nonetheless significantly

valued by the courts in determining the governing law. See, Kurkela, op.cit., p. 103.

(2) When there is no such directive, the factors relevant to the choice of the
applicable law include:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those
states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the field of law,
(f) certainty, predictability and uniformity or result, and
(g) ease in the determination of the law to be applied.

2. Determination of Governing Laws: UCC 5-116

(1) Revision of UCC
During the 1990s, the National Conference of Commissioners on Uniform State Law
redrafted Article 5 of the U.C.C. since it was believed that Article 5 did not reflect
international letter of credit practice.19 The main aims of the drafters were to harmonise
Article 5 of the U.C.C. with international letter of credit practice, clarify ambiguities,
and respond to omissions in Article 5.
As a result, Article 5 was redrafted completely in 1995.20 So far, the revised Article 5
has been adopted by most of American States, including the major financial centre, New
York, which deals with the majority of international letter of credits, 21 and the District of
Columbia.22 It would not be wrong to say that this rule reflects the current practice of
the USA.
(2) Choice of Rule for Letters of Credit : UCC 5-116
The revised Article 5 contains a specific choice of law rule at 5-116. The rule differs
significantly from the general rule. First of all, it upholds party autonomy more strongly

19

Chantayan , Choice of Law under Revised Article 5 of the Uniform Commercial Code - 5-116
(1999) 14 St. Johns J. Legal Comment 199, at 207.
20
See, Barnes and Byrne, Revision of U.C.C. Article 5 (1995) 50 Bus. L. 1449, at 1451. For
discussion of significant changes from the former version, see Schroeder, , Choice of Law under
Revised Article 5 of the Uniform Commercial Code - 5-116 (1997) 29 UCC L.J. 331 ; Lee, Letters
of Credit : What does Revised Article 5 have to offer to Issuers, Applicants, and Beneficiaries? (1996)
Comm. L.J. 234.
21
See, Sommer, A Law of Financial Accounts: Modern Payment and Securities Transfer Law (1998)
53 Bus. L. 1181. It notes that [a] vast amount of international letter of credit business is customarily
handled by certain New York banks. at 1189.
22
This fact was noted in Documentary Credit World, Nov/Dec 2000, at 3.

by eliminating the requirement of reasonable relationship to the contract. 23 In the

absence of the parties express choice, the current revision provides a specific rule as
follows:
[T]he liability of an issuer,24 nominated person,25 or adviser26 for action or
omission is governed by the law of the jurisdiction in which the person is located.
The person is considered to be located at the address indicated in the persons
undertaking. If more than one address is indicated, the person is considered to be
located at the address from which the persons undertaking was issued. 27

All branches of a bank are considered as separate entities for the purpose of this
Article,28 and a bank is considered to be located at the place where its relevant branch is
considered to be located.
Under this provision, the applicable law is determined dependent upon what specific
matters are brought in the suit. For example, where the beneficiary sues the confirming
bank/confirmer for wrongful dishonour, the law of the place in which the confirming
bank is located will be applied since the liability of the confirming bank is involved in
this matter. Where the beneficiary sues the issuing bank for the same reason, the law of
the issuing bank will be the law applicable to the particular case since the liability of the
issuing bank is involved. Often, the beneficiary may sue both the issuing and the
confirming banks together for, for example, wrongful dishonour. In that case, the
liability of each bank will be governed separately by the banks own law of its location.
An interesting point is that the law applicable to the contract between banks under this
rule depends entirely upon the role of the employed bank. For instance, as regards the
contract between the issuing bank and the correspondent bank, if the correspondent
23

