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ABSTRACT
The concept of negotiation in letter of credit practice and law has evolved from being an appendage of the law of negotiable instruments to an independent discipline that often alters basic assumptions of negotiable instruments law. From playing a central role in the letter of credit process, the draft or bill of exchange has become incidental and atrophied. Indeed, with respect to banks nominated in the letter of credit to "negotiate," negotiation can occur without there being a draft or bill of exchange. Nonetheless, negotiation, as used in letters of credit, is an important aspect of letter of credit practice, enabling it to serve as a means of trade facilitation and finance. The latest revision of the Uniform Customs and Practice for Documentary Credits, UCP600, reflects the currency of this concept in its attempts to define "negotiation" and to clarify its role in letter of credit practice.
This paper surveys and compares the concept of negotiation in both fields. It summarizes the law of negotiable instruments (Part I), studying, analyzing, and comparing negotiation in letter of credit practice (Part II). It then considers important issues that arise in the negotiation of LCs, such as the requirement of a draft, formalities, recourse, and letter of credit fraud (Part III), and ends by suggesting an approach to the definition of "negotiation" in letter of credit practice and law (Part IV).
It suggests that negotiation - whether by a bank that undertakes to do so in its letter of credit undertaking or by a bank nominated to do so without having made such an undertaking - gives rise to a basis of liability that is separate and preemptive from, if sometimes parallel to, that which arises on negotiable instrument that may be involved. Although the letter of credit concept of negotiation readily borrows from the law of negotiable instruments with respect to protection of the right to a protected status, important differences arise based on the nature of the letter of credit undertaking. Where there is a letter of credit undertaking to negotiate, negotiation is the means by which the bank honors its letter of credit obligation to the beneficiary, taking up the documents presented and any draft, and discounting the amount due to...