LAW RELATING TO COMMERCIAL CREDIT

Author: Aysha Hanan
School of Legal Studies, Cochin University of Science and Technology

ABSTRACT
This article delves into the legal framework governing commercial credit in international trade, with a focus on both international and Indian laws. It explores the key doctrines, regulations, and rules that shape commercial credit practices, including the UCP, ISBP, URDG, ISP, Indian Contract Act, and Civil Procedure Code. The article highlights the significance of commercial credit in export trade, its benefits, and the essential legal protections it offers to all parties involved. It provides a comprehensive overview of the laws and regulations that govern commercial credit, making it a valuable resource for professionals and scholars in the field of international trade and finance.

WHAT IS A COMMERCIAL CREDIT ?
A commercial credit is a payment mechanism in trade transactions, where a bank guarantees payment to the seller on behalf of the buyer. The bank ensures the seller receives payment upon providing compliant documents. This is the most common payment mode and a popular alternative to documentary bills. Commercial credits, also known as documentary credits, offer sellers increased security and are highly valued in international trade. Their origins can be traced back to ancient cultures, but their modern development is attributed to England. Merchants worldwide have widely adopted commercial credits, and the surrounding law is largely based on custom and commercial practice. They are considered the “lifeblood of international commerce” (United City Merchant (Investments) Ltd v Royal Bank of Canada, 1982). Commercial credits provide a secure payment solution, facilitating international trade and commerce.
PRINCIPLES GOVERNING COMMERCIAL CREDITS
Commercial credit, under common law, operates on two key principles:
1. Strict compliance: Documents must precisely match the letter of credit’s instructions, with no room for minor discrepancies (Equitable Trust Co of New York v. Dawson Partners Ltd., 1927). Even a 0.06% variance in shipped goods can lead to document rejection (Moralice (London) Ltd v E D and F Man, 1954).
2. Autonomy: Commercial credits are separate from the underlying transaction, creating a distinct agreement between the bank and seller (Hamerh Malas and Sons v British Imex Industries Ltd., 1958). The bank is obligated to pay, regardless of contract disputes, ensuring payment independence (United City Merchant (Investments) Ltd v Royal Bank of Canada, 1982).
These principles aim to provide sellers with a secure payment guarantee in international trade, shielding them from buyer disputes. The confirmed irrevocable documentary credit system ensures payment before goods are released, making commercial credits a vital component of global commerce.
THE INTERNATIONAL LEGAL LANDSCAPE OF COMMERCIAL CREDIT 
There are various laws that govern  commercial credit. But the majority of it is predicated in custom and mercantile practice. Numerous disputes regarding  commercial credit are referred for arbitration. At a global  level the International Center for Letter of Credit Arbitration specializes in this and their laws are structured from the UNCITRAL Arbitration Rules.
To harmonize the law on  commercial credit ICC made attempts to bring up the Uniform Customs and Practice of Documentary Credits (UCP). The UCP was by no means an overnight success. The UCP 600, published in 2007, was a result of several revisions, containing 39  articles and applies to irrevocable letters of credit. The UCP 600 includes new articles on definitions and interpretation, furnishing further clarity in understanding terms generally used in documents. The UCP 600 also contains other provisions for  example, advising credits and  amendments (Art 9), the effect of nomination (Art 12) and dealing with originals and  copies (Art 17). UCP needs to be specifically included in the contract for it to apply. This  generally doesn’t have a big impact on the parties’ rights and liabilities because English courts consider customary practices. The UCP rules align with common law, with a few differences. So, if there’s a conflict between the UCP and an express term in the contract, the contract prevails. 
As in Royal Bank of Scotland v. Cassa di Risparmio delle Provincie Lombard (1992) case, the UCP terms aren’t a statutory  law. They represent customs and practices that parties can include in their contracts by reference. However, any  disagreeing provision in the UCP must give way to the parties’ expressed intention, if the parties explicitly agree to incorporate the UCP terms. UCP isn’t comprehensive and doesn’t cover matters like fraud or illegality. So, when examining  commercial credits, we need to consider both the UCP and applicable common law.
The ICC released the International Standard Banking Practice (ISBP) in 2007 to provide clear guidelines for implementing UCP 600. The ISBP includes a checklist for document examiners and is recognized by UCP 600 Article 2 as a benchmark for “complying presentation”. This means that a presentation is considered compliant if it meets the credit terms, UCP rules, and international banking standards. Sub-article 14(d) of UCP 600 states that the data in a document, when considered with the credit and international standard banking practice, doesn’t have to be identical but must not conflict with other documents or the credit itself. 
ISBP requires examining banks to verify that presentations conform to credit terms and UCP-outlined banking practices, unless they contradict the credit. Banks can consult various sources, including local banking practices, ICC Banking Commission opinions, and academic insights. However, these sources must align with UCP provisions, which take priority in case of any discrepancies.
The International Chamber of Commerce (ICC) introduced the Uniform Rules for Demand Guarantees (URDG) in 1991, establishing global guidelines for demand guarantees. These guarantees enable one party to claim rights or take countermeasures against another party that fails to meet contractual obligations. The URDG operates in conjunction with other ICC rules, including the Uniform Customs and Practice for Documentary Credits (UCP 600), to provide a comprehensive framework for international trade.
The International Standby Practices (ISP) is a set of rules that, when added to a contract by mentioning the ISP98 or ICC publication 590, makes it legally recognized as a Standby Letter of Credit (SBLC). This is a document that’s commonly used in both international and local transactions when the parties involved don’t know each other well. 
Basically, an SBLC acts as a safety net for the seller. It assures them that if the buyer doesn’t pay for the goods or services on time, the bank will step in and make the payment instead. It gives the seller peace of mind knowing that they’ll still get their money, even if the buyer doesn’t fulfill their payment obligation. Commercial Letter Credits are different from SBLC in cost, its validity duration and many other aspects.  In commercial letters of credit (LCs), the beneficiary relies on the Letter of Credit as their primary payment option. They request payment from the issuer based on the letter of credit terms and the underlying contract. LCs require documentary presentations, which include commercial documents like invoices, packing lists, and transport documents.  