UCC 5-116 (a) The liability of an issuer, nominated person, or adviser for action or omission is
governed by the law of the jurisdiction chosen by an agreement in the form of a record signed or
otherwise authenticated by the affected parties in the manner provided in Section 5-104 or by a
provision in the persons letter of credit, confirmation or other undertaking. The jurisdiction whose law
is chosen need not bear any relation to the transaction.
24
UCC 5-102 (9) Issuer means a bank or other person that issues a letter of credit, but does not
include an individual who makes an engagement for personal, family or household purpose.
25
UCC 5-102 (11) Nominated person means a person whom the issuer (i) designates or authorizes to
pay, accept, negotiate, or otherwise give value under a letter of credit and (ii) undertakes by agreement
or custom and practice to reimburse.
26
UCC 5-102 (1) Adviser means a person who, at the request of the issuer, a confirmer, or another
adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been
issued, confirmed or amended.
27
UCC 5-116 (a).
28
According to 5-116 (b), this is also for the purpose of jurisdiction and recognition of interbranch
documentary credit. However, the rule is not subject to the enforcement of a judgment purpose.

bank is not allowed to have any autonomy either as an agent or a principal, the law of
that bank cannot be the law applicable to the contract.
(3) An Analysis on Chuidian v. Philippine National Bank29
With respect to the analysis of UCC 5-116, the revised Article 5 seems to confirm
the result in Chuidian v. Philippine National Bank. It calls for in-depth analysis on the
case.
This case arose out of the settlement of a lawsuit between Philippine Export and
Foreign Loan Guarantee Corporation, a government agency known as Philguarantee,
and Vincent Chuidian, a Philippine citizen domiciled in the USA. Philguarantee
procured the issue of a $5.3 million dollar irrevocable letter of credit by the Philippine
National Bank in Manila (P.N.B. Manila) in favour of Chuidian. For the performance of
the credit in the USA, P.N.B. Manila instructed its Los Angeles branch (P.N.B. LA) to
advise and to pay against the demand of Chuidian only once approved by P.N.B.
Manila. P.N.B. LA had no authority to confirm the credit or to make final payment on
its own examination of the demand. The credit contained no express choice of law. Two
payments were made by P.N.B. LA. However, it rejected a third demand because the
Philippine government issued a prohibition on making payment under the credit.
Subsequently, Chuidian sued P.N.B. at its local court. The district court pointed out that
the role of the LA branch was nothing more than a mechanical paymaster. It
therefore had no significance in determining the governing law, which was held to be
that of the issuing bank.30 The Court of Appeal upheld the application of Philippine law
stating that:
Designation of a place of payment under a letter of credit does not alter or
amplify that result unless the paying bank also serves as a confirming bank or
otherwise acts in a manner indicating that its role with respect to the letter of credit
is more than merely mechanical.31

Moreover, in respect of the contract between the issuing bank and the correspondent
bank, where the liability of the issuing bank is brought in a suit by the correspondent
bank/nominated person, the law of the place in which the former bank is located is
29

734 F. Supp. 415 (C.D. Cal. 1990), affd, 976 F.2d 561 (9th Cir. 1992).
Ibid. p. 419.
31
Ibid., at 563.
30

applied to the particular suit. Conversely, where the liability of the correspondent bank
is invoked by the issuing bank, the correspondent banks law is applied.

IV. Potential Problems

The rule does not state a choice of law rule for the liability of the applicant. It follows
that an applicable law for the liability of the applicant is not determined by this rule.
Therefore, for example, in the case of non-reimbursement by the applicant, the
applicable law will be ascertained according to the general choice of rule of UCC
outside 5-116.32
In relation to this matter, it must be noted that the issuing bank has a dual capacity
where the confirming bank confirms the credit. According to UCC 5-107,33 the issuing
bank has liabilities to the confirming bank as an issuer 34 and an applicant.35 Thus, all the
matters of the issuers liability in a suit brought by the confirming bank are not
determined under 5-116. For instance, the governing law for the reimbursement right
of the confirming bank is not subject to 5-116, but to a general approach of the UCC.36
This specific rule for letters of credit is not difficult to apply within the scope of the
rule. However, with respect to the letter of credit transaction as a whole, a complication
arises from the fact that the rule does not provide a choice of law rule for all matters
relating thereto, but applies merely to the liability for action or omission of the
parties.37 Consequently, other matters, such as the rights of the parties, will be
determined under the general approach set out in UCC 1-105. This problem can be
illustrated by reference to reimbursement. For example, assume that the issuing bank
and the applicant expressly chose the law of a jurisdiction which does not have any
reasonable relation to the contract, and the issuing bank claims reimbursement on the
applicant. In that case, since the issuing banks claim for reimbursement of the applicant
32

