UK: Interpreting ICC Standardised Rules In Trade Finance Disputes: Courts Take An International Perspective

KEY POINTS

• The International Chamber of Commerce (ICC) publishes sets of standardised voluntary rules which parties may incorporate into their contracts, irrespective of the governing law of the contract. However, this gives rise to the possibility that the interpretation of each set of rules would not be consistent as between different jurisdictions which apply their own principles of contractual interpretation.
• However, it has been established in relation to the most commonly used code (the UCP 600 and its predecessor, the UCP 500), which relates to letters of credit, that the code should be interpreted in a manner which prioritises maintaining consistency across jurisdictions, and with reference to its international consequences, rather than the principles of construction of the contract's governing law.
• This principle has recently been extended to the URDG 758, an ICC voluntary code relating to demand guarantees, by the English court and by the Qatari Appellate Court. This entrenches the fact that the English court, and at least some other national courts, will take an international approach, and not an approach focused on national law or literalistic interpretation, when construing the ICC voluntary codes

Banking practice in areas of trade finance such as demand guarantees and letters of credit is standardised by a collection of contractual rules published by the International Chamber of Commerce (ICC). The application of domestic contractual interpretation principles may risk inconsistency in the way such rules are construed between jurisdictions. However, in relation to the most commonly used rules (the UCP 600, which apply to letters of credit), several courts (including the English courts) have tried to ensure that the rules are interpreted consistently with reference to their international consequences, as opposed to strictly in accordance with the governing law of the contract. Two decisions of the English High Court and the Qatari Appellate Court demonstrate a trend towards construing other sets of ICC standardised rules in the same way as the UCP 600

Generally, when the English courts are presented with interpretation issues relating to contracts governed by English law, they will invoke established English law principles of contractual construction. However, many trade finance instruments such as demand guarantees and letters of credit voluntarily incorporate certain sets of contractual rules published by the International Chamber of Commerce (ICC). The aim of these rules is to standardise international banking practice. Two commonly used codes are the Uniform Rules for Demand Guarantees 758 (URDG 758) and the Uniform Customs and Practice for Documentary Credits 600 (UCP 600). These voluntary codes have gained international acceptance. For example, the URDG 758 was officially endorsed by

UNCITRAL in 2011 and the UCP 600 is described by the ICC as:

The incorporation of these codes into contracts governing trade finance instruments across a large number of countries presents the potential concern that inconsistencies in interpretation may arise if different national courts are each interpreting the codes with reference to their own national laws and principles. This may lead to differing and incompatible interpretations which could damage the international certainty and harmony strived for by the codes.

Therefore, this raises the question: should the codes be interpreted according to the governing law of the contract, or by taking account of how the rules have been interpreted by international courts?

A series of decisions in respect of the UCP 600 and its predecessor, the UCP 500 demonstrate a consistent approach by courts favouring an international focus on the question of interpretation. More recently, this approach has been explicitly extended to the URDG 758. The decisions of the English High Court in Tecnicas Reunidas Saudia for Services and Contracting Co Ltd v Korea Development Bank¹ and the Qatari Appellate Court in Leonardo S.p.A. v Doha Bank Assurance Company LLC,² indicate an extension of this international lens to interpreting the URDG 758. In combination, these cases suggest a general trend for the contractual construction of the ICC's standardised rules by reference to their international consequences

UCP: AN INTERNATIONAL APPROACH

The UCP 600 is a set of rules published by the ICC in 2007 which governs commercial letters of credit and can voluntarily be incorporated into contracts by parties.

Despite the voluntary nature of the rules, most letters of credit are subject to the UCP 600 and so it is perhaps not surprising that the question of how to approach contractual construction in the face of the multi-jurisdictional nature of the UCP 600 has arisen.

The courts have repeatedly favoured an approach which gives effect to the international consequences of both the UCP 600 and its predecessor the UCP 500 (together, the UCP), and prioritises achieving certainty across jurisdictions in international banking practice over an approach which is literalistic or makes reference to national laws.