CONCLUSION 
Commercial credit plays a vital role in international trade, enabling sellers to receive payment assurance without being affected by disputes with buyers. The common law principles of strict compliance and autonomy govern commercial credits, ensuring precise documentation and separating credit transactions from underlying contracts. Internationally, the Uniform Customs and Practice of Documentary Credits (UCP) and International Standard Banking Practice (ISBP) provide guidelines for commercial credit transactions, while the Uniform Rules for Demand Guarantees (URDG) and International Standby Practices (ISP) address specific aspects of commercial credits. In India, the Indian Contract Act and Civil Procedure Code govern commercial credits, emphasizing the importance of agent banks’ skill and diligence in managing credit transactions. Understanding these legal principles and regulations is crucial for facilitating smooth international trade and commerce. By recognizing the significance of commercial credit and its legal framework, businesses can navigate complex transactions with confidence, fostering global trade growth and economic development.
PROOF
Indira Carr and Peter Stone, Intemational Trade Law, Routledge, 2017
Documentary Credits: Rules, Guidelines & Terminology https://icc.academy/documentary-credits-rules-guidelines-terminology/ 
Indian Kanoon https://indiankanoon.org/ 
Some considerations on the doctrine of strict compliance and the autonomy principle in documentary credit https://www.businessjus.com/wp-content/uploads/2014/05/Someconsiderations-on-the-doctrine-of-strict-compliance-and-the-autonomy-principle-indocumentary-credit.pdf 
Commercial Credit: Overview, Examples and Types https://www.investopedia.com/terms/c/commercial-credit.asp 

FAQ
How does commercial credit work as per the principles?
Basically, commercial credit includes the seller giving the bank certain documents to get paid. These documents have to match exactly what the credit says and the credit is separate from the actual sale. 
What is the difference between Commercial Letter Credits and Standby Letter of Credit (SBLC)?
Commercial Letter Credits are the primary payment option for beneficiaries, relying on the Letter of Credit terms and underlying contract. In contrast, an SBLC acts as a safety net, ensuring payment if the buyer fails to fulfill their payment obligation. SBLCs are commonly used in international and local transactions where parties don’t know each other well.