In general, as the bank and the customer contract is governed by the law of the bank, the contractual
relationship between the issuing bank and the applicant will be determined similarly governed by the
law of the issuing bank
33
UCC 5-107 (a) A confirmer is directly obligated on a letter of credit and has the rights and
obligations of an issuer to the extent of its confirmation. The confirmer also has rights against and
obligations to the issuer as if the issuer was an applicant and the confirmer had issued the letter of
credit at the request and for the account of the issuer.
34
UCC 5-108 (a), Official Comment 5 to 5-108.
35
UCC 5-107 (a), Official Comment 1 to 5-107, 5-108 (i).
36
Official Comment 1 to 5-116.
37
See, UCC 5-115 (a), (b).

is the right of the issuing bank, and does not involve the liability of the issuing bank, the
choice of law provision is not effective because it is outside the scope of 5-116.
However, if the applicant claims that his non-payment is caused by the issuing banks
wrongful honour of the documents, since the matter is regarded as involving the issuing
banks liability, i.e., a failure to properly examine the documents and the granting of an
unauthorised payment, the chosen law will be upheld as a valid applicable law under
Article 5.38
Apart from this, problems in determining the governing law under 5-116 in the
absence of the parties intention arise. Since the liability of the confirmer and the issuer
are governed by different laws, the confirmer and the nominated person may not be
entitled to get payment from the issuer under the issuers law even if they may be
obligated under their law to pay the beneficiary. Similarly, in the case of nonreimbursement, the rights of the unreimbursed issuer, confirmer, or nominated person
against the beneficiary under 5-109,39 5-110,40 or 5-11741 may not be governed by
the same law which applies to the issuers or confirmers obligation upon presentation.42
The official comment on 5-116 notes that these rather obvious problems should not
be regarded as significant because such risks are minimised by two factors. First,
disputes arising from different legal obligations to honour have not been frequent.
Secondly, since 5-10843 incorporates standard practice, such as UCP, which is used in
most international letters of credit transactions, there are no significant divergences
between countries causing such conflicts.44 This may be true to a certain extent.
However, the letter of credit practice in international trade cannot be said to be so
harmonised as to eliminate all divergence of opinion. Thus, this rule may cause practical
problems contrary to the expectation of the drafters.

38

See, the wording of 5-116 and its Official Comment.

It states the rules of fraud exception.
40
It states what the beneficiary warrants to the issuer and the applicant.
41
It provides rules in relation to the subrogation of issuer, applicant and nominated person.
42
See, UCC 5-116, Official Comment 2.
43
UCC 5-108 (e) states that : An issuer shall observe standard practice of financial institutions that
regularly issue letters of credit. Determination of the issuers observance of the standard practice is a
matter of interpretation for the court. The court shall offer the parties a reasonable opportunity to
present evidence of the standard practice.
44
See, UCC 5-116, Official Comment 2.
39

V. Conclusion
As seen, determination of laws applicable to letter of credit transactions under UCC
5-116 may be briefly summarised that, except for the applicant, the law of the party
whose liability is in issue governs. However, it seems to have some practical
problems regarding its operation.
It is generally acknowledged that UCC Article 5 offers significant importance, as it
provides specific rules for letters of credit transactions. In that respect, substantive
matters of these express national rules have studied in many ways. However, procedural
matters thereof have not been thoroughly dealt with, although UCC 5-116 clearly
provides express rules. Considering its importance, scholars in international trade
should give more weight to this issue.
Although this article attempted to provide in-depth analysis on UCC 5-116 in order
to cure the lack of academic researches, it may not be regarded as the sufficient
academic treatment. It is hoped that this article may invite further researches in near
future.

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