This principle is encapsulated in various judgments of the courts of England and Wales. For example, in Glencore v Bank of China,³ which concerned whether documents presented pursuant to a letter of credit (subject to the UCP 500) complied with the terms of the letter of credit, the High Court confirmed (on an obiter basis) that the UCP is:

Another clear example of this approach to the UCP derives from Credit Industriel et Commercial v China Merchants Bank, ⁴ which related to discrepancies in documents presented under a letter of credit. Here again, the High Court confirmed that although French law governed the contract, it represented a "paradigm example" of the need to avoid any difference in approach to the UCP as between different jurisdictions

Finally, this approach was further reinforced in Fortis Bank S.A Stemcor UK Limited v Indian Overseas Bank, ⁵ which concerned the obligations of banks whengiving notice regarding returning documents under the UCP 600. In this case, the Court of Appeal said the court must recognise the international nature of the UCP and approach its construction in that spirit. The Court of Appeal highlighted that the code was drafted in English in a manner that could easily be translated into around 20 different languages and applied around the world. Therefore, the code should be treated as self-contained and a literalistic interpretation of the wording in the code should be avoided in favour of a purposive approach which strives for consistency across the world. The Court of Appeal also approvingly cited academic discussion regarding how to approach the UCP where the meaning of its provisions are in dispute or where there is not an express provision for the issue in question. Here, rather than reverting to national laws and doctrines, it is usually preferable to seek a solution from a general rule in the UCP and adopt a purposive and global interpretation reflective of international banking opinion and practice. "Parochial concepts and meanings" should not be used. The Court of Appeal concluded that a literalistic and national approach must be avoided.

These three cases illustrate how the English courts, in cases considering the UCP, have consistently emphasised the underlying aim of the code to achieve consistency across jurisdictions and placed very limited, if any, importance on an interpretation of the code which invokes the rules of the governing law of the contract.

URDG 758

The URDG 758 is a set of rules published by the ICC in 2010 which governs demand guarantees. Historically, the international approach outlined above in relation to the UCP was not explicitly applied to other ICC codes used in trade finance, such as the URDG 758. However, more recently, two decisions have pointed towards similar treatment of the URDG 758 by the courts.

In Tecnicas, which related to the interpretation of a condition in a demand guarantee, the English High Court confirmed (obiter), that:

This strongly echoes the message of the UCP decisions with a clear emphasis on the international nature of the rules and the importance of clarity and certainty for international users of the rules.

In Tecnicas, the High Court specifically rejected the suggestion that the usual rules of contractual interpretation under English law should apply, commenting that it was "quite wrong" to reduce the URDG to a set of standard conditions and to apply national principles of interpretation. The court said that the URDG is "far more important than that".

This approach was supported by the Qatari Appellate Court in Leonardo v Doha, which made a very clear (obiter) statement that a similar approach to the interpretation of the URDG 758 should be adopted as per the UCP. It repeated the mantra that the rules should not be interpreted in a literalistic manner or by adoption of rules of national law, because the URDG is intended to be an instrument underpinning international trade and commerce and to harmonise international demand guarantee practice. The Qatari court arguably went further by stating that, in such cases, national case law, however eminent, is no longer relevant on issues where the law and practices are set out in a code.

The common themes in these two cases are:

• the rejection of a literalistic or national approach to interpretation of the code;
• the aim of harmonising international banking practice in the context of demand guarantees; and
• the clear parallel between the approach that should be taken to the URDG 758 and the approach already taken to the UCP

Although the decision in Leonardo v Doha is not an English law decision, meaning it is not binding on the English courts, it has been cited by practitioners as a decision of interest and one which potentially sheds light on how common law jurisdictions are likely to interpret the URDG 758. Further, the decision seems to align with the goal of achieving consistency in international banking practice across jurisdictions (in line with the aims of the codes). The decision is likely, therefore, to be influential on any future cases before the English court, particularly given the comments from Tecnicas, which suggest strongly that the English courts are adopting this approach already.

BROADER IMPLICATIONS FOR ICC STANDARDISED RULES

This extension of the international-focused approach from the UCP to the URDG 758 suggests an emerging trend of treating the ICC's standardised rules as self-contained multi-jurisdictional provisions which should not be treated in a literalistic or national manner.

It seems likely that we may see this trend continue, with the approach extended further to cover other sets of standardised rules such as the ICC's International Standby Practices 98 (ISP 98) which governs standby letters of credit or the Uniform Rules for Contract Bonds (URCB) which governs bonds.

Although the English courts and the Qatari Appellate Court have endorsed this international approach, it is possible that courts in some countries may not take the same approach. However, at the very least we have some certainty in relation to English law governed trade finance contracts incorporating ICC standardised codes.

Footnotes

1 [2020] EWHC 968 (TCC).

2 [2020] QIC (A) I.

3 [1996] 1 Lloyd's Rep 135.

4 [2002] EWHC 973 (Comm).

5 [2011] EWCA Civ 58.

Originally Published by Butterworths Journal of International Banking and Financial Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.