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In international commercial transactions, documentary credit offers valuable security to the parties involved. This payment technique is based on a complex network of obligations between buyer, seller and banks. Let's untangle these legal relationships and their practical implications.
Relations between buyer and seller
The buyer (principal) undertakes to open a documentary credit in favour of the seller (beneficiary). This obligation arises from the sales contract.
Time of credit opening
The seller is entitled to the credit facility before any delivery. The Marseille Commercial Court has clearly established this principle (23 February 1948, Droc c/ Sofrancor). Where the contract provides for a delivery period, the buyer must nevertheless open credit from the start of that period.
Consequences of failure to open
What happens if the buyer fails to open the credit within the stipulated period? Case law is strict. The Court of Cassation (com., 11 February 1980) considers that the contract was not formed because the credit was not opened within the time limit set.
If the contract already exists, the seller can:
- Invoking the defence of non-performance
- Request cancellation of the contract
- Claiming damages
The courts almost always recognise this obligation as essential, justifying the resolution.
Relationships between client and banker
A second level of relationship is established between the buyer and his bank.
Buyer's obligations to the bank
The buyer must:
- Paying bank charges
- Setting up guarantees
- Repaying bank advances
The credit opening fee is payable as soon as the letter of credit is issued. It is generally retained by the bank, even if the credit is not used.
The bank obtains a pledge on the goods through the transport documents, in particular the maritime bill of lading (art. 92 of the French Commercial Code). Specific arrangements are required for other modes of transport.
Obligations of the bank to the buyer
The bank must:
- Opening credit without undue delay
- Check documents thoroughly for conformity
- Comply strictly with the client's instructions
This verification of the documents is formal: the bank checks their apparent regularity, without judging the actual performance of the sales contract.
As emphasised by the Court of Cassation (com., 13 July 1954): "The bank must refuse payment if the documents do not strictly comply with the terms and conditions of the loan..
Penalties in the event of default by the bank
If the bank pays with irregular documents, the buyer can:
- Reject documents
- Refusing to repay the bank
- Claiming damages
Case law allows the buyer to "leave for account" the goods delivered to the bank if the documents are not in order.
Relationship between bank and beneficiary
This third level varies considerably depending on the nature of the credit.
Revocable credit: no direct legal link
In a revocable credit, no legal relationship is formed between the bank and the seller. Article 8 of the Uniform Customs and Practice (UCP) authorises the bank to amend or cancel the credit at any time without prior notice.
Irrevocable loan: firm commitment by the bank
Conversely, irrevocable credit creates an independent and direct commitment by the bank to the beneficiary. This commitment arises from the letter of credit, a document by which the bank binds itself directly to the seller (Cass. com., 20 October 1953).
The key features of this commitment are
- Its independence from the sales contract
- Irrevocability until maturity
- The unenforceability of defences based on the bank-client relationship
The bank may not refuse payment on the grounds that:
- Bankruptcy of the principal (Cass. civ., 26 January 1926)
- The buyer's failure to fulfil its obligations to the company
- Non-performance of the sales contract (Cass. com., 3 April 1978)
The only exception: fraud. Case law accepts that the bank may refuse performance in the event of definite fraud (Cass. com., 4 March 1953), provided that it affects the credit itself and not simply the performance of the commercial contract.
Transfer of the beneficiary's right
Can the beneficiary transfer his right to a third party? Yes, but only if a transfer clause is included in the letter of credit (article 48b of the UCP).
Other mechanisms exist:
- Opening a subsidiary ("back-to-back") credit facility
- Endorsement of the bill of exchange
- Transfer of credit proceeds
As for the seizure of credit by the principal, the Cour de cassation firmly opposes it (com., 14 October 1981), ruling that it would contradict the irrevocable undertaking.
Documentary credit is based on a delicate balance between payment security and documentary rigour. Mastering these intersecting legal relationships can prevent many a disappointment.
Do you have any questions about your export or import project? Our firm is specialising in international payment techniques. An initial consultation often helps to identify the risks specific to your transaction.
Sources
- Commercial Code, article 92
- Commercial case law: Cass. com. 20 October 1953; Cass. com. 11 February 1980; Cass. com. 13 July 1954; Cass. civ. 26 January 1926; Cass. com. 3 April 1978; Cass. com. 4 March 1953; Cass. com. 14 October 1981.
- Uniform Customs and Practice for Documentary Credits, ICC Publication 600
- Tribunal de commerce de Marseille, 23 February 1948, Droc c/ Sofrancor
- JurisClasseur Droit bancaire et financier, Fasc. 1080: Documentary credit, updated 27 September 2015
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